Central Bank Governor: Economy on steady recovery path

Sri Lanka is on a steady economic recovery path and offers attractive investment opportunities despite global uncertainty and volatility in energy markets, Central Bank Governor Dr. Nandalal Weerasinghe said.

Speaking to Bloomberg on the sidelines of the Invest Sri Lanka events in Sydney and Melbourne, Australia, Weerasinghe said the economy had recovered strongly from the recent crisis and was now growing at around five per cent.

He said Sri Lanka had successfully weathered several external shocks, including tensions in the Middle East and adverse weather caused by cyclonic activity, while maintaining overall economic stability.

The economy was now moving towards a higher growth trajectory, creating favourable conditions for both domestic and foreign investors, he said.

“For anyone to benefit from the steady growth Sri Lanka has witnessed over the last three years and is expected to record over the next few years, this is the time to invest in Sri Lanka,” Weerasinghe said.

He attributed the improved investment climate to the stability of the rupee, prudent monetary and fiscal policies and growing confidence in private-sector-led economic growth.

However, he acknowledged that Sri Lanka remained vulnerable to global oil price shocks as a net energy importer.

While the country has substantial renewable energy resources, including hydropower, wind and solar, it continues to depend significantly on thermal power generation and imported fuel for transport. Consequently, fluctuations in global oil prices have a direct impact on domestic inflation.

Inflation, which had remained at around two per cent until March, rose sharply following the introduction of cost-reflective fuel pricing and reached about seven per cent, close to the upper end of the Central Bank’s target range.

Weerasinghe said energy and transport carried significant weight in the consumer price basket, leaving Sri Lanka particularly exposed to movements in international fuel prices.

The Central Bank’s baseline projection assumes that global oil prices will remain around US$80 a barrel for the rest of this year and into next year.

“If oil prices remain around that level, we can manage the situation,” he said, while warning that unexpected developments in global energy markets could pose fresh challenges.

Despite the recent inflationary pressures, Weerasinghe said the Central Bank expected inflation to return to its five per cent target by the end of this year or early next year.

Defending the decision to raise interest rates by 100 basis points in May, he described the move as a proactive measure aimed at containing inflation expectations, moderating rapid credit growth and preventing sustained inflationary pressures arising from higher oil prices.

The effects were already becoming evident, he said, with credit growth slowing and the rupee stabilising after coming under pressure in April and May amid higher fuel import costs.

He also cited Government and Central Bank measures, including restrictions on vehicle imports and macroprudential measures on loan-to-value ratios, as helping ease import-related pressures.

On the IMF programme, Weerasinghe said Sri Lanka had successfully completed the fourth and fifth reviews under the Extended Fund Facility, with the next review expected in November or December.

He expressed confidence that the review would also be completed successfully and said Sri Lanka remained on course to complete the four-year IMF programme in the second half of next year.

The IMF has also recognised Sri Lanka as one of its notable success stories, he said, citing the programme’s role in restoring macroeconomic stability and laying the foundation for sustainable medium- and long-term growth.