The Sri Lankan economy, which contracted by 1.7% and 16.3% in the first and second quarters of 2020, respectively, rebounded in the third quarter of 2020 and recorded growth of1.5% according to GDP estimates published by the Department of Census and Statistics (DCS).
However, the onset of the second wave of COVID-19 is expected to have dampened the momentum in the fourth quarter of 2020. Accordingly, the economy is expected to have contracted by around 3.9% in 2020. Nevertheless, the economy is well poised to rebound in 2021, supported by the unprecedented policystimulus measures introduced by the Government and the Central Bank, improved domestic economic sentiments, alongside the improving prospects of the global economy,” Governor CBSL, Dr. W. D. Lakshman told the Press Conference following the Monetary Policy announcement held virtually yesterday.
Cushioning the adverse impact of the pandemic on the balance of payments, the trade deficit continued to narrow, while the rebound ofworkers’ remittances continued through the second half of 2020. The trade deficit is expected to have narrowed by over USD 2 billion in 2020 in comparison to the previous year. Workers’ remittances have grown by 5.8% to US dollars 7.1 billion in 2020, with a historic high level of remittance receipts in December 2020.With these developments, the external current account deficit is estimated to have narrowed substantially in 2020.
Measures taken by the Government to promote exports of goods and services are expected to buttress the external sector in 2021. Reopening the country for tourists could help improve external sector conditions in the period ahead. Gross official reserves were estimated at US dollars 5.7billion at end 2020, with an import cover of 4.3 months.
The expansion in money and credit supply observed in the latter part of 2020 is expected to continue in 2021 supported by persistent low interest rates, yet notable inflationary pressures are unlikely, given the slack in the economy.
The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on January 18, 2021, 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 4.50 per cent and 5.50%, respectively.
The CBSL Monetary Board was of the view that the current monetary policy stance is appropriate. Accordingly, the Board decided to maintain the policy interest rates of the Central Bank at their current levels.
Trade deficit (y-o-y) and Workers’ remittances
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