The stabilisation policy measures taken by the Central Bank and the government in the past two years has resulted in reserves increasing from US dollars 8 billion by end 2017 to a historic US$ 9.88 billion, said Governor Central Bank, Indrajit Coomaraswamy yesterday.
He expressed these views after submitting the Central Bank Annual report to Finance Minister Mangala Samaraweera.
“Adverse weather conditions and their spillover effects continued to affect real economic activity and the economy recorded a growth of 3.1 per cent in real terms. However we predict this to grow to 5.5% end of the year,” he said.
Coomaraswamy said that the annual average inflation too was managed well last year. He said that several measures were introduced to deepen and develop the domestic foreign exchange market further during the year as well.
“Such measures helped the Central Bank to purchase a significant amount of foreign exchange from the domestic market without creating excess volatility in the exchange rate, while facilitating a market based exchange rate aligned with macroeconomic fundamentals.”
The overall balance of the balance of payments (BOP) recorded a surplus of US dollars 2.1 billion in 2017 after two years of deficits, as a result of significant inflows to the financial account. Substantial inflows were observed in the form of debt capital, while foreign direct investment (FDI) recorded the highest ever inflows in 2017 supported by improving investor sentiments.
Nevertheless, the improvements in relation to the government securities market, which corrected some distortions that prevailed in 2015 and 2016, resulted in a significant decline in yields on government securities, thus exerting a downward effect on some market interest rates towards the end of the year.
In the external current account, although earnings from exports increased to the highest levels recorded, the increase in imports, mainly arising from drought related imports of petroleum and rice as well as increased importation of gold, caused a wider trade deficit. Gold imports too contributed largely towards import of increase”
The Governor said that with the tax import on Gold exports the prices would be in par with India and the smuggling in large volumes to India too would reduce.
The Sri Lankan rupee depreciated against the US dollar by 2 per cent during the year, while the real effective exchange rate indices also depreciated, raising the competitiveness of the currency. Such a fairly-valued currency in real terms is expected to enable a gradual adjustment of the current account deficit of the BOP in the period ahead.
He said that this would not have a negative impact no have additional payments for debt repayment. “We also expect that the exchange would stabilize soon, ”he added.