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Monetary Policy Review - November 2016

As envisaged, the growth of credit extended to the private sector by commercial banks decelerated considerably during September 2016, in response to monetary policy measures adopted by the Central Bank since end 2015. Accordingly, the year-on-year growth of private sector credit by commercial banks was recorded at 25.6 per cent in the month of September 2016 compared to 27.3 per cent in the previous month. Despite the deceleration in credit extended to the private sector, broad money (M2b) growth accelerated to 18.4 per cent, year-on-year, in September 2016 in comparison to 17.3 per cent recorded in the previous month, as borrowings by the public sector from commercial banks expanded during the month. In the meantime, rupee liquidity conditions in the domestic money market have returned to a balanced level, which will help stabilise market interest rates at current levels.

Licensing, Regulation and Supervision of Companies Carrying on Microfinance Business

The Microfinance Act, No. 6 of 2016 was enacted with the objective of providing a regulatory framework to cover microfinance institutions that are not regulated at present. The purpose of the Act is to improve the delivery of financial services to low income persons and micro enterprises, increase financial inclusion, strengthen the soundness and systems of microfinance institutions, facilitate microfinance institutions to access wider sources of funding, promote consumer protection and promote a safe and stable financial system.

The Microfinance Act came in to operation on 15 July 2016. Accordingly, the Monetary Board of the Central Bank of Sri Lanka is empowered to issue licences for applicant  companies carrying on microfinance business, issue rules and directions for Licensed Microfinance Companies (LMFCs) and issue guidelines to the Registrar of Voluntary Social Services Organisations for the regulation and supervision of Microfinance Non-Governmental Organizations (MNGOs).

External Sector Performance - August 2016

The external sector recorded a modest performance during August 2016 amidst the widening of the trade deficit while inflows from tourism and workers’ remittances grew at a healthy rate. Although exports recorded a considerable growth during August 2016, imports also grew resulting in a widening of the trade deficit. However, earnings from tourism and workers’ remittances grew, cushioning the impact of the trade deficit. Meanwhile, inflows to the financial account were supported by foreign investments to the government securities market and the Colombo Stock Exchange (CSE) and long-term loan inflows to the government in August 2016.


The International Monetary Fund Releases the Second Tranche of US Dollars 162.6 million under the Extended Fund Facility

The first review of the three-year Extended Fund Facility (EFF) obtained by Sri Lanka has been successfully completed by the International Monetary Fund (IMF) and the second tranche to the value of SDR 119.894 million (approximately US dollars 162.6 million) has been disbursed on 18 November 2016.

The EFF aims at supporting the balance of payments and the broad economic reform agenda of the government. The IMF mission, that visited Sri Lanka in September, particularly welcomed the fiscal consolidation measures implemented by the Government and tightening of monetary policy, which has contributed to improved market confidence and an easing of pressures on the external sector. The mission appreciated the efforts of the government and other institutions in achieving all quantitative performance criteria through end-June. The members of the IMF Executive Board also have expressed their satisfaction on the achievements of Sri Lanka under the ongoing EFF programme.

Inflation in October 2016

Inflation, as measured by the change in the National Consumer Price Index (NCPI) (2013=100), which is compiled by the Department of Census and Statistics, increased to 5.0 per cent in October 2016 from 4.7 per cent in September 2016, on year-on-year basis. Both Food and Non-food categories contributed towards the year-on-year inflation in October 2016.

The change in the NCPI measured on an annual average basis increased to 4.0 per cent in October 2016 from 3.8 per cent in September 2016.

SL Purchasing Managers’ Index Survey - October 2016

The Manufacturing Sector PMI stood at 56.5 in October compared to 57.7 in September 2016. The deceleration in PMI indicate that the manufacturing activities are expanding at a moderate pace in October 2016. The deceleration in October compared to September was mainly due to the moderated pace in which Production and New Orders sub-indices performed. The Stock of Purchases sub-index increased significantly in October indicating a stack of stocks for the upcoming season while Suppliers’ Delivery Time increased marginally. The Employment sub-index also decelerated compared to the previous month. Overall data points to an expansion where all the subindices are above the neutral 50.0 threshold. The expectations for activities indicate an improvement for the next three months.