Economic contraction stopped by high interest rates - CB

The Central Bank has prevented a further contraction of the economy already expanded to very high level by tightening monetary policy and raising interest rates and it was like “taking out air by blowing up a balloon to avoid its blast”, Governor of the bank Nandalal Weerasinghe said on Wednesday 25.

Addressing the first media conference on monetary policy review in 2023 in Colombo, he categorically stated that the Central Bank did not contract the economy by increasing rates, but prevented a further contraction and possible hyperinflation by stabilising the external sector with high rates.

“By tightening monetary policy, we minimised the damage,” he said adding that “if we did not implement tight monetary policy and raising interest rates, we could have had a double-digit contraction and 100 per cent inflation or hyperinflation”.

Economic activity was subduing owing to a forex scarcity before Central Bank’s raising of interest rates and imports were restricted before April 2022, he disclosed.

Sri Lanka’s money printing has been decelerating at present compared to previous years and the normal way of calculation is finding the expansion of reserve money, he explained.

Accordingly money printing stood at Rs.31 billion in 2020, Rs.341 billion in 2021 and Rs 49 billion in 2022, Dr. Weerasinghe said pointing out that he did not want to compare these figures with periods of previous governors of the bank.

Answering a question raised by a journalist, he noted that the bank has reduced the issuance of forex to importers to bring down essential commodities including fuel and LP gas and it is now being done by local commercial banks as it has sufficient foreign reserves.

Although businesses of various sectors including tourism are still requesting for some relief by way of the extension of debt moratoria, the Central Bank does not encourage the continuity of such packages as it could affect the banking system, he added.

There were signs of a gradual easing of excessive market interest due to the administrative measures taken by the Central Bank, along with the improvements in domestic money market liquidity and overall sentiments in the domestic markets.

Sri Lanka was originally expecting an IMF programme to be in place by December and new funds to flow in from January 2023, but the IMF Board approval has been delayed as getting assurances from bilateral creditors on the debt restructuring process is still pending

India gave its assurances recently to the IMF informing their support to Sri Lanka’s debt restructuring process, he said adding that he hopes that they can get the board approval for the bailout loan in 1Q this year.