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Monetary Policy Review - No. 4 of 2022

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 18 May 2022, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at the current levels of 13.50 per cent and 14.50 per cent, respectively. The Board is of the view that although inflation is projected to remain elevated in the near term, the substantial policy measures taken by the Board, at its meeting held on 08 April 2022, combined with the other measures to stem the firming up of aggregated demand pressures, are expected to contain any further build-up of inflation expectations and ease inflationary pressures in the period ahead.

Sri Lanka Purchasing Managers’ Index - April 2022

Manufacturing PMI declined significantly in April 2022, following the seasonal pattern and indicating a contraction in manufacturing activities on a month-on-month basis.Accordingly, Manufacturing PMI recorded an index value of 36.4 in April 2022, with a decline of 21.4 index points from the previous month. This was due to the significant decreases reported in Production, New Orders, Stock of Purchases, and Employment subindices compared to the seasonal peak in month of March.

External Sector Performance – March 2022

Earnings from exports exceeded US dollars 1.0 billion for the tenth consecutive month in March 2022, despite a marginal decline compared to year earlier. Meanwhile, import expenditure recorded a notable decline, year-on-year, for the first time since February 2021. As a result, the trade deficit declined in March 2022 on year-on-year basis. Tourist arrivals and workers’ remittances showed a notable improvement in March 2022, compared to the previous month. Foreign investment in the Colombo Stock Exchange (CSE) recorded a net inflow during March 2022. The Central Bank started publishing a middle rate and variation margin of the interbank weighted average spot exchange rate beginning 13 May 2022 in view of curtailing any large volatility in the intraday exchange rate in the domestic foreign exchange market. 

External Sector Performance – February 2022

The momentum of export earnings continued with over US dollars 1.0 billion for the ninth consecutive month in February 2022. Meanwhile, import expenditure also increased substantially in February 2022, year-on-year, while recording a decline, compared to the previous month. The trade deficit widened, compared to year before. Tourist arrivals showed a notable recovery in February 2022 over the same month in the previous year. Workers’ remittances continued to moderate in February 2022. Foreign investment in the Colombo Stock Exchange (CSE) recorded a net inflow during the month. The weighted average spot exchange rate in the interbank market hovered around Rs. 202 per US dollar during February 2022. However, the Central Bank allowed a measured adjustment in the exchange rate in the first week of March 2022, in view of the heightened pressures on the exchange rate amidst subdued liquidity in the domestic foreign exchange market, resulting in an overshoot subsequently by market forces beyond the expected level of depreciation in the measured adjustment.

Central Bank of Sri Lanka Launched the Sri Lanka Green Finance Taxonomy

The Central Bank of Sri Lanka launched the Sri Lanka Green Finance Taxonomy at the John Exter International Conference Hall of the Central Bank on 06 May 2022. The Sri Lanka Green Finance Taxonomy is a classification system, which defines and categorizes economic activities that are environmentally sustainable, and is a key action item outlined in the Roadmap for Sustainable Finance of Sri Lanka introduced by the Central Bank in 2019. The Taxonomy has been prepared in line with the international best practices, while harmonizing for local context, hence it is expected to enable financial market participants to raise low-cost funding for green activities through both domestic and foreign markets.

On year-on-year basis, CCPI based headline inflation continuously increased to 29.8% in April 2022

Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2013=100) increased to 29.8% in April 2022 from 18.7% in March 2022. This increase in Y-o-Y inflation was driven by the monthly increases of both Food and Non-Food categories. Subsequently, Food inflation (Y-o-Y) increased to 46.6% in April 2022 from 30.2% in March 2022, while Non-Food inflation (Y-o-Y) increased to 22.0% in April 2022 from 13.4% in March 2022.