CB projects economy to contract by over 8% in 2022 | Daily FT

  • Anticipates economic contraction will positively reflect faster recovery from next year
  • CB Chief Dr. Nandalal Weerasinghe says raft of measures introduced since April is indicating favourable results already 
  • Opines SL can prolong economic activities if no major global volatility, and expects faster revival for tourism sector 
  • Predicts inflation to peak up to 65% next month, lower than previous estimate of 70%
  • States SL can now manage basic needs without having to reach out to any short-term facilities 
  • Outlines deceleration of currency circulation, roping in currencies to formal system, foreign exchange stability as key reasons for eased liquidity deficit 
  • Assures 8% NPL now could be managed with new steps by all banks

The Central Bank yesterday revised upwards this year’s economic contraction forecast from 7.5% to over 8%, though anticipating it will positively reflect in faster recovery next year.

“Earlier, we projected economic growth to contract by 7.5%, but now it looks like it will be little over 8% this year,” Central Bank Governor Dr. Nandalal Weerasinghe told journalists yesterday. He said having a sharper negative economic growth this year would mean that the recovery can be even faster from next year onwards.

“The outlook has some positives compared to negative risks. However, these are only projections and are subject to change,” he added.

The Monetary Board at its meeting yesterday has decided to hold its policy rates at 15.50%, citing policy measures taken by the Central Bank and the Government thus far would help contain any aggregated demand pressures, thereby anchoring inflation expectations, along with the anticipated decline in global commodity prices and its pass-through to domestic prices in the period ahead.

Noting that uncertain factors such as changes in global prices of goods and services can affect the situation, Dr. Weerasinghe said if Sri Lanka manages to maintain normal economic activities at current levels, sectors such as tourism will recover faster.

The Governor also said that the raft of measures introduced since April 2022 is indicating favourable results in the overall economy. 

“Although the projection was that the inflation would rise over 70% in our last policy review, we now estimate it to be around 60% to 65% even with the upward revision on electricity tariffs,” he pointed out.

However, he said the current inflation level was still high. In July headline was at 60.8% year-on-year, whilst the core inflation was at 44.3% YoY.

Considering data, Dr. Weerasinghe predicted inflation will peak in September to around 65% but not more, hoping it will gradually slow down going forward. 

He also said there are positive developments observed in the external sector, especially with the merchandise trade deficit continuing to decline in cumulative terms, reflecting mainly the impact of policy measures to curtail non-urgent imports, whilst earnings from exports continue to remain high. 

“Our foreign exchange situation has gotten better compared to the last Monetary Policy Review. We have been able to allocate foreign exchange for essential items like petrol, diesel, and medicine due to the decisions we took. Import cost has reduced and export earnings have improved consistently,” he explained.

Dr. Weerasinghe said Sri Lanka can now manage its basic needs without having to reach out to any short-term facilities.

Since April, Sri Lanka has maintained high policy rates to curtail private credit expansion. 

“There is a purpose of having high-interest rates; one is to decelerate personal credit, second is to reduce the growth in private sector credit and curtail inflation. We see these taking shape gradually,” he said stressed.