The State of the

Sri Lankan Economy

Challenges, Policies and Outlook
ANNUAL As Reflected in the Annual Report 2022

REPORT
2022 Dr. P K G Harischandra
Director of Economic Research
Central Bank of Sri Lanka
09 May 2023
ANNUAL REPORT 2022
Section 35 of the Monetary Law Act:
…Within four months after the end of each
financial year, the Monetary Board shall
submit to the Minister in charge of the
subject of Finance and shall publish an
annual report on the condition of the Central
Bank and a review of the policies and
measures adopted by the Monetary Board
during the financial year and an analysis of
the economic and financial circumstances
which prompted those policies and
measures…
ANNUAL REPORT 2022
 Content of the Annual Report
Content
Content
State of the economy, its performance, policies and issues
Volume 1 Part I - Statistical Appendix
Special Statistical Appendix

Part II - Accounts and Operations of the Central Bank

Administrative Measures adopted by the Government and

the Monetary Board during the year relating to the
Part III -
Functions and Operations of the Central Bank and
Volume 2 Banking Institutions in Sri Lanka

Major Legislative Enactments of 2022 relating to the

Part IV - Functions and Operations of the Central Bank and
Banking Institutions in Sri Lanka

ANNUAL REPORT 2022

The Sri Lankan economy
encountered its
most onerous year in its
post-independence
history in 2022…

ANNUAL REPORT 2022

• Rapidly deteriorating economic conditions warranted immediate
and coordinated policy initiatives to preempt a further worsening
of the situation

• The corrective measures affected the vast citizenry in the near

term, but they were necessary to safeguard the economy and
people from potentially devastating consequences of unrestrained
economic instability

• The expected outcomes of these efforts began to materialise

since late 2022, thereby helping to restore socio-economic stability

• Challenges remain in ensuring stability on a sustainable basis

ANNUAL REPORT 2022

Real economy contracted by 7.8% in 2022, recording the deepest
contraction on record…
Contraction remained broad-based in 2022…
Real estate activities => -12%
Services -2.0%  Financial services => -11%
Insurance => -47%

Real GDP Industry -16.0% 

Construction => -21%
Manufacturing => -13%

contracted by Growing of rice => -13%

Agriculture -4.6% 
7.8% in 2022,
Growing of tea => -16%
Animal production => -13%

Taxes less
-27.1% 
compared to the subsidies

growth of 3.5% in Overall Size of the Economy (USD bn)

2021
2021
2022
88.5 -12.9%
77.1

Per capita GDP Per capita GDP

3,997 US$ 3,474 US$

ANNUAL REPORT 2022 6

Inflation reached a historic high…
Inflation (based on the CCPI)
reached a historic high at
69.8% in Sep 2022
‒ Depreciation of LKR
‒ Supply shortages
‒ Large monetary financing
‒ Global energy and food
inflation
caused a reverberating effect on
all aspects of society, with the
significant increase in inflation

Y-o-Y (CCPI, 2013=100) Dec 2021 Sep 2022

Headline 12.1% 69.8%
Core 8.3% 50.2%
Food 22.1% 94.9% High inflation
and de-anchoring of
Non-Food 7.5% 57.6% inflation expectations

ANNUAL REPORT 2022 7

The external sector met with severe BOP stresses in 2022…
Workers’ Remittances fell to Trade deficit
widened
1.1
Forex liquidity US$ 205 mn US$ bn
dried, causing Feb 2022 (Dec 2021)

shortages of US$ 585 mn

2018 (monthly average) USD 781 mn (avg)
essentials from Jan-Apr 2022

USD bn
Earnings from tourism declined Usable official Foreign
2021: 6.8
Currency debt
US$ 41 mn reserves fell to
Sep 2022 critically low 20 US$ mn servicing 2022 (Proj.)*:
2022: Q1:
7.6
2.5
levels Apr 2022 soared
US$ 365 mn 2022: Q2-Q4:
2018 (monthly average) 0.7
*before debt standstill announcement

Gross official reserves depleted Exchange rate Market

US$ 1.7 bn
LKR was allowed a speculation 44%
Depreciation LKR/USD
measured caused a large
Oct 2022 adjustment overshooting 08 Mar - 12 May 2022

ANNUAL REPORT 2022 8

The vulnerabilities in the power and energy sector heightened
amidst forex shortages causing significant loss of economic activity…
• Fuel crisis in 2022 led to severe social inconvenience and
unrest
– Worsened financial position of the CPC
– Sparse liquidity in the domestic foreign exchange market
• Excessive hoarding of stocks by the people and long
queues for fuel due to;
– Inconsistency in fuel distribution
– Uncertainty in the availability of fuel

Daily Power Outages in 2022 (Minutes)

Electricity and Petroleum 600
500
400

MAY – JUN 300

Fuel 2022 200
Shortages 100
0

Nov

Dec
Mar

May

Aug

Sep
Apr

Oct
June

July
ANNUAL REPORT 2022 9
Fiscal sector imbalances that persisted for several decades reached
a tipping point in 2022…

Government Government Overall fiscal Government

Revenue expenditure deficit debt
8.2% 18.5% 10.2% 113.8%
of GDP of GDP of GDP of GDP

One of the lowest Expenditure remained The third highest deficit Central Government debt
in the world rigid in 20 years reached an unsustainable level

A series of sovereign credit rating downgrades by international rating agencies that

started in January 2020 was intensified during the second half of 2021 through early 2022, hence
constrained the access to foreign financing

ANNUAL REPORT 2022 10

Monetary sector performance also reflected the impact of the crisis
and corrective measures taken…

• Monetary financing NCG by the CBSL Credit to the Private sector

increased End continued to contract
• NCG by the banking
2021 1.2 Rs. tn consecutively from June 2022
system expanded
Rs -494 bn (Jun 22 - Feb 23)
End
2022 1.3 Rs. tn

Net foreign assets of the Central AWPR reached a Yields on Gov. Sec. increased
Bank turned negative and historic high at to extraordinarily high levels
recorded at lowest levels
29.7% 33.1%
as of end
2022
-1.6 ≈ -4.4 Nov-2022 Nov-2022 (91d T-bills)
Rs. tn US$ bn

ANNUAL REPORT 2022 11

The financial system weathered headwinds from the most profound
economic crisis since independence…

Banking Sector LFCs and SLCs Sector CSE

The banking sector faced looming The LFCs and SLCs sector operated …a bleak performance
challenges arising from continuously amidst challenges stemming from during 2022 reflecting the
declining credit quality, acute pressure on contraction of credit growth, high yield for fixed income
liquidity, low level of profitability, and declining profitability and securities and negative
deteriorating capital levels… increase in NPLs. market sentiments…

ROA (Before Tax) NPL (%)(a) ROA (Before Tax) NPL (%)(b) ASPI(c)

1.0% 11.3% 3.7% 17.5% -30.6%

2021: 1.4% 2021: 7.6% 2021: 5.4% 2021: 11.0%
S&P SL20(c)

Capital Adequacy (%) Credit Growth (%) Capital Adequacy (%) Credit Growth (%) -37.7%
15.3% 5.7% 22.0% 5.0% Market Capitalisation(c)
2021: 17.9% 2021: 14.5%
(a) as indicated by stage 3
2021: 17.0% 2021: 9.9%
(b) as indicated by stage 3
-29.9%
loans to total loans loans to total loans (c) y-o-y % changes

ANNUAL REPORT 2022 12

Economic crisis led to
severe hardships to
individuals and
businesses

ANNUAL REPORT 2022

Rising inflation led to severe deterioration of living conditions of the
public and substantial hardships to businesses…
High Production Costs Negative Real Returns
Increasing Prices

Gas 240% (Aug)

Fuels For Personal Transport 207% (Jul) Businesses and

Bread and Bakery Products 183% (Aug)
the general public
alike were in severe
Passenger Transport By Road 145% (Aug)
distress amidst
Materials For Household Maintenance 120% (Aug) shortages and rationing
Water Supply 120% (Oct) of essentials, the
Meat 119% (Oct) ballooning cost of living
Personal Hygiene Products 116% (Dec)
and cost of production,
Falling Real Wages
and the loss of welfare
Electricity 114% (Nov)
Highest and livelihoods.
Y-o-Y Inflation Fruits 108% (Dec)

(CCPI, 2013=100) Fish and Sea Food 99% (Sep)

of Selected
Milk, Cheese and Eggs 98% (Aug)
Categories
During 2022 Meals Bought From Outside 97% (Sep)

Spices and Other Foods 94% (Jul)

Rice 94% (Sep)

Vegetables 90% (Jun)

ANNUAL REPORT 2022 14

The acceleration in consumer prices had a severe impact on
vulnerable households, exacerbating pre-existing income
inequalities…
Scarcity of essential items amidst
dearth in foreign exchange liquidity
caused significant social suffering
(Pharmaceuticals, fuel, LP Gas, food items,
industrial raw materials etc.)

Sri Lanka’s progress

in eradicating poverty
has stalled with
heightened
economic
vulnerabilities from
Severe economic hardships
multiple fronts during led to both public anxiety
the crisis and political upheaval

ANNUAL REPORT 2022 15

 Credible and transparent
policy measures prevented
further worsening of the
crisis and helped reviving
socio-economic stability...

ANNUAL REPORT 2022

 The Central Bank adopted aggressive monetary
policy tightening in April 2022 to rein in demand
pressures, complemented by a robust communication
strategy aimed at anchoring inflation expectations,
while taking measures to stabilise the exchange
rate amidst exhausted levels of useable reserves, and
preserve financial system stability…

ANNUAL REPORT 2022

Mounting inflationary pressures warranted a swift and sizeable
policy intervention to ensure economic and price stability…
Contain rising inflationary pressures
and its adverse impact on domestic
economic stability

Unwind the lagged impact of

accommodative monetary policy
measures adopted during the pandemic

The need for Contain the de-anchoring of inflation

large and expectations
persistent
monetary policy Reduce the magnitude of negative
real interest rates
tightening
Address external sector imbalances

Correct anomalies in the interest rate

structure

ANNUAL REPORT 2022 18

The tight monetary policy stance, which was in place from August
2021, was tightened further from early 2022…
The Standing Rate Corridor (SRC), the Average Weighted Call Money Rate
(AWCMR), and the Statutory Reserve Ratio (SRR)
• Policy interest rates:

950 bps  (2022) 700 bps

(Apr 2022)
100 bps  (so far in 2023)
• SRR:

2 % pts  (Sep 2021)

• Caps on interest rates were
removed

ANNUAL REPORT 2022 19

In response to tight monetary policy, market interest rates rose
notably within a span of a few months…
Movement of Selected Market Interest Rates In addition to the substantial increase
36
in policy interest rates, market interest
33 rates were driven by:
30
27
24
21
The surge in the yields on
G-secs driven by
Per cent

18
15 increased risk premia
12
9
6
3
The large and persistent
Oct-20

Oct-21

Oct-22
Aug-20

Aug-21

Aug-22
Apr-20

Apr-21

Apr-22
Feb-20

Jun-20

Feb-21

Jun-21

Feb-22

Jun-22

Feb-23
Dec-19

Dec-20

Dec-21

Dec-22
liquidity deficit in the
Monthly AWPR AWDR domestic money market
AWNDR AWFDR
AWLR AWNLR
Treasury Bill Yield (91-day) (month-end) Source: Central Bank of Sri Lanka

However, excessive market interest rates are gradually decreasing…

ANNUAL REPORT 2022 20

Liquidity in the domestic money market was allowed to remain at
negative levels, thereby supporting the tight monetary policy stance…

Rupee Liquidity in the Domestic Money Market and AWCMR (a)

The need for maintaining
tight monetary conditions
amidst high inflation rates

...the Central Bank used a wide range of conventional

and unconventional liquidity management tools to
ensure both monetary and financial stability…

Large volume of market interventions

Imposing restrictions on SFs (SDF: < 5 times per
month, SLF: < 90% of SRR)
Term reverse repos
Introducing the Liquidity Assistance Facility
Strengthening the ELA facility

ANNUAL REPORT 2022 21

The BOP pressures were contained by measures on multiple fronts…
Established the export proceeds monitoring
Widening trade deficit resulting from high import expenditure needed system to ensure conversion
import compression measures amidst the dearth of forex inflows

Tightening of monetary policy

Imports, Exports and Trade Balance

2.5
Imports Trade Balance Exports Restrictions on certain payment terms for imports
2.0 (in May 2022)
• Open accounts
1.5 • Consignment accounts
• Documents against Acceptance (DA)
1.0 • Documents against Payments (DP)
USD bn

0.5
Introduction of margin deposit requirement
0.0 • 779 items in May 2022
• 64 items in Feb 2023
-0.5

-1.0
Temporary suspension of selected imports
-1.5 • TS in August 2022 (1,400 HS codes)
• Relaxation of TS initiated during Sep - Nov 2022
Jul-20

Jul-21
May-20

Sep-20

May-21

Sep-21
Mar-20

Mar-21

Mar-22
Oct-20

Apr-21

Oct-21
Apr-20

Nov-21

Apr-22
Jan-20

Jun-20

Nov-20
Dec-20
Jan-21

Jun-21

Dec-21
Jan-22
Feb-20

Aug-20

Feb-21

Aug-21

Feb-22
• Consolidated TS (1,220 HS codes)

ANNUAL REPORT 2022 22

Policy measures were also taken to improve worker’s remittances by
introducing several incentive schemes to migrant workers…

Additional • Continuation of the “Additional Incentive Scheme on

Incentive Schemes Inward Workers’ Remittances” scheme

Reimbursing • Scheme to reimburse the transaction costs borne by

transaction costs migrant workers up to Rs. 1,000 per each transaction
over Rs. 20,000 when remitting money

Lanka • The CBSL launched “Lanka Remit”, the National

Remit Remittance Mobile Application, to encourage the use
of formal remittance channels

Duty • Additional duty concession and electric vehicle import

Concessions allowance to migrant workers based on the amount
they remit to the country through official channels

ANNUAL REPORT 2022 23

Capital flow measures were in place to manage forex outflows in
both 2021 and 2022…
Outward
• Limits on outward remittances through an
OIA Accounts
Outward Investment Account (per calendar year) Remittances

USD 296 mn in 2022

• Limit outward remittances on capital transactions USD 270 mn in 2021
BFCA Accounts through Business Foreign Currency Accounts USD 910 mn in 2020
or/and Personal Foreign Currency Accounts

• Limit repatriation of funds under the migration Travel

Migration allowance and limit on allowance for the
Allowance emigrants who are claiming the migration outflows
allowance for the first time
USD 244 mn in 2022
• Limit on outward remittances/ issuance of USD 239 mn in 2021
Temporary
foreign exchange for any Sri Lankan individual USD 449 mn in 2020
Residence visa
who has obtained Temporary Residence Visa of
holders
another country

ANNUAL REPORT 2022 24

Measure was taken to safeguard official reserves, while providing forex to
finance essential imports, thereby reducing the suffering of the people...

CBSL Intervention, Foreign Currency Debt Servicing
and Gross Official Reserve
Considerable support was received from Sri Lanka’s bilateral
and multilateral partners during these difficult times:
Several humanitarian credit lines from India
facilitated importation of fuel, fertilizer and
medicines

Bilateral international swap arrangements

with Central Banks of India and Bangladesh
strengthened reserves, in addition to the
swap facility from China

Proceeds from the Asian Clearing Union

(ACU) facility from India were utilised for debt
servicing and import financing

The World Bank and the Asian Development

Bank continued to provide financial support

ANNUAL REPORT 2022 25

The Central Bank commenced market guidance to stabilise the
exchange rate…
Exchange Rate since the Introduction of the Guidance Band Exchange rate began to stabilise around the guidance band…
375
368

LKR per USD

365
LKR per USD

300 362
Rs. 327.29
Rs. 363.11 359
31 Mar
Rs. 186.41 30 Dec
Rs. 181.63 2023 356
225 31 Dec 2019 31 Dec 2020 2022
Lower Rate Upper Rate Middle Rate Spot Rate
353
Rs. 200.43
31 Dec 2021 350
150

16-Sep-22
05-Aug-22

26-Aug-22

03-Mar-23
13-May-22

03-Jun-22

24-Jun-22

07-Oct-22

28-Oct-22

09-Dec-22

30-Dec-22
15-Jul-22

18-Nov-22

20-Jan-23

10-Feb-23
Nov-21

Nov-22
Dec-20

Dec-21

Dec-22
Nov-20
Feb-20

Feb-21

Feb-22

Feb-23
Jan-20

May-20
Jun-20
Jul-20

Oct-20

Jan-21

May-21
Jun-21
Jul-21

Oct-21

Jan-22

May-22
Jun-22
Jul-22

Oct-22

Jan-23
Mar-20

Aug-20

Mar-21

Aug-21

Mar-22

Aug-22

Mar-23
Apr-20

Apr-21

Apr-22
Sep-20

Sep-21

Sep-22
Effective Exchange Rate Index
24 currency (2017 = 100)
Impact on • The depreciation of the currency supported
Exports the competitiveness of exports

Impact on • Non urgent imports were discouraged

imports

ANNUAL REPORT 2022 26

Several prudential policy interventions, including the issuance of
regulations and strengthening of the supervisory approach to
maintain the resilience of the Financial Sector…
The Central Bank introduced several measures for banks to maintain stability, including the following:
• Permitted to draw down on the Capital Conservation Buffer
• Reduce the regulatory minimum requirements for the Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR)
• Permitted to stagger the mark-to-market losses on government securities over two years
• Extended the deadlines to meet the minimum capital requirements, and the required documentation
• Restrictions on discretionary payments

The Masterplan for consolidation of NBFIs is being implemented with the objective of establishing strong
and stable LFCs in the medium term

Debt moratoria and concessions on loan repayments were extended to affected individuals and
businesses in certain sectors due to persistent unfavorable business conditions

The stability of the financial sector was maintained despite the looming challenges arising from continuously declining
credit quality, acute pressure on liquidity, low level of profitability due to high impairments, and deteriorating capital
buffers to absorb unexpected losses.

ANNUAL REPORT 2022 27

 As fiscal sector pressures mounted during 2022, the
Government was compelled to frontload unparalleled
fiscal reforms and policy measures aimed at regaining
confidence and stability.…

The Government initiated measures in early 2022 to seek

assistance from the IMF…

and announced a debt standstill in mid-April 2022…

ANNUAL REPORT 2022

The Government embarked on a strong fiscal consolidation path,
primarily based on revenue enhancing…
Revised/ Increased Reintroduced
Raised Amended Revised
Telco Levy Withholding
excise
VAT to 15% Expanded
the
the tax
structure
Tax (WHT)
duties
Revenue
Tax for on petrol,
Enhancing Imposed
corporates
One-time diesel,
Surcharge
SSCL Base and Removed VAT
cigarettes
(2.5% on individuals exemptions
Tax of 25% and liquor
turnover)

‒ Cabinet approval to reduce 6% of approved recurrent

Guidelines issued to the expenditure estimates of all government institutions for
Guidelines issued to
Expenditure public sector to restrict 2023
minimise electricity ‒ Reforms to key SOBEs (CPC/CEB)
Rationalisation and fuel usage
non-urgent/non-essential ‒ Cost reflective pricing formula
expenses ‒ SOE Restructuring Unit
‒ Amending Sri Lanka Electricity Act

Considering these Government Primary

revenue Revised targets
measures, fiscal targets deficit
Original targets
for 2022 were revised
as per the Interim Government Overall fiscal
Budget 2022 Expenditure deficit

ANNUAL REPORT 2022 29

The Government announced a temporary suspension of selected
foreign debt servicing from 12 April 2022, and initiated a debt
restructuring process…

A series of sovereign credit rating

downgrades by international
rating agencies posed a
formidable challenge for the
Government in mobilising
foreign financing required for
servicing foreign debt

Lack of access to foreign

financing and the depletion of
usable official reserves to near-
zero levels in early 2022
constrained foreign debt
servicing by the Government
The estimated saving of foreign currency
outflows through the suspension of
bilateral and commercial debt during
April to December 2022 amounted to
USD 2.8 bn

ANNUAL REPORT 2022 30

The escalation of vulnerabilities in the power and energy sector
warranted immediate and decisive actions…
• Domestic petroleum product prices were revised upwards in multiple rounds from Jan-2022 by the
CPC in line with the global price movements…

Revisions to Domestic Prices of Petroleum Products of CPC

• Further measures were taken to
600
improve financial viability of SOE’s
500 – As a measure to improve the
financial viability of CPC,
400
government guaranteed foreign
300 % Increase of prices currency debt stock of CPC
Rs./ltr

(peak prices compared to the price as of end 2021)

amounting to USD 2.5 bn were
• Petrol 90/92 Octane: 166%
200 transferred to the government
• Petrol 95 Octane: 166%
• Auto Diesel: 280%
balance sheet
100
• Super Diesel: 227%
– Further, CEB’s liabilities of
0
Rs. 146.6 bn were also transferred
May-22

Jul-22
Mar-22

Mar-23
Mar-23
Oct-22
Apr-22
Apr-22

Nov-22
Dec-22
Jan-22

Jun-22
Jun-22

Sep-22

Nov-22

Jan-23
Jan-23
Feb-22
Feb-22

Aug-22
Aug-22

Feb-23
to the Government
Petrol 90/92 Octane Petrol 95 Octane Auto Diesel Super Diesel

Source: Ceylon Petroleum Corporation

ANNUAL REPORT 2022 31

 The coordinated policy measures have
delivered expected outcomes, while
helping to achieve a workable
equilibrium until the assistance from the
international financial institutions began to
materialise…

ANNUAL REPORT 2022

The corrective policy measures were costly and painful, but without
them, the crisis could have aggravated further, thereby prolonging
the suffering of the people and businesses…

ANNUAL REPORT 2022 33

Inflation has returned to a faster disinflation path…
Headline Inflation (Year-on-Year) (a)

80
The easing of demand pressures
owing to the lagged effects of

69.8
66.0
64.3
70
monetary policy tightening as well as

61.0
60.8
Food and Non Alcoholic Beverages

57.2
the softening of food and energy

54.6
60

51.7
Energy and Transport

50.6
50.3
50
Other
inflation caused headline inflation to
decelerate from late 2022….

39.1

35.3
40 Y-o-Y Headline Inflation
%

Replace

29.8
30
with
18.7 energy
15.1
14.2

20
Y-o-Y Dec Sep Apr
12.1

chart
9.9

2021 2022 2023

7.6

(CCPI)
6.0
5.7
5.7
5.2
4.5

10
4.1
3.9
3.3
3.0

0 Headline 12.1% 69.8% 35.3%

Feb-2021

Feb-2022

Feb-2023
Sep-2021

Sep-2022
Mar-2021
Apr-2021

Aug-2021

Mar-2022
Apr-2022

Aug-2022

Mar-2023
Apr-2023
Jan-2021

Oct-2021

Dec-2021
Jan-2022

Oct-2022

Dec-2022
Jan-2023
May-2021
Jun-2021
Jul-2021

Nov-2021

May-2022
Jun-2022
Jul-2022

Nov-2022
Core 8.3% 50.2% 27.8%
(a) The Department of Census and Statistics (DCS) commenced publishing the CCPI with the new base year, 2021=100, from
2013=100 the data
2021=100
release of February 2023 and discontinued the publication of the CCPI with the old base year, 2013=100. Accordingly, data commencing Food 22.1% 94.9% 30.6%
January 2023 in the chart are based on the series with the new base year, 2021=100.

Source: Department of Census and Statistics Non-Food 7.5% 57.6% 37.6%

ANNUAL REPORT 2022 34

 Monthly Change in Domestic Credit (a)
The high interest
rate environment 500 Credit to the Private Sector

dampened the
400
300

expansion of credit 200

100
to the private 0

sector and SOBEs, -100

400 Credit to Public Corporations/SOBEs

which was 300

necessary to tame
Rs. billion
200

inflation… 100

However, NCG -100

remained high, 500

400
Net Credit to the Government

reflecting the cashflow 300

200
pressures of the 100

Government under the 0

-100
debt standstill and -200

elevated risk premia… Jan Feb Mar Apr May Jun Jul Aug Sep Oct NovDec Jan Feb Mar Apr May Jun Jul Aug Sep Oct NovDec Jan Feb
2021 2022 2023

ANNUAL REPORT 2022 35

Despite the elevated levels of NCG, monetary expansion slowed,
driven by the significant contraction of credit to the private sector
and the decline in NFA of the banking system…
Contribution to Y-o-Y Change in Broad Money - M2b (Assets Side) (a) Y-o-Y Growth of Monetary Aggregates (a)
4,000 45
40
35
3,000
30
25

Per cent
2,000 20
15
Rs. billion

10
1,000
5
0
0 -5
-10

Aug-20

Aug-21

Aug-22
Feb-20

Feb-21

Feb-22

Feb-23
Oct-20

Oct-21

Oct-22
Jun-20

Dec-20

Jun-21

Dec-21

Jun-22

Dec-22
Dec-19

Apr-20

Apr-21

Apr-22
-1,000

-2,000 Reserve Money M1 M2b M4

Jun-20

Jun-21

Jun-22
Feb-20

Feb-21

Feb-22

Feb-23
Oct-20

Oct-21

Oct-22
Dec-19

Dec-20

Dec-21

Dec-22
Aug-20

Aug-21

Aug-22
Apr-20

Apr-21

Apr-22
Net Foreign Assets Net Credit to the Government
Credit to Public Corporations/ SOBEs Credit to the Private Sector Y-o-Y growth End 2021 Apr 2022 End 2022
Other Items (net)
M2b 13.2% 20.0% 15.4%
PSC 13.1% 20.3% 6.2%

ANNUAL REPORT 2022 36

 Forex pressures eased to a large extent with a significant reduction
in the merchandise trade deficit…
Import expenditure declined Merchandise exports remained resilient Trade deficit remained low
Imports Exports Trade Balance

2,500 1,300
100
2,300
1,200
2,100
-100
1,900 1,100

USD mn
USD mn

1,700
1,000
1,500 -300
1,300 900
1,100
800 -500
900

USD mn
700 700
Jan-21

Jan-22

Jan-23
Mar-21

Jul-21

Mar-22
Sep-21
Nov-21

Jul-22

Mar-23
Sep-22
Nov-22
May-21

May-22

-700

Jan-21

Jan-22

Jan-23
Mar-21

Jul-21

Mar-22
Sep-21
Nov-21

Jul-22

Mar-23
Sep-22
Nov-22
May-21

May-22
-900
Value (USD mn) Growth Value (USD mn)
Import Category Growth
2021 2022 % Export Category
2021 2022 %
Consumer Goods 3,848.7 2,813.0 -26.9 -1,100
Food and beverages 1,666.5 1,607.9 -3.5 Industrial Goods 9,702.0 10,465.3 7.9
Non-food consumer goods 2,182.2 1,205.1 -44.8 Agricultural Goods 2,729.5 2,568.0 -5.9 -1,300
Intermediate Goods 12,308.9 12,438.8 1.1

Jan-21

Jan-22

Jan-23
Mar-21

Mar-22

Mar-23
May-21
Jul-21
Sep-21
Nov-21

May-22
Jul-22
Sep-22
Nov-22
Investment Goods 4,462.7 3,030.5 -32.1
Mineral Goods 44.5 50.0 12.3
Total Imports 20,637.4 18,291.0 -11.4 Total Exports 12,498.6 13,106.4 4.9

ANNUAL REPORT 2022 37

The IMF Board approval for the Extended Fund Facility has
bolstered confidence in the economy…
Total IMF EFF
Staff Level approved amount
Agreement Staff level agreement was reached in September 2022
SDR 2.3 bn
Approx. USD 3 bn
IMF Board Approval
and the First Upon securing financing assurances from official creditors,
Tranche the EFF was approved in March 2023 Prior Actions
09
Financial Support The World Bank and the Asian Development Bank are
from Multilateral expected to provide over USD 1.5 bn in exceptional
Creditors SBs QPCs
financing support in 2023
18 04
Gradual Restoration Investor confidence is improving with gradual inflows to
of Investor the government securities market and the Colombo Stock ITs MPCC
Sentiments Exchange 04 01

ANNUAL REPORT 2022 38

Gross official reserves continued to improve, while the exchange
rate is allowed to be determined by the market forces…

Gross Official Reserves Movement of USD/LKR spot exchange rate

5 375
Rs. 363.11
30 Dec 2022
4

350

LKR per USD

3 2.8
USD bn

1.9
2 1.7
325

1 Rs. 321.65
End-Apr 2023

- 300

Jan-23
Dec-22

Mar-23
Feb-23
May-21

May-22
Jan-21

Oct-21

Jan-22

Oct-22

Jan-23
Mar-21
Apr-21

Sep-21

Mar-22
Apr-22

Mar-23
Apr-23
Jul-21
Aug-21

Nov-21

Jul-22
Aug-22
Sep-22

Nov-22
Dec-22
Feb-21

Jun-21

Feb-22

Feb-23
Dec-21

Jun-22

Net Inflows to G.Sec Market Net CBSL Absorption First Tranche of IMF EFF
Inflows to the BOP
in 2023 Around USD 250 mn Around USD 1.1 bn Around USD 333 mn
Jan-Apr 2023 Jan-Apr 2023 March 2023

ANNUAL REPORT 2022 39

Workers’ remittances and earnings from tourism are on
a rising trend…
Workers’ Remittances Earnings from Tourism
800 250
2021 2022 2023 Q1
USD 5,491.5 mn USD 3,789.5 mn USD 1,413.2 mn 2021
USD 506.9 mn
200
600

2022
150
USD 1,136.3 mn
USD mn

USD mn
400

100 2023 Q1
USD 529.8 mn
200
50

0 0
Jan-21
Feb-21

Oct-21

Jan-22
Feb-22

Oct-22

Jan-23
Feb-23
Mar-21

Jul-21
Aug-21

Mar-22

Jul-22
Aug-22

Mar-23
Apr-21

Sep-21

Nov-21

Apr-22

Sep-22

Nov-22
May-21
Jun-21

May-22
Jun-22
Dec-21

Dec-22

Jan-21

Apr-21

Oct-21

Jan-22

Apr-22

Jan-23
Aug-21

Oct-22
Mar-22
Mar-21

Jul-21

Mar-23
Sep-21

Nov-21

Jul-22
Aug-22
Sep-22

Nov-22
Feb-21

May-21
Jun-21

Feb-22

May-22
Jun-22

Feb-23
Dec-21

Dec-22
Workers’ remittances that recorded at USD 205 mn in February Average monthly tourist arrivals so far in 2023 is
2022 increased to USD 568 mn by March 2023 around 110,000, compared to tourist arrivals of monthly average in
2022 around 60,000

ANNUAL REPORT 2022 40

Corrective policy measures helped contain the deterioration of the
fiscal sector performance...
Key Fiscal Balances (% of GDP)

• All key fiscal balances (% of GDP) improved in 2022:

Current Account Deficit Primary Deficit Overall Fiscal Deficit

6.4% 3.7% 10.2%

2021: 7.3% 2021: 5.7% 2021: 11.7%

Central Government Debt Service Payments (% of GDP)

• Suspension of these debt service payments enabled the
Government to save a considerable amount of foreign
currency outflows providing a temporary reprieve amidst the
balance of payments crisis
Domestic Debt Service Payments Foreign Debt Service Payments
(Rs. bn) (Rs. bn)

2,510 487
2021: 1,594 2021: 786

ANNUAL REPORT 2022 41

Commissioning of cost reflective pricing strategies for utilities, along with long
delayed reforms, helped improve financial viability of key SOBEs…
CPC continued to record profit (before taxes) on a monthly basis, The operating loss of CEB was moderated since August 2022, partly due to
from July 2022 onwards along with price adjustments and gradual the cashflow improvements along with the upward revisions to electricity tariffs
stabilisation in exchange rate

Long term debt burden of CEB and CPC has been eased to a certain extent with the transfer of identified liabilities to the Central Government …

CPC CEB
Foreign Currency Denominated Loans and Import Bills Long term Liabilities

Rs. 541.2 bn Rs. 346.0 bn

USD 3.4 bn

USD 0.2 bn

2021 2022 2021 2022

Petroleum Sector Reforms:

• Introduction of cost reflective pricing formula
• Enactment of the Petroleum Products (Special
Provisions) (Amendment) Act
• Competitive domestic petroleum market
Electricity Sector Reforms:
• Measures are in progress to facilitate the restructuring of CEB
• Sri Lanka Electricity Act, No.20 of 2009 was amended in June 2022
• Semi-Annual Cost Recovery-based Electricity Tariff Adjustment
Mechanism

ANNUAL REPORT 2022 42

The Government strengthened the existing safety net programmes
aimed at enhancing the socioeconomic wellbeing of vulnerable
households...
Cash transfer programme of
Revision to Family Unit Allowance of Samurdhi Subsidy Programme
(Covering 1.7 million beneficiary families and other categorical beneficiaries)
Samurdhi Programme
Rs. 120 bn
Rs.3,500.00 Rs.4,500.00 From February 2022, average Emergency cash transfer programme
increase in Samurdhi of Rs. 3,000 - Rs. 5,000
Rs.2,500.00 Rs.3,200.00 allowance per beneficiary
(Samurdhi beneficiaries, and waiting listed beneficiaries
family under Samurdhi programme and elderly, disabled, and
Rs.1,500.00 kidney disease subsidy schemes)
Rs.1,900.00

28% Rs. 38.5 bn

(World Bank)
Rs. 45.5 bn
(ADB)

Expedite the establishment of a social registry under the

“Leave No One Behind" programme
Planned to
• establish a Welfare Benefits Information System
• develop an Integrated Welfare Management System

ANNUAL REPORT 2022 43

 Medium Term Outlook

The Medium term macroeconomic framework presented here is based on the policy
scenario
with the assumption of successful continuation of the IMF-EFF supported programme,
including the completion of the debt restructuring process before end of September
2023, thereby unlocking further assistance from international financial institutions.

ANNUAL REPORT 2022

Inflation is expected to stabilise at the targeted levels over the
medium term, following the rapid disinflation in 2023...
Supported by; Headline Inflation Projections
• Subdued aggregate demand, owing to tight monetary and fiscal policies (CCPI*, quarterly average, y-o-y, %)
• Abating supply disruptions, both globally and domestically
90
Favourable statistical base effect
0
•
Momentum and Base Effect (CCPI, 2021=100)
5 60 -30

0.7 1.4
0.4
0
-0.3 -0.5 -0.5
-1.2 -2.2
-5
-3.1 -3.6 -2.9 30 -60
%

-4.2
∆𝒀𝒐𝒀≈𝑩𝒂𝒔𝒆 𝑬𝒇𝒇𝒆𝒄𝒕+𝑴𝒐𝒎𝒆𝒏𝒕𝒖𝒎
-10 -8.1
-9.6 -11.8 Base Effect Momentum 0 -90
-15
Apr-23

Jan-24

Apr-24
Oct-23
Mar-23

Jul-23

Aug-23

Mar-24
Sep-23

Nov-23
Feb-23

May-23

Feb-24
Jun-23

Dec-23
Source: Central Bank Staff Projections
-30 -120

2021:Q1 2022:Q1 2023:Q1 2024:Q1 2025:Q1

The Central Bank remains committed to bringing down the prevailing high
90% CI 70% CI 50% CI
inflation towards single digit levels by late 2023

…However, the successful continuation of the IMF-EFF supported programme, along with efforts to sustainably strengthen
the fiscal and external buffers, and the implementation of the proposed structural reforms to improve the economic
potential, remain instrumental to ensuring economic and price stability over the medium term…

ANNUAL REPORT 2022 45

Over the medium term, the Sri Lankan economy is expected to
gradually revive from its deepest economic contraction in 2022…
• The stabilisation of macroeconomic conditions is expected to bolster the economic recovery in the near to medium
term, thereby achieving the potential level of economic growth
Real GDP Growth (Y-o-Y) Investment and Savings (as a percentage of GDP)
6 38

36
4
5.0
3.5 4.0 4.5 34
3.3

%
2 32

30
0
28
-2 -2.0 2023 2024 2025 2026 2027
%

2021 2022 Projections

-4
Total Investment Domestic Savings National Savings
-6
Medium term growth is expected to facilitate with;
-7.8
• Envisaged non-debt creating financial inflows to Colombo Port City,
-8
Colombo West Container Terminal, and the Industrial Zones such a
Hambanthota Industrial Zone
-10
2023 2024 2025 2026 2027
• Investments in the tourism industry
• Investor Facilitation Centre established under BOI is also expected to
2021 2022 Projections
promote FDIs

ANNUAL REPORT 2022 46

External sector outlook remains positive, the implementation of
reforms outlined in the IMF-EFF is crucial to sustain the momentum…
Exports, Imports and Trade Balance External Current Account Balance
30 -3.0 0.0
26.0
24.4 -4.0 -0.5
25 22.9
21.6 -1.0
20.6 20.2 -5.0 -0.9
19.4 18.8 -1.1 -1.1
20 18.3 -1.2
17.1 -1.5 -1.3

% of GDP
15.5 -6.0
USD bn

15 14.1 -5.9 -2.0

-6.1

%of GDP
12.5 13.1 -1.9
-7.0
-6.7 -6.7
-6.9 -2.5
10
-7.4 -8.0
-3.0
5
-9.0
-3.5
-9.2
0 -10.0 -4.0 -3.7
2021 2022 2023 2024 2025 2026 2027
-4.5
Exports Imports Trade Gap
2021 2022 2023 2024 2025 2026 2027

The trade deficit is expected to narrow down over the External current account deficit is expected to decline
medium term as the growth in exports is expected to gradually to a sustainable low level over the medium term.
outpace the growth in imports.

ANNUAL REPORT 2022 47

Fiscal Sector Outlook…
Government Revenue and Expenditure Key Fiscal balances
2.3 2.3 2.3
19.9 19.9 0.8
19.0 19.7 19.6 0.0
18.5

14.9 15.0 15.1 -0.7 -0.7 -0.4

13.3
% of GDP

-2.1

% of GDP
11.0
-3.7
8.3 -4.5 -4.8 -4.5
-5.0
-6.4 -6.4
-8.0

-10.2

2022 2023 2024 2025 2026 2027 2022 2023 2024 2025 2026 2027
Total Revenue and Grants Current Account Balance Primary Balance
Expenditure and Net Lending Overall Budget Deficit

Revenue enhancement measures implemented in 2022 and
early 2023 are expected to yield benefits in the near to medium
term. However, strengthening the revenue administration
measures is also crucial to achieve medium term revenue
targets of the Government
Curtailment of recurrent expenditure, including limiting
public sector recruitment and better targeting of social
safety nets, and prioritizing capital expenditure are
imperative to contain government expenditure in the medium
term

ANNUAL REPORT 2022 48

Successful completion of the debt restructuring process remains
crucial for ensuring public debt sustainability and sustaining the
economic stability…
Central Government Debt
120

115 113.8
• The completion of the ongoing debt restructuring is
expected to result in a notable reduction in the
Government’s debt service burden and limit the annual
110
gross financing needs to below 13% of GDP, on
average, during 2027-2032
105
% of GDP

103.3
101.6 102.2
100.0 • Foreign currency debt servicing of the Central
100
97.6 Government is expected to be maintained below 4.5%
of GDP in any year during 2027-2032
95

• Public debt is envisaged to reduce below 95%* of GDP

90
by 2032
85
2022 2023 2024 2025 2026 2027

*Public Debt to GDP measured as per the IMFs debt perimeters

ANNUAL REPORT 2022 49

 Issues and Policies
• From being one of the most promising nations in the developing world a few
decades ago to one that is struggling to overcome multiple crises in the present day,
successive governments have failed to steer the island nation towards sustained socio-
economic progress and prosperity.
• Despite the many initiatives taken since independence, the country has faced difficulties in
thriving due to the lack of a robust and consistent national policy framework,
resulting in poor macroeconomic performance, persistent twin deficits
reflecting legacy issues and slow evolution, adaptability and transformation, thereby losing
pace and falling behind peer economies, especially in the most recent decades.
• To overcome many of these challenges and longstanding issues, policymakers and
relevant authorities need to urgently embark on implementing essential reforms.
• Most importantly, a crisis presents several opportunities to bring about change and
implement reforms to address structural issues.

ANNUAL REPORT 2022 50


Commitment in carrying out long
overdue reforms would be critical in
shaping the economy over the
medium to long term
Successful implementation of the
debt restructuring process, in line
with debt sustainability targets
outlined in the IMF-EFF
Lack of consistent taxation policies
and need for improving tax
administration and legal compliance
framework to achieve envisaged
revenue targets
Issues &
Policies
Effective prioritisation and utilisation
of external financing for external
debt sustainability in the post-
restructuring period
Long overdue structural reforms to
restructure lossmaking SOEs
Need for efficient expenditure
rationalisation strategies for
sustainable fiscal consolidation in
the medium to long run
ANNUAL REPORT 2022 51
 Issues &
Policies
Institutional and legislative reforms
are warranted to strengthen the
Energy insecurities of the country
oversight of public expenditure
management

The country needs structural

Export sector policies need to focus on adjustments to become more export
improving the sophistication of oriented through a significant
goods and services reorientation of national trade
policy

Considering low FDI over the last few Measures to increase tourist arrivals
decades, exploiting non-liability and a proper network to capture
creating investments is critical for tourism earnings are needed to
economic revival promote tourism

ANNUAL REPORT 2022 52


Mass migration of professionals and
skilled workers is likely to lead to a
substantial drop in productivity
The downward rigidity in domestic
prices of imported goods remains a
concern in lowering the domestic cost
of living
The national policy planning
mechanism and holistic
implementation need to be
strengthened in order to support
strong recovery and growth
Issues &
Policies
Importance of improving the
resilience of the Small and Medium
scale Enterprises (MSME) sector for
overall economic development and
welfare
Urgent need to reformulate policy
strategies to ensure the welfare of
the most vulnerable groups
The reliance of the public sector on
the banking system has continued
over the recent years
ANNUAL REPORT 2022 53
 Issues &
Policies

Policy inconsistency in the domestic

Long overdue factor market reforms
agriculture sector

Due regard to preserving the

Acceleration in digitalization of
environment is vital for ensuring
economy remains vital
sustainable growth

Sustainable recovery hinges on

undertaking much needed reforms
expeditiously

ANNUAL REPORT 2022 54

1. Sri Lanka’s Disinflation Process
2. Sri Lanka’s Economic Adjustment Programme Supported by an Extended Fund
Facility Arrangement of the International Monetary Fund
3. Highlights of ‘the Central Bank of Sri Lanka Act’
Box
4. Rebasing of National Accounts Estimates to Base Year 2015 Articles
5. Fighting Child Malnutrition in Sri Lanka amidst the Economic Crisis
6. Rebasing of Consumer Price Indices to Base Year 2021
7. Monitoring of Export Proceeds Repatriations and Conversions
8. Post-Debt Restructuring Policy Priorities for Strengthening External Sector
Balance
9. The Role of Central Banks in Preventing Systemic Financial Crises and Restoring
Public Confidence in the Banking Sector
10. Establishment of a Macroprudential Authority in Sri Lanka
11. The Central Bank Intervention in Addressing Systemic Liquidity Issues during
Stress Periods to Ensure Monetary and Financial Stability
12. Financial Consumer Protection Framework: A Way Forward
13. Strengthening the Financial Safety Net in Sri Lanka
14. Major Economic Policy Measures
ANNUAL REPORT 2022
Thank
You!

ANNUAL REPORT 2022