Home Finance Six-Month Road Map for Ensuring Macroeconomic and Financial System Stability

Six-Month Road Map for Ensuring Macroeconomic and Financial System Stability

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Today, Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka (CBSL), unveiled the ‘Six-Month Road Map for Ensuring Macroeconomic and Financial System Stability’ (October 01).He said that the Central Bank’s ‘to-do list’ for macroeconomic stability concerns includes –

  • Intervene in the foreign exchange market by providing funds to cover the country’s energy bills, thereby incorporating liquidity.
  • Encourage investments in rupee-denominated government securities with a fixed exchange rate guarantee.
  • Strengthen the requirement for export proceeds to be converted.
  • Request that the government tax export profits at a rate of 28 percent rather than 14 percent where foreign currency is not repatriated and converted.
  • Extend the moratorium while also assisting affected finance companies with liquidity.
  • Stop partial executions and vehicle repossessions for pandemic-affected borrowers in the next six months.
  • Share the burden of Pandemic losses incurred by local SMEs by allocating Rs. 15,000 million to interest accrued, according to a mechanism to be devised.
  • To unwind the monetary stimulus that was extended during the pandemic, use monetary policy tools.
  • To guide the financial sector toward long-term stability, use macroprudential tools as well as microprudential regulation and supervision.
  • Immediately facilitate forex outflows related to education and health.
  • In January 2022, the ceiling on outward investment and migration allowances will be lifted.
  • With immediate effect, eliminate cash margin deposit requirements for “non-essential/non-urgent imports.”
  • Beginning January 1, 2022, establish the International Transactions Reporting System (ITRS) to track foreign exchange transactions.
  • Monitor foreign exchange inflows related to services and ensure proper repatriation and conversion.
  • Wherever possible, replace maturing debt obligations with new inflows from non-debt sources.
  • If high discounts are prevalent in the market, consider buying back the entire issue of ISBs maturing in January 2022 and/or July 2022.
  • Until the ISB/GDP ratio falls to 10% or less, replace maturing ISBs with Government-to-Government loans.
  • Take steps to raise sovereign ratings.
  • Boost workers’ remittances via official channels.
  • Encourage forex transactions through formal channels by restoring money changer licenses.

The general public will benefit directly as a result of:

  • Facilitating forex outflows related to education and health, including those made with credit cards
  • In January 2022, the restrictions on the migration allowance will be lifted.
  • Improving the flow of fuel and other essential imports to ensure uninterrupted supplies
  • With the correction in deposit interest rates, savers will get better real returns.
  • Supporting the availability of credit at reasonable interest rates
  • Maintaining stable price levels and thus lowering living costs
  • Assuring the financial system’s stability and, as a result, the public’s savings

By the end of March 2022, the Central Bank hopes to achieve the following results…

• Gross Official Reserves should be increased to cover at least four months’ worth of imports.

• Foreign holdings of rupee-denominated government securities of 2.5 percent (USD 1,000 mn)

• A SLDB with a diverse investor base

• Low interest rates and a stable exchange rate

• Improved Net Foreign Assets/Net Domestic Assets ratio in the Central Bank’s balance sheet

• A more robust banking and non-banking sector

• Weekly Treasury bill auctions with a value of less than Rs. 50 billion

• Real GDP growth of around 5% in 2021 and 6.5 percent in the first quarter of 2022

• Inflation has remained stable in the mid-single digits.

The Central Bank anticipates more positive outcomes by the end of 2022:

• Economic activity has returned to normal now that the COVID-19 pandemic has been contained, resulting in a real GDP growth of around 6%.

• Inflation to settle in the middle of the target range of 4-6 percent.

• Interest rates will continue to stabilize.

• Tourism resurgence, resulting in improved business sentiment

• Increased investment flow

• Stronger macroeconomic fundamentals lead to higher sovereign ratings.

• A more stable and disciplined economy

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