Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2013=100) decreased to 54.2% in January 2023 from 57.2% in December 2022. The decline in the headline inflation is broadly in line with the disinflation path envisaged by the Central Bank of Sri Lanka (CBSL) in January 2023.
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CCPI based headline inflation eased further in January 2023
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The Central Bank of Sri Lanka Maintains Policy Interest Rates at their Current Levels
The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 24 January 2023, 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 14.50 per cent and 15.50 per cent, respectively. The Board, having noted the recent and expected developments and projections on the domestic and global macroeconomic fronts, was of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures. Such tight monetary conditions, together with the tight fiscal policy, are expected to adjust inflation expectations downward, enabling the Central Bank to bring inflation rates towards the desired levels by end 2023, thereby restoring economic and price stability over the medium term.
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NCPI based headline inflation decreased further in December 2022
Headline inflation, as measured by the year-on-year (Y-o-Y) change in the National Consumer Price Index (NCPI, 2013=100)1 decreased further to 59.2% in December 2022 from 65.0% in November 2022. Similarly, the Food inflation (Y-o-Y) decreased further to 59.3% in December 2022 from 69.8% in November 2022, while Non-Food inflation (Y-o-Y) decreased to 59.0% in December 2022 from 60.4% in November 2022.
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Sri Lanka Purchasing Managers’ Index - December 2022
In December 2022, Purchasing Managers Indices indicated an expansion in Services activities and a continued setback in Manufacturing activities.
Manufacturing PMI recorded an index value of 44.8 in December, indicating a continued setback in manufacturing activities. This setback was driven by subdued performance observed in all the sub-indices, except Suppliers’ Delivery Time.
Services PMI returned to the growth territory, recording an index value of 51.6 in December 2022 after declining for two consecutive months. This increase was underpinned by the improvements observed in New Businesses, Business Activities and Expectations for Activity sub-sectors. However, Employment and Backlogs of Work continued to decline during the month.
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External Sector Performance - November 2022
The merchandise trade deficit continued to remain low compared to a year ago, though it widened in November 2022 over the previous month. Earnings from merchandise exports declined in November 2022, mainly due to lower global demand, particularly for garment exports. Meanwhile, merchandise import expenditure also declined for the ninth consecutive month in November 2022 on year-on-year basis, despite recording an increase, compared to October 2022. Workers’ remittances continued to recover and recorded a notable increase in November 2022 over a year earlier and the previous month. Earnings from tourism increased in November 2022 over the previous month supported by a growth of tourist arrivals over 40 per cent. Foreign investment in the government securities market recorded a marginal net inflow during November 2022, while the Colombo Stock Exchange (CSE) recorded a marginal net outflow during November 2022. The Central Bank continued to provide foreign exchange to the domestic foreign exchange market to part finance essential imports. Consequently, the build-up of gross official reserves remained constrained. Meanwhile, the weighted average spot exchange rate in the interbank market remained around Rs. 363 per US dollar during the month.
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The Central Bank of Sri Lanka Introduces Measures to Reduce the Overdependence on the Standing Facilities
The liquidity deficit in the domestic money market, which remained significantly high during the first half of 2022, declined in the latter part of 2022. However, in spite of the improvements in money market liquidity conditions, market interest rates continued to remain high, partly due to subdued activity in the domestic money markets. At the same time, it has been observed that several Licensed Commercial Banks (LCBs) have continued to depend excessively on the overnight Standing Facilities under Open Market Operations (OMOs) of the Central Bank without considering market based funding options to address their structural liquidity needs. Such LCBs have not indicated any signs of taking remedial actions to reduce the over dependence on overnight facilities offered by the Central Bank, which are available to be used as fall back options after utilizing all other funding options.
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Extension of the Suspension of Business of Perpetual Treasuries Limited
The Monetary Board of the Central Bank of Sri Lanka, acting in terms of the Regulations made under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance, has decided to extend the suspension of Perpetual Treasuries Limited (PTL) from carrying on the business and activities of a Primary Dealer for a further period of six months with effect from 4.30 p.m. on 05th January 2023, in order to continue the investigations being conducted by the Central Bank of Sri Lanka.
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Monetary and Financial Sector Policies for 2023 and Beyond
Sri Lanka encountered the most challenging year in 2022 in the post-independence economy. Headwinds due to consecutive economic shocks in recent years, including the Easter Sunday attacks in 2019, the outbreak of COVID-19 in 2020, and its protracted impact on activity in the aftermath in 2021, the socioeconomic and political crisis in 2022 amidst catastrophic balance of payments (BOP) pressures, along with unprecedented policy tradeoffs, have severely affected economic activity, inflicting unimaginable hardships to individuals and businesses. Livelihoods were lost, while real incomes suffered the most. Structural economic impediments that existed across various spheres of the economy over decades were compounded by these economic shocks, along with ill-timed policy choices, thereby loosening the macroeconomic balance and resulting in a sudden and multipronged setback for the nation.
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Sri Lanka Prosperity Index - 2021
Sri Lanka Prosperity Index(SLPI) , recorded an index value of 0.796 in 2021 with a slight increase compared to 0.764 recorded in 2020 where the economy was severely affected by the COVID-19 pandemic. The marginal increases of ‘Economy and Business Climate’, ‘Well-being of the People’ and ‘Socio-Economic Infrastructure’ sub-indices have contributed to this slight increment in SLPI.
Overall increase in the Economy and Business Climate sub-index in 2021 was driven by increases in Gross Domestic Product (GDP) per capita in nominal terms, employment, wages and industrial density compared to 2020. However, relatively high inflation in 2021 compared to the previous year had detrimental effects on the sub-index.
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CCPI based headline inflation eased further in December
Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2013=100) decreased to 57.2% in December 2022 from 61.0% in November 2022 recording the lowest reading in the second half of 2022. Following a similar trend, the Food inflation (Y-o-Y) decreased to 64.4% in December 2022 from 73.7% in November 2022. Meanwhile, the Non-Food inflation (Y-o-Y) decreased to 53.4% in December 2022 from 54.5% in November 2022.