The Central Bank states that domestic economic activity is expected to recover in the second half of this year and gradually reach the potential level of economic growth over the medium term.
Economic activity is projected to recover gradually during the second half of this year and reach its potential level thereafter.
This will be supported by the normalisation of monetary conditions, improvements in business confidence, enhancements in supply conditions and the relaxation of import restrictions, and the impact of growth promoting structural reforms.
Leading indicators of economic activity point to a lower contraction in GDP in the second quarter of this year, compared to previous projections, while the second half of this year is expected to record a positive growth, compared to the corresponding period last year.
However, the impact of weather related disruptions and modest external demand conditions could weigh on expected growth in the near term. The external sector remains resilient, allowing a gradual relaxation of balance of payments restrictions.
The trade deficit decreased notably during the seven months ending July 2023 with a significant decrease in merchandise imports, despite the decrease in merchandise exports. Earnings from tourism and workers’ remittances, which improved considerably from January to July 2023, in comparison to the corresponding period in the previous year, are expected to improve further in the period ahead.
Despite some recent outflows from the government securities market, net foreign investment inflows remained positive during the seven months ending July 2023.
In view of the improvements in the balance of payments conditions and the need to support the recovery of activity, the Government relaxed import restrictions related to 638 HS codes, including those of commercial vehicles, since June 2023.
Although a significant share of import restrictions has already been relaxed, demand for imports continued to remain subdued, reflecting the tight financial conditions.
The Sri Lanka rupee recorded an appreciation of around 12 per cent against the US dollar thus far during the year.
The level of gross official reserves was estimated at around US dollars 3.8 billion as at end July 2023, including the swap facility from the People’s Bank of China, while measures were also taken to repay a part of the swap facility with Bangladesh Bank, in addition to the repayment of maturing debt of multilateral lending agencies.
It is essential that market lending interest rates are lowered by financial institutions in line with the eased monetary policy stance of the Central Bank, thereby boosting credit flow to the economy, which in turn would help the revival of economic activity.
The Monetary Board of the Central Bank, at its meeting on August 23, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 11.00% and 12.00%.