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MONITORY POLICY

 

 

Monetary policy was aimed at maintaining stability in the financial markets in the background of a continuing decline in inflation, shortage of rupee liquidity and some instability in the foreign exchange market. In order to maintain stability in interest rates and provide necessary liquidity for economic activities, the Bank met the shortfall of liquidity through reverse repurchase transactions and through the purchase of Treasury bills at the primary auction. The Bank relied mainly on open market operations in the conduct of monetary policy and the repurchase and reverse repurchase rates were used to signal policy directions to the market. In view of the continuing downward trend in inflation and market liquidity conditions, the repo rate was reduced in January 2000. However, it was increased in May and June as monetary policy was tightened somewhat to reduce volatility in the foreign exchange market. Allowing further market orientation in the determination of exchange rates, a significant change was effected in the exchange rate management system, with effect from June 20. The Bank continued to monitor reserve money to maintain it within the overall monetary targets. Net foreign assets of the monetary authorities declined with the deficit in the balance of payments. Increased import expenditure arising from a growth in the import of intermediate goods and a sharp increase in the price of oil and outflows on account of the repayment of debt contributed to the deficit in the balance of payments. The domestic assets of the Bank increased with the increase in holdings of government securities.

Several changes were made to the repurchase and reverse repurchase rates to consolidate the downward trend in inflation, stabilise market interest rates and avoid excessive volatility in the foreign exchange market. At the beginning of the year, there was an inflow of cash into the banking system following the reversal of the large cash withdrawals by the public towards the end of 1999 in view of the market uncertainties generated by the Presidential election, the Y2K issue and seasonal factors. This inflow resulted in a significant increase in liquidity in the market and a consequent fall in interest rates. With the increase  in liquidity and the continued decline in inflation, the Bank reduced its overnight repo rate from 9.25 per cent to 9.00 per cent in January. The Bank also mopped up excess liquidity, and in order to assist in this process, temporarily reduced the margin  between the primary market yield on Treasury bills and its discount rate from 15 basis points to 5 basis points from 13 January. This was reversed on 18 January, following the successful mopping up of liquidity.

Monitory Policy At a Glance  Sri Lanka Budget 2003

CURRENCY
Sri Lankan Rupee

CURRENCY CONVERTIBILITY REGIME
By mid-1994, Sri Lanka had removed all foreign exchange restrictions on current account transactions.  The monetary authorities are rapidly moving towards full convertibility of the Sri Lankan rupee.

LATEST EXCHANGE RATE
Sri Lankan rupees (SLRe) per US$1 : 96.04 (April 2002)

Economic Indicators 2002

  • GDP: $15.5 billion
  • GDP growth rate: 4.3%
  • GDP per capita: $814
  • Exports of goods and services: $5.6 billion
  • Major export trading partners: US 38.9%, UK 13.1%, Middle East 7.9%, Germany 4.7%, Japan 3.5%
  • Imports of goods and services: $8 billion
  • Major import trading partners: Japan 9.5%, India 8.7%, Hong Kong 7.8%, Singapore 7.6%, South Korea 6.5%
  • Foreign direct investment (net): $122 million

NAME OF THE CENTRAL BANK
Central Bank of Sri Lanka