CB optimistic of stability amidst ongoing economic reforms

• Says economy expected to continue to recover and reach its potential in coming years
• Inflation expected to stabilise around the target over the medium term
• Signs of economic recovery observed in 2H23 expected to translate into a broad-based recovery across all sectors
• Overall outlook of the Sri Lankan economy in the medium to long term will be conditional on the continuation of the IMF-EFF programme, among others

The Central Bank of Sri Lanka sounded optimistic about Sri Lanka witnessing stability on multiple fronts, provided that the ongoing ambitious reforms and economic adjustments underpinned by the Extended Fund Facility (EFF) programme of the International Monetary Fund (IMF) continue without any interruptions.

The financial sector regulator in its Annual Economic Review 2023 released last week said that the Sri Lankan economy is expected to continue to recover and reach its potential in the coming years, bolstered by the return of greater macroeconomic stability. 

Following the swift disinflation process, inflation is expected to remain around the target of 5 percent on average during 2024. This is despite intermittent fluctuations caused by supply-side shocks amid lower demand conditions.

According to the Central Bank, inflation is expected to stabilise around the target over the medium term, supported by appropriate policy measures. 

“Central Bank’s independence coupled with greater public accountability in monetary policymaking would be instrumental in maintaining domestic price stability over the medium term,” it stressed.

The early signs of economic recovery observed in the second half of 2023 are expected to translate into a broad-based recovery across all sectors in the ensuing period. 

Despite a possible widening in the trade deficit driven by the revival of imports along with increased economic activity, the external sector is anticipated to build upon the favourable developments in 2023, with the revived tourism sector, elevated levels of workers’ remittances, and expected non-debt creating inflows while augmenting external buffers. 

With the waning of profound vulnerabilities in 2023, the financial sector is expected to expand its service provision in the period ahead, with improved resilience reinforced by the strengthening of the legislative structure. 

On the fiscal front, the government is expected to persevere with its fiscal consolidation efforts, while continuing the much-needed reform drive to ensure the economy’s transition towards a sustainable path, the Central Bank said.

Amidst longer term challenges arising from climate change, population ageing and geopolitical tensions, the overall outlook for the Sri Lankan economy in the medium to long term will be conditional on the continuation of the IMF-EFF programme with the successful completion of the debt restructuring process and uninterrupted execution of productivity and efficiency enhancing reforms with broader political and social consensus.