Central Bank kept its policy rates unchanged in February 2020 as the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at their current levels of 6.50 per cent and 7.50 per cent and continue its monetary policy stance. The bank said in a statement the decision was made after ‘a careful analysis of the current and expected developments in the domestic economy and the financial market as well as the global economy.
The decision of the Monetary Board is consistent with the aim of maintaining inflation in the 4-6 per cent range while supporting economic growth to reach its potential over the medium term.
It said, the escalation of the coronavirus (COVID-19) outbreak to a ‘global health emergency’ level and its potential to become a pandemic pose significant threats to global economic recovery in 2020. The widespread impact on China, the world’s second largest economy, will have spillover effects on the global economy through weakening trade, tourism and investment flows.
The recent rapid rise in cases outside China highlights the high degree of health and economic contagion that the outbreak entails. Policymakers around the globe are expected to intensify policy support to address the effect of the outbreak on global demand and supply conditions, while monetary policies in both advanced economies and emerging market and developing economies are projected to be relaxed at a faster pace than previously envisaged.
The exact impact on the Sri Lankan Economy would depend on the extent of the global spread of the COVID-19 outbreak, its persistence and policy responses of major economies and trading partners. Sri Lanka’s economic links with China could be directly affected as significant volumes of consumer goods, intermediate goods and investment goods are imported from China. The likely slowdown of the global economy and disruptions to the supply chain could affect Sri Lanka’s merchandise and service exports as well as related logistics. The slowdown in global tourist movements will affect Sri Lanka’s tourism sector, in addition to the direct impact of lower arrivals from China. The spread of the virus to countries with a significant number of Sri Lankan migrant workers could affect remittance inflows as well. These adverse implications are likely to outweigh any marginal benefit arising from reduced global energy prices and international interest rates.
Despite global disruptions to growth caused by the spread of COVID-19 and uncertainties in the domestic market due to upcoming elections and the delayed presentation of the annual government budget, the economy is expected to somewhat recover in 2020 from the current subpar performance, supported by monetary and fiscal stimulus measures complemented by improving investor confidence. However, the introduction of appropriate structural reforms is essential to foster high economic growth, given limited policy spaces available to sustain such momentum over the medium to long term.
A notable improvement was observed in the external current account balance in 2019, with the trade deficit contracting significantly as a result of a sharp decline in the growth of imports and a marginal growth of exports. The tourism sector witnessed a faster than expected recovery in 2019 following the Easter Sunday attacks.
Yet, the COVID-19 outbreak is likely to pose challenges to the tourism sector in the period ahead. Workers’ remittances that moderated in the first eleven months of 2019, showed an improvement in December 2019 as well as January 2020. In the meantime, foreign investment in rupee denominated government securities recorded a net outflow thus far in 2020, partly due to increased investor appetite for safe haven assets amidst rising global uncertainty. Outflows of foreign investment from the secondary market of the Colombo Stock Exchange (CSE) remained modest thus far during the year.
Reflecting these developments, the Sri Lankan rupee remained broadly stable with a marginal depreciation, while gross official reserves stood at US dollars 7.5 billion by end January 2020, sufficient to cover 4.5 months of imports.
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