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External Sector Performance - June 2020

Sri Lanka’s external sector stabilised further in June 2020, with the gradual normalisation of domestic economic activity. The trade deficit declined in June 2020 (year-on-year), with a more than expected rebound in merchandise exports and notable reduction in merchandise imports on account of restrictions on non essential imports. Workers’ remittances recorded a growth in June, for the first time since the outbreak of the COVID-19 pandemic. During the month, both the government securities market and the Colombo Stock Exchange (CSE) recorded some outflows. Supported by the reduction in the trade deficit, the Sri Lankan rupee recorded a marginal appreciation during June 2020.

CCPI based Inflation increased in July 2020

Headline inflation as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2013=100) increased to 4.2 per cent in July 2020 from 3.9 per cent in June 2020. This was mainly driven by monthly increase of prices of items in Non-food category along with the statistical effect of the low base prevailed in July 2019. Food inflation (Y-o-Y) increased to 10.9 per cent in July 2020 from 10.0 per cent in June 2020. Further, Non-food inflation  (Y-o-Y) also increased marginally to 1.5 per cent in July 2020 from 1.4 per cent in June 2020.

The Central Bank of Sri Lanka Denies Media Reports on Macroeconomic Projection Updates

Several media reports have been brought to the notice of the Central Bank of Sri Lanka (CBSL) in which certain macroeconomic projections are erroneously attributed to the CBSL. 

The CBSL has not released to the public any update to its macroeconomic projections since the publication of the CBSL Annual Report in April 2020. Given the conditions of uncertainty created by the COVID-19 pandemic, frequent updates to macroeconomic projections are required, and the CBSL has continued to monitor standard indicators of economic activity as they become available. It has been using unconventional indicators as well on a real time basis in its analysis and policy guidance. 

The Central Bank enters into a Bilateral Currency Swap Agreement with the Reserve Bank of India

The Central Bank of Sri Lanka (CBSL) and the Reserve Bank of India (RBI) have entered into a currency swap agreement on 24th July 2020 under the Framework on Currency Swap Arrangement for South Asian Association for Regional Cooperation (SAARC) countries for 2019 - 2022. This would provide short-term financing to the CBSL to meet the country’s balance of payment requirements.

The intention of the CBSL in entering into this Swap agreement was to be able to maintain a sufficient short-term foreign exchange liquidity while preserving the foreign currency reserve position of the country intact. The challenging external economic environment of Sri Lanka today is the result largely of this Covid-19 pandemic. This Swap agreement has the approval of the Cabinet of Ministers, received on the recommendation of the Monetary Board of the Central Bank of Sri Lanka.

The Central Bank clarifies its Repurchase Agreement with the Federal Reserve Bank, New York

The Central Bank of Sri Lanka (CBSL) has recently entered into an agreement with the Federal Reserve Bank, New York (FED) as a temporary source of US dollar liquidity to be used when required. The facility, in technical jargon, is an overnight Repurchase (Repo) facility available for “Foreign and International Monetary Authorities” (FIMA). Many central banks in the world have resorted to this facility to meet their short-term US dollar liquidity requirements. This facility enables a Central Bank to secure short-term funding when needed, without having to make any sudden structural adjustments to its long-term investment portfolios in foreign exchange. 

Imposition of penalties to enforce compliance on Financial Institutions during 2019 and 2020 by the Financial Intelligence Unit (FIU)

By virtue of the powers vested under Section 19 (1) read together with section 19 (2) of the Financial Transactions Reporting Act, No. 06 of 2006 (FTRA), financial penalties can be imposed on Institutions for non-compliance with the provision of the FTRA. The penalties may be prescribed taking into consideration the nature and gravity of relevant noncompliance of the Financial Institution or the Designated Non-Finance Business (DNFBs).

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