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Governor of the Central Bank of Sri Lanka Dr. Nandalal Weerasinghe, co-chaired RCG Asia Meeting of FSB, held in Hong Kong SAR on 29 November 2023

The Financial Stability Board (FSB) Regional Consultative Group for Asia (RCG Asia) met on 29 November 2023 in Hong Kong SAR and discussed recent financial market developments and their impact on the region, vulnerabilities arising from non-bank financial intermediation, the deepening of the sovereign-bank nexus in some emerging market and developing economies, and ways to promote effective regulation and supervision of crypto-asset related risks. Members shared their experiences of identifying, monitoring, and addressing these risks and welcomed FSB’s continued focus on enhancing the resilience of financial systems.

The meeting was co-chaired by Mr. Eddie Yue, Chief Executive, Hong Kong Monetary Authority (HKMA) and the current member co-chair, and Dr. Nandalal Weerasinghe, the Governor of the Central Bank of Sri Lanka (CBSL) and the current Non- Member Co-chair of the RCG Asia. The Membership of RCG Asia comprises financial authorities from Australia, Brunei Darussalam, Cambodia, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Thailand, and Vietnam.

CCPI based headline inflation increased in November 2023

Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2021=100) increased to 1.5% in October 2023 from 1.3% in September 2023. This slight increase in the headline inflation is mostly in line with the projections envisaged by the Central Bank of Sri Lanka (CBSL) in October 2023.

The Food deflation (Y-o-Y) continued for the fourth consecutive month and remained unchanged at 5.2% in October 2023 compared to the previous month. Meanwhile, the Non-Food inflation (Y-o-Y) increased to 4.9% in October 2023 from 4.7% in September 2023. Monthly change of CCPI recorded at -0.22% in October 2023 due to the combined effect of price decreases of -0.63% observed in the items of Food category and price increases of 0.41% recorded in the items of Non-Food category. The core inflation (Y-o-Y), which reflects the underlying inflation in the economy, decreased to 1.2% in October 2023 from 1.9% in September 2023.

External Sector Performance – October 2023

Merchandise trade deficit widened in October 2023 due to relatively low export earnings driven by subdued garment exports and high import expenditure driven by fuel imports, compared to October 2022 as well as September 2023. 

Workers’ remittances exceeded US dollars 500 million in October 2023, while earnings from tourism continued the notable improvement in October 2023, compared to a year ago. 

Foreign investments in the government securities market continued to record a net outflow in October 2023, however, year-to-date net inflows continued to be positive.

Gross Official Reserves amounted to US dollars 3.6 billion by end October 2023.

The Sri Lanka rupee remained stable against the US dollar during the month of October 2023.

Central Bank Governor shares Sri Lanka’s Inflation Success Story at the Economic Dialogue Series in Berlin, Germany

Dr. P. Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, attended, by invitation, the Economic Dialogue Series held in Berlin under the theme “Inflation Kills Democracy: Fiscal Rationality as the basis of Functioning Communities” on 21 November 2023. This event was organised by the Federal Ministry of Finance, Germany. Governor Weerasinghe presented Sri Lanka’s success story in reining in inflation following the record high acceleration in 2022. In his speech, he discussed the measures taken by the Central Bank and the Government in curtailing inflation and shared experience on the disinflation strategy and the process. 

The Federal Minister of Finance of Germany, Mr. Christian Lindner; the President of the European Central Bank (ECB), Ms. Christine Lagarde; and Prof. Albrecht Ritschl, London School of Economics, also spoke at the event, among other speakers.

Sri Lanka Purchasing Managers’ Index (Construction) - October 2023

The Total Activity Index reached the neutral threshold of 50.0 in October 2023 after twenty consecutive months of contraction. Several respondents mentioned that some of the suspended government-funded projects recommenced at a limited scale during the month. However, the industry operates with a low level of available work since most of the ongoing projects are in their final stages.

Meanwhile, New Orders declined at a slower pace in October compared to the previous month. Many respondents had observed a gradual increase in sizable tender opportunities, mostly scheduled to be commenced in the first half of next year. Employment remained contracted since the companies operate with limited staff under current circumstances. Further, Quantity of Purchases declined, yet at a slower pace during the month. Moreover, several respondents highlighted the pressure emanated from the increase in energy-related expenses. In the meantime, Suppliers’ Delivery Time slightly lengthened during the month.

Monetary Policy Review - No. 8 of 2023

The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 23 November 2023, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points (bps) to 9.00 per cent and 10.00 per cent, respectively. The Board arrived at this decision following a careful analysis of the current and expected developments in the domestic and global economy, with the aim of achieving and maintaining inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach and stabilise at the potential level. The Board took note of possible upside risks to inflation projections in the near term due to supply-side factors stemming from the expected developments domestically and globally. However, the Board viewed that such near-term risks would not materially change the medium-term inflation outlook, as inflation expectations of the public remain anchored and economic activity is projected to remain below par in the near to medium term. Further, the Board viewed that with this reduction of policy interest rates, along with the monetary policy measures carried out since June 2023, sufficient monetary easing has been effected in order to stabilise inflation over the medium term. Hence, the Monetary Policy Board underscored the need for a swift and full passthrough of monetary easing measures to market interest rates, particularly lending rates, by the financial institutions, thereby accelerating the normalisation of market interest rates in the period ahead.