Nandalal Weerasinghe, the governor of the central bank of Sri Lanka, stated at an LSEG FX Community Event on Monday that the country’s monetary policy transmission to the actual economy is still lacking.
Weerasinghe added that the domestic debt restructuring is the country’s top priority in the near future and that he would like to see private sector interest rates decline lower and more quickly.
“We would like to see yields first reduce in line with policy rates and then further decline. We are anticipating the markets’ response,” he said.
We believe there is opportunity to further slacken policy rates given the inflation trajectory on the down.
Sri Lanka’s economy collapsed last year due to a severe foreign cash shortage, forcing the central bank to boost interest rates to all-time highs to combat rife inflation and currency pressure.
The International Monetary Fund (IMF) granted the government a $2.9 billion rescue package in March.
After the crisis-hit economy shrank by 7.8% last year, Sri Lanka has cut policy rates by 450 basis points in the previous two months, signaling a focus on growth.
According to Weerasinghe, Sri Lanka is on course to outperform this year’s IMF projection of a 3% contraction.
“Sri Lanka has previously performed better than anticipated, and we are optimistic that Sri Lanka will again outperform expectations.”
Sri Lanka’s economy has stabilized over the past five months, with inflation falling to 6.3% in July from a peak of 69% in last September and on track to reach the central bank’s goal range of 4%-6%.