Sri Lankan Central Bank projects 3.9% economic contraction due to Covid

The Central Bank of Sri Lanka on Monday projected an economic contraction of 3.9 per cent for the financial year 2020 due to the COVID-19 pandemic.

Central Bank Governor W D Lakshman presented the bank's roadmap for economic recovery in 2021 in a virtual meeting with journalists on Monday.

"With observed developments in the fourth quarter (of 2020), we expect the economy to record an annual contraction of around 3.9 per cent. The Central Bank is of the view that continued support through monetary and fiscal interventions is essential to provide adequate impetus to the economy amidst the challenging domestic and global macroeconomic conditions," said Lakshman.

"Therefore, the Central Bank will continue the prevailing accommodative monetary policy stance in 2021 to ensure the envisaged recovery of economic activity," he said.

Sri Lanka, which is heavily dependent on its tourism sector, recorded a huge number of job losses and business closures in the aftermath of the COVID-19 outbreak. The virus has so far claimed 213 lives, along with 44,774 confirmed infections in the island nation.

The Central Bank has ensured liquidity in the market with a number of accommodative monetary measures, leading to the country recording growth of 1.5 per cent in the third quarter of 2020.

The second quarter had seen a sharp contraction, a period which coincided with a protracted lockdown from mid-March.

The IMF and the World Bank had forecasted over 4 per cent contraction of Sri Lanka's economy in 2020.

"Growth-conducive policy measures introduced in 2020, we believe, would take a while to be effectively transmitted to the real economy. To catch up with the lost momentum and to sustainably realign itself with the envisaged high growth path, the economy would need some time," Lakshman said.

"The Central Bank will continue to remain vigilant but is confident that inflation will remain within the targeted range of 4 to 6 per cent over the medium-term", the governor said.

The Central Bank has imposed strict import restrictions to maintain its currency reserves. This, analysts say, has eased pressure on the Sri Lankan Rupee against the US dollar.

Experts expect currency swap with India and a syndicated loan from China to support the business sector and carry out welfare schemes.