Relief to public through stronger Rupee:
EPF interest rate raised to 13 percent:
No deviation from current path:
The Central Bank of Sri Lanka (CBSL) is the main operator of the country’s economy and its policies have determined many turning points. This article was prepared based on the information given by the Governor of the Central Bank Dr. Nandalal Weerasinghe regarding the economy and the role of the CBSL during the ‘Sustaining Stability’ press conference held at the CBSL headquarters on May 7.
“At present, there is a stable situation in the country in terms of ‘universal economy’. That situation arose because of the actions taken by the Government and CBSL in the past. The stability gained in a short period of time should be sustained.
To provide some relief especially for the public, it will be essential to continue the successful policies. If this is the case, economic growth will increase and inflation will stabilise. Also, the banking system will become stable and people’s income will increase. Poverty will be reduced and we will have economic stability. For that to happen, it is important to continue on the current route.
Although the CBSL operates under the new Act, two main responsibilities of the Bank should be pointed out here. The first is to maintain the country’s inflation at five percent. In this regard, an agreement has been signed between the CBSL and the Ministry of Finance. The second is to protect the stability of the country’s financial system. The CBSL will act to fulfil that responsibility, where banks and non-bank financial institutions will be properly supervised.
Here, attention should be paid to the matters which are misinterpreted. It seems that some individuals, especially some Members of Parliament (MPs), are misinterpreting that ‘CBSL is one and the Government is another’. It should be noted that there are two policies – one of the CBSL Bank and the other of the Government. But both can be described as Government agencies.
The CBSL decides the monetary policy of the country. Fiscal policy is carried out by the Government. In other words, the Government carries out the necessary policy related to State institutions to impose taxes. It appears that certain comments are being made due to lack of understanding in this regard. Policies such as interest rate, exchange rate are done through the CBSL. Some have said that due to this lack of understanding, the CBSL is a loss-making and failed institution.
Attention
The CBSL was not established for profit. It may sometimes incur losses. Sometimes there is a possibility of profit. It is necessary to pay attention to the success and failure of the policies taken and implemented by the CBSL.
There may be profit or loss in the implementation of policies. It is clearly defined in the Central Bank Act.
The CBSL has made profits for many years and there have also been losses in the past few years. For example, in 2007, the CBSL made a loss of five billion rupees. Also, it made losses of 24 billion rupees in 2013 and 32 billion rupees in 2014. Also, 19 billion has been lost in 2015. In 2022, the CBSL lost 374 billion rupees and in 2023, it lost 114 billion rupees. But how did this happen?
The reason for the loss in 2022 was the decrease in foreign reserves of the CBSL. There was an increase in the amount of liabilities related to assets and liabilities, and because the dollar was allowed to float at 203 rupees, it exceeded 370 rupees. As a result, the foreign exchange decreased drastically.
In 2023, although the CBSL reserves were built up, it had to incur losses through domestic debt restructuring. It should also be pointed out that it is a big loss to the tax payers of the country. However, by now the gross reserves have increased to US$ 5.4 billion (US$ 5,438 million).
Also, another important point is related to the Employees Provident Fund (EPF), which has been misinterpreted in various ways by some people in the past. The interest rate of the EPF, which was at nine percent, has been increased to 13 percent. The percentage of interest paid to the members of the EPF is determined by the investments made by the fund. Most of the schemes were invested in Treasury Bills and in the past Treasury Bills paid a higher interest rate so they could pay an additional two percent interest. Accordingly, it was possible to increase the interest amount up to 11 percent on one hand.
Another point is that the Inland Revenue Department (IRD) had informed that the Financial Service Tax must be paid to the EPF. But the CBSL had continuously pointed out that Financial Service Tax should not be levied from the EPF. However, the retained funds did not have to be paid as per the policy of paying such tax if required. Therefore, it was possible to give an additional interest rate of two percent. Thus the interest percentage of the EPF will be increased to 13 percent.
Due to the fall in the dollar in relation to the Rupee, relief can be given to the people for fuel, gas, electricity and so on. It is not possible to give benefits on other imported goods and services immediately because the goods were imported about three months ago, so the benefit cannot be given to the public at once. However, these can be done through regulation.
Benefit
Special attention should be paid to inflation. The economic adjustment process carried out by the CBSL has achieved good results in 2023 itself. From a peak recorded in 2022, inflation has been contained to single-digit levels by the end of 2023, allowing monetary policy to normalize. Accordingly, after the longest continuous economic contraction for six quarters, the economy had recorded an expansion in the second half of 2023.
It has been shown above that the twin deficits of the overall Government budget deficit and the foreign current account deficit, which has been the root of the economic crisis for a long time, showed signs of correction in 2023. In that year, the primary balance of the Government recorded a surplus, and the foreign current account also recorded a surplus.
In the medium term, lower import demand, earnings from the tourism and other service export sectors, as well as remittance receipts from the expats and improved foreign exchange flows helped overcome the problem of limited foreign exchange liquidity during the crisis.
Growth in gross official reserves was supported by net purchases of foreign exchange by the CBSL and financing from multilateral partner institutions. With these trends and improved market confidence, the Sri Lankan Rupee (LKR) strengthened in 2023 and early 2024. Completing the process through the concerted effort to restructure the Government’s foreign debt will provide the country with the necessary space for a sustainable recovery.
It should be reiterated that the economic progress made in the last half of 2023 should be continued in the coming years with the support of the continuation of the reform program under the International Monetary Fund’s (IMF) comprehensive credit facility program.
The strong recovery of the Sri Lankan economy depends on the continuation of the policies implemented so far. As part of this process, it is also important to successfully continue the IMF’s comprehensive credit facility program and complete the debt restructuring process. As the country is still not completely out of the economic crisis, it should not deviate from the planned path. Reversing the crucial reforms implemented and planned would throw the economy back into a state of instability.
Translated by Jonathan Frank
