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Central Bank of Sri Lanka, in a groundbreaking announcement, revealed its strategic vision for 2024, focusing on the adoption of a singular policy rate mechanism. The move aims to bolster economic recovery while concurrently sustaining a low-interest environment and advancing key initiatives like the International Monetary Fund (IMF) program, external debt restructuring, and comprehensive reforms.
Sri Lanka is emerging from a time of economic difficulties that saw fuel queues, electricity shortages and various other economic challenges that gripped the island nation in 2022. The current Governor took over at a time when fiscal policy and monetary circumstances were tough. Today, the island nation has emerged from the toughest times with the aid of an IMF bail out yet more needs to be done.
Central Bank of Sri Lanka Governor Dr. Nandalal Weerasinghe unveiled the ‘Annual Policy Statement 2024,’ outlining progressive measures to fortify the economy. A key highlight is the consideration to shift from the existing dual policy interest rates (Standing Deposit Facility Rate and Standing Lending Facility Rate) to a single policy interest rate. This strategic move aims to enhance monetary policy transmission and signal the policy stance more effectively.
Transitioning to a Unified Policy Interest Rate Mechanism
Central Bank of Sri Lanka’s Commitment to Inflation Control and Proactive Measures
Dr. Weerasinghe affirmed the commitment to maintain CCPI-based headline inflation at 5%, aligning with the Monetary Policy Framework Agreement. Despite recent inflation upticks due to administrative measures, he emphasized that the current conditions might not necessitate an immediate shift in monetary policy. However, the Central Bank remains vigilant, ready to implement proactive measures to ensure domestic price stability.
Introduction of Open Market Operations (OMO) Auction Schedule
In a bid to improve monetary policy effectiveness, the Central Bank of Sri Lanka will introduce an OMO auction schedule this year. Dr. Weerasinghe highlighted the plan to create a user-friendly OMO system, ensuring a smooth transition to the new auction mechanism by 2025. The OMO auction schedule provides a transparent calendar to guide Participating Institutions on upcoming auctions, effectively managing money market liquidity.
Revamping Statutory Reserve Requirement (SRR) Framework
The Central Bank of Sri Lanka aims to review the SRR framework, aligning it with international best practices. This initiative seeks to enhance flexibility for Licensed Commercial Banks in managing reserves and supporting the payment system. Dr. Weerasinghe emphasized stakeholder consultation before implementation, with the overarching goal of optimizing the SRR framework for the broader economy and the financial system.
Mitigating Risks and Focusing on Economic Stability
To prevent overreliance on liquidity facilities, the Central Bank of Sri Lanka has imposed restrictions on access to standing facilities, which can be revisited if market activity improves. Dr. Weerasinghe identified completing the IMF bailout program and advancing external debt restructuring as top priorities. He cautioned against derailing these initiatives, stressing their importance in eliminating market uncertainties and enhancing investor confidence.
Ensuring External Sector Stability and Autonomy
The Governor expressed confidence in the autonomy of the Central Bank of Sri Lanka to formulate effective policies. Maintaining a market-determined and flexible exchange rate remains a priority, serving as a buffer against external shocks. Monthly reporting on the external current account, particularly on trade in services, will commence in 2024, providing transparency based on International Transactions Reporting System (ITRS) data.
Fostering Collaboration for a Prosperous Future
Dr. Weerasinghe concluded by emphasizing the Central Bank’s commitment to fostering a stable and prosperous economy. He urged collective efforts and collaboration with stakeholders to ensure the effective implementation of outlined policies. Despite the challenges faced by the country, he expressed optimism about achieving a brighter future through policy adjustments aligned with evolving economic conditions.
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