The Central Bank of Sri Lanka recently released its Economic Analysis for the year 2023 titled Central Bank of Sri Lanka Annual Economic Review.
This article is based on a recent televised discussion – “The Economic Reality Revealed by the Annual Economic Review” based on the report and the path to be taken in the future with the Minister of Transport, Highways and Mass Media, Dr. Bandula Gunawardena, Colombo University Department of Economics Prof. Priyanaga Dunusinghe and Deputy Director of Economic Research Division
– Central Bank of Sri Lanka, Janaka Edirisinghe.
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There is a need for intellectual debate – Minister of Transport, Highways and Mass Media, Dr. Bandula Gunawardena
The Economic Review of the Central Bank is presented to the Parliament through the Minister of Finance. According to Article 148 of the Constitution, Parliament has full power over money as well as majority power over handling the economy.
Therefore, the Central Bank’s economic analysis is a message to the Sri Lankan people. Through the analysis we can gauge how the country’s output, income, price level, Balance of Payments, employment, investment, and so on have behaved, and whether that behaviour is good or bad for the country.
This analysis was formulated according to standards expected by top economic experts, analysts and bankers in the world.
It is not possible to interpret the Central Bank’s economic analysis based on its own wisdom. On one hand, it can be described as a logical document. The year 2022 can be pointed out as Sri Lanka’s most ominous year since Independence.
At that time, the country’s economy shrunk to the bottom. The economy fell to minus 7.3 points. The country’s agriculture collapsed, industries were crippled and tourists did not arrive.
The banking system was shaken. Reserves were depleted. Oil tankers arrived and stopped midway because we had no money to pay them. Without LP Gas, people struggled in queues across the country. Electricity had to be cut for 10 to 12 hours.
This sparked mass protests. MPs were murdered on the street. Houses of politicians and innocent people were burnt. The country was gripping with a great economic and social crisis.
It was much worse than the Hartal of 1956. There is a lot of economic damage in this country. The country’s output was negative. Inflation became unbearable – it went up to about 70 percent. The interest rate went up a lot. There were no forex reserves at all. Without them, the Dollar rose to around Rs. 420. The Sri Lanka Rupee (LKR) collapsed.
Compared to the situation then, the economy today has reached a state of minus 2.3 points. According to the Central Bank’s analysis, economic growth of three percent is expected in 2024. Inflation has reached single digits.
The rate of increase in commodity prices is low. The price of carrots, which had gone up to Rs. 2,500 per kilogram, is now very low, although no one is talking about it now. Interest rates have also fallen into single digits.
According to the Central Bank Review, the Balance of Payments has reached a positive level for the first time. There is a surplus in the State Budget account. The US$ has reached the level of Rs.300. But we should not forget that we have foreign debts to pay.
This is why the International Monetary Fund (IMF) head in charge of Sri Lanka said the country is still not out of the woods yet. We have to take this path at least until 2027 and we have a very busy journey ahead of us.
We must remember that the journey to go is far longer than the journey we have come from. Many of the right signals for that long journey are seen in the Central Bank’s Review for 2023. Therefore, if a three-day debate is held only on the commentary’s data, it will also be the reason for great progress on the part of the Sri Lankan people.
Currently, the Government’s daily income is Rs.8,420 million and the daily recurring expenditure is Rs.14,670 million. Accordingly, there is a deficit of Rs.6,250 million rupees to meet the daily recurring expenses.
We have seen this situation for about 35 years since 1988. Therefore, no matter who is the President and no matter which Government is in power, these recurring expenses cannot be met. Tax and non-tax Government revenue in 2003 was Rs.3 trillion while expenditure was Rs.4.6 trillion. How can you run a country like that?
Recurrent expenditure includes Government employees’ salaries, pensions, welfare subsidies and public debt interest. Therefore, loans have to be taken for the outstanding amount of Rs.1.6 trillion.
Also we have to pay for imported goods. This deficit is compounded every month and has finally created this dire situation for the country. Therefore, it is mandatory to study this path provided and recommended by the Central Bank and act accordingly.
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Fiscal discipline is extremely important during budget gap -Prof. Priyanga Dunusinghe, Department of Economics, University of Colombo
A 
Central Bank report primarily interprets economic data. How was macroeconomic performance during the particular year in question? It also shows the basic principles related to it. It explains the domestic financial stability, inflation control, economic sector, foreign sector situation etc.
It also contains measures taken by the Central Bank regarding forex to stabilise prices as well as measures taken to keep the market financial sector stable. It also contains a commentary on future macroeconomic conditions.
It contains a large amount of data regarding that. And unlike previous Central Bank reports, the 2023 Annual Economic Review has in-depth analysis on these data theories. It also contains what needs to be done to take further measures in the economy. Such policies are essential for a country. Those data details will be needed by policymakers, politicians as well as the general public.
In which direction should the country’s economy move? What are the necessary reforms? What are the possible consequences of not taking them? All this is contained in the Central Bank report.
Such methods are not only practised in Sri Lanka. Through this we will get awareness about how we should move especially according to global trends. The general public will receive very good guidance through the Central Bank’s independent opinion. Unlike earlier, now it is actually independent.
Currently, some parties say that the IMF will present various recommendations. If there is no funding, we should not do such work. But we have to understand that we are continuously in a budget gap, so we have to work to reduce this gap. In particular, we need to understand what measures we need to take to correct the gap between investment and savings.
But it is not just us, but other countries that have fallen into economic woes have followed those policies. Therefore, we must follow those principles.
In particular, instilling fiscal discipline is extremely important as it has a major impact on reducing the budget gap.
The independence of the Central Bank can be pointed out as one of its steps. It should be kept in mind that Latin American countries took those measures around 1990. Even after 34 years, it is very necessary that we take such action.
Through that, the expenses incurred by the Government can be undermined. In particular, the use of public funds for political activities must be avoided. The business of making election promises using money from the Central Bank should stop. When one political party makes a promise and goes away, another party promises something more.
Therefore, steps taken to present the Public Finance Management Act (PFMA) to Parliament in the future should be appreciated. A very favourable situation will be created for investment in this country through the independence of the Central Bank and the Public Finance Management Act. Otherwise, not just foreign investment, but even the local investors will be reluctant to invest.
Since we are not familiar with dealing with independent institutions, some people express different opinions.
Accordingly, by working together with the policies of the Government and the Central Bank, we will be able to recover from this financial crisis.
Otherwise, if existing governments go to the Central Bank to cover the budget, we will not create a favourable economic environment.
According to the PFMA, the Government will not be able to apply the funds to non-productive investments. It is essential to have such financial discipline if we are to progress towards development. To instil such discipline, attention must be paid to the Economic Review published by the Central Bank.
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The Central Bank’s purpose is not making profits -Janaka Edirisinghe, Deputy Director – CBSL Economic Research Division
The Central Bank of Sri Lanka (CBSL) was established in 1950 by the Monetary Law Act of 1949. But Act No. 16 of 2023 amended the ordinances related to the CBSL. As the Central Bank is currently working in accordance with the new Act, a CBSL Economic Analysis/Review will be published instead of the previous Central Bank Report. Accordingly, as before, the Central Bank must submit the relevant financial report within four months at the end of a financial year.
The economic forecasts made and policies taken by CBSL, and the financial situation of Sri Lanka should be analysed and the Governor of the Central Bank should present the analysis to Parliament through the Minister of Finance. This is a must.
What is the main function of the Central Bank? Many people get this wrong, so it is necessary to point out the facts. The Central Bank’s main objective is to maintain domestic price stability in the economy. The second is to maintain the stability of the financial system. The Central Bank may make a profit or a loss in carrying out the policy functions related to these two objectives. It should be pointed out here that the objective of the Central Bank is not to make a profit per se.
It is not possible to consider facts like making profit calculations at the end of a normal business.
The success or failure of the Central Bank’s work is determined by the trends that have occurred in the implementation of its policies. It can be pointed out that the Central Bank is successful if the implementation of policies for the country is done properly.
Different institutions are established for different purposes. The Central Bank Act itself has established functions related to the Central Bank.
Therefore, the Central Bank intervenes on behalf of the exchange rate only when necessary. If the exchange rate falls or rises too much, the Central Bank will intervene and issue or buy reserves to the market.
Generally, market exchange rates are determined by supply and demand, and during the last crisis, the CBSL adopted strict monetary policies. Accordingly, the market was adjusted to a stable level through the strict implementation of those policies while taking the exchange out of the country and bringing the exchange into the country. But now most of those exchange restrictions have been lifted. Therefore, the use of exchange methods through informal methods such as ‘Undial’ is much less likely.
Due to the exchange policies carried out during the crisis, we have been able to achieve many significant goals. It should be pointed out that the Government even had to inform foreign workers to send back money through the prescribed methods especially in 2022.
Also, when the economy grows well, the Central Bank will also accumulate gross official reserves. By the end of 2022, including loans from China, the country had only US$ 1.9 billion as reserves. But by the end of last April, the country’s gross official reserves had risen to US$ 5.43 billion. Of course, this needs to expand.
Accordingly, it is clear that exchange rates are determined by market forces. That is why the price of the dollar, which had exceeded Rs.370 has now fallen below Rs.300. The market, which had risen, strengthened by 12.1 percent in 2023 and strengthened by 8.4 percent in the first quarter of this year.
Due to the policy decisions taken by the Central Bank and the Government, we have been able to bring the economy of our country to a good level. Therefore, it has been possible to bring inflation which was 70 percent to single digit. At the time when Sri Lanka’s economy was in decline, Argentina and Pakistan also suffered a severe economic downturn and today their inflation has risen to about 200 percent.
But due to the policies we followed, inflation could be reduced drastically.
Immediately after the arrival of current Central Bank Governor Dr. Nandalal Weerasinghe, the bank interest rate was suddenly increased by about eight points. Accordingly, the first step was taken to control market inflation. But today, all those high interest rates have been normalised again. That is clear from the Central Bank’s 2023 Economic Review.
Translated by Jonathan Frank
