Courtesy The Daily Mirror

---

Dr. Nandalal Weerasinghe

The Central Bank of Sri Lanka (CBSL) said it expects inflation to remain well below its upper target of 5 percent until early next year, supporting the ongoing economic recovery by providing some relief to both livelihoods and business activities.

Based on current projections, inflation is expected to stay below the 5 percent target until the first quarter of 2025 before stabilising around the targeted level. 

Although technically a miss on the lower bound (3 percent), the economy could benefit from this extended period of low inflation as it recovers from its deepest crisis following historic inflation levels,” CBSL Governor Dr. Nandalal Weerasinghe said at the Organization of Professional Associations of Sri Lanka’s (OPA) annual conference. 

He emphasised that low inflation has created a favourable environment, alleviating a significant bottleneck previously faced by various economic sectors.

During the peak of the economic crisis, inflation surged to an all-time high of 70 percent in September 2022. However, it returned to single digits within a year due to monetary policy tightening and has remained close to or below the targeted level since then.

Considering the low inflation, well-anchored inflation expectations, and moderation of external sector pressures, the Central Bank began easing the monetary policy in mid-2023 to support the economy in reaching its potential. Our monetary policy stance remains accommodative, aligning with softened inflationary pressures,” Dr. Weerasinghe noted.

Under the current low interest rate environment, the Governor observed a gradual pickup in private sector credit, which has recently reinvigorated economic activity.

We expect a notable expansion in lending to productive sectors, particularly those focused on exports and to Small and Medium Enterprises (SMEs), which have long been the backbone of the economy,” he said.

Dr. Weerasinghe also highlighted the importance of the Central Bank of Sri Lanka Act, enacted in September 2022, in curbing record-high inflation. The Act formally recognized Flexible Inflation Targeting as the Central Bank’s monetary policy framework.

The independence of the Central Bank has been reinforced by limiting monetary financing and ensuring independent decision-making without fiscal influence, thereby strengthening both monetary policy formulation and governance,” he added.

Regarding the financial sector, the Governor noted that the Central Bank provided regulatory guidance to banks and non-bank financial institutions during the crisis to ensure their resilience with adequate capital and liquidity.

An Asset Quality Review (AQR) was conducted as part of a bank diagnostic exercise. Based on the AQR, the expected impact of debt restructuring, and forward-looking stress testing, the Central Bank developed a roadmap to address issues related to capital and foreign currency shortfalls. We expect the financial sector’s resilience to improve further as macroeconomic vulnerabilities dissipate,” he elaborated.

While the country has rebounded faster than expected from the economic crisis, Dr. Weerasinghe stressed that sustained growth depends on consistent reforms, targeted policies and addressing grassroots-level challenges. (NF)