Chapter 1

MACROECONOMIC DEVELOPMENTS AND

CONDITIONS OF THE FINANCIAL SYSTEM

Summary
The Sri Lankan economy entered a path towards recovery in 2023 following its deepest
economic catastrophe encountered in the preceding year. The recovery was buttressed by
rapid disinflation, improved external resilience, stronger fiscal balances, and preserved
financial system stability. Prompt and coordinated implementation of a suite of policy measures
by the Government and the Central Bank and the structural reform agenda alongside the
International Monetary Fund’s Extended Fund Facility (IMF-EFF) arrangement reinforced overall
macroeconomic stability. Having benefited from restored stability, the economy commenced
transitioning to a growth trajectory. After six consecutive quarters of contraction, the economy
recorded an expansion in the second half of 2023, limiting the annual economic contraction
during the year. The growth in aggregate demand was driven by both domestic demand and
net external demand. Although unemployment remained unchanged in comparison to the
preceding year, labour force participation declined further in 2023. Inflation that had peaked at
an all-time high in September 2022 reverted to single-digit levels within a year and continued
to remain in the vicinity of the target by end 2023. With the adoption of accommodative
monetary policy stance by the Central Bank since mid-2023 and the decline in risk premia
following the finalisation of the Domestic Debt Optimisation (DDO) operation, market interest
rates including yields on government securities recorded a notable decline in 2023. Credit to
the private sector experienced a positive shift from mid-2023, ending the longest streak of
monthly contractions. The external current account recorded a surplus in 2023 supported by
a significant contraction in the trade deficit amidst increased services exports and improved
workers’ remittances. Gross official reserves improved with the support of net purchases of
foreign exchange by the Central Bank and financing support from multilateral partners. Despite
intermittent volatility, the Sri Lanka rupee recorded an overall appreciation in 2023, which
broadly reflected the market behaviour and sentiments, as the Central Bank adopted a market-
based exchange rate policy. Notwithstanding a series of domestic and external shocks, the
financial sector demonstrated its resilience stemming from the proactive and prudent policies
and greater crisis-preparedness. Amidst challenges, the banking sector, which dominates the
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

financial sector, was able to maintain stability by preserving capital adequacy level, supported

1
by the decline in risk weighted assets, while liquidity was maintained above the regulatory
minimum. Total assets of the banking sector improved along with profitability, while credit
risk as indicated by the Stage 3 loans ratio increased during 2023. The fiscal performance in
2023 was commendable, driven by rigorous consolidation measures for revenue enhancement
and expenditure rationalisation. The primary balance showed a surplus in 2023, while the
overall budget deficit declined compared to previous year. The Government continued to rely
primarily on domestic sources to finance the budget deficit, amidst constraints in accessing
foreign sources. The central government debt as a percentage of GDP declined by end 2023,
primarily due to the growth in nominal GDP and partly due to the impact of rupee appreciation
on foreign debt.

1.1 Inflation and Price during the preceding year, recorded deflation
Developments during several months in 2023. This was primarily
due to the normalisation of supply bottlenecks
1.1.1 Inflation and cost-reflective fuel price adjustments, amidst
the normalisation of global crude oil prices,
Inflation, which reached the historically
together with the impact of the appreciation
highest level in September 2022, recorded
of the exchange rate. The frequent changes in
a rapid disinflation process since then,
electricity tariffs, due to the implementation of
reaching lower single-digit levels towards
cost-reflective pricing, also contributed to the
end 2023. Subdued demand due to the gradual dynamics of inflation during 2023. In particular,
transmission of the effects of the tight monetary the pace of disinflation slowed during the first
conditions to the wider economy was the major quarter of 2023 due to the upward adjustment
contributor to this transition on the demand to the electricity tariffs, while the subsequent
side that prevented the escalation of price reduction of tariffs in July 2023 supported the
pressures. This was further complemented by decline in inflation. However, since September
tight fiscal measures. Further, the normalisation 2023, inflation has been moving upward
of domestic supply conditions, moderation of towards the targeted level, as anticipated, due
global commodity prices, and the strengthening to energy price hikes, particularly the electricity
of the Sri Lanka rupee, alongside the favourable tariff increase, while weather related disruptions
statistical base effect created by the large month- to the agriculture sector also contributed to the
on-month increases in prices seen in 2022 also pickup in inflation, particularly towards the end of
contributed to this rapid disinflation process. the year. Accordingly, CCPI-based year-on-year
Consequently, year-on-year headline inflation, headline inflation was recorded at 4.0 per cent
measured by the Colombo Consumer Price Index (2021=100) by end 2023 compared to 57.2 per
(CCPI, 2021=100), decelerated to 1.3 per cent cent (2013=100)1 by end 2022, while
in September 2023. The prices of food items
1 The Department of Census and Statistics (DCS) commenced publishing NCPI and
and the transport sector, which were two of the CCPI with the new base year, 2021=100, from the data releases of January 2023 and
February 2023, respectively, and discontinued the publication of NCPI and CCPI with
largest contributors to the high inflation episode the old base year, 2013=100.

2
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
1.1 Recent Inflation Dynamics in Sri Lanka

80

70

60
Contribution to CCPI-based Headline Inflation
(year-on-year) (a) 80

70

60
Contribution to NCPI-based Headline Inflation
(year-on-year) (a)
1
50 50

Per cent
40 40
Per cent

30 30

20 20

10 10

0 0

-10 -10
Jul-21
Mar-21

Nov-21

Jul-22

Jul-23
Jan-21

Mar-22

Nov-22
Jan-22

Mar-23

Nov-23
May-21

Jan-23

Mar-24
Sep-21

May-22

Jan-24
Sep-22

May-23

Sep-23

Mar-21

Nov-21

Mar-22
Jan-21

Nov-22
May-21
Jul-21

Mar-23
Sep-21

Jan-22

Nov-23
May-22
Jul-22
Sep-22

Jan-23

May-23
Jul-23
Sep-23

Jan-24
Food and Non-Alcoholic Beverages Housing, Water, Electricity, Gas and Other Fuels
Transport Restaurants and Hotels
Education Health
Furnishing, Household Equipment and Communication
Routine Household Maintenance Recreation and Culture
Clothing and Footwear Miscellaneous Goods and Services
Alcoholic Beverages, Tobacco and Narcotics Y-o-Y Headline Inflation Sources: Department o f Census and Statistics
Central Bank Staff Calculations

Movements in Headline Inflation (year-on-year) (a) Movements in Core Inflation (year-on-year) (a)

75 73.7 75
64.1

60 CCPI 69.8 60 CCPI

NCPI NCPI
45 45
Per cent

Per cent

50.2

30 30

15 15
5.1 3.1
2.7
0 0.9 0
Jul-21
Mar-21

Nov-21
Jan-21

May-21

Sep-21
Nov-21

Nov-22
Mar-21
May-21

Nov-23
Mar-22
May-22

Mar-23
May-23

Mar-24
Sep-21

Sep-22

Sep-23
Jan-21

Jan-24
Mar-24
Jan-22

Jan-23

Jan-24

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

Jul-22

Jul-23

Source: Department o f Census and Statistics Source: Department o f Census and Statistics
(a) The Department of Census and Statistics (DCS) commenced publishing NCPI and CCPI with the new base year, 2021=100, from the data releases of January 2023 and February 2023, respectively, and
discontinued the publication of NCPI and CCPI with the old base year, 2013=100. Accordingly, data commencing January 2023 in the charts are based on the series with the new base year, 2021=100.

CCPI-based annual average headline inflation in in the Value Added Tax (VAT) rate from 15 per
2023 decelerated to 17.4 per cent (2021=100) cent to 18 per cent alongside the removal of
from 46.4 per cent (2013=100) recorded in certain exemptions at the beginning of 2024, led
2022. The National Consumer Price Index to a brief surge in inflation from January 2024.
(NCPI) based year-on-year headline inflation also However, the reduction of electricity tariffs in early
followed a similar path, dropping to 4.2 per cent March 2024 and several subsequent responsive
(2021=100) by end 2023, compared to 59.2 price reductions are expected to partly negate
per cent (2013=100) recorded at end 2022, the immediate impacts as well as spillovers of the
while NCPI-based annual average headline tax amendments. This was evidenced through the
inflation in 2023 decelerated to 16.5 per cent large reduction of inflation in March 2024, which
(2021=100), compared to 50.4 per cent was partially due to these reasons, along with a
(2013=100) in 2022. Meanwhile, the increase favourable statistical base effect.

3
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

SNAPSHOT OF THE

1 69.8
Inflation registered a rapid disinflation process...
CCPI-based Inflation (Y-o-Y, %)

94.9
Steady rebound in real GDP growth...

2022
Annual
Agriculture -4.2%

Industry -16.0%
4.5
64.4
-7.3%
0.3 57.6 53.4 5.8 Services -2.6% 1.6

End 2022

End 2023

End 2022

End 2023
Sep 2022

Sep 2022
Y-o-Y, %
-0.6
Food Non - Food
-3.0

Inflation returned
-5.3
to single digit levels
Agriculture 2.6%
2023
6.3 Annual
5%
1.3 4.0 (target) Industry -9.2%
-10.7 -2.3%
-11.2
Nov 22

Dec 22

May 23

Nov 23

Dec 23
Mar 23

Aug 23
Sep 22

Sep 23
Feb 23

Apr 23
Oct 22

Oct 23
Jan 23

Jun 23

Jul 23

Services -0.2%
-12.4
2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 2023 Q2 2023 Q3 2023 Q4
Headline

Policy interest rates were reduced... Notable decline in market interest rates...

Policy Interest 32.6

Rates End 2022
by 30
28.2
6.50% pts 26.2
(From Jun - Dec 2023) 23.1

20
18.7
%

SLFR 9.50% 14.2 14.4 14.1 14.5 End 2023

AWCMR 12.4 13.7 13.4 11.6 11.1
SDFR 8.50% 10 11.1
10.3 9.5 10.1
March/Feb
Policy Interest 2024
Rates by
50 bps in March
2024
0

T-bill Yield
Deposit Rate
Lending Rate

Deposit Rate
Prime Rate

Lending Rate
(Monthly

(AWNDR)

91-day
(AWNLR)
AWPR)

(AWDR)
(AWLR)

New
New
Apr 22

Oct 22

Apr 23

Apr 24
Oct 23
Jul 23
Jan 22

Jan 23

Jan 24
Jul 22

Monetary expansion remained subdued... Private sector credit recovered in 2H-2023...

NFA 552
Net Foreign Assets
Money Supply (M2b)
1,311 Growth (Y-o-Y) - 2023 Industry Services
NCG -5.6% 2.1%
Net Credit to the Personal
Government Loans &
Agriculture Sectoral Credit Advances
814 0.9% Growth -0.2%
7.3% (Y-o-Y)
204
Rs. bn

Rs. bn

15.4%
(2022) 181
Quarterly Change in
Private Sector Credit 90

-45
PSC -200 Private Sector Credit
(Private Sector Credit)
Other Growth (Y-o-Y) - 2023
(Other Items Net) -66
-0.6%
-137 6.2%
-165 (2022)
-980
Credit to SOBEs -273
(State Owned Business
Enterprises) 2022 2023

Sep 2022 Mar 2023

Progress of the Staff-level agreement with IMF Executive Board
the IMF on EFF approval and receipt of
IMF-EFF Programme programme the first tranche

4
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

SRI LANKAN ECONOMY 2023

Sri Lanka’s external sector rebounded strongly in 2023...

Current Account
Balance
Gross Official
Reserves
Exchange Rate
1
recorded a surplus in 2023 USD 4.4 bn 363.11 Appreciation
12.1%

2023
end 2022
1977

USD 1.9 bn
323.92

Rs. / USD
end 2023
Lorem ipsum dolor sit amet,
end 2022 end 2023
Exports Imports
consectetuer adipiscing elit, sed
2022 USD 13.1 bn 2022 USD 18.3 bn
diam GOR increased
nonummy with,
nibh euismod
2023 USD 11.9 bn 2023 USD 16.8 bn
tincidunt CBSL Net dolore
ut laoreet Intervention
magna
1.7 bn
2.1 bn Workers’
USD
Remittances 2023
aliquam USD
erat volutpat. appreciation was supported by,
(based on value date)
1.1 bn
USD Higher inflows
2022

USD
3.8 bn and
Lower outflows
Receipts from multilateral institutions
2022

2023

USD and
World
6.0 bn IMF ADB Market sentiments
2023

Earnings from Tourism Bank

Overall financial sector stability was maintained in 2023...

44.9 12.8
Statutory Liquid Stage 3 Loans to 3,857.4
Assets Ratio - DBU (%) Total Loans Ratio (%) Net Worth of the EPF
(Rs. bn)
8.7 Total Assets
Y-o-Y Growth in
Deposits (%) of the Rs

Banking Financial Sector

12%
Sector as at end 2023 EPF
16.9
62% Capital Adequacy
Rs. 33.2 Tn
Ratio (%)
13%
-2.6 Central Bank
Y-o-Y Growth in Loans 1.5
and Advances (%) ROA-before Tax (%)
4.3
ROA-before
LFCs Sector Tax (%)
5% 5%
Other Insurance -3.2
Sector 17.8 Y-o-Y Growth in 22.3
Gross Stage 3 Loans Loans and Capital Adequacy
3% Ratio (%) Advances (%) Ratio (%)

Pronounced fiscal adjustments towards sustainability…

Government Revenue (as a % of GDP) Government Expenditure (as a % of GDP)
8.9 10.5
19.4 (2023)
8.4
11.1
(2022) (2023) 6.5 12.1
18.6 (2022)
Interest Expenditure Non-Interest Expenditure

Primary Balance and Fiscal Balance* (as a % of GDP) Central Government Debt (as a % of GDP)
+0.6 114.2
5 +2.8 2018
100.0
+1.21955
96.6 103.9
+0.04 +0.01 +0.6
1954 1992 2017 2023
-
38.7 37.0 51.8 42.1
-5
-8.3
-10 2023
57.9 63.0 62.5 61.7
-15

-20

2020
-25 2021 2022
Primary Balance Total Interest Expenditure Fiscal Balance (Prov.) 2023
*The fiscal balance equals to primary balance minus interest expenditure
(Prov.)
Foreign Debt Domestic Debt Total Outstanding Central Government Debt

Oct 2023 Dec 2023 Mar 2024

Staff-level agreement IMF Executive Board Staff-level agreement
with the IMF on the approval and receipt with the IMF on the
first review of the second tranche second review

5
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table
1.1 Macroeconomic Performances (2018-2023)

1
Indicator Unit 2018 2019 2020 2021 (a) 2022 (a) 2023 (b)
Real Sector (c)
Real GDP Growth % 2.3 -0.2 -4.6 4.2 -7.3 (b) -2.3
GDP at Current Market Price Rs. bn 15,352 15,911 15,646 (a) 17,612 24,064 (b) 27,630
Per Capita GDP (d)(e) USD 4,372 4,082 3,851 (a) 3,999 3,464 (b) 3,830
External Sector
Trade Balance (c) % of GDP -10.9 -9.0 -7.1 -9.2 -6.7 -5.8
Current Account Balance (c) % of GDP -3.0 -2.1 -1.4 -3.7 -1.9 1.8
Overall Balance USD mn -1,102.9 376.6 -2,327.7 -3,966.6 -2,806.1 2,825.6
External Official Reserves USD mn 6,919.2 7,642.4 5,664.3 3,139.2 1,897.6 4,392.1
Fiscal Sector (c)
Current Account Balance % of GDP -1.1 -3.4 -7.5 -7.3 -6.4 -6.0
Primary Balance % of GDP 0.6 -3.4 -4.4 -5.7 -3.7 0.6
Overall Balance % of GDP -5.0 -9.0 -10.7 -11.7 -10.2 -8.3
Central Government Debt (f) % of GDP 78.4 81.9 96.6 100.0 114.2 103.9
Monetary Sector and Inflation
Broad Money Growth (M2b) (g) % 13.0 7.0 23.4 13.2 15.4 7.3
Private Sector Credit Growth (in M2b) (g) % 15.9 4.2 6.5 13.1 6.2 -0.6
Annual Average Inflation (h) % 4.3 4.3 4.6 6.0 46.4 17.4

(a) Revised Sources: Department of Census and Statistics

(b) Provisional Ministry of Finance, Economic Stabilization and
(c) GDP estimates (base year 2015) released in March 2024 by the Department of Census and Statistics have been used. National Policies
(d) Estimates updated with latest population figures Central Bank of Sri Lanka
(e) Based on quarterly GDP in USD terms calculated using quarterly average exchange rate.
(f) Debt statistics are presented on net basis (net of deposits).
(g) Year-on-year growth based on end year values.
(h) Based on CCPI (2013=100) until 2022, and based on CCPI (2021=100) in 2023

Core inflation also underwent a substantial per cent (2021=100) compared to 34.6 per
disinflation process in 2023. The fall in cent (2013=100) in 2022. Meanwhile, NCPI-
core inflation mirrored the underlying subdued based year-on-year core inflation decelerated
demand conditions in the economy, amidst to 0.9 per cent (2021=100) by end 2023,
the tight monetary conditions until June 2023 compared to 57.5 per cent (2013=100)
and prevailing tight fiscal conditions, and the at end 2022, whereas NCPI-based annual
persistent impact of the erosion of the purchasing average core inflation in 2023 slowed to 15.8
power of the public. Unlike headline inflation, per cent (2021=100) compared to 43.9 per
which picked up during the latter part of 2023, cent (2013=100) recorded in 2022. In the
CCPI-based core inflation continued to decelerate meantime, the impact of increased prices due
throughout 2023 and has accelerated somewhat to VAT adjustments in early 2024 was visible in
since then. This behaviour reflects that the core inflation as well since most items in the core
acceleration in headline inflation in late 2023 consumer basket were subject to VAT.
was mainly due to the price increases in energy As indicated by the inflation expectations
and volatile food items, which are excluded when survey of the Central Bank during the year,
calculating core inflation. Accordingly, inflation expectations of both corporate and
CCPI-based year-on-year core inflation fell household sectors declined from the elevated
to 0.6 per cent (2021=100) by end 2023 levels observed in 2022. Meanwhile, medium
compared to 47.7 per cent (2013=100) by term inflation expectations remained broadly
end 2022, while CCPI-based annual average anchored despite some volatility observed in the
core inflation in 2023 was recorded at 14.5 near term. The downward adjustment in inflation

6
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

BOX 1

1
The Effects of Supply Side Inflation on Monetary Policy

Supply side inflation, often referred to as cost push Lanka, including rice and coconut, are significantly
inflation, is typically driven by changes in production affected2 by variations in temperature and rainfall.
costs, caused by factors such as disruptions to the An increase in nighttime temperatures, particularly
availability of inputs, changes to global commodity due to global warming, significantly decreases rice
prices, revisions to taxes and regulatory measures yields. For example, based on the field experiments
of the Government, unfavourable weather conducted at the International Rice Research
conditions, supply chain disruptions due to global Institution in the Philippines, rice yields are found to
economic conditions and geopolitical tensions, decline by 10 per cent for every 1°C increase in the
and inefficiencies of production processes. In the minimum temperature during the dry season (Peng
Sri Lankan context, irregular weather patterns et al., 2004). Although the trend of vegetable and
are a major factor affecting inflation through the fruit prices can be usually predicted during normal
supply side, causing frequent volatilities in food weather seasons, the impact of climate change or
inflation. Similar to many other countries, Sri the abnormal weather patterns on rice, vegetables,
Lanka is also threatened by the effects of climate and fruits make their pricing unpredictable. In
change on economic activity and social wellbeing. addition to the above, prolonged drought conditions
Additionally, changes in global supply chains, as could impact electricity prices due to a shift from
well as the increase of production costs amidst low cost hydro power to costly fuel based electricity
generation, thus transmitting weather and climate
supply bottlenecks are the main causes for the
related disturbances to the wider economy, creating
recent volatility in inflation through the supply side. If
large supply disruptions.
these supply side pressures are short lived, they may
not pose any major monetary policy implications. Therefore, extreme weather events can have
However, persistent acceleration of inflation due significant macroeconomic effects. These effects
to supply factors could complicate the conduct of were perceived to be largely transitory and less of
monetary policy, mainly due to the possible de- a concern for central banks in the past. However,
anchoring of inflation expectations and it can have the increased frequency and intensity of weather
an adverse impact on a central bank’s credibility. fluctuations, such as heatwaves, prolonged
Literature shows that when the supply shock is droughts, or flooding, can lead to a more persistent
transitory, inflation returns to the equilibrium without impact on inflation and inflation expectations
the need for any monetary policy action, while through the combined impact of direct and second
repeated supply shocks trigger second round effects, round impacts. This remains a major concern
warranting pre-emptive monetary policy action for policymakers and makes forecasting inflation
(John, Kumar and Patra, 2022). increasingly challenging. Meanwhile, given the
enhanced emphasis placed on climate change,
The Impact of Weather Patterns and Climate central banks are gradually incorporating climate
Change on Inflation in Sri Lanka related variables and/or climate specific scenarios
Climate change encompasses enduring alterations into their macroeconomic models to better capture
in temperature and various facets of the earth's the potential impacts of climate change on key
climate system, largely attributed to human activities. economic indicators.
Its impacts are extensive and diverse, spanning
The Impact of Other Supply Side Factors and
environmental, social, economic, and health
Government Policies on Inflation
implications. Irregular weather patterns and climate
change can result in significant fluctuations in food As an oil importing country for both transportation
inflation. In turn, it could lead to higher volatility in and electricity generation, the impact of global oil
headline inflation, particularly in a country like Sri prices on Sri Lanka is substantial and alters inflation
Lanka, where food items account for a large share dynamics through direct and indirect channels.
of the consumption basket.1 The agricultural sector In Sri Lanka, energy, oil, and gas prices are now
revised regularly and are determined broadly
could be affected mainly by changes in rainfall
on a cost recovery basis. As a result, changes in
patterns and rising temperatures. Major crops in Sri
global commodity prices and shipping costs due
1 The Colombo Consumer Price Index (CCPI) and the National Consumer Price Index
(NCPI) are the measures of inflation in Sri Lanka. Out of 12 categories, the food
category has the most significant weight in both indices, accounting for 26.2 per cent 2 The weight for the rice category in the CCPI basket is 2.72 per cent, and for the
in CCPI and 39.2 per cent in NCPI. coconut category, it is 1.38 per cent.

7
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure
B 1.1 Contribution to Headline Inflation: Supply vs. Non-Supply Related Items (CCPI-based, year-on-year) (a)

1 70

60

50
Contribution from Supply Related Items

Contribution from Non-Supply Related Items

Y-o-Y Headline Inflation

40
Per cent

30

20

10

-10
Oct-2015

Oct-2016

Oct-2017

Oct-2018

Oct-2019

Oct-2020

Oct-2021

Oct-2022

Oct-2023
Jan-2015

Jan-2016

Jan-2017

Jan-2018

Jan-2019

Jan-2020

Jan-2021

Jan-2022

Jan-2023

Jan-2024
Jul-2015

Jul-2016

Jul-2017

Jul-2018

Jul-2019
Apr-2015

Apr-2016

Apr-2017

Jul-2020
Apr-2018

Apr-2019

Apr-2020

Jul-2021

Jul-2022

Jul-2023
Apr-2021

Apr-2022

Apr-2023
(a) Supply items contain the set of items in CCPI whose prices are predominantly determined by supply factors, Sources: Department of Census and Statistics
while the remaining items are considered as non-supply items (based on staff judgement). Central Bank Staff Judgement

to geopolitical tensions and global economic The Contribution from Supply Side Factors on
conditions affect domestic prices and may now have Overall Inflation
a greater impact on domestic prices than before.3 Disentangling demand and supply factors behind
Based on recent experiences, the indirect impact of inflation dynamics is a challenging process due
price changes in electricity, fuel, and gas on inflation to the complexity of identification. Food inflation
could be greater than the direct impact amidst is generally considered to be largely driven by
uncertainty. However, such regular adjustments to supply side factors. In addition to the food category
domestic prices of energy will eliminate the risks of the Colombo Consumer Price Index (CCPI)
of one time drastic corrections to domestic prices, basket, prices of certain items in the non-food
similar to the domestic fuel price adjustment and category could also be classified as supply/cost
electricity price adjustments in 2022 and 2023. This driven contributors to inflation, given the increased
would help mitigate large swings in inflation in the frequency and magnitude of price adjustments in
period ahead and would promote forward looking these categories.4
economic decisions by the stakeholders of the
economy, thereby assisting the anchoring of inflation Supply side inflation is often characterised by its
expectations. increased volatility (Table B 1.1) compared to
non-supply inflation. Given the transitory nature of
Further, frequent changes to the tax structure supply side inflation in general, central banks may
can significantly affect inflation volatility, even if adopt a cautious approach in using monetary policy
they are one off events. The recent adjustments actions to address it. Moreover, supply disturbances
in the Value Added Tax (VAT) had a notable move output and prices in opposite directions, and
direct impact on the prices of many items in the the central bank may not be able to maintain both
consumer basket, including fuel prices, thereby output and price stability (Amarasekara, 2009). In
having a greater impact on inflation. Moreover, such circumstances, extreme policies aimed purely
the direct and indirect impacts of these policies at price stability aggravate the effect of the supply
can be unpredictable, as businesses could use disturbance on the real economy. Certain supply
these tax amendments to arbitrarily change prices. side shocks may be better left to correct themselves
Further, the lack of competition for essential items, over time without the need for immediate and
aggressive policy responses. For instance, if the
along with downward price rigidities could lead to
impact stems from transitory weather related factors,
persistent price pressures. An oligopoly in markets
it will gradually diminish. Conversely, if it results
for essentials, such as rice and eggs, could exert
from adjustments to taxes on goods and services or
considerable pressure on the prices of these items
directly and several other prices indirectly.
4 In this estimate, the supply/cost driven category represents food and non-alcoholic
beverages and selected administered price categories such as fuels for personal
3 This impact was earlier absorbed by the relevant State Owned Business Enterprise transport equipment; electricity, gas and other fuels; water bill; and transport services
(SOBE), which in turn had implications on the fiscal sector or the financial sector, categories of the CCPI basket of goods and services, whereas non-supply driven
thereby burdening the public indirectly. category represents all other subcategories of the CCPI basket.

8
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
B 1.2 Supply Side Inflation (CCPI-based, year-on-year) (a)

1
35
140
30
100
25
60 mid-2022:
Substantial
late 2017: Upward energy price
20 revision of LP gas price late 2019/early late 2023:
2020: Prolonged hikes, decline in
and bus fares 2021/22 Extreme
15 mid-2016: Supply rainy conditions
Maha harvest weather
disruptions caused
Per cent

and other conditions

10 by floods
supply
bottlenecks
5
0
early-2017: mid-2018: Upward mid-2019: late 2021: Global 2023:
-5 Drought revisions to prices of Bumper harvest commodity price Normalisation
conditions domestic petroleum in 2018/19 hikes and domestic of supply
-10 2015: Bumper harvest and products and bus fares Maha season
downward revision of prices supply side conditions
of fuel, LP gas and bus fares bottlenecks
-15
Oct-2015

Oct-2016

Oct-2017

Oct-2018

Oct-2019

Oct-2020

Oct-2021

Oct-2022

Oct-2023
Jan-2015

Jan-2016

Jan-2017

Jan-2018

Jan-2019

Jan-2020

Jan-2021
Jul-2015

Jul-2016

Jan-2022
Jul-2017

Jul-2018

Jan-2023

Jan-2024
Apr-2015

Jul-2019
Apr-2016

Apr-2017

Apr-2018

Jul-2020
Apr-2019

Jul-2021
Apr-2020

Jul-2022
Apr-2021

Jul-2023
Apr-2022

Apr-2023
Sources: Department of Census and Statistics
(a) Based on the aggregate price movements of the set of items in CCPI whose prices are predominantly determined by supply factors. Central Bank Staff Judgement

administrative changes, the direct impact of it will issues. Therefore, attempting to address supply side
be mainly a one time occurrence. Even in the case price pressures through monetary policy may result
of transitory or one off supply shocks, central bank in adverse consequences. Raising interest rates to
communications play a key role by providing clarity, ease inflation could slow down economic activity,
assurance, and guidance on the future trajectory of thereby further worsening the supply side pressures.
inflation and anchoring inflation expectations.
However, central banks closely monitor supply
Why are Central Banks Less Aggressive in side inflation, as persistent or severe disruptions
Handling the Supply Side Issues of Inflation? could have broader implications for overall price
Central banks usually do not respond to supply side and economic stability. In some cases, where
shocks as their primary control lies with affecting supply side shocks have secondary effects on
demand side inflationary pressures. Supply side inflation expectations or lead to a more persistent
issues can have an immediate effect on prices and inflationary environment, central banks may consider
inflation. In addition, many supply side factors appropriate actions to mitigate these impacts. In
are essentially structural and weather related, and this regard, the optimal monetary policy response
not simply a consequence of the business cycle. to a single supply shock depends on the nature and
Addressing these may necessitate longer term policy duration of the shock, its second round effects, and
measures or structural reforms, such as supply side the impact on real incomes (Bandera et al., 2023).
policies of the Government aimed at improving the These factors, taken together, determine whether
productive capacity and efficiency of the economy. monetary policy should be ‘looked through’ (no
Central banks, which aim at addressing business policy response) or ‘lean against the shock’ (policy
cycle fluctuations through demand driven policies, adjustment). A sequence of inflationary supply
may not be able to tackle underlying structural shocks would call for a tighter policy response.
In such instances, responding to each shock
Standard Deviation of Supply Side and Non-Supply
Table individually, trading off near term over medium
B 1.1 Side Inflation (CCPI-based, year-on-year, %)
term inflation deviations from target, could result
Year
Headline
Supply Non-Supply
in undesirable outcomes. Therefore, any monetary
Inflation policy response to a series of supply shocks should
2015 1.3 2.8 1.3
2016 1.1 2.5 0.8 be based on the overall macroeconomic impact of
2017 0.9 2.2 1.0 such shocks and should also incorporate a careful
2018 1.0 2.1 0.2
2019 0.6 1.7 0.5
assessment of the dynamics of inflation expectations.
2020 0.8 1.3 0.5 Moreover, amidst larger and persistent supply
2021 2.6 3.9 1.6 shocks, frontloading of monetary policy actions can
2022 20.3 32.0 11.0
2023 20.1 29.9 12.9 keep inflation expectations firmly anchored thus
Source: Department of Census and Statistics maintaining the credibility of the central bank (John
Central Bank Staff Calculations
et al., 2022).

9
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

The Government’s Role in Managing Supply surrounding supply driven inflation present

1
Side Inflation significant challenges for monetary policymaking,
Governments play a crucial role in managing particularly in small open economies like Sri Lanka,
supply side inflation through various policies where a multitude of factors originating from the
and interventions. By prioritising investments in domestic and global environment contribute to
infrastructure like transportation and energy, volatility in prices. While transitory supply shocks
the Government could enhance productivity may not necessitate immediate monetary policy
and efficiency of the economy. In addition, the action, persistent disruptions can complicate the
Government, together with the private sector, could task of maintaining price stability. Moreover, the
focus on increasing investments in agricultural structural nature of some supply side issues demands
infrastructure, such as storage facilities, to boost longer term policy measures and structural reforms,
domestic food production while preventing post often beyond the scope of traditional monetary
harvest losses and stabilising food prices. On policy tools. Despite the limitations in directly
the other hand, regulatory measures can be addressing supply driven inflation, central banks
implemented to bolster market competition, remain vigilant, aiming to mitigate adverse impacts
dismantle barriers for businesses, and streamline on economic stability and inflation expectations.
bureaucratic processes, fostering an environment Ultimately, navigating the intricacies of supply
conducive to investments. In the short run, to driven inflation requires a balanced strategy that
address sudden price pressures emanating from considers both short term stabilisation and long
supply side shocks, the Government could take term economic sustainability. Clear and proactive
proactive measures to facilitate the importation of communication by a central bank on the impact of
food items that are in short supply due to supply supply side disturbances on inflation is expected to
disruptions and shortages, as and when required, manage expectations and ensure domestic price
and take preventive measures to minimise the stability, along with appropriate monetary policy
upward price movements. The Inflation Reduction actions to manage demand pressures on inflation.5
Act of 2022 in the USA is an example of a recent
Government initiative to address supply side issues. References
The Act aims to curtail inflation by lowering drug
1. Amarasekara, C. (2009) Central bank objectives and aggregate disturbances.
prices, and investing in domestic energy production Proceedings of the Central Bank of Sri Lanka International Research
while promoting clean energy. Conference – 2009, pp. 41-55.
2. Bandera, N., Barnes, L., Chavaz, M., Tenreyro, S., and von dem Berge, L.
(2023) Monetary policy in the face of supply shocks: The role of inflation
Conclusion expectations. In ECB Forum on Central Banking, pp. 26-28.
3. John, J., Kumar, D., and Patra, M.D., (2022) Monetary policy: Confronting
There is an intricate interplay between supply supply-driven inflation, RBI Bulletin, 76(7), July 2022, pp. 97-109.
side dynamics, such as weather patterns, global 4. Peng, S., Huang. J., Sheehy. J., Laza. R., Visperas. R., Zhong. X., Centeno. G.,
Khush.G. and Cassman. K. (2004) Rice yields decline with higher night
commodity prices, and Government policies, and temperature from global warming, Proceedings of the National Academy of
their profound impacts on inflation. The complexities Sciences, 101(27), pp. 9971-9975.

Table
1.2
Movements of Inflation (year-on-year)
Per cent
2013=100 2021=100
Dec-2019 Dec-2020 Dec-2021 Sep-2022 Dec-2022 Sep-2023 Dec-2023 Jan-2024 Feb-2024 Mar-2024
Headline CCPI 4.8 4.2 12.1 69.8 57.2 1.3 4.0 6.4 5.9 0.9
Inflation NCPI 6.2 4.6 14.0 73.7 59.2 0.8 4.2 6.5 5.1
Core CCPI 4.8 3.5 8.3 50.2 47.7 1.9 0.6 2.2 2.8 3.1
Inflation NCPI 5.2 4.7 10.8 64.1 57.5 1.7 0.9 2.2 2.7
Food CCPI 6.3 9.2 22.1 94.9 64.4 -5.2 0.3 3.3 3.5 3.8
Inflation NCPI 8.6 7.5 21.5 85.8 59.3 -5.2 1.6 4.1 5.0
Non-Food CCPI 4.3 2.0 7.5 57.6 53.4 4.7 5.8 7.9 7.0 -0.5
Inflation NCPI 4.2 2.2 7.6 62.8 59.0 5.9 6.3 8.5 5.1
Note: The Department of Census and Statistics (DCS) commenced publishing NCPI and CCPI with the new base year, 2021=100, from the data releases of January 2023
and February 2023, respectively, and discontinued the publication of NCPI and CCPI with the old base year, 2013=100.
Source: Department of Census and Statistics

10
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

expectations was driven by a variety of factors, prices, a favourable harvest was realised. This

1
including the deceleration in realised inflation translated into a decline in the prices of certain
supported by stringent fiscal and monetary domestically produced food items during the
policies. In addition, the appreciation of the Sri year. Nevertheless, in the latter part of the
Lanka rupee against the US dollar, eased supply year, extreme weather conditions across the
side disruptions, moderation of global commodity entire island coupled with festive demand, led
prices, and relaxation of import restrictions to substantial increases in volatile food prices.
contributed to driving inflation expectations Meanwhile, prices of imported food items,
downward. Accordingly, the inflation expectations which recorded significant increases in 2022,
of the corporate sector reached single digit moderated to some extent during 2023, which is
levels by August 2023. Subsequently, inflation attributable to the strengthening of the Sri Lanka
expectations declined further with the exception of rupee and the softening of global commodity
marginal increases in October 2023 attributed to prices despite export restrictions imposed by some
the electricity tariff adjustments and in December countries.
2023 following the announcement of VAT
The cost-reflective pricing formula played a
amendments. Meanwhile, inflation expectations
pivotal role in shaping the price movements
of the household sector reached single digit levels
by November 2023 followed by a slight uptick in of non-food items. The prices of items in
December 2023. the non-food category exhibited an overall
increasing trend in 2023, yet at a moderate pace
1.1.2 Prices compared to the substantial increases observed
The general price level, measured by in 2022. Accordingly, non-food prices increased
both CCPI and NCPI, exhibited a modest until March 2023 primarily due to the upward
increase in 2023 from substantially high revision to electricity tariff by 146 per cent for bills
levels in the preceding year. Prices of both consuming 90 units2 effective from 16 February
domestically produced and imported food items 2023, while domestic consumers experienced a
increased, though at a slower rate compared to tariff hike of 66 per cent on average. However,
the substantial price hikes witnessed in 2022. starting from March 2023, non-food prices
Moreover, price movements of non-food items experienced a decrease until July, followed by an
were primarily impacted by the cost-reflective increase until November 2023, primarily driven
pricing adjustments made throughout the year. In
by price adjustments in several administrative
line with these developments, the cost of living of
items. There was a downward adjustment to the
the economy, as indicated by the consumer price
electricity tariff by 24 per cent for bills consuming
indices, continued to increase in 2023, but at a
90 units effective from 01 July 2023 followed
slower rate compared to 2022.
by an upward revision of 18 per cent effective
Prices of food items, which were primarily from 20 October 2023. Further, water tariffs
driven by supply side factors, albeit with underwent an upward price revision of 102 per
periodic influence from demand side factors cent for bills consuming 22 units effective from 01
during festive seasons, exhibited a modest
August 2023, partially reflecting the changes in
increase compared to the substantial price
electricity tariff revisions. During 2023, the prices
hikes witnessed in 2022. With the adequate
of Petrol (92 Octane), Auto Diesel, and Kerosene
supply of chemical fertiliser and decreased
input costs, in line with reductions in fuel 2 The expenditure related to using 90 units is considered in the CCPI basket.

11
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

exhibited overall downward trends, although In addition, prices of alcoholic beverages and

1
there were intermittent increases observed in tobacco increased following the upward revision
February and during the period from July to to Excise Duty effective from 01 July 2023.
October 2023. These adjustments were made
1.1.3 Consumer Price Indices and
adhering to the cost-reflective pricing formulas
Cost of Living
amid fluctuating global crude oil prices. Further,
LP Gas prices demonstrated an overall decline Against this backdrop, it was observed that
in 2023, despite increases in the months of both official Consumer Price Indices (CPIs),
February, September, October, and November. which measure changes in the general price
level, exhibited a modest rise throughout
Aligning with changes in fuel prices, bus fares
2023. Accordingly, CCPI (2021=100) increased
were reduced by 7 per cent effective from 31
at a slower pace during 2023 compared to the
March 2023 and subsequently increased by 4 per
previous year, recording 195.1 index points in
cent effective from 03 September 2023. However, December 2023. The movement in CCPI was
no revision was made to train fares in 2023. largely in line with the movement of prices of

Figure
1.2 Cost of Living, Consumer Price Index and Inflation

Cost of Living as reflected by Cost of Living as reflected by

CCPI (2021=100) (Rs.) NCPI (2021=100) (Rs.)

176,253
103,383
150,184
88,704
68.1%
66.6% 56.2%
91,880 53.9%
50,729

73.8% 60.8%
33.4% 31.9% 43.8%
46.1%
26.2% 39.2%

2021 2022 2023 2021 2022 2023

Non-Food Food Non-Food Food
Sources: Department of Census and Statistics
Central Bank of Sri Lanka

CCPI vs. Headline Inflation

225 100 Following the high inflation episode in 2022, the
role of monetary policy has been to minimise
200 80
further increases in the general price level,
thereby bringing headline inflation
Per cent

175 60
Index

(year-on-year) to the targeted level, in line

150 40 with the Central Bank’s primary objective of
achieving domestic price stability. Without
125 20 such appropriate policy measures, the sharp
escalation in price levels observed in late 2021
100 0
and 2022 could have continued further, leading
Jan-22

Mar-22

Jan-24

Mar-24
May-22

Jul-22

Sep-22

Nov-22

Jan-23

Mar-23

May-23

Jul-23

Sep-23

Nov-23

to hyperinflation. By ensuring price stability, the

Central Bank supports the overall health and
CCPI (2021=100) - Index Value stability of the economy, which is necessary for
Headline Inflation (CCPI, year-on-year) (RHS)*
sustainable economic growth over the long run.
Source: Department of Census and Statistics
*Note: Year-on-year Inflation for 2022 is based on CCPI (2013=100)

12
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

items in the non-food category except for June, Figure Movements of the Informal Private Sector
1.3 Wage Rate Index during 2023 (Nominal)

1
August, October and December 2023. The NCPI
(2021=100) also increased at a slower pace 180 25
21.5 22.2
during 2023 compared to 2022 recording 208.8 170
20
index points in December 2023. The movement 17.1
160
of NCPI was mainly attributed to fluctuations in 14.6 15

Per cent
13.3

Index
12.1
prices of items in the non-food category except 150
9.6 10
for May, June, September, November and 140 7.1 6.8
6.2 5.9
December 2023. 130
4.7
5

The cost of living, as reflected by the 120 0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
consumer price indices,3 continued to 2022 2023 Year-on-Year (RHS)

increase in 2023, although at a slower pace Source: Central Bank of Sri Lanka

compared to the surge witnessed in 2022.

2023 except in the informal private sector,
The estimated average monthly consumption
expenditure for a household,4 based on CCPI which recorded an increase during the year
(2021=100), increased from Rs. 150,184 in compared to 2022. This increase in nominal
2022 to Rs. 176,253 in 2023 by 17.4 per wages of employees in the informal private sector
cent. This indicates a considerable slowdown was mainly attributable to the demand for higher
compared to the 63.5 per cent increase recorded wages by daily wage earners, due to the rising
in 2022 compared to 2021. Similarly, based cost of living and shortage of labour supply.
on NCPI (2021=100), the estimated average
Meanwhile, on an annual average basis, real
monthly household5 consumption expenditure
wages recorded an erosion during the year across
increased from Rs. 88,704 in 2022 to
Rs. 103,283 in 2023 by 16.5 per cent both the private and public sectors. Nevertheless,
highlighting a notable easing from the 74.9 per available wage indices i.e., informal private
cent increase recorded in 2022. Considering sector wage rate index (2018=100), formal
the distribution of consumption expenditure private sector minimum wage rate index (1978
between food and non-food items, it is evident December=100), and public sector wage rate
that a major share is allocated to non-food index (2016=100) exhibit certain limitations in
items. Further, the notable increase observed in
capturing the overall wage developments of the
the share of monthly household consumption
economy.
expenditure allocated to the food category in 2022
moderated in 2023 due to the improved supply Private Sector Wages
conditions in the country.
Nominal wages of informal private sector
1.1.4 Wages
employees, as indicated by the informal
Available information6 shows that wages private sector wage rate index (2018=100),
remained largely stagnant throughout exhibited an increasing trend throughout
2023. Notably, the index increased in nominal
3 Consumer price indices are based on fixed consumption baskets derived from House-
hold Income and Expenditure Survey (HIES) (2019) conducted by DCS. Hence do not
terms by 11.4 per cent in 2023 compared to
reflect the changes in the household consumption patterns over the period.
the previous year. In terms of the sub-activities,
4 An average household in Colombo District consists of 3.8 persons based on the HIES
(2019) conducted by DCS. namely, agriculture, industry, and services, the
5 An average household in Sri Lanka consists of 3.7 persons based on HIES (2019)
conducted by DCS. informal private sector wage rate index increased
6 Information in this section is primarily based on the public sector wage rate index
(2016=100) and informal private sector wage rate index (2018=100) compiled by in nominal terms by 13.0 per cent, 9.9 per
CBSL, and the formal private sector minimum wage rate index (1978 December=100)
compiled by the Department of Labour. cent and 13.1 per cent, respectively, in 2023,

13
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

compared to 2022. This was driven by the 1.2 Real Sector Developments

1
continuous demand from daily wage earners for
higher compensation in response to the rising cost 1.2.1 Economic Growth
of living. As a result, employers were compelled In 2023, the Sri Lankan economy showed
to increase daily wages to retain particularly
signs of rebound with a moderate contraction
experienced workers ensuring continuity of their
of 2.3 per cent, in comparison to a significant
business operations. Further, a significant labour
contraction of 7.3 per cent observed in 2022.
shortage across all sectors, attributed to the
The gradual yet steady rebound in 2023 was
migration of workers to other countries, created a
evident, particularly in the second half of the
competitive environment for experienced workers,
year, during which the Gross Domestic Product
resulting in wage increases. However, owing to
(GDP)7 recorded positive growth rates. This was
the high inflation environment that prevailed until
underpinned by renewed macroeconomic stability
early 2023, employees in the informal private
amidst softening inflation and easing of external
sector experienced a real wage erosion of 7.1 per
sector pressures.
cent in 2023, compared to the previous year.
GDP at current market prices grew by 14.8
Nominal wages of employees in the formal
per cent to Rs. 27,629.7 billion in 2023,
private sector, as measured by the minimum
owing to the price impact, as reflected by the
wage rate index (1978 December=100)
compiled by the Department of Labour, of GDP deflator of 17.5 per cent. Further, Gross
employees whose wages are governed by National Income (GNI), estimated by adjusting
wage boards, recorded a slight increase in GDP for the net primary income from the rest of
2023. Accordingly, the nominal minimum wage the world, grew by 14.1 per cent at current prices
rate index increased by 0.4 per cent in 2023 in 2023. In US dollar terms, GDP increased to
compared to the previous year. Nevertheless, the 84.4 billion in 2023 from 76.8 billion in 2022,
minimum real wage rate index decreased by 17.6 supported by the appreciation of the Sri Lanka
per cent in 2023 compared to 2022. rupee during the year.

Public Sector Wages Driven by the growth in nominal GDP and

the decline in mid-year population, GDP
Nominal wages of public sector employees, per capita increased to Rs. 1,253,785 in
as measured by the public sector wage rate 2023, compared to Rs. 1,084,882 in 2022.
index (2016=100), remained unchanged Meanwhile, GNI per capita also increased to
in 2023, recording a real wage erosion of Rs. 1,213,159 in 2023, compared to
17.5 per cent compared to the previous year.
Nevertheless, as proposed by the Budget 2024, 7 DCS estimates GDP in production, expenditure and income approaches.
the Cost of Living Allowance (COLA) for public
Figure
sector employees was increased by 1.4 Annual GDP Growth Rates (a)
Rs. 10,000.00 from January 2024. Due to fiscal 10

constraints, public sector employees were given a 5

4.2

partial payment of Rs. 5,000.00 from January to 0

Per cent

-0.2
-5 -2.3
March 2024. The full payment of Rs. 10,000.00 -4.6
-7.3
-10
will be made from April 2024 onwards. -15
Meanwhile, arrears for the initial three months will -20
2019 2020 2021 2022 2023
be paid in three equal instalments, starting from Agriculture Industry Services GDP
January 2025. (a) Based on the GDP estimates (base year 2015) Source: Department of Census and Statistics

14
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Rs. 1,056,424 in 2022. In US dollar terms, GDP continued to impact all industry activities,

1
per capita in 2023 was 3,830, compared to resulting in a 9.2 per cent contraction in
3,464 in 2022, while GNI per capita was 3,706, Industry activities during 2023. This was
compared to 3,378 in 2022. driven by the notable decline in the construction
industry, which is highly vulnerable to economic
1.2.2 Production downturns, mainly due to the holdback of
Agriculture construction projects. Further, manufacturing
activities, the largest segment of the Industry
Agricultural activities exhibited a notable sector, contracted during the year mainly due
resurgence, with a 2.6 per cent increase in to the significant decline in global demand for
value added in 2023, marking a significant the manufacture of textiles, wearing apparel and
turnaround from the 4.2 per cent contraction leather-related products. However, most of the
witnessed in 2022, mainly driven by the other manufacturing activities recorded a strong
improved supply conditions, especially recovery in the latter part of the year, mainly
fertiliser, other agrochemical inputs and supported by the manufacture of food, beverages
fuel. The growing of rice, fruits, vegetables, and and tobacco products, and the manufacture of
fishing activities were the main contributors to this coke and refined petroleum products.
growth. However, the growing of tea, rubber and
coconut contracted during the year, largely due to
Services
the adverse impact of weather anomalies. A notable growth in accommodation,
food and beverage services, and transport
Industry
activities, mainly attributable to the gradual
Although a gradual recovery in supply revival of the tourism sector and the
conditions was observed throughout the uninterrupted provisioning of power and
year, the subdued demand conditions energy, played a pivotal role in limiting the

Table Gross National Income by Industrial Origin at Constant (2015) Prices (a)(b)
1.3

Rate of Change Contribution to Growth As a Percentage of GDP

(%) (%) (%)
Economic Activity
2022 (c) 2023 2022 (c) 2023 2022 (c) 2023
Agriculture, Forestry and Fishing - 4.2 2.6 - 0.3 0.2 7.5 7.9
Manufacturing, mining and quarrying and other industry - 13.9 - 4.7 - 2.9 - 0.9 19.6 19.1
Of which: Manufacturing activities - 12.7 - 3.2 - 2.2 - 0.5 16.1 16.0
Construction - 20.9 - 20.8 - 1.9 - 1.6 7.6 6.2
Wholesale and retail trade, transportation and storage, 2.4 3.1 0.6 0.8 26.5 28.0
accommodation and food service activities
Information and communication - 0.4 - 13.2 - 0.0 - 0.5 3.4 3.0
Financial and insurance activities - 18.3 - 5.3 - 1.0 - 0.3 5.0 4.8
Real estate activities (including ownership of dwelling) - 12.1 - 6.0 - 0.6 - 0.3 4.6 4.4
Professional, scientific, technical, administration and supporting - 17.7 2.4 - 0.4 0.0 2.0 2.1
service activities
Public administration, defense, education, human health and social - 0.3 - 0.6 - 0.0 - 0.1 9.6 9.8
work activities
Other services (excluding own-services) 0.3 0.4 0.0 0.0 8.2 8.4
Equals Gross Value Added (GVA) at Basic Price - 7.0 - 2.6 - 6.6 - 2.5 94.1 93.7
Taxes less subsidies on products - 12.4 2.8 - 0.8 0.2 5.9 6.3
Equals Gross Domestic Product (GDP) at Market Price - 7.3 - 2.3 - 7.3 - 2.3 100.0 100.0
Net primary income from rest of the world - 4.5 - 23.7
Gross National Income at Market Price - 7.6 - 3.0
(a) Based on the GDP estimates (base year 2015) Source: Department of Census and Statistics
(b) Provisional
(c) Revised

15
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure
1.5 Growth in Economic Activities - 2023 (a)

1 Agriculture

Rice 20.0
Industry

Construction -20.8
Financial service
activities
Services

-10.0

Computer
Fruits 7.2
programming -21.4

Fishing 3.0 Manufacturing Real estate activities -6.0

-3.2

Vegetables Public administration

3.2 -1.7
and defense

Other perennial crops 8.9 Mining and Telecommunication -2.2

-22.3
quarrying
Animal production 1.8 Human health activities - 0.7

Sugar cane -7.6 Wholesale and retail 0.1

Electricity -2.3 trade
Tea -1.5 Education 1.8

Spices -1.7 Professional services 2.4

Water -17.6

Rubber -7.7 Insurance 26.0

Forestry and logging -7.3 Accommodation 26.0

Sewerage -0.4
Coconut -3.6 Transportation 3.9

(a) Based on the GDP estimates (base year 2015) Source: Department o f Census and Statistics

contraction in overall Services activities to 0.2 both private and government consumption
per cent in 2023. However, financial services expenditures, driven by the price impact. Despite
and real estate activities, which were largely the increase in investment expenditure during
affected by the high-interest-rate environment, the year, fixed capital formation contracted, led
particularly during the first half of the year, by the decline in expenditure on construction
and the continued contraction in computer activities. Further, the growth in expenditure
programming activities, weighed negatively on the on goods and services exports alongside the
growth of services activities during the year. stagnation in expenditure on goods and services
imports, resulted in a substantial improvement in
1.2.3 Expenditure net external demand.
From an expenditure perspective, the growth Considering expenditure estimates at
in the total demand of the economy at constant prices in 2023, consumption
current prices was contributed positively by expenditure contracted due to decreased
both domestic and net external demand. purchasing power, while investment
In terms of domestic demand, consumption expenditure contracted owing to the
expenditure, the dominant expenditure unfavourable investment climate. Meanwhile,
component, grew by 16.7 per cent, while the net external demand recorded a significant
investment expenditure grew by 1.6 per cent growth at constant prices during the year, helping
in 2023. The overall growth in consumption to limit the GDP contraction in real terms to
expenditure is attributable to the increase in 2.3 per cent.

16
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Table
Aggregate Demand and Savings at Current Market Prices (a)(b)

1
1.4

Rs. billion % Change As a Percentage of GDP

Item
2022 (c) 2023 2022 (c) 2023 2022 (c) 2023
1. Domestic Demand 24,921.2 28,042.4 31.8 12.5 103.6 101.5
1.1 Consumption 18,038.2 21,051.6 45.0 16.7 75.0 76.2
Private 16,311.0 19,158.5 51.3 17.5 67.8 69.3
Government 1,727.3 1,893.1 3.8 9.6 7.2 6.9
1.2 Investment (Gross Capital Formation) 6,883.0 6,990.8 6.4 1.6 28.6 25.3
Gross Fixed Capital Formation 5,724.1 4,859.6 23.4 -15.1 23.8 17.6
Changes in inventories and Acquisitions less 1,159.0 2,131.2 -36.7 83.9 4.8 7.7
disposals of valuables
2. Net External Demand -857.5 -412.7 34.1 51.9 -3.6 -1.5
Export of Goods and Services 5,187.9 5,634.2 74.1 8.6 21.6 20.4
Import of Goods and Services 6,045.4 6,046.9 41.2 0.0 25.1 21.9

3. Total Demand (GDP) (1+2) 24,063.8 27,629.7 36.6 14.8 100.0 100.0
4. Domestic Savings (3-1.1) 6,025.5 6,578.1 16.6 9.2 25.0 23.8
Private 7,566.0 8,228.9 17.1 8.8 31.4 29.8
Government -1,540.4 -1,650.9 -19.4 -7.2 -6.4 -6.0
5. Net Primary Income from Rest of the World (d) -631.2 -895.3 -59.6 -41.8 -2.6 -3.2
6. Net Current Transfers from Rest of the World (d) 1,159.4 1,836.2 12.1 58.4 4.8 6.6
7. National Savings (4+5+6) 6,553.7 7,519.0 12.8 14.7 27.2 27.2
8. Savings Investment Gap
Domestic Savings - Investment (4-1.2) -857.5 -412.7 -3.6 -1.5
National Savings - Investment (7-1.2) -329.3 528.2 -1.4 1.9
9. External Current Account Balance (2+5+6) (d) -329.3 528.2 -1.4 1.9
(a) Based on the GDP estimates (base year 2015) Sources : Department of Census and Statistics
(b) Provisional Central Bank of Sri Lanka
(c) Revised
(d) Any difference with the BOP estimates is due to the time lag in compilation.

In 2023, the country’s domestic savings income component of the economy, grew
grew by 9.2 per cent at current prices, while by 21.2 per cent at current prices during
national savings grew by 14.7 per cent. The the year, compared to the growth of 39.8
higher growth in national savings was attributable per cent recorded in 2022, accounting
to the notable increase in net current transfers for 37.9 per cent of Gross Value Added
from the rest of the world in rupee terms, while (GVA). Gross Mixed Income, the second largest
net primary income from the rest of the world income component, grew by 13.8 per cent in
continued to contract. As a percentage of GDP, 2023, compared to the growth of 43.4 per
domestic savings was recorded at 23.8 per cent cent in 2022. In terms of other major sources
in 2023, while national savings stood at 27.2 of income, Other Taxes less Subsidies on
per cent. Further, the national savings-investment Production continued to expand during the year,
gap turned positive in 2023, owing to relatively while Compensation of Employees, driven by the
higher growth in national savings compared Non-Financial Corporations (NFC), contracted
to investment, with the notable improvement in during the year. Considering the institutional
external sector performance. sector classification of GVA, NFC was the largest
income generator, followed by Household and
1.2.4 Income
Non-Profit Institutions Serving Households,
Considering the income estimates in 2023, Financial Corporations, and General
the Gross Operating Surplus, the largest Government, respectively.

17
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table Income Components by Economic Sector at Current Market Prices (a)(b)

1
1.5
Percentage Share (%)
2022 (c) 2023
Households House- Gross
Gross
Item Non- and Non- Financial General holds and Value
Financial General Value
Financial Non-Profit Financial Corpora- Govern- Non-Profit Added
Corporations Govern- Added at
Corporations Institutions Corporations tions ment Institutions at basic
ment basic price
Serving Serving price
Households Households
Compensation of Employees 48.2 10.3 23.4 18.1 27.0 44.7 11.1 23.7 20.6 23.8
Gross Operating Surplus 85.7 12.0 2.3 - 35.4 84.3 13.8 2.0 - 37.9
Gross Mixed Income - - - 100.0 37.3 - - - 100.0 37.6
Other Taxes less Subsidies on Production 71.2 11.1 - 17.7 0.2 64.1 14.6 - 21.3 0.7
Gross Value Added at basic price 43.5 7.1 7.1 42.3 100.0 43.0 7.9 6.4 42.6 100.0

(a) Based on the GDP estimates (base year 2015) Source : Department of Census and Statistics
(b) Provisional
(c) Revised

1.2.5 Population, Labour Force during the year. In 2023, the unemployed
and Employment population decreased marginally to 0.398 million
compared to 0.399 million in 2022. Further, the
As estimated by the Registrar General's employed population10 also decreased in 2023
Department, the mid-year population in to 8.010 million, compared to 8.148 million in
Sri Lanka in 2023 declined by 0.6 per cent the previous year.
to 22.037 million, due to a decrease in
births and increases in both deaths and net Departures for foreign employment remained
migration. In line with this decline in population, high, but recorded a decline of 4.3 per cent
the country’s population density decreased to 351 to 297,656 in 2023 from 311,056 in 2022.
people per square kilometre in 2023 from 354 The departures of males and females for foreign
people per square kilometre recorded in 2022. employment accounted for 55.3 per cent and
As shown in the Sri Lanka Labour Force 44.7 per cent, respectively, of the total departures
Survey conducted by the Department of for foreign employment during the year.
Census and Statistics (DCS), the economically
active8 population (labour force) decreased 10 Persons who worked at least one hour during the reference period, as paid employ-
ees, employers, own account workers or contributing family workers are said to be
to 8.408 million in 2023 from 8.547 employed. This also includes persons with a job but not at work during the reference
period.
million recorded in 2022. The Labour Force
Table Household Population, Labour Force
Participation Rate (LFPR), which is the ratio of the 1.6 and Labour Force Participation
labour force to the household population, also
Item 2022 2023 (a)
decreased to 48.6 per cent in 2023, compared
Household Population '000 Persons (b) 17,162 17,306
to 49.8 per cent in 2022. Labour Force '000 Persons 8,547 8,408
Employed 8,148 8,010
The unemployment rate remained Unemployed 399 398

unchanged at 4.7 per cent in 2023, Unemployment Rate 4.7 4.7

compared to the previous year, as a Male 3.7 3.6
Female 6.5 7.0
combined outcome of the decline in both the
unemployed population9 and labour force Labour Force Participation Rate (c) 49.8 48.6
Male 70.5 68.6
8 This is the current economically active population, i.e., the number of persons (aged 15 Female 32.1 31.3
years and above), who are employed or unemployed during the reference one-week
period. Source: Department of Census and Statistics
(a) Provisional
9 Persons available and/or looking for work, and who did not work and took steps to find (b) Household population aged 15 years and above
a job during the last four weeks and are ready to accept a job given a work opportunity (c) Labour force as a percentage of household population
within next two weeks are said to be unemployed.

18
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

1.2.6 Economic Infrastructure in the aftermath of the economic crisis and

1
the improved availability of fuel with the
Power and Energy
improved foreign currency liquidity status.
Petroleum Sales volumes of petroleum products recorded
a year-on-year growth of 7.1 per cent in
Although geopolitical tensions exerted
2023. Moreover, with the abatement of supply
upward price pressures during the latter
constraints, the Government took measures to
part of the year, the overall downward
relax demand management strategies, which
trend observed in global prices of crude oil
in 2023 together with the appreciation of were in place since mid 2022, by increasing the
the Sri Lanka rupee translated into lower weekly quotas under the National Fuel Pass QR
domestic prices of petroleum products, code system in the months of April and May 2023
compared to 2022. Global crude oil prices and subsequently abolishing these quotas with
recorded declines in 2023, when compared to effect from 01 September 2023.
2022, largely on account of subdued global
demand offsetting voluntary production cuts by CPC saw a significant turnaround in its
OPEC+ countries. Accordingly, the average financial performance during the year. The
Brent crude oil price decreased by 17.0 per cent implementation of the cost-reflective pricing
to US dollars 82.22 per barrel in 2023 from US formula paved the way to improve the financial
dollars 99.06 per barrel in 2022. In line with this performance of CPC, with the entity recording a
downward trend in global crude oil prices, the profit of Rs. 120.3 billion in 2023, in comparison
annual average import price of crude oil of the to the loss of Rs. 617.6 billion recorded in 2022.
Ceylon Petroleum Corporation (CPC) decreased At the end of 2022, the Government decided to
to US dollars 89.60 per barrel in 2023, while the transfer government guaranteed foreign currency
gradual appreciation of the Sri Lanka rupee also debt stock of CPC amounting to around US
supported the decline in import prices in rupee dollars 2.5 billion to the government balance
terms. Throughout the year, monthly adjustments sheet as a measure to improve the financial
were made to domestic prices of petroleum viability of CPC. The CPC’s outstanding trade
products in line with the cost-reflective pricing receivables from government entities decreased
formula. Consequently, by the end of the year, by Rs. 206.0 billion to stand at Rs. 17.7 billion by
the prices of Petrol 92, Auto Diesel, and Kerosene the end of December 2023, with the restructuring
retailed by the CPC recorded overall reductions of the CPC’s trade debt receivables from
of 6.5 per cent, 21.7 per cent, and 32.3 per SriLankan Airlines (SLA) and Ceylon Electricity
cent, respectively, compared to the end of 2022. Board (CEB) in December 2023. Meanwhile, the
However, further reductions were capped due settlement of dues from SLA and CEB enabled
to the imposition of an Excise Duty of Rs. 25.00
CPC to settle its liabilities in relation to the Indian
per litre, on imports of key refined petroleum
credit line by end December 2023.
products, in two rounds in January and June
2023 by the Government.11 Several reforms were undertaken in 2023
to liberalise the domestic petroleum
Petroleum sales increased in 2023, reflecting
market with the view of improving the
the gradual restoration of economic activity
competitiveness and efficiency of the
11 VAT exemptions on major petroleum products of Petrol 92, Petrol 95, Auto Diesel,
petroleum sector in Sri Lanka. In March 2023,
and Super Diesel were removed with effect from 01 January 2024, while the VAT
exemption on Kerosene was continued. the Cabinet of Ministers granted approval to

19
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

award contracts to three private companies for 2023. During the year, hydro, fuel, coal, and

1
the importation, storage, distribution, and sale Non-Conventional Renewable Energy (NCRE)
of petroleum products through a predetermined sources contributed to 29 per cent, 20 per cent,
dealer-operated distribution network in Sri Lanka. 30 per cent, and 21 per cent, respectively, of
Accordingly, two foreign suppliers commenced overall electricity generation.
their retail business operations in 2023 and in
Cost-reflective pricing in electricity resulted in
early 2024. Under the new arrangement, retail
improvements in the financial performance
prices of petroleum products sold by the CPC,
of CEB. In 2023, the Government established a
which are determined by the Ministry of Power
semi-annual tariff revision mechanism to address
and Energy through the cost-reflective pricing
the financial woes of CEB through cost-reflective
formula, serve as a ceiling price in the market
pricing. However, due to the volatility in the
and new suppliers may determine their prices
generation mix, electricity tariffs were revised three
subject to the same.
times during the year, with two upward revisions
Electricity in February and October, and a downward
revision in July 2023. Accordingly, the average
The daily scheduled power cuts that were
electricity tariff was revised upward by around
undertaken from February 2022 as a
66 per cent and 18 per cent, respectively, in
demand management strategy amidst fuel
February and October 2023, while it was revised
and coal shortages on account of foreign
downward by around 14 per cent in July 2023.
exchange liquidity crunch and the poor
Further, based on these developments, the
reservoir levels, were phased out and
Government decided to reduce the tariff revision
uninterrupted supply of electricity resumed
cycle to three months, commencing from the first
from mid-February 2023, supported by the
quarter of 2024. Accordingly, electricity tariffs
sufficient availability of thermal sources for
were revised downward effective from 05 March
electricity generation. Despite the favourable
2024. Regular tariff revisions contributed to a
statistical base impact stemming from a low level
notable improvement in CEB’s cash flow, leading
of electricity generation amidst scheduled power
to a sizeable profit of Rs. 61.2 billion in 2023,
outages in 2022, electricity generation witnessed
subsequent to recording continuous losses for
a year-on-year contraction of 2.2 per cent in
around seven years since 2016. This improved
2023. This reflected the weak energy demand
financial performance of CEB in 2023 was also
in the economy stemming from the combined
supported by the increased share of hydro in total
impact of cost-reflective electricity tariffs and
generation, particularly in the latter part of 2023.
subdued economic activity. The power sector
faced pressures during the second and third The Government initiated several policy
quarters of 2023 due to the delayed onset of the measures to reform the domestic power
South-West monsoon as a result of the sector with a view to improving its
El Niño effect. This resulted in an increased competitiveness and efficiency to cater to
usage of expensive thermal sources for electricity emerging demand. Amid the ongoing reforms
generation. However, this trend reversed towards of State Owned Business Enterprises (SOBEs),
the end of the third quarter of 2023, with the proposed new legislation for the power sector
improved reservoir levels amidst unusually high is expected to catalyse necessary reforms within
rainfall reported from the latter part of September the sector, thereby paving the way for an efficient

20
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
1.6 Energy and Power Sector Developments

1
Trends in Global Crude Oil Prices Revisions to Domestic Prices of Petroleum
Products of CPC
150 600

500

100 400

Rs./litre
99.06 82.22
USD/bbl

64.04 70.80 300

81.57
50 43.35 200

100

0 0

Jan-21
May-21
Sep-21
Jul-19

Jul-20

Jul-21

Jul-22

Jul-23
Jan-19
Apr-19

Jan-20
Apr-20

Jan-21
Apr-21
Oct-19

Jan-22
Apr-22

Jan-24
Oct-20

Jan-23
Apr-23
Oct-21

Jan-24
Oct-22

Jan-22
May-22
Sep-22
Oct-23

Jan-23
May-23
Sep-23
Jan-19
May-19
Sep-19
Jan-20
May-20
Sep-20
Brent WTI Petrol 90/92 Octane Petrol 95 Octane
Brent average for the relevant period Auto Diesel Super Diesel
Source: Bloomberg Source: Ceylon Petroleum Corporation

Electricity Generation Mix Average Costs and Average Tariffs of Electricity

100 80

80
60

60
Rs./Unit
Per cent

40

40

20
20

0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2022 2023

2019 2020 2021 2022 2023 Hydro (a) Coal (a)

Fuel Oil (a) NCRE (includes Mini Hydro) (a)
Hydro Fuel Oil Coal NCRE Average Cost (at Generation Point) Average Tariff
Average Cost (at Selling Point)
Source: Ceylon Electricity Board (a) Average cost at Generation Point Source: Ceylon Electricity Board

While the downward trend in global crude oil prices and appreciation of the Sri Lanka rupee translated into
lower domestic prices of petroleum products, electricity tariffs were higher on account of volatilities that were
observed in the generation mix during the year.

and financially viable sector that will ensure helped reduce the burden on the fiscal sector to
energy security. Moreover, the Government’s some extent. The improved financial performance
priority to diversify energy sources and expand of these key SOBEs has, however, reduced their
generation capacity through various power excessive reliance on the financial system. In turn,
projects, especially renewable energy initiatives, this is expected to enable the rechannelling of
which are financed through foreign investments, valuable resources of the financial system, that
is expected to facilitate the country’s commitment were previously locked in the losses of SOBEs,
to source 70 per cent of energy from renewable into productive sectors across the economy.
sources by 2030, while enabling the meeting of However, the Government’s commitment to
growing energy demand in a cost-effective and the continued implementation of cost-reflective
sustainable manner. Recent improvements in the pricing along with continued reforms towards
financial performance of CPC and CEB have diversification, improved competition, and

21
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

transparency across the power and energy sectors Other Developments

1
will be vital to preventing any crisis in these
Other infrastructure development activities
sectors in the future.
gradually resumed in 2023. The Colombo
Transport Sector Port City reached the final stages in relation to
Phase I, pertaining to the construction of ground
During the year, transportation activities
infrastructure, including roads and utilities, and
regained their momentum as fuel availability
is expected to attain completion by mid-2024.
normalised and economic activity began
Further, several measures were undertaken during
to recover. The operations of the Sri Lanka
the year to continuously strengthen the legal
Transport Board (SLTB), in terms of operated
framework of the Colombo Port City, and a key
kilometrage, reported a year-on-year growth
milestone in this regard was the establishment of
of 11.2 per cent, while passenger kilometrage
the International Commercial Dispute Resolution
reported a contraction of 4.6 per cent during the
Centre. Infrastructure development activities
year. Meanwhile, both passenger kilometrage and
in the Port of Colombo pertaining to the East
operated kilometrage of private bus operators
Container Terminal Phase II and West Container
witnessed notable year-on-year growth rates of
Terminal Phase I continued during the year and
23.7 per cent and 94.3 per cent, respectively,
are expected to enable capacity expansion by
in 2023. In the rail transportation sector, the
around 6 million TEUs by 2027. During the year,
estimated passenger kilometrage and goods
through the Urban Infrastructure and Township
kilometrage recorded year-on-year increases of
Development Programme Siyak Nagara, the
6.7 per cent and 15.0 per cent, respectively, in
Urban Development Authority completed several
2023. Across the civil aviation sector, there were
regional development projects that sought
7.5 million passenger movements (excluding
to convert regional town centres into citizen
transit passengers) in 2023, reflecting a notable
centric cities, including those in Nuwara Eliya,
year-on-year growth of 35.8 per cent. However,
Kurunegala, and Galle. The National Housing
cargo handling recorded a contraction of 5.0 per
Development Authority took steps to restart the
cent during the year. Meanwhile, the Government
Mihindupura housing project under a public-
continued the restructuring of SLA with the calling
private partnership in 2023. Several water supply
for Expressions of Interest from potential investors
projects were completed during the year by the
for the divestiture of SLA in October 2023. The
National Water Supply and Drainage Board.
port sector, which experienced a significant
Meanwhile, initiatives under the DIGIECON
setback in early 2023, gathered pace during
2030 programme of the Government were also
the period thereafter supported by the gradual
underway, and these are expected to contribute to
relaxation of import restrictions and increased
the acceleration of Sri Lanka’s transformation into
trade activity. Accordingly, container handling
a digital economy.
and cargo handling activities reported year-
on-year growth rates of 1.3 per cent and 3.4 1.2.7 Social Infrastructure
per cent, respectively, while ship arrivals also
Education
recorded a year-on-year growth of 18.4 per cent
in 2023. This positive performance was also Despite the seeming return to normalcy,
driven by the surge in transshipment volumes due inequalities in the education system which
to the diversion of vessels away from the Red Sea, were aggravated during the crisis period
particularly towards the latter part of the year. remain unaddressed. Education sector

22
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

activities recommenced ‘in-person’ in 2023 after (105,049 cases). Further, Sri Lanka reported

1
approximately three years of hybrid learning, 62 imported malaria cases in 2023 raising
with the dissipation of disruptions caused by concerns about a potential malaria resurgence.
the COVID-19 pandemic and the economic Recent nutrition related indicators highlight the
crisis. The Government continued to conduct disconcerting and worsening nutritional status
all national level exams, despite the delay of an of the country, particularly among children
academic year continuing to remain unaddressed and women, amid existing socioeconomic
resulting in two overlapping batches of students challenges and particularly among those
for Grades 11 and 13 with those facing the exam belonging to vulnerable groups. In this context,
potentially disadvantaged in terms of availability authorities continued to provide child nutrition
of resources to them from their respective schools. services during the year with the collaboration
As per the findings of the survey of the DCS, of development partners in an attempt to curb
schooling of 54.9 per cent of individuals aged the long lasting impact of such issues. However,
3-21 years has been affected by the crisis. In a more comprehensive and better targeted
light of this, the Government continued to invest strategy is essential in this regard as the effects
in student welfare and subsidy programmes of malnutrition are long term and can trap
during 2023 with a view to minimising student individuals across generations in the vicious circle
dropout from school education, and improving of poor productivity and thereby, poverty.
access to and participation in quality education. Lapses in the health sector are becoming
These measures include the continuation of increasingly disconcerting raising serious
the school meal programme, provision of free concerns about the efficacy of the sector.
textbooks, and free school uniforms and school Service delivery in the public health sector had
shoes. However, it must be reiterated that these been severely impacted by the economic crisis
measures can only mitigate the scarring impact of with the foreign exchange liquidity affecting
the aftermath of the crisis on academic outcomes, the procurement of medicines and required
especially among the vulnerable segments of equipment, alike. While pressures in this regard
the population for whom education is of even have been alleviated to a great extent, issues
more importance to break generational cycles of pertaining to the quality of medicines have been
vulnerability and poverty. recurring regularly in recent times on account of
poor quality controls and the lack of a stringent
Health
regulatory mechanism in relation to the same.
The health sector continued to grapple with Further, there are growing concerns of negligence
the burden of both communicable and non- in the provisioning of health services. Both
communicable diseases, facing additional aforementioned developments have resulted in
financial strains to treat these diseases casualties which are reprehensible in light of the
amid limited resources, necessitating country’s long standing commitment to universal
comprehensive strategies and resources for health care. These developments threaten to
efficient management and prevention of underestimate the health outcomes that have
these diseases. In 2023, the number of dengue been achieved thus far. This underscores the
cases in Sri Lanka increased substantially, with critical need to focus on strengthening the
the country reporting its third largest outbreak of country’s healthcare system, as it is an essential
89,799 cases, following the substantially large pillar of the human capital base of the economy.
outbreaks in 2017 (186,101 cases) and 2019 In addition to urgent prioritisation of adequate

23
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

budgetary allocations for investments in the outset, around 1.4 million applicants out of

1
health sector, stringent regulatory mechanisms 3.7 million applicants were selected to receive
at every stage of the supply chain pertaining to benefits under four major categories, namely,
pharmaceutical products and medical equipment transitional, vulnerable, poor, and severely poor,
are of utmost importance considering that as classified under the Aswesuma programme.
the sector deals with the wellbeing and lives Further, several measures were taken to
of individuals. The timely implementation of strengthen the selection criteria, along with data
sustainable health financing policy is also an recertification and verification procedures as well
essential measure that needs to be undertaken as regular reviews, to improve the targeting of the
in the short term. Over the medium term, programme. Under this programme, around Rs.
sustainable healthcare provisioning will hinge 53.8 billion was disbursed in 2023. Meanwhile,
on the active encouragement of public-private the Cabinet granted approval in July 2023 to
partnerships in relation to not only service delivery continue the Samurdhi Subsidy Programme
but also other aspects of healthcare provisioning, until the appeal process under the new benefit
including infrastructure development, production scheme was completed. Accordingly, as at end
of medicines and medical equipment and 2023, the number of beneficiary families under
even research and development in this sector. the Samurdhi Programme stood at 363, 214
Meanwhile, there is also an urgent need for families compared to 1.7 million families at the
action to address issues pertaining to the loss of beginning of the year. While the Government’s
human capital as well as the lack of infrastructure efforts to improve the efficacy of social assistance
for the production of necessary personnel to programmes are commendable, the lack of post
ensure that achievements made thus far are not crisis national statistics on the status of poverty,
wounded by these recent developments. vulnerability and inequality is disconcerting as
Social Safety Nets it hinders timely poverty alleviation and social
assistance efforts.
Considering the disproportionate and
prolonged effect of the economic crisis on 1.3 Monetary Sector
vulnerable households, measures were taken Developments
to strengthen the country’s social safety nets 1.3.1 Domestic Money Market
in line with the macroeconomic adjustment Liquidity and Short Term
programme under the IMF-EFF. Accordingly, Interest Rates
the Aswesuma welfare benefit scheme was
initiated in July 2023 under the purview of the Overnight liquidity in the domestic money
Welfare Benefits Board (WBB) with the intention market improved notably in 2023 from
of replacing the Samurdhi Development deficit levels to broadly balanced levels.
Programme. The programme was designed after Liquidity provision to the market through
developing the welfare benefit information system, term reverse repo auctions under open
considering multidimensional parameters, with market operations (OMO), in addition to the
an improved verification approach to ensure overnight liquidity provision, in line with the
the effective targeting of needy sectors, while accommodative monetary policy stance and
providing opportunities for appeals in the event provision of special liquidity assistance to certain
of non-inclusion in the benefit scheme. At the licensed banks, which had experienced persistent

24
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

liquidity deficits were the measures taken by March 2024. The asymmetric distribution of

1
the Central Bank to improve market liquidity. In liquidity among LCBs continued, with foreign
addition, substantial net purchases of foreign banks maintaining large liquidity surpluses. In
exchange by the Central Bank also released response to the easing of the monetary policy
rupee liquidity. Further, the reduction of the stance14 and the gradual improvements in
Statutory Reserve Ratio (SRR) applicable on all domestic money market liquidity conditions, the
rupee deposit liabilities of Licensed Commercial Average Weighted Call Money Rate (AWCMR),15
Banks (LCBs) by 200 basis points to 2.00 per cent which hovered around the upper bound of the
with effect from 16 August 2023 Standing Rate Corridor (SRC) during the period
injected additional liquidity of around of significantly tight monetary policy, adjusted
Rs. 200 billion into the domestic money market. downwards towards the lower bound of SRC.
Consequently, domestic money market liquidity, In turn, this facilitated the overall downward
which remained in deficit, on average, of around adjustment in the market interest rate structure.
Rs. 450 billion during 2022, improved to an
1.3.2 Market Interest Rates
average deficit of around Rs. 70 billion during
2023. Overnight liquidity remained volatile Market interest rates declined significantly
during the period under consideration due to in 2023 from notably high levels recorded
restrictions imposed on the Standing Facilities by in 2022. The reduction of market interest rates
the Central Bank.12 However, the volatility and was driven by the accommodative monetary
uncertainty on liquidity are expected to normalise policy measures implemented since June
in the period ahead as a result of the removal of
2023, supported by several other factors.16
the aforementioned restrictions13 in February/
Administrative measures and moral suasion
that targeted the reduction of excessive
12 Effective from the reserve maintenance period commencing 16 January 2023,
the Standing Deposit Facility (SDF) was limited to a maximum of five (5) times per market interest rates supported by the rapid
calendar month, while the Standing Lending Facility (SLF) was limited to 90% of the
Statutory Reserve Ratio (SRR) of each LCB on any given day. disinflation process and moderation of inflation
13 The restrictions on the Standing Facilities were relaxed/ removed in two stages.
Initially, with effect from the reserve maintenance period commencing 16 February expectations, and the decrease in risk premia
2024, the restriction on SLF was removed and the restriction on SDF was relaxed
from five times (5) to ten times (10) during a calendar month. Finally, the remaining
restriction on SDF was removed with effect from the reserve maintenance period
attached to yields on government securities
commencing 01 April 2024.
following the Domestic Debt Optimisation
Figure Key Policy Interest Rates, AWCMR and (DDO) operation are other important factors
1.7 Overnight Money Market Liquidity
18 300
that contributed to the broad based reduction
17
16
200 in market lending rates. The administrative
15
14
100
measures introduced in August 2023 to reduce
13 0
12 excessive lending interest rates, and broader
Rs. billion

-100
11
Per cent

10 -200 guidelines that were introduced to induce a

9
8
-300 gradual reduction in other market lending
7 -400
6
5 -500
4 14 Since the commencement of the monetary policy easing cycle in June 2023, policy
-600 interest rates of the Central Bank were reduced by 650 basis points in 2023, and a
3
further 50 basis points thus far in 2024, totalling a cumulative reduction of 700 basis
2 -700
points.
Nov-22
Mar-22

Nov-23
Jan-22

Mar-23
May-22

Jan-23
Sep-22
Jul-22

May-23

Sep-23
Jul-23

Mar-24
Jan-24

15 The short term interest rate closely monitored by the Central Bank as the operating
target to guide the market interest rates under the Flexible Inflation Targeting (FIT)
SDFR SLFR framework.
AWCMR Overnight Liquidity (RHS) 16 The Central Bank increased its policy interest rates by 100 basis points in March 2023
Average Liquidity for the Reserve Maintenance Period (RHS) marking it as the last policy interest rate hike in the tight monetary policy cycle which
Source: Central Bank of Sri Lanka started in August 2021.

25
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

interest rates on rupee loans and advances the lending interest rate based on all outstanding

1
during the latter part of the year resulted in rupee loans and advances extended by LCBs
a decline in market lending rates reflecting (Average Weighted Lending Rate (AWLR)),
an appreciable passthrough. Market lending and the lending interest rate based on all new
interest rates displayed some downward rupee loans and advances extended by LCBs
stickiness as yields on government securities (Average Weighted New Lending Rate (AWNLR))
remained at relatively elevated levels. The during a particular month declined by 4.49
interest rates based on the outstanding stock and 11.82 percentage points, respectively, in
of interest bearing rupee deposits held with 2023. The interest rates applicable on loans to
LCBs (Average Weighted Deposit Rate (AWDR) Small and Medium Sized Entrepreneurs (SMEs)
and Average Weighted Fixed Deposit Rate also declined during the year in line with the
(AWFDR)) declined by a range of 2.42 – 3.61 moderation of other market lending interest
percentage points, while the interest rates on rates. Accordingly, the interest rate based on all
new interest-bearing rupee deposits mobilised outstanding rupee loans and advances extended
by LCBs (Average Weighted New Deposit Rate by licensed banks to the SME sector (Average
(AWNDR) and Average Weighted New Fixed Weighted SME Lending Rate (AWSR)) and the
Deposit Rate (AWNFDR)) during a particular interest rate based on all new rupee loans and
month declined by a range of 12.01 – 12.40 advances extended by licensed banks during
percentage points during 2023. Lending rates, a particular month to the SME sector (Average
particularly interest rates applicable on short Weighted New SME Lending Rate (AWNSR))
term rupee loans and advances granted by LCBs declined by 5.40 and 11.95 percentage points,
to their prime customers during a particular respectively. Although, there was an overall
week (Average Weighted Prime Lending Rate reduction in lending interest rates to SMEs,
(AWPR)), which is one of the benchmark interest interest rates charged from SMEs remained
rates in the retail market, declined notably by relatively high, particularly for smaller loans, due
15.11 percentage points in 2023. Meanwhile, to the nature of lending and risks associated.

Figure
1.8 Movement of Selected Market Interest Rates

Deposit Rates 30
Lending Rates
26

24 28
26
22
24
20
22
18 20
Per cent
Per cent

16 18

14 16
14
12
12
10
10
8 AWDR AWFDR AWPR (Monthly) AWLR
8
AWNLR AWNSR
6 AWNDR AWNFDR
6 AWSR
4 4
Jan-22
Feb-22
Mar-22
Apr-22
May-22
Jun-22
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
Jan-23
Feb-23
Mar-23
Apr-23
May-23
Jun-23
Jul-23
Aug-23
Sep-23
Oct-23
Nov-23
Dec-23
Jan-24
Feb-24
Jan-22
Feb-22

May-22
Jun-22
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
Jan-23
Feb-23

May-23
Jun-23
Jul-23
Aug-23
Sep-23
Oct-23
Nov-23
Dec-23
Jan-24
Feb-24
Mar-22
Apr-22

Mar-23
Apr-23

Mar-24

Source: Central Bank of Sri Lanka

26
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

The downward trend in market interest rates Table

1.7 Movements of Interest Rates

1
continued in early 2024, highlighting the space Per cent per annum
End 2023 Change
available for market interest rates to decline Interest Rate End 2022 in % pts
Key Policy Interest Rates
further in response to accommodative monetary Standing Deposit Facility Rate (SDFR) 14.50 9.00 -5.50
Standing Lending Facility Rate (SLFR) 15.50 10.00 -5.50
conditions. In spite of these developments, real Average Weighted Call Money Rate (AWCMR)
Yield Rates on Government Securities
15.50 9.24 -6.26

market interest rates remained positive, given the Primary Market (a)
Treasury bills
low level of inflation, indicating that monetary 91-day
182-day
32.64
32.20
14.51
14.16
-18.13
-18.04
364-day 29.27 12.93 -16.34
conditions from an interest rate perspective Treasury bonds
2-year 33.01 (b) 13.87 (c) -19.14
remained somewhat tight. Meanwhile, interest 3-year 31.36 (b) 14.07 (c) -17.29
4-year - 14.21 (c) -
rates offered on foreign currency deposits 5-year 31.78 (b) 14.32 (c) -17.46
10-year 30.86 (b) - -
recorded a moderation during 2023 compared Secondary Market
Treasury bills
to the previous year owing to improvements in 91-day 30.75 14.13 -16.62
182-day 29.50 13.86 -15.64
foreign exchange balances in the banking sector 364-day 28.39 12.71 -15.68
Treasury bonds
supported by inflows from the merchandise 2-year 28.19 13.52 -14.67
3-year 28.32 13.62 -14.70
and services sector exports as well as workers’ 4-year
5-year
27.60
26.78
13.66
13.74
-13.94
-13.04
remittances, although the global stance of 10-year
Interest Rates on Deposits
26.18 13.10 -13.09

Licensed Commercial Banks (d)

monetary policy remained tight. Savings Deposits 0.25-6.00 0.25-13.00 -
1 Year Fixed Deposits (e) 4.50-30.00 1.00-22.00 -
Yields on government securities, which AWDR (f)
AWFDR (f)
14.06
18.49
11.64
14.88
-2.42
-3.61

declined notably with the announcement of AWNDR (f)

AWNFDR (f)
23.07
23.73
11.06
11.33
-12.01
-12.40
Other Financial Institutions (g)
the DDO operation in July 2023, reduced National Savings Bank
Savings Deposits 3.00 3.00 -
further underpinned by the easing of 1 Year Fixed Deposits 12.00 8.00 -4.00
Licensed Finance Companies (h)
monetary policy and the gradual dissipation Savings Deposits 4.63-8.03 4.33-6.62 -
1 Year Fixed Deposits 20.48-27.15 11.88-13.56 -
of risk premia associated with government Interest Rates on Lending
Licensed Banks (i)
securities. Further, fiscal consolidation efforts AWSR 20.73 15.33 -5.40
AWNSR 26.91 14.96 -11.95
and improvement in government revenue, the Licensed Commercial Banks (d)
AWPR (Monthly) 28.19 12.39 -15.80
buildup of buffer funds for cashflow operations AWLR 18.70 14.21 -4.49
AWNLR 26.20 14.38 -11.82
by the Government, the deceleration of inflation Licensed Specialised Banks (g)
National Savings Bank 28.00-32.00 15.00-20.00 -
and reduction in inflation expectations, and State Mortgage and Investment Bank (j)
Licensed Finance Companies (h)
18.00-27.25 9.50-21.00 -

improved market sentiments also supported Finance Leasing

Loans against Immovable Properties
21.53-35.37 14.98-32.48
26.80-28.43 14.18-23.86
-
-
Corporate Debt Market
the normalisation of yields on government Debentures 15.42-28.00 13.50-29.50 -
Commercial Papers
securities. Accordingly, yields on Treasury bills 11.00-36.00 17.00-26.50 -
(a) Weighted average yield rates at the latest Sources: Respective Financial Institutions
across all maturities decreased by 16.34 – available auction
(b) Last primary auction during 2022:
Colombo Stock Exchange
Central Bank of Sri Lanka
2 yr - 13 Dec | 3 yr - 29 Dec |
18.13 percentage points during 2023, while 5 yr - 28 Oct | 10 yr - 11 Nov
(c) Last primary auction during 2023:
Treasury bond yields also moderated. In the 2 yr - 28 Dec | 3 yr - 12 Dec | 4 yr - 28 Dec | 5 yr - 12 Dec
(d) Based on the rates quoted by LCBs
(e) Maximum rate is a special rate offered by certain LCBs
meantime, the secondary market yield curve, (f) Since July 2018, AWDR and AWFDR were calculated by replacing senior citizens’ special
deposit rate of 15% with relevant market interest rates to exclude the impact of special rates.
which had shown unusual movements since Same method was applied to calculate AWNDR and AWNFDR since June 2018. However,
senior citizens’ special deposit rate of 15% was discontinued from 01.10.2022.
(g) Based on the rates quoted by other selected Financial Institutions
April 2022 triggered by uncertainties that arose (h) Interest rate ranges are based on the average maximum and average minimum rates quoted
by LFCs which are applicable for deposits mobilised and loans granted during the respective
from domestic debt restructuring concerns and months. Data for 2023 are provisional
(i) Based on the rates quoted by LCBs and LSBs
(j) Lending for housing purposes only
the heightened borrowing requirement of the

27
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure Secondary Market Yield Curve for by LCBs experienced an unexpected monthly
1.9 Government Securities

1
contraction in January 2024 (a contraction of
32
Rs. 52.2 billion) partly due to the advancing of
28
spending in view of the implementation of VAT
24
adjustments effective January 2024 and the
20
Per cent

settlement of short term borrowings obtained by

16
businesses during the end-year festive season.
12
Further, the valuation impact arising from the
8 appreciation of the Sri Lanka rupee exacerbated
4 the contraction in January 2024. Nevertheless,
12 Years
11 Years

13 Years

15 Years
14 Years
10 Years
2 Years

7 Years
3 Years

5 Years
4 Years

9 Years
8 Years
6 Years
1 Year

credit to the private sector expanded in February

End 2021 End 2022 2024 to some extent and is anticipated to
End 2023 End Mar 2024
Source: Central Bank of Sri Lanka
expand in the period ahead, aligning with the
Government, continued to exhibit a double envisaged further reduction in market interest
humped inverted yield curve during the most rates and improvements in economic activity.
part of 2023. However, with the moderation of Meanwhile, credit to the private sector by
yields on government securities following the Licensed Specialised Banks (LSBs) contracted
DDO operation and improved fiscal outturn, it by Rs. 32.9 billion during 2023, recording a
transitioned to a normal upward sloping yield year-on-year contraction of 2.8 per cent by end
curve since early 2024. 2023 amidst relatively tight liquidity conditions
of those banks and comparatively high interest
1.3.3 Credit Aggregates rates. Private sector credit by Licensed Finance
The turnaround of credit to the private Companies (LFCs) also contracted by Rs. 24.2
sector by LCBs recorded in June 2023 ended billion during 2023, recording a year-on-year
the longest streak of monthly contractions contraction of 1.8 per cent by the end of 2023.
of credit to the private sector. The turnaround Credit to the major sectors of the economy17
was supported by the gradual relaxation of suffered contractions during the first
the monetary policy stance and improvements half of 2023 but commenced recovering
in economic activity and market sentiments. thereafter. During the year, an improvement
Accordingly, the cumulative increase in was observed in credit extended to productive
outstanding credit to the private sector by LCBs sectors, excluding credit to the Industry sector,
during June-December 2023 was Rs. 367.4 which experienced a setback. Accordingly, on a
billion. Despite the recovery during the second year-on-year basis, credit to the Agriculture and
half of 2023, credit to the private sector by LCBs Services sectors grew by 0.9 per cent and 2.1
recorded a cumulative contraction of
per cent, respectively, during 2023. Within the
Rs. 45.0 billion during 2023, registering a
Agriculture sector, the tea, paddy, and fisheries
year-on-year contraction of 0.6 per cent by end
subsectors recorded credit expansions during
2023 compared to the growth of 6.2 per cent
the year, reflecting a broad based expansion in
(year-on-year) recorded at end 2022. However,
17 Findings are based on the Quarterly Survey on Loans and Advances extended to the
the increasing trend in credit to the private sector Private Sector by LCBs.

28
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
1.10 Credit Extended to the Private Sector by LCBs

1
Monthly Change in Credit vs Growth (Y-o-Y) Growth of Sectoral Credit (Y-o-Y)
(As per the Quarterly Survey of Loans and Advances by LCBs)
300
500 30

250 25 25

200 20 20

150 15 15
Rs. billion

100 10 10

Per cent

Per cent
50 5 5
0.9 2.1
0.9
0 0 0 -0.2

-50 -5 -5 -5.6

-100 -10 -10

-150 -15 -15

Nov-22
Jan-22

Jun-22

Sep-23

Mar-22

Jun-22

Sep-22

Dec-22

Mar-23

Jun-23

Sep-23

Dec-23
Apr-23

Feb-24

% Share of total (Dec-23)

Agriculture & Fishing 8.7
Monthly change
Industry 39.4
Y-o-Y Growth (RHS) Services 27.7
Personal Loans and Advances 24.2
Source: Central Bank of Sri Lanka

agriculture activities. In the Services sector, the although a resumption was observed in the
wholesale and retail trade, communication and second half of the year driven by the substantial
information technology, and shipping, aviation increase in pawning related credit, which has
and freight forwarding subsectors recorded been growing continuously since the onset of
expansions in credit during the year, showing COVID-19.
signs of a rebound in service related economic
Credit obtained by SOBEs from the banking
activity in the economy. However, credit
system contracted in 2023, in contrast to
granted to the Industry sector remained weak
the notable expansion recorded during
on account of the construction subsector being
2022. Credit to SOBEs by LCBs contracted by
severely affected by the lack of government
Rs. 979.9 billion during 2023 mainly due to
and private sector projects stemming from
the Government taking over the government
fiscal constraints, rising raw material prices,
guaranteed foreign currency debt obligations
and associated finance costs due to the high
of CPC, provided by LCBs, and improved
interest rate environment in 2022 and early
financial performance of key SOBEs following
2023. A contraction in credit was also observed
the implementation of cost-reflective price
across the textiles and apparel, and food
adjustments thus reducing their reliance on bank
and beverages subsectors, followed by some
financing.
recovery during the second half of the year.
However, on a year-on-year basis, credit to the Net Credit to the Government (NCG) by
Industry sector contracted by 5.6 per cent in LCBs continued to increase in 2023 as
2023. Meanwhile, credit extended in the form the banking system was one of the main
of personal loans and advances suffered a sources of domestic financing of the
marginal contraction of 0.2 per cent in 2023, Government. NCG by the banking system

29
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

increased by Rs. 813.9 billion during 2023 but on the Financial Survey (M4)18 amounted to

1
remained lower than the expansion recorded Rs. 1,038.6 billion during 2023, of which
during 2022 (an expansion of Rs. 1,638.7 Rs. 140.7 billion was through LSBs and
billion). NCG by LCBs recorded an increase of Rs. 84.0 billion was through LFCs.
Rs. 1,870.1 billion during the year reflecting
1.3.4 Money Aggregates
the increase in investments in government
securities by LCBs amidst the reduction in credit Reserve money recorded a marginal
provided to the private sector, and the transfer contraction in 2023, although high volatility
of government guaranteed outstanding foreign was observed in its levels since early
currency debt of CPC to the Government. In 2023 due to the impact of administrative
contrast, NCG by the Central Bank recorded measures taken by the Central Bank to
a significant reduction of Rs. 1,056.3 billion reduce the overdependence of LCBs on the
during 2023 mainly due to the offloading of standing facilities of the Central Bank. The
Treasury bills held by the Central Bank and restricted access to Standing Deposit Facility
reduction in the use of SLF of the Central Bank (SDF) resulted in LCBs maintaining large excess
by LCBs with the gradual improvements of the reserves with the Central Bank at irregular
liquidity position of LCBs. The reduction in intervals. This created daily volatility in LCBs’
NCG by the Central Bank was partly due to the deposits with the Central Bank causing reserve
restrictions on monetary financing introduced money to be volatile. With the reduction in SRR
in the Central Bank of Sri Lanka Act, No. 16 by 200 basis points in August 2023, LCBs’
of 2023 (CBA), which prohibited monetary deposits with the Central Bank declined notably,
financing and created a commitment to reduce although volatility continued as restrictions were
the government securities holding of the Central still in force during 2023. Meanwhile, currency
Bank. Meanwhile, the expansion of NCG based in circulation, which declined significantly after
the festival season of April 2023, recorded
some expansion towards end June 2023, mainly
Figure Annual Change in NCG from the
1.11 Banking System (a) reflecting the uncertainties surrounding the DDO
2,000 operation. However, with the public gaining
1,800
1,600 greater clarity on DDO, a return of currency to
1,400
1,200 the banking system was observed since mid-July
1,000
800 2023, albeit moderately. As in the past, currency
600
Rs. billion

400 in circulation increased notably towards the end

200
0 of the year due to festive demand, although part
-200
-400 of the seasonal demand for currency returned
-600
-800 to the banking system. However, currency in
-1,000
-1,200 circulation continued to increase thereafter
2021
2014

2022
2015

2023
2016

2018

2019
2017

2020

as the preference to hold currency remained

LCBS
Central Bank
Net Credit to the Government elevated as recent tax related measures are
(a) With the approval of the Cabinet of Ministers at its meeting held on 30 January 2023, the
outstanding foreign currency guaranteed debt of CPC was absorbed into central government debt likely to have increased cash based transactions,
with effect from December 2022. Accordingly, this adjustment was implemented in two phases,
first in April 2023 and subsequently in December 2023, hence, was reflected in the balance sheets
of the particular state owned commercial banks, which caused a reduction in credit to public
corporations/ SOBEs and a corresponding expansion in NCG. 18 The Financial Survey provides a broader measure of money supply, covering all
deposit taking institutions, including LSBs and LFCs, in addition to LCBs and the
Source: Central Bank of Sri Lanka Central Bank.

30
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Table
Developments in Money Aggregates
1.8

1
Rs. billion
End End End End End
Item
2019 2020 2021 2022 2023 (a)
1. Reserve Money 933 964 1,306 1,349 1,329
(% change Y-o-Y) -3.0 3.4 35.4 3.3 -1.5
Net Foreign Assets of the Central Bank 896 527 -387 -1,614 -837
Net Domestic Assets of the Central Bank 37 438 1,693 2,963 2,166
2. Narrow Money (M1) 865 1,177 1,460 1,454 1,658
(% change Y-o-Y) 4.2 36.0 24.0 -0.4 14.1
3. Broad Money (M2b) 7,624 9,406 10,647 12,290 13,189
(% change Y-o-Y) 7.0 23.4 13.2 15.4 7.3
3.1 Net Foreign Assets (NFA) 101 -209 -982 -1,767 -456
Monetary Authorities (b) 896 527 -387 -1,614 -837
Licensed Commercial Banks (LCBs) -795 -736 -595 -153 381
3.2 Net Domestic Assets (NDA) 7,523 9,615 11,629 14,056 13,645
Domestic credit 9,411 11,721 14,002 16,632 16,421
Net Credit to the Government (NCG) 2,796 4,548 5,832 7,471 8,285 (c)
Central Bank 363 869 2,094 3,432 2,376
Licensed Commercial Banks (LCBs) 2,433 3,679 3,738 4,039 5,909
Credit to Public Corporations / SOBEs 818 1,002 1,188 1,750 (d) 770 (c)
Credit to the Private Sector 5,797 6,171 6,981 7,411 (d) 7,366
(% change Y-o-Y) 4.2 6.5 13.1 6.2 -0.6
Other Items (net) -1,887 -2,106 -2,373 -2,576 -2,776
4. Broad Money (M4) 9,445 11,462 12,985 14,840 15,829
(% change Y-o-Y) 8.2 21.4 13.3 14.3 6.7
4.1 Net Foreign Assets (NFA) 89 -217 -999 -1,767 -456
Monetary Authorities (b) 896 527 -387 -1,614 -837
Licensed Commercial Banks (LCBs) -795 -736 -595 -153 381
Licensed Specialised Banks (LSBs) -12 -8 -17 0 0
4.2 Net Domestic Assets (NDA) 9,356 11,679 13,984 16,607 16,285
Net Credit to the Government (NCG) 3,483 5,366 6,769 8,469 9,507 (c)
Central Bank 363 869 2,094 3,432 2,376
Licensed Commercial Banks (LCBs) 2,433 3,679 3,738 4,039 5,909
Licensed Specialised Banks (LSBs) 614 742 845 881 1,022
Licensed Finance Companies (LFCs) 73 75 92 116 200
Credit to Public Corporations / SOBEs by (LCBs) 818 1,002 1,188 1,750 (d) 770 (c)
Credit to the Private Sector 7,793 8,285 9,339 9,917 (d) 9,815
(% change Y-o-Y) 3.9 6.3 12.7 6.2 (1.0)
Licensed Commercial Banks (LCBs) 5,797 6,171 6,981 7,411 (d) 7,366
Licensed Specialised Banks (LSBs) 814 936 1,094 1,159 1,126
Licensed Finance Companies (LFCs) 1,182 1,177 1,264 1,347 1,323
Other items (net) -2,738 -2,973 -3,312 -3,529 -3,807
Memorandum Items:
Money Multiplier (M2b ) 8.18 9.75 8.15 9.11 9.93
Velocity (M2b average) (e) 2.16 1.84 1.73 2.04 (d) 2.19

(a) Provisional Source: Central Bank of Sri Lanka

(b) This includes NFA of the Central Bank as well as the Government's Crown Agent's balance reported by the Department of State
Accounts
(c) With the approval of the Cabinet of Ministers at its meeting held on 30 January 2023, the outstanding foreign currency guar-
anteed debt of the Ceylon Petroleum Corporation (CPC) was absorbed into central government debt with effect from December
2022. Accordingly, this adjustment was implemented in two phases, first in April 2023 and subsequently in December 2023,
hence, was reflected in the balance sheets of the particular state owned commercial banks, which caused a reduction in credit to
Public Corporations/ SOBEs and a corresponding expansion in Net Credit to the Government (NCG).
(d) Revised
(e) Based on rebased GDP estimates (base year 2015) by the Department of Census and Statistics

31
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure Contribution to Y-o-Y Growth of placements by LCBs, which led to the expansion
1.12 Broad Money (M2b)

1
of other items (net). Meanwhile, NFA of the
40
35 Central Bank, which turned negative in August
30
2021, gradually improved in 2023, reflecting
25
20 the combined effect of increased foreign assets
15
with the accumulation of foreign reserves and
10
Per cent

5
6.4 decreasing foreign liabilities of the Central
0
-1.7 Bank. During 2023, NFA of the Central Bank
-5
-10
improved by Rs. 776.5 billion, albeit remaining
-15 negative by the end of the year.
-20
-25 Despite the expansions recorded in NCG
Jan-22

Nov-22
Jul-22
Mar-22

Jan-23

Nov-23
Jul-23
Sep-22

Mar-23
May-22

Sep-23

Jan-24
May-23

and NFA of the banking system, the growth

Net Foreign Assets Credit to the Private Sector of broad money (M2b) supply remained
Credit to Public Corporations/ Net Credit to the Government
SOBES
Other Items (net)
Broad Money (M2b) growth moderate during 2023 mainly due to the
Domestic credit growth Source: Central Bank of Sri Lanka contractions recorded in credit extended by
together with lower opportunity cost of holding LCBs to the private sector and SOBEs. NFA
currency due to reduced deposit interest of the banking system improved notably by
rates. Accordingly, reserve money contracted Rs. 1,310.7 billion during 2023 due to the
marginally to Rs. 1,328.7 billion by end 2023, decline in foreign liabilities and the build-up
recording a year-on-year contraction of 1.5 of foreign assets, reflecting an improvement in
per cent. Meanwhile, with the relaxation of the external sector performance and gross official
restrictions imposed on the standing facilities in reserves (GOR). Settlement of foreign currency
February and March 2024, the volatility of daily liabilities by the Central Bank as well as LCBs,
reserve money reduced somewhat. helped reduce foreign currency liabilities of
the banking system, while the receipts from
On the assets side of the Central Bank’s
multilateral agencies as well as the retention
balance sheet, a contraction of reserve
money was recorded during 2023 entirely of foreign exchange within the banking system
due to the contraction in Net Domestic due to lower demand for foreign exchange
Assets (NDA) of the Central Bank surpassing augmented the foreign currency assets of the
the expansion of its Net Foreign Assets banking system. Accordingly, driven by these
(NFA) during the year. NDA of the Central developments, the year-on-year growth of broad
Bank declined by Rs. 797.2 billion during 2023 money (M2b) decelerated gradually to 7.3 per
mainly due to the decline in net claims on the cent by end 2023 and further to 6.4 per cent
Government, particularly the decline in the by end January 2024 from 15.4 per cent at
government securities holdings of the Central end 2022. On the liabilities side of M2b, the
Bank (net of repo). Nevertheless, this decline was increase in time and savings deposits held by
somewhat negated as retained earnings turned the public with LCBs contributed 77 per cent
negative from September 2023 as a result of to the year-on-year expansion of M2b during
accounting for the upfront day one loss incurred 2023. Meanwhile, an expansion of currency
following DDO, and reduction in the SDF and demand deposits held by the public with

32
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

LCBs was also recorded during 2023, partly Table

1.9 Current and Capital Account

1
due to increased holdings of currency and
USD million
demand deposits amidst increased cost of living Item
2022 (a) 2023 (b)
and declining interest rates which reduced Current Account (net) -1,448 1,559

the opportunity cost of holding currency and Receipts 20,228 23,780

Payments 21,677 22,221
demand deposits. Following the similar trend
Trade Balance -5,185 -4,900
observed in M2b, the growth of M4 broad money Exports 13,106 11,911
supply, as measured by the Financial Survey, Imports 18,291 16,811

remained moderate during 2023. Services (net) 2,110 3,404

Receipts 3,062 5,416
1.4 External Sector Of which;

Developments Transport 676 1,550

Travel 1,136 2,068

Sri Lanka’s external sector rebounded Computer Services 1,066 795

Construction Services 9 355
strongly in 2023 and demonstrated
Payments 953 2,012
greater stability, having recorded positive
Of which;
developments on many fronts towards the Transport 333 732
latter part of the year. The commencement Travel 244 152

of the IMF-EFF programme in March 2023 and Computer Services 133 198
Construction Services 11 111
its successful continuation thus far have been
Primary Income (net) -1,870 -2,564
instrumental in achieving stability in the external
Receipts 266 463
sector. The external current account recorded Compensation of employees 30 53

a surplus in 2023. This was supported by the Investment Income 237 410
Direct Investment 15 12
notable contraction in the trade deficit and Portfolio Investment - -
significant inflows in terms of services exports Other Investment 217 349
Payments 2,136 3,027
and workers’ remittances. The merchandise
Compensation of employees 69 30
trade deficit for 2023 recorded its lowest since Investment Income 2,068 2,997

2010, supported by a larger contraction in Direct Investment 549 888

Portfolio Investment 778 866
import expenditure than that of export earnings. Other Investment 741 1,243
The increase in services account surplus is Secondary Income (net) 3,496 5,619
mainly attributed to the notable improvement Receipts 3,793 5,989
Of which;
in earnings from tourism with the robust
Workers’ Remittances 3,789 5,970
recovery in tourist arrivals after facing repeated Payments 296 371

challenges over the past four years. The deficit Capital Account (net) 19 63

in the primary income account, compiled on an Receipts 38 94

Payments 19 31
accrual basis, widened in 2023 due to higher
Current and Capital Account (net) -1,429 1,622
interest payments on foreign loans, including
arrears. Further, workers’ remittances recorded As a Percentage of GDP
Trade Balance -6.7 -5.8
a notable improvement as a result of continuous Goods and Services -4.0 -1.8
departures for foreign employment and higher Current Account -1.9 1.8
(a) Revised Source: Central Bank of Sri Lanka
inflows through official channels. On the other (b) Provisional

hand, the financial account performance

33
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure
1.13 Highlights of the External Sector

1
Current Account Balance, Trade Balance, Earnings from Exports, Imports and Trade Balance
Tourism and Workers' Remittances
10 5 15
8 4
10
6 3
4 2 5
2 1
USD billion

USD billion

USD billion
0 0 0
-2 -1
-4 -5
-2
-6 -3
-10
-8 -4
-10 -5 -15
-12 -6
-20
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Current Account Balance Trade Balance -25
(RHS)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Earnings from Tourism Workers' Remittances
Exports Imports Trade Balance

Gross Official Reserves and the Exchange Rate

6 400

350
5
300 A moderate level of trade deficit, rebounding
4
250 workers’ remittances, earnings from tourism
USD billion

and other net inflows to the services sector

Rs./USD

3 200

150 contributed to the current account surplus in

2
100 2023, resulting in a stable exchange rate
1
50 and increased gross official reserves.
0 0
Feb- 21
Apr- 21
Jun- 21
Aug- 21
Oct- 21
Dec- 21
Feb- 22
Apr- 22
Jun- 22
Aug- 22
Oct- 22
Dec- 22
Feb- 23
Apr- 23
Jun- 23
Aug- 23
Oct- 23
Dec- 23
Dec- 20

Gross Official Reserves End Exchange Rate (RHS)

Source: Central Bank of Sri Lanka

remained subdued with modest foreign direct 1.4.1 Balance of Payments

investment (FDI) inflows. However, foreign
investments in the government securities market Current and Capital Account
and the stock market recorded net inflows in
2023. Meanwhile, notable net forex purchases The external current account recorded a
by the Central Bank from the domestic forex surplus of US dollars 1,559 million in 2023,
market, disbursements under the IMF-EFF, and compared to a deficit of US dollars 1,448
foreign financing from multilateral agencies such million in 2022. This surplus was mainly driven
as the World Bank and the Asian Development by a lower trade deficit of US dollars 4.9 billion
Bank (ADB) helped augment GOR substantially in 2023, compared to a trade deficit of US
by end 2023. As opposed to the significant
dollars 5.2 billion recorded in 2022, improved
depreciation recorded in 2022, the Sri Lanka
trade in services, particularly earnings from
rupee appreciated notably during 2023 due
to improved liquidity conditions and market tourism, and a higher surplus in the secondary
sentiments in the domestic foreign exchange income account, despite a notable widening of
market. the primary income account deficit.

34
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
1.14 Current Account Balance and its Composition

1
2 Current Account Balance 3 8 Major Components of the Current Account
6
1 2
4
1 2

Percentage of GDP
0
0
USD billion

USD billion
-1 -2
-1
-4
-2
-2 -6

-8
-3 -3
-10

-4 -4 -12
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Current Account Balance Current Account Balance Trade Balance Primary Income (net) Secondary Income
as a % of GDP (RHS) (net)
Services (net) Current Account Balance
Source: Central Bank of Sri Lanka

Merchandise Trade Account exports, driven by garment exports. Meanwhile,

a significant drop in import expenditure was
The merchandise trade deficit for 2023
observed due to subdued economic activity,
reached its lowest level since 2010, largely
lower disposable income, import restrictions,
driven by a notable decline in import
and tight monetary and fiscal conditions.
expenditure relative to the decline observed
Accordingly, the deficit in the trade account
in export earnings. Export earnings dipped in
narrowed to US dollars 4,900 million compared
2023, with a sizeable contraction of industrial
to US dollars 5,185 million recorded in 2022.
As a percentage of GDP, the trade deficit
Table Summary of Merchandise Trade
narrowed to 5.8 per cent in 2023 from 6.7
1.10 Performance
per cent in 2022. Terms of trade, i.e., the ratio
2022 2023 Y-o-Y
Value Value Change
of the price of exports to the price of imports,
Category
(USD (USD deteriorated marginally, since both export and
%
million) million)
import unit value indices deteriorated close
Exports 13,106.4 11,910.7 -9.1
to similar levels in 2023, compared to 2022.
Industrial 10,465.3 9,277.7 -11.3

Agricultural 2,568.0 2,566.5 -0.1

Meanwhile, total trade, i.e., the total of export
Mineral 50.0 38.5 -23.1 earnings and import expenditure, declined
Unclassified 23.2 28.0 20.8 significantly by 8.5 per cent (year-on-year) in
Imports 18,291.0 16,811.1 -8.1 2023.
Consumer 2,813.0 3,043.9 8.2

Food and beverages 1,607.9 1,693.0 5.3 Export Performance

Non-food consumer 1,205.1 1,350.9 12.1

Intermediate 12,438.8 11,006.6 -11.5

The performance of merchandise exports
Investment 3,030.5 2,744.6 -9.4 was subdued in 2023. Earnings from exports
Unclassified 8.8 16.0 82.9 recorded US dollars 11,911 million in 2023,
Trade Balance -5,184.6 -4,900.4 which declined by 9.1 per cent compared to
Total Trade 31,397.4 28,721.8 -8.5
2022. This decline was influenced by global
Sources: Sri Lanka Customs
Petroleum Exporters and Importers factors, including high cost of living and
National Gem and Jewellery Authority
Central Bank of Sri Lanka economic downturn in major export destinations

35
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

and geopolitical tensions, which resulted in exports. The notable increase in earnings from

1
reduced demand for Sri Lankan exports. On the tea exports reflected higher export prices despite
other hand, domestic factors, such as higher a decline in export volumes. Mineral exports
operating expenses and supply constraints of recorded a decline compared to 2022, led by
intermediate goods adversely impacted the lower titanium ores exports in 2023.
overall competitiveness of exports. Further, as
Import Performance
a percentage of GDP, export earnings in 2023
declined to 14.1 per cent from 17.1 per cent in A notable contraction in import expenditure
2022. was observed in 2023. Expenditure on imports
The decline in industrial exports largely declined by 8.1 per cent to US dollars 16,811
contributed to the contraction in export million in 2023 compared to 2022, driven by
earnings, though the decline was broad- several factors, including restrictions on
based. The export of textiles and garments, the non-essential imports, subdued economic
single largest export of Sri Lanka, registered an activity, and constrained spending capabilities
18.0 per cent decline in 2023 compared to of the public due to tight monetary and fiscal
2022, thereby emerging as a key contributor to policies. As a percentage of GDP, import
the overall decline in exports. A notable decline expenditure declined to 19.9 per cent in 2023
was observed in petroleum product exports in compared to 23.8 per cent in 2022.
2023, attributed to the lower prices of bunker The decline in import expenditure was a
and aviation fuel. Earnings from most other result of lower intermediate and investment
industrial goods also experienced subdued goods imports, while expenditure on both
performance. However, gems, diamonds and food and non-food consumer goods imports
jewellery, transport equipment and machinery, increased. Expenditure on rice imports declined
and mechanical appliances exports recorded significantly due to lower volumes of rice
a growth in 2023. Meanwhile, agricultural imports in 2023 compared to 2022 although
exports reported a marginal dip in earnings in this decline was offset by higher expenditure
2023 compared to 2022. Of the agricultural on imports of most other food commodities,
exports, the increases in mainly tea, spices, and such as sugar, oils and fats, and milk powder.
unmanufactured tobacco were offset by weaker Meanwhile, expenditure on non-food consumer
performances in coconut, rubber, and seafood goods increased largely due to imports of

Figure Figure
1.15 Composition of Exports 1.16 Composition of Imports

Textiles and garments Fuel

Tea 16.4% 18.1% Textiles and textile articles
0.6%
21.5% Rubber products Machinery and equipment
Machinery and mechanical Chemical products
appliances
2023 Building material
Petroleum products
2023 USD 16.8 bn Medical and pharmaceuticals
USD 11.9 bn Food, beverages and tobacco 2022 2023
Plastics and articles thereof
Gems, diamonds and jewellery
Sugar and confectionery
Spices 2022 2023
Paper and paperboard and
65.5% articles thereof
77.9% Coconut Vegetables (a)
Seafood Wheat and maize
Chemical products Consumer Goods Cereals and milling industry
Industrial Goods products
Intermediate Goods Other
Minor agricultural products
Agricultural Goods Investment and Other Goods 0 2 4 6
Other
Mineral and Other USD billion
Goods 0 2 4 6 (a) Includes lentils, onions, potatoes, leguminous and
other vegetables.
USD billion
Sources: Sri Lanka Customs
Sources: Sri Lanka Customs Central Bank of Sri Lanka
Central Bank of Sri Lanka

36
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

medical and pharmaceutical products, and Table Summary of Terms of Trade

1.11 (2010=100)

1
mobile phones. In addition, most other items
categorised under non-food consumer goods Y-o-Y change 2022/ 2023 (%)
Category Value Volume Unit Value
showed an increasing trend during the latter Index Index Index

part of 2023 due to the relaxation of import Total Exports -9.1 2.4 -11.3

restrictions. Expenditure on intermediate Agricultural goods -0.1 -0.3 0.3

Industrial goods -11.3 3.0 -13.9

goods declined with textiles and textile articles
Mineral goods -23.1 -15.0 -9.5
accounting for a significant portion of the
Total Imports -8.1 3.0 -10.8
decline, in line with the reduction of apparel
Consumer goods 8.2 -1.4 9.7
exports. Expenditure on fuel imports, the largest Intermediate goods -11.5 0.7 -12.1
item in the import basket, declined primarily Investment goods -9.4 10.6 -18.1

due to lower import prices across all products: Terms of Trade -0.6

crude oil, refined petroleum (including LP gas), Source: Central Bank of Sri Lanka

and coal, though import volumes of crude

oil and coal recorded an increase. Reflecting the decline in the overall import price index.
lower economic activities, expenditure on most The volume indices for all main categories of
other intermediate goods declined in 2023. exports deteriorated, except industrial exports,
Expenditure on imports of investment goods whereas the import volume indices of all main
declined with notable reductions in all three categories, except for consumer goods, showed
main categories of investment goods, namely improvement during 2023.
machinery and equipment (mainly engineering
Direction of Trade
equipment), building material (mainly iron and
steel), and transport equipment, and most of Bilateral trade with most major trading
their subcategories, in 2023 compared to 2022, partners declined significantly, in line with
mainly attributable to import restriction and lower total trade in 2023. India continued
lower levels of economic activity, especially in to be the major trading partner of Sri Lanka,
the construction sector. followed by China and the USA. Accordingly,
these three key trading partners together
Terms of Trade
contributed to around 37 per cent of the total
The terms of trade, which is the ratio of trade of Sri Lanka in 2023. During the year,
export prices to import prices, deteriorated total trade with India was around US dollars
marginally in 2023. Export price and import 4 billion, while trade with both China and the
price indices declined by 11.3 per cent and USA exceeded US dollars 3 billion each. Total
10.8 per cent to 82.7 index points, and 96.6 trade with most countries declined in line with
index points, respectively, causing the terms of the decline in imports in general. The major
trade to deteriorate by 0.6 per cent in 2023 countrywise trade balances in 2023 remained
compared to 2022. The decline in the price almost unchanged, with notable trade surpluses
indices of industrial exports and mineral exports recorded with the USA, the UK, Italy, Germany,
contributed to the decline in export prices, while and the Netherlands, while significant trade
lower prices of the importation of intermediate deficits were recorded with China, India, the
goods and investment goods, accounted for UAE, Malaysia, and Singapore.

37
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure
Countrywise Trade Balances
Sri Lanka signed its fourth bilateral FTA
1.17

1
with Thailand, while negotiations of several
USA
other FTAs were fast tracked. Negotiations
UK on SLTFTA were resumed in January 2023 for
Italy
Germany
the 3rd round and the negotiations concluded
Netherlands at the 8th round held in November 2023. This
Singapore
Malaysia comprehensive FTA covers both trade in goods
Other Countries 2022 2023 and services, in addition to investments, customs
UAE
India procedures, intellectual property rights, etc.
China
-4 -3 -2 -1 0 1 2 3
Negotiations on the Economic and Technology
USD billion Cooperation Agreement with India (ETCA)
Source: Central Bank of Sri Lanka
resumed with the 12th round taking place during
External Trade Policies, October 2023 in Sri Lanka, and the 13th round
Developments, and Institutional in January 2024. ETCA has a broader scope
Support than the Indo-Sri Lanka Free Trade Agreement
(ISFTA) and these negotiations are expected to
Amidst subdued merchandise trade sector deepen the current trade of goods, technology
performance, the trade policy sphere moved cooperation, economic cooperation, liberalising
ahead with renewed momentum during services and investments. In line with lower
2023. Negotiations of Free Trade Agreements export earnings, exports under ISFTA, Pakistan-
(FTA), which were on hold since October 2018, Sri Lanka Free Trade Agreement (PSFTA) as
were fast tracked in 2023. As a result, FTA well as most other regional trade agreements
between Sri Lanka and Thailand (SLTFTA) was
Table Exports under Preferential and Free
signed in February 2024. Most of the import 1.12 Trade Agreements of Sri Lanka
restrictions imposed in 2020-2022 were eased
2022 2023 (a)
in 2023 with the improvement in liquidity Preferential Agreement
Value Value
Growth Share
(USD (USD
conditions in the domestic foreign exchange million) million)
(%) (%)
GSPs 4,314.7 3,803.5 -11.8 79.7
market. Accordingly, the 100 per cent cash
o/w EU (including GSP+) 2,440.3 2,094.5 -14.2 43.9
margin deposit requirement, imposed by the USA (b) 719.0 663.4 -7.7 13.9

Central Bank in May 2022, on the importation UK 659.0 562.4 -14.7 11.8
Russian Federation (c) 125.7 127.9 1.7 2.7
of selected non-essential items was removed in
Australia 97.0 93.3 -3.8 2.0
May 2023. Meanwhile, import restrictions to Canada 86.2 72.9 -15.4 1.5
temporarily suspend selected non-essential items Japan 80.7 68.3 -15.3 1.4
Turkey 45.3 62.6 38.1 1.3
were also gradually relaxed by the Government
Other GSP 61.6 58.2 -5.5 1.2
in June, July, and October 2023. Thereafter, ISFTA 561.5 536.4 -4.5 11.2
only motor vehicles remained on the suspended APTA (d) 228.4 213.9 -6.4 4.5
SAFTA 75.2 93.2 23.9 2.0
list. The restriction on payment terms that was
GSTP 62.5 79.1 26.7 1.7
imposed in May 2022 mainly on open account PSFTA 56.6 46.1 -18.6 1.0
terms continued throughout 2023, although SAPTA 1.5 1.1 -24.5 0.0

the requirement to obtain prior approval from Total 5,300.4 4,773.4 -9.9 100.0
As a Share Total Exports 40.4 40.1
commercial banks for Documents against (a)  Provisional Sources: Department of Commerce
Acceptance (DA) and Documents against (b) Shows GSP eligible exports since the US-GSP
expired on 31.12.2020
Sri Lanka Customs

Payment (DP) terms imports was removed in (c) Includes Russia, Belarus and Kazakhstan
(d) Earlier known as the Bangkok Agreement
February 2024. (1975)

38
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

declined in 2023. However, exports under the Institutional support was the cornerstone

1
Global System of Trade Preference (GSTP) of progress in trade policy initiatives during
increased, driven by cinnamon exports to 2023. In this regard, an International Trade
Mexico, and exports under the South Asian Free Office was established under the Presidential
Trade Area (SAFTA) increased due to pepper Secretariat to deal with all international trade
exports to India. Negotiations on a Preferential negotiations. The Office also spearheaded
Trade Agreement (PTA) with Bangladesh the combined efforts of several line agencies
completed 4 rounds, while negotiations on to conclude negotiations of the SLTFTA in
several other PTAs with Indonesia, Malaysia, an expeditious manner. The Department
and Vietnam are in the pipeline. In other trade of Commerce took necessary steps for the
related arrangements, the 14th US-Sri Lanka continuation of GSP schemes and other existing
Trade and Investment Framework Agreement FTAs, while supporting trade negotiation
(TIFA) Council Meeting was held in September processes. The Export Development Board
2023 in Colombo, while in October 2023, (EDB) launched the National Export Brand
Sri Lanka assumed the chairmanship of Indian “Your Vital Island - Sri Lanka” in November
Ocean Rim Association (IORA) for the period 2023 to position Sri Lanka as a recognised
2023 to 2025. sourcing destination to increase exports. The
Despite the subdued performance of implementation period of the National Export
garment exports, and other major export Strategy (NES) expired at end 2022 and a
items to the EU, the UK, and the USA, revitalisation of the NES project is currently in
Sri Lanka continued to benefit from the progress. Meanwhile, Sri Lanka Customs (SLC)
Generalised System of Preference (GSP) initiated its Strategic Plan for 2024-2028,
schemes offered by these key trading focusing on four strategic areas: revenue,
partners. The EU GSP scheme was set to expire trade facilitation, eco-social protection, and
on 31 December 2023 with a proposed new organisational development. To create a more
EU GSP+ 10-year scheme to be in effect from favourable environment for investment and
01 January 2024 until 31 December 2033, export promotion, the Cabinet of Ministers
which contains six additional International granted approval in November 2023 to
Conventions, that Sri Lanka has already ratified. establish the Sri Lanka Economic Commission
However, in September 2023, the European with the expectation to consolidate the Board
Commission extended the validity period of of Investment (BOI) and the EDB. Meanwhile,
the current EU GSP scheme until the end of to provide the overall policy direction, a new
2027. The new GSP Scheme of the UK named National Trade Policy is being drafted by the
“Developing Countries Trading Scheme” (DCTS) Ministry of Trade, Commerce and Food Security.
came into effect in June 2023, under which Such initiatives are key for the sustainable
Sri Lanka would benefit from its Enhanced development of the tradable sector of the
Preferences Scheme for 3 years. The US GSP economy.
scheme, which expired on 31 December
Services Account
2020 has not yet been reauthorised by the
US Government, although it is expected to be The surplus in the services account recorded
reauthorised on a retroactive basis as per the a notable increase in 2023. The surplus in
general practice of the US Government. Export the services account amounted to US dollars
performance under most other GSP schemes 3,404 million in 2023, compared to US dollars
remained weak during 2023. 2,110 million in 2022. The performance of the

39
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

services sector, including the travel, transport, and the Central Bank, particularly due to the

1
construction and telecommunications services new swap arrangement under which the swap
sectors improved significantly. Net inflows liabilities of RBI and payment arrears of the
to insurance and pension services and other ACU were combined. Meanwhile, the income
business services remained modest, while from reserve assets increased with the notable
inflows to the other sub sectors including increase in gross official reserves during 2023.
computer services contracted significantly.
Having commenced data collection under the Secondary Income Account
International Transactions Reporting System The surplus in the secondary income
(ITRS) in January 2023, the Central Bank account increased in 2023 with continuous
initiated publishing monthly services sector data improvement in workers’ remittance inflows
based on ITRS for the first time in January 2024. since the second half of 2022. Increased
Notably, under the newly established ITRS, there workers’ remittances were supported by the
has been a significant refinement of already continued departures for foreign employment
existing data series such as computer services,
abroad. Increased inflows through official
air transport, sea transport, and construction
channels, supported by the correction in the
services. Tourism continued to recover in 2023
large disparity that prevailed between the
recording 1,487,303 arrivals, which is more
official exchange rate and informal rates, also
than double the arrivals recorded in 2022.
supported the improved levels of remittances.
Accordingly, earnings from tourism increased to
Hence, workers’ remittances increased notably
US dollars 2,068 million in 2023 compared to
by 57.5 per cent to US dollars 5,970 million in
US dollars 1,136 million in 2022.
2023, compared to US dollars 3,789 million
Primary Income Account in 2022. Consequently, the secondary income
account recorded a surplus of US dollars 5,619
Deficit in the primary income account
million in 2023, compared to US dollars 3,496
widened in 2023. All interest payments,
million in 2022.
including arrears accrued as a result of the
debt standstill, and interest payments made by Capital Account Balance
the Central Bank on account of outstanding
Net inflows to the capital account increased
liability of Asian Clearing Union (ACU) and
international currency swap arrangements in 2023. Capital transfers to both the
with the Bangladesh Bank and Reserve Bank Government and private sector increased in
of India (RBI) mainly contributed to outflows in 2023, with capital grants to the Government
the primary income account. Accordingly, the remaining modest. Accordingly, the capital
primary income account deficit amounted to account recorded a surplus of US dollars 63
US dollars 2,564 million in 2023 compared million in 2023, compared to a surplus of
to US dollars 1,870 million in 2022. Despite US dollars 19 million in 2022.
an increase in the dividends paid out by direct Financial Account
investment enterprises (DIEs) during the year, an
increase was observed in reinvested earnings In the financial account of the Balance of
in 2023 compared to 2022. However, interest Payments (BOP), both the net incurrence
payments on account of debt securities remained of liabilities and net acquisition of financial
at similar levels. Nevertheless, there was a assets recorded notable increases during
notable increase in interest payments on foreign 2023. Net incurrence of liabilities recorded an
loans, including arrears of the Government increase of US dollars 2,171 million in 2023

40
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure Table
1.18 Financial Account 1.13
Financial Account

2
Item

Financial Account (net)

Net Acquisition of Financial Assets
2022 (a)
USD million

-1,569
84
2023 (b)
1,304
3,474
1
USD billion

0 Net Incurrence of Liabilities 1,652 2,171

Direct Investment: Assets 15 34
-2 Equity 11 29
Debt Instruments 5 5
Direct Investment: Liabilities 884 712
-4
Equity 275 496
Debt Instruments 610 216
-6 Portfolio Investment: Assets - 173
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Debt Securities - 173
Assets Liabilities Financial Account (net) Portfolio Investment: Liabilities 370 931
Equity 151 8
Source: Central Bank of Sri Lanka
Debt Securities 218 923
General Government 212 910
compared to US dollars 1,652 million in 2022. Short Term (Treasury Bills) 30 132
Long Term 183 778
Main inflows to the financial account during Treasury Bonds 21 78
Sri Lanka Development Bonds 2 -27
2023 included the receipt of the proceeds of Sovereign Bonds 159 727
Other Sectors 6 12
the IMF-EFF arrangement amounting to around Long-term 6 12
Financial Derivatives - -
US dollars 670 million and the receipts from the Other Investment: Assets 1,302 1,022
Currency and Deposits 514 114
World Bank and ADB amounting to around US Trade Credit and Advances 282 186
dollars 500 million and US dollars 550 million, Other Accounts Receivable
Other Investment: Liabilities
506
398
721
528
respectively. Currency and Deposits -583 -143
Loans 385 1,056
Trade Credit and Advances -895 -555
Direct Investments Other Accounts Payable 1,492 171
Special Drawing Rights (SDRs) - -
Reserve Assets -1,234 2,245
FDI inflows, including foreign loans to Net Errors and Omissions -139 -318
Overall Balance (c) -2,806 2,826
DIEs, remained modest during the year. (a) Revised Source: Central Bank of Sri Lanka
(b) Provisional
Although equity investments and reinvestment (c) Refer Table 1.15 for the derivation of overall balance

of earnings recorded an increase in 2023,

related party loans to DIEs recorded a notable
Portfolio Investment
decline. Meanwhile, foreign loan inflows to BOI Portfolio investment, in the form of equity
companies moderated in 2023. Accordingly, and investment fund shares in CSE,
FDI, including foreign loans, amounted to remained modest, while foreign investment
US dollars 758 million in 2023, compared to in government securities increased notably
US dollars 1,167 million in 2022. Further, FDI, during 2023. The notable increase in foreign
excluding loans, amounted to US dollars 712 investment in government securities was primarily
million in 2023, compared to US dollars 884 due to the accrued interest on International
million in 2022. On a sectoral basis, FDI inflows Sovereign Bonds (ISBs), the repayment of which
to BOI registered companies were mainly to was suspended temporarily since early 2022.
logistics services, telecommunications, hotels Non resident investments in the government
and manufacturing sectors, while FDI inflows securities market, particularly in Treasury bills
to companies listed in the Colombo Stock increased substantially in 2023. Arrears due to
Exchange (CSE), but not registered with BOI, non-payment of coupon payments and interest
were mainly to the telecommunications and, on foreign loans were added to the outstanding
fuel, gas, and petroleum sectors. liability of the relevant instrument. Accordingly,

41
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

US dollars 727 million of coupon payments of 1.4.2 International Investment

1
ISBs were recorded as accrued interest of ISBs. Position, Reserve Assets,
Further, during 2023, US dollars 12 million was and Overall Balance
recorded as accrued interest on international
International Investment Position
bonds to non-residents, which were issued by (IIP)
SOBEs.
Sri Lanka’s net international investment
Other Investment and Reserve position deteriorated in 2023. There was
Assets a notable increase in both the total external
liability position and total external asset position
Meanwhile, trade credits and advances
of the country by end 2023 compared to end
recorded a decline in liabilities as CPC
2022. However, the increase in the total liability
continued to repay its trade credit liabilities position exceeded the increase in the total asset
throughout the year, while being unable position by end of 2023, compared to end
to secure new trade credit facilities during 2022.
the year. The banking industry's exposure to
In terms of the outstanding external liability
foreign loans decreased during 2023 as a result position of the country, the Central Bank
of obtaining fewer new foreign borrowings entered into a special swap arrangement
while paying off previous borrowings, especially with RBI to issue a new debt instrument,
in light of the banking system's higher foreign replacing the outstanding RBI international
exchange liquidity in 2023. In the meantime, swap arrangement and the outstanding
borrowings by the corporate sector continued liability of ACU. This instrument was reflected in
to be constrained, resulting in insignificant net outstanding currency and deposits of the Central
inflows into the sector during the year. Bank and replaced ACU outstanding amount
Net acquisition of financial assets recorded classified under other accounts payable as at
a notable increase during 2023 amounting end 2023. The outstanding liability position
to US dollars 3,474 million, compared to as direct investments increased only modestly
a marginal net increase of US dollars 84 during the year, as FDI inflows remained low
million in 2022. This was mainly due to the and market prices of publicly listed companies
increase in GOR by US dollars 2,245 million remained subdued. The increase in liability
in 2023 compared to the decline of GOR by position of the debt securities was a result of the
US dollars 1,234 million in 2022. The increase increased market prices19 and accrued coupon
in GOR was mainly due to the substantial net payments of ISBs. The increase in foreign loans
purchases of forex from the domestic market was due to the receipt of IMF, World Bank and
by the Central Bank and the receipts from IMF, ADB funding by the Government as well as the
World Bank, and ADB. However, net acquisition increase in accrued interest of unpaid foreign
of assets in terms of currency and deposits, loans by the Government. Consequently, the
trade credits and advances and other accounts country’s total external liability position increased
receivable increased in the banking sector in 19 The market prices of ISBs are based on market prices available in international
trading platforms and may not necessarily be attributed to secondary market trades
2023. in international markets during the year.

42
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

from US dollars 58.1 billion as at end 2022 to Figure

1.19 International Investment Position

1
US dollars 64.0 billion as at end 2023.
20
The country’s external asset position 10
0

USD billion
improved during 2023. The external asset -10

position in the form of reserve assets and -20

-30
banking sector external assets increased during -40

the year. The reserve asset position of the -50

-60
Central Bank more than doubled during the -70
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
year. Further, the external asset position of the Total Assets Total Liabilities Net International Investment Position

banking sector also increased due to increases Source: Central Bank of Sri Lanka

in banks’ currency and deposits and other

accounts receivable. Accordingly, the country’s the total liability position was higher than the
total asset position increased from US dollars increase in the total asset position, the country’s
8.8 billion as at end 2022 to US dollars 12.5 net liability position as reflected by the IIP
billion as at end 2023. As the increase in increased to US dollars 51.4 billion as at end
2023 from US dollars 49.3 billion as at end
Table International Investment Position 2022.
1.14 (Summary) (a)
USD million
(End period position)
Reserve Asset Position
2022 (b) 2023 (c)
Item
Assets Liabilities Assets Liabilities
GOR20 improved and reached a healthy
Direct Investment 1,534 14,047 1,560 14,831 level of US dollars 4,392 million as at
Equity and Investment Fund Shares 1,489 8,103 1,511 8,671
end 2023, compared to US dollars 1,898
Debt Instruments 45 5,944 50 6,160
million as at end 2022, reflecting favourable
Portfolio Investment 0.1 4,366 174 7,744 developments in the external sector observed
Equity and Investment Fund Shares 332 484
during 2023. The buildup of GOR was mainly
Debt Securities 0.1 4,035 174 7,260
due to the absorption of foreign exchange by the
Other Investment 5,399 39,689 6,420 41,412 Central Bank from the domestic foreign exchange
Currency and Deposits 1,656 5,880 1,770 7,941
market and the receipt of other foreign exchange
Loans 29,497 31,721
Trade Credit and Advances 1,493 1,020 1,679 464 inflows, such as the first and second tranches of
Other Accounts Receivable /
Payable
2,250 2,028 2,971 - the ongoing IMF-EFF arrangement and financing
Special Drawing Rights (SDRs) 1,265 1,285
support from the World Bank and the ADB.
Reserve Assets 1,898 4,392
The Central Bank’s intervention in the domestic
foreign exchange market by way of
Total Assets / Liabilities
Net International Investment
8,830 58,102 12,546 63,986
absorbing foreign exchange amounted to
-49,272 -51,440
Position
US dollars 1,683 million on a net basis (based
Memorandum Items
IIP- Maturity-wise Breakdown 8,830 58,102 12,546 63,986
on value date) during the year, while net foreign
Short Term 7,091 7,957 9,330 5,516 exchange swap arrangements with domestic
Long Term 1,739 50,145 3,216 58,471
banks amounted to around US dollars 861
Source: Central Bank of Sri Lanka
(a) Refer Appendix Table 12 for a detailed breakdown of the IIP
20 These levels of GOR at the end of 2022 and 2023 also included the international
(b) Revised swap facility of Chinese Yuan 10 billion from the People's Bank of China (PBOC)
(c) Provisional which was valued at US dollars 1,433 million and US dollars 1,420 million,
respectively.

43
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

million (based on value date). The buildup Figure Major Components of Reserve
1.20 Asset Position

1
of GOR through direct absorption of foreign
2022 2023
exchange from the domestic foreign exchange Reserve Asset Position: USD 4.4 bn
Reserve Asset Position: USD 1.9 bn
market enabled the Central Bank to overperform
on the net international reserve targets under
the IMF-EFF arrangement. Net foreign asset
position of the banking sector stood at a positive
level as a result of recording a higher foreign
assets position than foreign liabilities position.
The foreign asset position of the banking sector Securities Currency & Deposits Monetary gold
Reserve position in the IMF + Special Drawing Rights
increased to US dollars 4,981 million by end Source: Central Bank of Sri Lanka

2023 from US dollars 3,976 million as at end

2022. Consequently, total international reserves, Consequently, there was an improvement in the
which comprise both GOR and foreign assets of net international reserve position by end 2023
the banking sector, increased significantly by end compared to the previous year, resulting in the
2023. overall balance recording a surplus of around
US dollars 2,826 million in 2023, compared to
Overall Balance
a deficit of US dollars 2,806 million in 2022.
The overall balance of the BOP, which
1.4.3 External Debt and Debt
represents the change in net international
Service Payments
reserves, recorded a significantly higher
surplus by end 2023, after recording External Debt
higher deficits in previous years since
2020. GOR increased significantly mainly Sri Lanka’s external debt expressed in terms
due to the significant net absorption of foreign of market value,21 increased in 2023. There
exchange by the Central Bank from the was a notable increase in the external debt of
domestic foreign exchange market and receiving 21 Since 2012, external debt statistics for official publication purposes are calculated
in terms of market value in line with international standards on BOP compilation as
significant inflows from multilateral institutions. per the 6th edition of the Balance of Payments and International Investment Position
Manual (BPM6).

Table
1.15 Gross Official Reserves, Total Foreign Assets and Overall Balance
USD million
(End period position)

Item 2019 2020 2021 2022 2023 (a)

1. Government Foreign Assets 386 155 177 39 875

2. Central Bank Foreign Assets 7,256 5,510 2,962 1,858 3,517
3. Gross Official Reserves (1+2) 7,642 5,664 3,139 1,898 4,392
4. Foreign Assets of Deposit-taking Corporations 2,760 2,856 2,983 3,976 4,981
5. Total Foreign Assets (3+4) (b) 10,402 8,521 6,122 5,874 9,373
6. Reserve Related Liabilities (c) 1,771 2,121 3,562 5,127 4,796
7. Net International Reserves (NIR) (3-6) 5,871 3,543 -423 -3,229 -404
8. Overall Balance (d) 377 -2,328 -3,967 -2,806 2,826
9. Gross Official Reserves in Months of Imports of Goods 4.6 4.2 1.8 1.2 3.1
10. Total Foreign Assets in Months of Import of Goods 6.3 6.4 3.6 3.9 6.7

(a) Provisional Source: Central Bank of Sri Lanka

(b) Excludes foreign assets in the form of ‘Direct investment abroad’ and ‘Trade credit and advances granted’
(c) The total outstanding debt of the Central Bank, excluding outstanding Special Drawing Rights (SDRs)
(d) Change in NIR position during the period

44
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
1.21 Outstanding External Debt

1
External Debt Position (Market Value) 65
60
External Debt
50 60

40 55

USD billion
USD billion

30 50

20 45

10 40

0 35
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Q4-2012
Q2-2013
Q4-2013
Q2-2014
Q4-2014
Q2-2015
Q4-2015
Q2-2016
Q4-2016
Q2-2017
Q4-2017
Q2-2018
Q4-2018
Q2-2019
Q4-2019
Q2-2020
Q4-2020
Q2-2021
Q4-2021
Q2-2022
Q4-2022
Q2-2023
Q4-2023
General Government Central Bank

Deposit-Taking Corporations Other Sectors

Direct Investment: Intercompany Lending Market Value Face Value

Government External Debt (Face Value)

40 50
48
35
46
“Sri Lanka’s external debt, based on market
30 44

25
42 value terms, amounted to USD 54.8 bn as at
USD billion

40
per cent

20 38 end 2023, which is significantly lower than the

36
15 external debt at face value of USD 60.2 bn.
34
10 32 The reduction in market value of external debt
30
5
28 is due to the significantly lower market
0 26 valuation of ISBs issued by the Government”
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
T bills + T bonds+ SLDS ISBs
Foreign Loans
Government External Debt as a % of GDP (RHS)
Source: Central Bank of Sri Lanka

the Government in 2023 compared to 2022 in accrued interest of bilateral foreign loans
mainly due to an increase in market value of of the Government, and a modest increase
ISBs issued by the Government compared to the in foreign investments in Treasury bills and
significantly lower market values that prevailed Treasury bonds contributed to the increase in
in 2022. Further, the external debt of the outstanding external debt of the Government.
private sector and SOBEs and DIEs recorded a Consequently, the outstanding external debt
moderate increase. Meanwhile, external debt of the Government, expressed in market value
of the Central Bank and the banking sector for tradable debt instruments, amounted to US
recorded a decline. dollars 33.1 billion as at end 2023, compared
to US dollars 27.5 billion as at end 2022. In
The external debt of the Government
terms of face value, the external debt of the
recorded a marked increase in 2023. The
Government was around US dollars 38.4 billion
increase in the market value of ISBs issued by
as at end 2023.
the Government, increase in accrued coupons
of outstanding ISBs, increase in outstanding The outstanding external debt of the Central
foreign loans of the Government associated with Bank decreased modestly with the gradual
the receipts from multilateral partners, increase repayment of the IMF-EFF obtained in 2016

45
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table
Outstanding External Debt Position and the commencement of repayment of
1.16

1
the special swap arrangement with RBI.
USD million
(End period position) Meanwhile, the outstanding external debt of
2022 2023
Item
(a) (b) the banking sector decreased with a significant
General Government 27,518 33,117
decline in outstanding short term and long term
Treasury Bills (based on book value) 31 210
Treasury Bonds (based on book value) 34 124 loans. Although there was a notable reduction
Sri Lanka Development Bonds (based on face value) 27 - in the outstanding trade credits of the private
International Sovereign Bonds (based on market price
3,866 6,794
including accrued interest) sector, the outstanding foreign loans of the
Outstanding Foreign Loans (including accrued interest) 23,562 25,988
Central Bank 6,391 6,081 private sector increased and the outstanding
Currency and Deposits (short term) 0.2 0.3 foreign loans of SOBEs remained at similar
Asian Clearing Union (ACU) Liabilities 2,028 -
Special Drawing Rights (SDRs) Allocation 1,265 1,285 levels. Outstanding foreign loans with related
RBI Swap Arrangement 400 - parties by DIEs also increased during 2023.
RBI and ACU Combined Swap Arrangement (RBI Special
2,451
Swap)
Bangladesh Bank Swap Arrangement 200 - The country’s external debt position as a
PBOC Swap Arrangement 1,434 1,420 percentage of GDP remained at similar
Accrued Interest Applicable to Swap Arrangements 3 20
Credit and Loans with the IMF 1,062 904 levels as at end 2022 and 2023. The external
Deposit-taking Corporations 5,370 4,933 debt position as a percentage of GDP was 65.0
Currency and Deposits (c) 3,843 4,050
Loans - short term 704 307
per cent as at end 2023, compared to 64.6 per
Loans - long term 823 576 cent as at end 2022. Further, the proportion
Other Sectors (d) 4,443 4,542
of loans that are short term in nature recorded
Trade Credit and Advances (e) 1,020 464
Debt Securities (based on market price and including
78 132 a reduction during the year. Moreover, as the
accrued interest)
Loans by Private Sector Corporations 2,361 2,966 government debt standstill continued, there was
Loans by State Owned Business Enterprises and Public
Corporations
985 980
no change in the face value of outstanding ISBs
Direct Investment: Intercompany Lending (f) 5,944 6,160
Gross External Debt Position 49,667 54,832
to non-residents during the year.
As a Percentage of GDP
Gross External Debt 64.6 65.0 Foreign Debt Service Payments
Short Term Debt 9.9 6.0
Long Term Debt 54.7 59.0 Sri Lanka’s external debt service payments
As a Percentage of Gross External Debt
remained modest in both 2022 and 2023
Short Term Debt 15.4 9.2
Long Term Debt 84.6 90.8 since the announcement of the debt
Memorandum Items
standstill on selected government debt in
Non-Resident Holdings of Debt Securities - Sectorwise 11,622 12,615
Breakdown at Face Value April 2022. The country’s external debt service
General Government 11,447 12,440 payments, which averaged close to US dollars
Treasury Bills 34 233
Treasury Bonds 36 130
5.0 billion per year in 2019, 2020, and 2021
Sri Lanka Development Bonds 27 - reduced to US dollars 2.5 billion in 2022 and
International Sovereign Bonds 10,800 10,800
US dollars 2.6 billion in 2023. External debt
Accrued Interest of ISB Coupons due to Non-Residents 551 1,278
Other Sectors 175 175 service payments in 2023 were marginally
Face Value of Total Outstanding ISBs 12,550 12,550 higher than 2022 due to increased external
Outstanding ISBs held by Non-Residents 10,800 10,800
Outstanding ISBs held by Residents 1,750 1,750
debt servicing of the Central Bank. Government
(a) Revised
Source: Central Bank of Sri Lanka external debt servicing was significantly lower
(b) Provisional
(c) Includes deposits of personal foreign currency account holders
in 2023 as there were no repayments of ISBs
(d) Includes private sector and State Owned Business Enterprises
(e) Includes trade credits outstanding of the Ceylon Petroleum Corporation and
in 2023 due to the debt standstill. However,
private sector companies
(f) Includes inter-company borrowings and shareholder advances of BOI
external debt servicing of foreign loans of the
registered companies Government increased as capital and interest

46
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Table 44.8 per cent against the US dollar in 2022,

1.17 External Debt Service Payments

1
appreciated by 12.1 per cent in 2023. During
USD million
the first two months of 2023, the Sri Lanka
Item 2022 (a) 2023 (b)
1. Debt Service Payments 2,483 2,589
rupee remained stable at around Rs. 362 per
1.1 Amortisation 1,714 1,869 US dollar as the Central Bank continued to
General Government 1,236 1,043
Project Loans 845 1,041 provide daily guidance on the spot exchange
Debt Securities 391 2
Central Bank 140 522 rate by publishing a middle spot exchange
IMF 140 172
International Swaps - 350 rate and a variation margin, which helped
Private Sector and Deposit-taking Corporations
Foreign Loans
339
339
304
304
stabilise the exchange rate from significant
1.2 Interest Payments 769 720 intraday volatility. The Sri Lanka rupee
General Government 465 405
Project Loans 273 377 appreciated notably thereafter, helped by the
Debt Securities 192 28
Central Bank 57 118 policy measures taken by the Central Bank to
IMF
International Swaps
20
36
57
60
enhance forex liquidity in the market and to
Private sector and Deposit-taking Corporations 216 185 provide greater flexibility in the determination
Foreign Loans 204 173
Debt Securities 12 12 of exchange rate. From 27 February 2023, the
Intercompany Debt of Direct Investment Enterprises 31 12
2. Earnings from Export of Goods and Services 16,169 17,327 Central Bank commenced gradually relaxing
3. Receipts from Export of Goods, Services, Income
and Current Transfers
20,228 23,779 the requirement imposed on licensed banks
4. Debt Service Ratio
4.1 As a Percentage of 2 above on mandatory sales of foreign exchange to
Overall Ratio
Excluding IMF Transactions
15.4
14.4
14.9
13.6
the Central Bank out of the converted export
4.2 As a Percentage of 3 above proceeds and workers’ remittances and later
Overall Ratio 12.3 10.9
Excluding IMF Transactions 11.5 9.9 revoked the said requirement with effect from
5. Government Debt Service Payments
5.1 Government Debt Service Payments (c) 1,701 1,448 07 March 2023 with a view to enhancing forex
5.2 As a Percentage of 1 Above 68.5 55.9
Source: Central Bank of Sri Lanka
liquidity in the banking system. Further, the
(a) Revised
(b) Provisional
Central Bank discontinued the provision of daily
(c) Excludes transactions with the IMF guidance on exchange rates with effect from 07
March 2023, in order to allow greater flexibility
payments of the multilateral institutions were
in the determination of the exchange rate and
repaid during 2023. The Central Bank repaid
encourage market driven activity in the domestic
an international swap facility of US dollars
forex market in line with the flexible inflation
200 million owed to the Bangladesh Bank
targeting framework of the Central Bank.
and started repaying outstanding liabilities on
Subsequently, liquidity in the domestic forex
account of the special swap arrangement with
market improved and spot market activity picked
the RBI. Further, the Central Bank continued to
up. Favourable market sentiments subsequent to
repay IMF-EFF liabilities initiated in 2016. Debt
the commencement of the IMF-EFF arrangement
service payments of private sector corporations
in March 2023 also helped the exchange rate to
in 2023 remained around similar levels to that
appreciate.
of 2022.
A notable appreciation of the Sri Lanka
1.4.4 Exchange Rate Movements
rupee was registered during the second
The Sri Lanka rupee appreciated sharply quarter, particularly in May and early
in 2023 under a market based exchange June 2023 due to several favourable
rate policy implemented by the Central developments. Improved market liquidity
Bank despite some intermittent volatility. as a result of increased forex inflows in the
The Sri Lanka rupee, which depreciated by form of export proceeds, workers’ remittances

47
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table
1.18 Exchange Rate Movements

1 Euro
Currency

Indian rupee
2021
226.86
2.69
In Rupees per unit of Foreign Currency
End Year Rate
2022
386.93
4.39
2023
358.75
3.90
2021
Annual Average Rate

235.10
2.69
2022
339.04
4.11
2023
354.11
3.97
Percentage Change over Previous Year (a)

2022
End Year

-41.37
-38.59
2023
7.86
12.57
Annual Average
2022
-30.66
-34.57
2023
-4.26
3.63
Japanese yen 1.74 2.74 2.29 1.81 2.44 2.34 -36.41 19.53 -25.92 4.54
Pound sterling 270.60 437.35 412.61 273.51 396.89 407.07 -38.13 5.99 -31.09 -2.50
US dollar 200.43 363.11 323.92 198.88 324.55 327.53 -44.80 12.10(b) -38.72 -0.91(b)
Special Drawing Rights (SDRs) 280.53 483.24 434.60 283.18 431.91 436.88 -41.95 11.19 -34.43 -1.14
Source: Central Bank of Sri Lanka
(a) Changes computed on the basis of foreign currency equivalent of Sri Lanka rupees. The sign (-) indicates depreciation of the Sri Lanka rupee against each currency.
(b) For analytical purposes, the appreciation/depreciation of the Sri Lanka rupee is calculated by the Central Bank based on the year end exchange rate. Accordingly,
the Sri Lanka rupee recorded an appreciation in terms of end 2023 exchange rate compared to that of end 2022. However, the Sri Lanka rupee recorded a marginal
depreciation in 2023 based on the annual average exchange rate compared to 2022.

and foreign investments to the government impact. In the latter part of the year, improved
securities market along with subdued demand workers’ remittances and services sector inflows
for imports, reflecting tight monetary conditions, were observed. Market sentiments continued
were the major factors that contributed to this to improve, mainly as a result of receiving the
appreciation. Further, the receipts of the special second tranche of the IMF-EFF arrangement and
policy based loan for budget support from ADB receipts from ADB and the World Bank, towards
in May 2023 and the World Bank financing in the latter part of the year. Accordingly, the rupee
June 2023 were conducive to the improvement recorded an appreciation in the latter part of
in market sentiments. Overall, the Sri Lanka the year despite some intermittent volatility.
rupee recorded the highest appreciation of Meanwhile, the intervention of the Central
24.8 per cent against the US dollar since Bank in the domestic foreign exchange market
the beginning of the year by 08 June 2023. resulted in an absorption of US dollars 1,896
Thereafter, the Sri Lanka rupee showed some million, on a net basis (based on trade date),
volatility and recorded a depreciation during the in 2023. This included an absorption of US
third quarter of 2023, reflecting relatively tight dollars 2,722 million and a supply of US dollars
liquidity conditions that prevailed in the domestic 826 million. In contrast, in 2022, the Central
foreign exchange market. The main factor that Bank supplied foreign exchange amounting to
contributed to the depreciation pressure was the
drain in liquidity due to increased demand from Figure CBSL Intervention and
1.22 Annual Average Exchange Rate
banks to cover their foreign currency position
2 350
associated with rupee settlement of the Sri Lanka
1
Development Bonds (SLDBs). Consequently, the 300

Central Bank intervened by providing liquidity 0

250
USD billion

Rs. / USD

support to the affected bank and to the market -1

from time to time during the third quarter of -2

200

2023. However, pressure on the exchange rate 150

-3
that was expected to have arisen out of the pent
100
up demand for imports at the commencement -4
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
of the gradual relaxation of import controls Net Absorption (+) / Supply (-)
Average Exchange Rate (RHS)
from June 2023 onwards did not have a major Source: Central Bank of Sri Lanka

48
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure Exchange Rate Appreciation / Japanese yen (19.5 per cent) and the Indian
1.23 Depreciation

1
rupee (12.6 per cent) during 2023. With the
15
10 combined effect of the appreciation of the rupee
5
0
against major currencies, the Sri Lanka rupee
-5 also appreciated against the Special Drawing
-10
Per cent

-15 Rights (SDR) by 11.2 per cent during the year.

-20
-25 Nominal and Real Effective
-30
-35 Exchange Rates
-40
-45
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
During 2023, the Nominal Effective
Appreciation(+) / Depreciation(-) Exchange Rate (NEER) indices increased
Source: Central Bank of Sri Lanka while the Real Effective Exchange Rate
US dollars 2,726 million to the market while (REER) indices decreased. The 5-currency
purchasing US dollars 2,147 million. NEER index increased by 10.52 per cent while
the 24-currency NEER index increased by 13.39
The appreciation trend of the Sri Lanka
per cent. The increase in NEER indices reflects
rupee continued in 2024 as well.
the nominal appreciation of the Sri Lanka rupee
Accordingly, the Sri Lanka rupee appreciated
against the selected major currencies together
by 7.6 per cent against the US dollar as of end
with the movements in cross currency exchange
March 2024. This appreciation was mainly
rates. Further, 5-currency REER index decreased
due to robust inflows in the form of earnings
by 12.87 per cent and the 24-currency REER
from tourism, workers’ remittances, and
index decreased by 12.42 per cent. Overall,
reduced import expenditure. Consequently, the
both REER indices remained significantly below
Central Bank has also been able to purchase
the level that prevailed in the base year 2017,
a significant amount of foreign exchange of
indicating the continued competitiveness of the
around US dollars 1,200 million on net basis
Sri Lanka rupee.
(based on the trade date) during the first
quarter of 2024 which helped prevent excessive Figure Effective Exchange Rate Indices
appreciation pressure that prevailed in the 1.24 24-Currency (2017=100)
120
market.
110

Reflecting movements in cross-currency 100

exchange rates against the US dollar 90

Index Points

in international markets, the rupee 80

appreciated markedly against all other 70

major currencies in 2023, in comparison 60

to the previous year. Accordingly, the Sri 50

40
Lanka rupee appreciated against the euro (7.9
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Feb-15
Jul-15
Dec-15
May-16
Oct-16
Mar-17
Aug-17
Jan-18
Jun-18
Nov-18
Apr-19
Sep-19
Feb-20
Jul-20
Dec-20
May-21
Oct-21
Mar-22
Aug-22
Jan-23
Jun-23
Nov-23

per cent), the pound sterling (6.0 per cent), the

NEER 24 REER 24
Source: Central Bank of Sri Lanka

49
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table
Nominal and Real Effective Exchange Rates
1.19

1 Effective Exchange
Rate Indices (a) (b)
(2017=100)

NEER - 24 currencies
2021
79.65
End Year Index

2022
47.32
2023
53.66
Annual Average Index

2021
78.64
2022
53.99
2023
53.30
Percentage Change over Previous Year

End Year Index

2022
-40.59
2023
13.39
Annual Average Index

2022
-31.34
2023
-1.28
REER - 24 currencies 90.51 79.74 69.84 84.76 77.49 71.39 -11.90 -12.42 -8.58 -7.87
Source: Central Bank of Sri Lanka
(a) The Nominal Effective Exchange Rate (NEER) is a weighted average of nominal exchange rates of 24 trading partner and competitor countries. Weights are based on the trade shares
reflecting the relative importance of each currency in each of the currency baskets. The Real Effective Exchange Rate (REER) is computed by adjusting the NEER for inflation differentials
with respect to each currency in the basket. A minus sign indicates depreciation. CCPI was used for REER computation.
(b) The exchange rate has been defined in terms of indices so that the appreciation/depreciation of the rupee relative to other currencies is directly reflected by a rise/fall in the values of
the effective exchange rate indices, respectively.

1.5 Financial Sector The domestic equity market recorded mixed

Developments performance in terms of price indices, market
capitalisation and daily turnover while foreign
During 2023, overall financial sector participation declined in 2023, compared to
stability was maintained amidst challenging 2022. The Central Bank continued to engage
conditions particularly emanating from in activities relating to financial inclusion and
the economic crisis. The banking sector in ensuring the provisioning of robust financial
which dominates the financial sector was infrastructure for the smooth functioning of
able to maintain stability by preserving capital the financial sector. Further, new regulations
supported by the decline in risk weighted on Financial Consumer Protection aimed at
assets while liquidity was maintained above the fortifying the financial consumer protection
regulatory minimum with increased investments framework for Financial Service Providers under
in government securities. Moreover, total assets the regulatory purview of the Central Bank
of the banking sector improved along with were issued during 2023. Further details about
profitability while default risk as indicated by the conditions of the financial system could be
obtained from the Financial Stability Review
the Stage 3 loans ratio increased during 2023
2023.22
compared to 2022. Similarly, the asset base
of the LFCs sector also improved while the 1.5.1 Banking Sector
default risk of the sector recorded an increase The banking sector, which dominates
in terms of the Stage 3 loans ratio in 2023. the financial sector, accounting for 61.5
Accordingly, elevated credit risk as reflected by per cent of total assets as at end 2023,
the Stage 3 loans ratio remained a concern for managed to withstand challenges that
both the banking and LFCs sectors. Meanwhile, emanated from the economic crisis and
the insurance sector, which includes long adverse global conditions, with the support
term and general sub-sectors, showed varying of preserving capital and liquidity above
financial performance during the year. Within the regulatory minimum. By end 2023, the
financial markets, liquidity shortage in the banking sector comprised 30 banks, i.e., 24
domestic money market declined considerably LCBs including 11 branches of foreign banks,
by the end of the year while liquidity conditions and 6 LSBs. The banking sector continued to
in the domestic foreign exchange market support financial intermediation by expanding
also improved. Moreover, the yields of the the banking network and enhancing banking
government securities market witnessed a
22 https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/financial-
decline in both primary and secondary markets. system-stability-review

50
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

BOX 2

1
International Monetary Fund’s Extended Fund Facility (IMF-EFF)
Programme – A Progress Update
Sri Lanka commenced discussions with the The key targets and elements of the current IMF-
International Monetary Fund (IMF) on obtaining a EFF programme, are discussed below.
funding arrangement linked to a macroeconomic
adjustment programme to restore macroeconomic Net International Reserves (NIR) Target
stability, debt sustainability and to rebuild the The NIR target is a QPC under EFF to gauge
linkages with the world, following the historic the reserve level maintained by the Central Bank
socio-economic and political crisis in 2022. In excluding the reserve related liabilities. The
September 2022, the IMF staff and the Sri Lankan reserves remained at depleted levels in 2022 and
authorities reached a staff level agreement for a
early 2023 as GOR declined notably, due to the
48-month arrangement under the EFF amounting
continued moderation of inflows to the financial
to SDR 2.286 billion (about US dollars 3 billion).
Subsequently, on 20 March 2023, the Executive account, external debt service payments to the
Board of the IMF approved the EFF as budget multilateral creditors, and net sales to the domestic
support to assist Sri Lanka’s economic policies foreign exchange market by the Central Bank
and reforms denoting the commencement of primarily for importation of essential imports during
the seventeenth IMF programme in Sri Lanka. the year. At the beginning of the programme, as
Accordingly, the first and second tranches of the at end March 2023, the reserve related liabilities
IMF-EFF totaling SDR 508 million (about were far higher than the reserve assets and thus NIR
US dollars 670 million) were disbursed in March stood at largely negative levels. The primary aim of
and December 2023, respectively. The IMF and achieving the NIR target under EFF is to ensure that
relevant authorities regularly monitor the progress the gross official reserve assets increase surpassing
under the EFF in terms of Quantitative Performance the liabilities and thereby maintaining NIR at
Criteria (QPCs), Continuous Performance Criteria positive levels. Thus far in the EFF programme, the
(CPCs), Monetary Policy Consultative Clause Central Bank has continued to build up reserves
(MPCC), Indicative Targets (ITs), and Structural by purchasing foreign exchange from the domestic
Benchmarks (SBs) as set out in the EFF programme. foreign exchange market on a net basis. As a
Achievement of these targets on behalf of Sri Lanka result, the gross official reserve level also witnessed
is the responsibility of the Government and the
a notable increase from US dollars 1.9 billion as at
Central Bank. In terms of performance, all QPCs
and ITs for end December 2023 were met except end 2022 to around US dollars 4.4 billion by end
for the IT on social spending, while most SBs falling 2023, and further to around US dollars 5.0 billion
due before end February 2024 were either met or by end March 2024.
implemented with delay. On 21 March 2024, a
The Central Bank’s Net Credit to the
staff level agreement was reached on economic
policies to conclude the second review of the IMF- Government (NCG) Target
EFF programme. Once the review is approved by Historically, successive Governments have resorted
the IMF Executive Board, Sri Lanka will have access to monetary financing from the Central Bank, which
to a further SDR 254 million (about US dollars 337 was one of the main causes for the elevation of
million) in financing. inflation to significantly high levels in 2022. The
Central Bank’s NCG is measured as the difference
To restore macroeconomic stability and public debt between the Central Bank’s claims against the
sustainability in Sri Lanka, the IMF-EFF programme
central government and deposits made by the
was designed as a comprehensive economic reform
central government in rupees at the Central Bank.
programme that rests on several key pillars. These
pillars include revenue based fiscal consolidation, Prior to the IMF programme, the Central Bank
a stronger social safety net to protect the most was compelled to regularly engage in monetary
vulnerable, a sovereign debt restructuring strategy financing of the budget deficit of the Government.
aimed at restoring public debt sustainability, a One of the main purposes of the IMF programme
multi-pronged strategy to restore price stability is to prevent any avenues that would enable the
and rebuild international reserves under greater Government to obtain monetary financing from the
exchange rate flexibility, policies to safeguard Central Bank, and this was achieved through the
financial stability, focused reforms to address enactment of the Central Bank of Sri Lanka Act No.
governance and corruption vulnerabilities, and 16 of 2023 (CBA). With no new monetary financing
growth enhancing broader structural reforms. and gradual offloading of existing holdings of

51
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

the government securities of the Central Bank, end the Sri Lankan authorities so far. In addition, the

1
December 2023 NCG target set out by the IMF programme has specified ITs related to central
was also achieved. government tax revenue, social spending by the
central government, cost of non-commercial
Monetary Policy Consultation Clause (MPCC) obligations (NCOs) for fuel and electricity, and
Sri Lanka’s inflation escalated to historically high Treasury guarantees. All ITs except for social
levels in 2022. The MPCC has been set to closely spending by the central government have been met
monitor the developments in inflation to ensure that under the programme as of December 2023.
Sri Lanka achieves the targeted level of inflation
in line with its objective of maintaining domestic Progress on Debt Restructuring
price stability. It monitors quarterly inflation on The Government has been engaging with the
predetermined target dates. Accordingly, quarterly external creditors to negotiate relief on external
average year-on-year inflation calculated based debt with the intention of bringing down the debt
on the Colombo Consumer Price Index (CCPI)
trajectory towards a sustainable path as envisaged
(2021=100), as per the method specified in the
by the IMF-EFF arrangement. There is significant
Technical Memorandum of Understanding (TMU)
progress in the external debt restructuring process.
of the IMF Staff Report was at 3.0 per cent by
December 2023. Hence, realised inflation by In November 2023, an agreement in principle was
December 2023 was within the lower outer band of reached between the authorities and the Official
MPCC of 2.0-3.5 per cent. Creditors Committee (OCC) and a preliminary
agreement with the China EXIM Bank and Sri
Primary Balance Target, Revenue, and Overall Lanka was also reached to restructure its claims
Budget Balance on Sri Lanka. Currently, Sri Lanka is engaging
Sri Lanka’s central government revenue collection closely with OCC and China EXIM Bank to reach
is identified to be one of the lowest in the world debt agreements consistent with the programme
and has led to significant primary balance deficits parameters and in a comparable manner. Sri Lanka
historically. The IMF-EFF programme requires is also engaging closely with external commercial
Sri Lanka to implement revenue based fiscal creditors in good faith through continuous
consolidation measures and introduce reforms dialogues and information sharing, aiming to reach
to social safety nets, fiscal institutions, and State a consensus on the debt treatment at the earliest.
Owned Enterprises (SOEs) that are aimed at
enhancing the efficiency and reducing the burden Additionally, the Government launched its
on government coffers. Supported by stringent fiscal Domestic Debt Optimisation (DDO) programme
consolidation efforts, the Government achieved in July 2023 and its key aspects were concluded
a primary surplus in 2023, which is well over in September 2023. The debt exchanges that were
the primary deficit target set under the IMF-EFF initiated were geared towards providing significant
for 2023. Meanwhile, the overall budget deficit liquidity relief to the Government, while contributing
for 2023 improved as a result of the significant to reducing future annual gross financing needs of
increase in revenue despite an increase in the Government to sustainable levels.
government expenditure.
Key Structural Benchmarks (SBs)
In addition, the central government tax revenue is
The ongoing IMF-EFF programme includes SBs
specified as an indicative target under the IMF-
in areas such as fiscal, SOEs, and social safety
EFF programme. During the recently concluded
net reforms, financial sector and governance.
programme review mission of the IMF, the notable
Significant progress has been made thus far
improvement in tax revenue collection was
commended. with respect to achieving these SBs. Major SBs
applicable to the Central Bank that have been met
Continuous Performance Criteria (CPCs) and include the enactment of the CBA, completion of
Indicative Targets (ITs) the asset quality review component of the bank
The IMF-EFF programme has specified two CPCs. diagnostic exercise for the two largest state owned
These include (i) non-accumulation of new external banks and the three largest private sector banks,
payments arrears by the nonfinancial public sector the development of a roadmap for addressing
and the Central Bank and (ii) no new Central banking system capital and forex liquidity shortfalls
Bank purchases of government securities in the and recapitalisation plan. Further, Parliamentary
primary market. These CPCs have been met by approval for the amendments to the Banking Act

52
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

was obtained although with a delay. With respect Governance

1
to SOE reforms, setting cost-reflective fuel pricing Addressing corruption vulnerability is critical to
and electricity tariff schedules with formula based ensure sustainable and inclusive economic recovery
adjustments among others are important SBs in Sri Lanka. Sri Lanka remains committed to
that were met. These efforts have already shown advancing governance and anti-corruption reforms
successful outcomes with improved profitability of as a main central pillar of the programme. In
chronically loss making entities such as the Ceylon this regard, Sri Lanka published the Governance
Electricity Board (CEB) and the Ceylon Petroleum Diagnostic Report in September 2023 making Sri
Corporation (CPC). Parliamentary approval of Lanka the first country in Asia to undergo the IMF
the 2024 Appropriation Act, obtaining Cabinet Governance Diagnostic exercise. Further, Sri Lanka
approval of a reduction in the limit on government recently published the Action Plan to implement
guarantees to 7.5 per cent of GDP, obtaining the key recommendations of the Governance
Cabinet approval on a strategy to build a Value Diagnostic Report, and this was commended by the
Added Tax (VAT) refund system and to achieve a IMF at the recent review. The IMF has emphasised
full repeal of Simplified Value Added Tax (SVAT) the need for sustained efforts to implement these
and introducing key performance indicators for tax reforms to address corruption risks, rebuild
compliance are some of the fiscal sector related economic confidence, and make growth more
SBs that have been met so far. robust and inclusive.

Table
1.20 Total Assets of the Financial System
2022 (a) 2023 (b)

Rs. bn Share (%) Rs. bn Share (%)

Banking Sector 23,928.0 76.2 24,611.5 74.1

Central Bank 4,510.3 14.4 4,205.4 12.7
Licensed Commercial Banks (LCBs) 17,226.3 54.9 18,121.0 54.6
Licensed Specialised Banks (LSBs) 2,191.4 7.0 2,285.0 6.9

Other Deposit Taking Financial Institutions 1,812.1 5.8 1,914.1 5.8

Licensed Finance Companies (LFCs) 1,610.2 5.1 1,692.0 5.1
Co-operative Rural Banks (c) 201.2 0.6 221.3 0.7
Thrift and Credit Co-operative Societies 0.8 0.0 0.9 0.0

Specialised Financial Institutions 328.9 1.0 728.7 2.2

Specialised Leasing Companies (SLCs) 1.0 0.0 1.2 0.0
Licensed Microfinance Companies 9.9 0.0 11.7 0.0
Primary Dealers 131.7 0.4 270.8 0.8
Stock Brokers 24.8 0.1 24.3 0.1
Unit Trusts / Unit Trust Management Companies 153.5 0.5 411.6 1.2
Market Intermediaries (d) 8.0 0.0 9.1 0.0
Venture Capital Companies N/A N/A N/A N/A

Contractual Savings Institutions 5,320.3 16.9 5,945.5 17.9

Insurance Companies 947.3 3.0 1,086.9 3.3
Employees' Provident Fund 3,491.8 11.1 3,895.1 11.7
Employees' Trust Fund 465.0 1.5 520.5 1.6
Approved Pension and Provident Funds 330.4 1.1 347.2 1.0
Public Service Provident Fund 85.9 0.3 95.8 0.3
Total 31,389.4 100.0 33,199.8 100.0

(a) Revised Sources: Central Bank of Sri Lanka

(b) Provisional Department of Co-operative Development
(c) Due to unavailability of data, asset base of Co-operative Rural Banks as Department of Labour
at end 2023 was taken to be same as the asset base as at end 2023 Q3. Department of Pensions
(d) Excluding Licensed Banks, Licensed Finance Companies & Specialised Employees’ Trust Fund Board
Leasing Companies, which are registered as Market Intermediaries Insurance Regulatory Commission of Sri Lanka
SANASA Federation
Securities and Exchange Commission of Sri Lanka
Unit Trust Association of Sri Lanka

53
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table Composition of Assets and Liabilities Table Composition of Deposits of the

1.21 of the Banking Sector 1.22 Banking Sector

1
2022 (a) 2023 (b) Change (%) 2022 (a) 2023 (b) Change (%)
Item
Rs. bn Share (%) Rs. bn Share (%) 2022 2023
Assets Rs. bn Share (%) Rs. bn Share (%) 2022 2023
Loans & Advances 11,312.5 58.3 11,017.6 54.0 5.5 -2.6
Investments 5,931.7 30.5 7,314.0 35.8 19.4 23.3 Demand Deposits 1,060.0 6.9 1,079.0 6.5 19.4 1.8
Others (c) 2,172.4 11.2 2,074.4 10.2 92.1 -4.5
Savings Deposits 3,713.0 24.3 4,293.0 25.8 -7.4 15.6

Liabilities Time Deposits 10,393.0 67.9 11,042.3 66.4 32.2 6.2

Deposits 15,298.7 78.8 16,623.6 81.5 18.8 8.7
Borrowings 1,871.6 9.6 1,389.0 6.8 -13.9 -25.8 Other Deposits 133.2 0.9 209.3 1.3 12.0 57.2
Capital Funds 1,598.1 8.2 1,766.9 8.7 18.5 10.6
Others 648.2 3.3 626.5 3.1 52.2 -3.4 Total Deposits 15,299.1 100.0 16,623.6 100.0 18.8 8.7
Total Assets/Liabilities 19,416.6 100.0 20,406.0 100.0 15.4 5.1
Source: Central Bank of Sri Lanka
(a) Revised Source: Central Bank of Sri Lanka
(b) Provisional (a) Revised
(c) Includes cash and bank balances, placements, (b) Provisional
reverse repurchase agreements and fixed assets

services, thereby promoting financial inclusion. liabilities as at end 2023, while borrowings
In 2023, 07 bank branches and 272 ATMs were accounted for 6.8 per cent. The share of time
established, while 04 bank branches and 31 deposits accounted for 66.4 per cent, while the
ATMs were closed. Accordingly, the total number savings and demand deposits accounted for
of banking outlets and ATMs had increased 25.8 per cent and 6.5 per cent, respectively,
to 7,517 and 6,943, respectively, by the end of total deposits as at end 2023. Accordingly,
of 2023. Total assets of the banking sector the Current and Savings Account (CASA) ratio
increased by Rs. 989.4 billion during the year increased from 31.2 per cent in 2022 to 32.3
and surpassed Rs. 20.0 trillion by end December per cent in 2023. Total borrowings of the
2023. Year-on-year growth of assets recorded banking sector decreased by Rs. 482.5 billion
5.1 per cent as at end 2023 compared to that (negative 25.8 per cent) in 2023 compared to
of 15.4 per cent as at end 2022. This slowdown a decrease of Rs. 301.4 billion (negative 13.9
in growth was mainly due to the conversion per cent) in 2022. This decrease was mainly
attributed to foreign currency borrowings which
of foreign currency denominated loans and
reported a negative growth of 40.8 per cent
receivables and investments to Sri Lanka rupee,
(US dollars 514.5 million) reflecting the impact
with the appreciation of the exchange rate.
of sovereign rating downgrades, while rupee
The tight monetary policy stance that prevailed
borrowings decreased by 19.4 per cent
during the first half of 2023 led to a year-on-
(Rs. 256.0 billion) during 2023.
year contraction of loans and receivables by 2.6
per cent as at end 2023 compared to a growth Off-balance sheet exposures of the banking
of 5.5 per cent as at end 2022. Meanwhile, the sector reported a growth of 15.6 per cent
year-on-year growth in investments accelerated (increase of Rs. 724.4 billion) during 2023
from 19.4 per cent at end 2022 to 23.3 per compared to a negative growth of 0.6 per
cent as at end 2023. The increase in investments cent (decrease of Rs. 26.3 billion) recorded
during the period under review was mainly during 2022. Significant increases were
due to an increase in financial assets at fair observed in foreign currency (FX) related off-
value through other comprehensive income by balance sheet purchases (Rs. 415.0 billion),
FX related off-balance sheet sales (Rs. 261.0
Rs. 828.2 billion and financial investments at
billion), undrawn credit lines (Rs. 118.4 billion)
amortised cost by Rs. 311.2 billion.
and documentary credit (Rs. 52.3 billion), while
Deposits continued to be the main source of guarantees and bonds (Rs. 223.8 billion), and
funding in the banking sector, representing acceptances (Rs. 3.8 billion) reported decreases
81.5 per cent of total on-balance sheet during 2023.

54
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure Off-Balance Sheet Exposure of the at 158.4 per cent at end 2023, well above the
1.25 Banking Sector as at end 2023

1
regulatory requirement of 100 per cent.
Others Documentary Credit
9% 7% Profitability improved during the year mainly
Guarantees and due to the decline in new impairment
Bonds
18% charges. Interest income of the banking sector
Acceptances
increased by 25.5 per cent, while the interest
Undrawn Credit Lines
38% 2%
expenses increased by 42.7 per cent during
FX Purchases 2023, resulting in a decrease in net interest
16%
income by 4.9 per cent. As a result, the net
FX Sales
10% interest margin decreased from 4.0 per cent
Source : Central Bank of Sri Lanka
at end 2022 to 3.6 per cent as at end 2023.
As indicated by the Stage 3 Loans Ratio, Non-interest expenses increased by Rs. 49.2
credit risk of the Banking Sector remained billion, largely due to the increase in staff costs
at an elevated level at end 2023. Stage 3 by Rs. 16.8 billion, while impairment for loans
Loans Ratio of the banking sector increased to and other losses decreased by Rs. 305.0 billion
12.8 per cent at end 2023, compared to 11.3 during 2023. As a result, profit before tax was
per cent at end 2022 mainly due to increased Rs. 294.4 billion in 2023 as per the regulatory
Stage 3 loans and contraction of loans and reporting, which was Rs. 116.6 billion higher
receivables, indicating concerns about the credit than the previous year. Profit after tax of the
quality of the sector. However, impairment for banking industry was Rs. 188.9 billion during
Stage 3 loans (including undrawn amounts) 2023 which was an increase of 22.8 per cent
grew by 18.4 per cent (year-on-year), improving compared to the previous year. The increase
the Stage 3 Impairment Coverage Ratio to 49.3 in profits was reflected in the Return on Assets
per cent at end 2023 compared to 44.9 per (ROA) before tax, which increased from 1.0 per
cent at end 2022. cent as at end 2022 to 1.5 per cent as at end
2023, while Return on Equity (ROE) after tax
Liquidity of the banking sector, as indicated increased from 10.2 per cent in 2022 to 10.6
by the Statutory Liquid Assets Ratio (SLAR) per cent in 2023. Further, the efficiency of the
and Liquidity Coverage Ratios (LCRs), banking sector deteriorated from 31.5 per cent
improved during 2023, mainly due to the as at end 2022 to 40.5 per cent as at end 2023,
high growth in liquid assets in the form of mainly due to the increase in operating costs.
rupee-denominated government securities.
The SLAR increased to 44.9 per cent at end Table
Profit of the Banking Sector
2023 and remained well above the minimum 1.23

regulatory requirement. Furthermore, Liquid Item

2022 (a)
Amount As a % of
2023 (b)
Amount As a % of
Assets to Total Assets also improved to 35.9 per (Rs. bn) Avg. Assets (Rs. bn) Avg. Assets
Net Interest Income 750.8 4.0 713.8 3.6
cent at end 2023 compared to 23.6 per cent Interest Income 2,079.4 11.0 2,609.0 13.0
at end 2022. A considerable improvement was Interest Expenses 1,328.6 7.0 1,895.2 9.4
Non-Interest Income 280.6 1.5 206.8 1.0
observed in LCRs of the banking sector during Net Fee & Commission Income 127.0 0.7 132.1 0.7
2023. The Rupee and All Currency LCRs of the Non-Interest Expenses 324.0 1.7 373.2 1.9

banking sector stood at 340.9 per cent and Staff Cost 173.2 0.9 190.0 0.9
Impairment for Loans & Other
286.4 per cent, respectively, at end 2023. In Losses
468.8 2.5 163.8 0.8

addition, the Net Stable Funding Ratio (NSFR) Profit Before Tax (after VAT) 177.8 0.9 294.4 1.5
Profit After Tax 153.8 0.8 188.9 0.9
introduced in 2019, which requires banks to (a) Revised Source: Central Bank of Sri Lanka
maintain sufficient stable funding sources, stood (b) Provisional

55
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure Profitability Ratios of the Table Composition of Regulatory Capital of

1.26 Banking Sector 1.24 the Banking Sector

1
5 25 Rs. bn Composition (%)
Item
2022 (a) 2023 (b) 2022 (a) 2023 (b)
4.0
4 Tier I: Capital 1,152.0 1,261.6 100.0 100.0
3.5 3.6 3.6 3.5 3.6 20 Share Capital 366.7 385.3 31.8 30.5
3.1
Statutory Reserve Funds 74.3 81.1 6.4 6.4
3 17.6
Per cent

13.2 13.4 15 Retained Profits 544.5 627.2 47.3 49.7

Per cent
11.4 10.6 General and Other Reserves 295.2 312.4 25.6 24.8
10.3 10.2
2 10 Others 67.2 77.2 5.8 6.1
2.0
1.8 Regulatory Adjustments (195.9) (221.6) (17.0) (17.5)
1.4 1.4 1.4 1.5
1 1.4 1.0 5 Tier II: Capital 277.7 290.2 100.0 100.0
1.1 1.0 1.1
0.9 0.8 0.9 Revaluation Reserves 35.4 42.4 12.7 14.6
0 0 Subordinated Term Debt 135.4 148.8 48.8 51.3
2017 2018 2019 2020 2021 2022 2023 General Provisions and Other 107.3 99.6 38.6 34.3
Interest Margin Return on Assets (After Tax) Regulatory Adjustments (0.5) (0.6) (0.2) (0.2)
Return on Assets (Before Tax) Return on Equity (RHS) Total Regulatory Capital Base 1,429.6 1,551.8
(a) Revised Source: Central Bank of Sri Lanka
Source: Central Bank of Sri Lanka (b) Provisional

The banking sector was largely in Meanwhile, the banking sector increased its
compliance with the minimum capital Tier 2 capital through issuance of subordinated
requirements during 2023. Capital adequacy debentures.
of the sector recorded an improvement at end
2023 compared to end 2022, as risk weighted
1.5.2 Non-Bank Financial
assets declined during the period, mainly due
Institutions Sector
to the overall credit contraction, increased Licensed Finance Companies (LFCs)
investments in government securities, and the
appreciation of the Sri Lanka rupee. Banks were Despite the challenges stemming from
encouraged to raise high quality capital buffers adverse economic conditions, the LFCs
to absorb the potential losses from the risks sector remained resilient with adequate
arising from challenging business conditions capital and liquidity buffers throughout the
and impact due to external sovereign debt year. The sector recorded growth in terms of
restructuring. As a result, banks increased Tier assets, deposit base, and profitability. However,
I capital through retention of profits (Rs. 82.7 the asset quality of the sector deteriorated as
billion), issuance of new shares (Rs. 18.6 billion), reflected by increasing Stage 3 loans. The LFCs
and increase in reserves (Rs. 17.2 billion) sector comprised 33 LFCs23 accounting for 5.1
during 2023. The regulatory capital of the per cent of total assets as of end 2023. There
were 1,827 branches, of which 1,198 branches
banking sector reported a growth of 8.5 per
(65.6 per cent) were located outside the Western
cent during the year, of which Tier I capital
Province. The asset base of the sector recorded
contributed 89.7 per cent of the increase.
growth of 5.1 per cent (Rs. 81.8 billion) reaching
Figure
Rs. 1,692.0 billion by end 2023, compared
1.27 Capital Ratios of the Banking Sector to the 10.9 per cent growth in 2022. This was
10,000 20 mainly driven by the significant growth of the
17.2 17.1
9,000 16.4 16.2 16.5 15.3
16.9 18
16
investment portfolio with increased investments
8,000
7,000 14 in government securities.
13.7 13.6 13.8
Rs. billion

6,000 13.4 13.1 13.2 12

Per cent

12.3
5,000 10 Loans and advances accounted for 68.6 per
4,000 8
3,000 6 cent of the total assets of the LFCs sector.
2,000 4
During 2023, the loans and advances portfolio
1,000 2
5,713 6,787 7,137 7,640 8,240 9,355 9,164
0 0
2017 2018 2019 2020 2021 2022 2023
23 Excluding ETI Finance Limited (The Commercial High Court of Colombo ordered that
Risk Weighted Assets Core CAR (RHS) Total CAR (RHS)
the winding up of ETI Finance Limited be carried out subject to the Supervision of the
Source: Central Bank of Sri Lanka Court on the 15th day of December 2023).

56
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

BOX 3

1
The Establishment of Business Revival Units in Licensed Banks to Support
Sustainable Economic Recovery
Background by the extraordinary macroeconomic circumstances
The challenging macroeconomic environment that and to ensure a transparent and effective resolution
prevailed during the recent years disrupted many policy framework on reviving the stressed borrowers
business entities limiting their income-generating of LBs, the CBSL issued a Circular in March 2024 on
capabilities and hence forcing them to avoid making “Guidelines for the Establishment of Business Revival
timely payments of loans, which resulted in impairing Units in Licensed Banks”. The Circular includes broad
the recovery process of licensed banks (LBs)1. As guidelines to give effect to further strengthen the
evidenced by the increase of non-performing loans2 already established Post COVID-19 Revival Units
of LBs from 5.2 per cent at end-2019 to 13.6 of LBs on Governance Framework and Resources,
per cent by the end of Quarter 3 in 2023, which Eligibility Criteria for Selection of Borrowers, Revival
marginally improved later to 12.8 per cent by the Mechanisms, Framework for Corporate Workouts,
end of 2023, the credit quality of the banking sector Accounting Considerations and Regulatory Reporting.
has deteriorated significantly. The revival of such
businesses would enhance economic activities and Objectives of Establishing Business Revival Units
employment opportunities and hence, contribute to in Licensed Banks
the rebound of the national economy. The purpose of Business Revival Units is to identify
and assist performing and non-performing borrowers
With the negative impact of the Easter Sunday of LBs who are facing challenges or may face
attacks in 2019, COVID-19 pandemic and adverse potential financial (and/or business) difficulties due to
macroeconomic conditions that prevailed during a reduction of income, cash flows or sales, reduction
the economic crisis, the Central Bank of Sri Lanka or impairment of business operations or temporary
(CBSL) issued multiple guidelines from time to time closure of business emanating from extraordinary
to LBs to provide relief to the affected borrowers macroeconomic circumstances.
whose debt servicing capacities were impaired.
Currently, LBs have established Post COVID-19 The Unit aims to revive businesses that are facing
Revival Units, and it is a timely requirement for actual or potential financial difficulties but are
considering a more standardised framework with fundamentally viable, intending to provide benefits
an enhanced scope in reviving fundamentally viable to such borrowers, leading to the revival of such
borrowers, by guiding LBs on eligibility criteria businesses, enhancing economic activities and
for selection of borrowers, revival mechanisms, contributing to the development of the national
corporate workout frameworks and governance economy.
framework.
Governance and Operational Framework of
With the onset of slowing down of economies owing Business Revival Units
to multiple reasons, the business revival frameworks
With a view to reviving viable businesses of
became widely accepted in many countries.
borrowers of banks, LBs shall formulate a revival
The “Out-of-Court Workouts” are negotiated
and rehabilitation policy for borrowers who are
restructurings between the borrower and lender/s
facing actual or potential financial difficulties but are
with or without the administrative guidelines. The
fundamentally viable, and these policies need to be
main advantages of “Out-of-Court Workouts” are
the expeditious implementation, relatively low-cost, reviewed and updated, at least annually.
preservation of confidentiality and greater flexibility A Business Revival Unit is expected to work in an
with respect to the terms and conditions of the orderly and an independent manner with Loan
restructuring. Origination, Legal, Risk Management and Credit
Alternatively, some countries practice the business Enforcement units to ensure that all relevant
revival processes through the involvement of judicial information and system access for the loans that may
procedures usually within the legal framework fall under the purview of the Business Revival Unit are
provided by the insolvency laws. shared effectively. Further, LBs are required to provide
the necessary staff and other resources to establish
By considering the above factors, to facilitate the Business Revival Units, and LBs whose operations
sustainable economic revival of businesses affected are geographically spread across the island are

57
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

encouraged to have the units regionally, based on A Framework for Corporate Workouts

1
the effectiveness of the operation. Under the business revival process a Framework
Fundamental viability assessment will be a crucial for Corporate Workouts is a newly introduced
task under the business revival process as the mechanism as an overarching framework for a
viability assessment procedures should be both mutually agreeable business revival plan between
effective and transparent. Under the fundamental a borrower and multiple banks as creditors. Since
viability assessment, both quantitative and qualitative this is a mutual agreement between parties, a court
indicators will be considered on a prudential basis. intervention would not be required. LBs may adopt
These indicators may include the assessment a collaborative approach to develop a common
regarding the profitability, leverage, liquidity, model for a Framework Agreement for Corporate
maturity profile of liabilities and other relevant Workouts that will govern negotiations of a workout
qualitative criteria. The viability assessment, to the agreement between LBs and any eligible corporate
extent possible, needs to be based on the audited borrower that seeks to avail of the Corporate
financial statements of the borrower. However, in Workout Framework. Currently, a common model
the absence of audited financial statements for the is being developed by LBs. Given due consideration
borrower owing to justifiable reasons, LBs may use to the possible complexities and cost involvement
appropriate and credible sources of information that may arise in the process of negotiating
at the discretion of the bank. In this regard, it will mutually agreeable conditions, this framework is
be important for LBs to ensure that borrowers recommended for corporate borrowers.
are cooperative, as LBs will consider only such
borrowers for revival. Way Forward
As per the proposed business revival mechanism
Further, LBs are encouraged to disclose their
of LBs, it is expected that distressed borrowers who
governance framework, operational procedures and
are engaged in business activities will be able to
viability assessment methodologies in their Annual
Report or any other published reports to enhance revive their businesses with the guidance of LBs, and
accountability and transparency. improved cash flows will be utilised to repay their
non-performing loans and thereby improving asset
Revival Mechanisms: Financial and Operational quality of the banking sector.
The Business Revival Unit shall use financial and/ or
Further, with the improvement in the macroeconomic
operational restructuring tools and techniques or any
environment of the country, the revival of businesses,
combination thereof to revive distressed but viable
businesses. especially the Micro, Small & Medium Enterprises
(MSMEs), would promote sustainable economic
 Financial restructuring tools would include debt growth and employment opportunities and hence,
forgiveness, debt rescheduling including grace contribute to the sustained development of the
periods for the payment of principal and interest, national economy. In addition, the other measures,
adjustment of interest rates, maturity extensions, which are in progress, such as establishment of
and provision of new financing, including interim National Credit Guarantee Institution (NCGI),
financing and exit financing. implementation of an enhanced legal framework
through the Secured Transactions Act and the
 Under operational restructuring, the Business
Revival Unit may consider proposing fundamental expansion of MSME definition to cover a wide scale
changes in the business’s operations or assets to of businesses will be conducive to revive the affected
restore commercial viability, developing a new businesses and accordingly, to contribute the
business plan/strategy, and enhancing operational enhancement of economic activities. 1
efficiency and profitability of such businesses,
improving cash management systems, reviewing
pricing strategy, and reviewing customer retention Notes
and/or acquisition strategies. Moreover, the 1. Licensed Banks include both licensed commercial banks and licensed specialised
Unit may also conduct awareness programmes banks, licensed under the Banking Act No.30 of 1988, as amended.
2. Non-performing loan means where contractual payments of a customer are past due
on rehabilitation initiatives, and provide credit for more than 90 days or have remained in excess of the sanctioned limit for more
counselling and business advisory services, in than 90 days and any other credit facilities classified as Stage 3 credit facilities under
Sri Lanka Accounting Standard 9 (SLFRS 09) (based on potential risk and impaired
reaching out to potential investors. status at origination).

58
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure Total Loans and Advances (Gross) by The LFCs sector’s Profit After Tax (PAT)
1.28 Productwise for 2022 and 2023

1
increased by 11.3 per cent from Rs. 42.8
Finance Leasing 531
549 billion in 2022 to Rs. 47.7 billion in 2023,
38
Hire Purchase
31 due to increased net interest income
Secured Loans and 415
Advances 446 and non-interest income. The increase in
Pawning Advances 219
230 profitability was reflected in increased ROA to
31
Loans against Deposits
32 4.3 per cent in 2023, compared to 3.7 per cent
Loans against Real Estates 27
16 in 2022. However, ROE of the sector marginally
Others 17
15 reduced to 12.4 per cent in 2023, compared to
0 100 200 300 400 500 600
Rs. billion
12.7 per cent in 2022, due to a comparatively
2022
Figure1.28 has been replaced due to a labelling
2023 higher increase in equity capital. The cost to
Source: Central Bank of Sri Lanka
error in the printed version.
income ratio increased to 81.1 per cent in
of the sector recorded a contraction of 3.2 per 2023, from 79.9 per cent in 2022.
cent (Rs. 38.0 billion) and amounted to The capital base of the LFCs sector improved
Rs. 1,160.4 billion compared to a growth of marginally by 3.9 per cent (Rs. 12.3 billion)
7.7 per cent in 2022. Finance leases dominated
to Rs. 329.0 billion by end 2023 compared
the loans and advances portfolio of the sector
to Rs. 317.0 billion recorded by end 2022.
and accounted for 41.5 per cent of total loans
The sector’s core capital and total capital ratios
and advances by end 2023, compared to 41.6
increased to 21.1 per cent and 22.3 per cent,
per cent by end 2022. Other secured loans
respectively, by end 2023 from the levels of 20.6
including vehicle loans accounted for 32.5 per
cent of total loans and advances by end 2023, per cent and 22.0 per cent, respectively, by end
compared to 33.8 per cent by end 2022. Loans 2022. However, 6 LFCs24 were non-compliant
against gold and loans against deposits also with the minimum core capital requirement and/
contracted by 4.7 per cent and 3.2 percent, or capital adequacy requirement.
respectively, during the year. Meanwhile, other On an aggregate basis, the LFCs sector
assets that mainly include cash and balances maintained liquidity well above the
with banks and financial institutions increased by
minimum required level during 2023. The
3.2 per cent in 2023 compared to the 23.2 per
overall regulatory liquid assets available in the
cent growth in 2022.
sector was Rs. 254.9 billion as at end 2023,
The asset quality of the LFCs sector against the stipulated minimum requirement of
deteriorated as indicated by the elevated Rs. 103.4 billion recording a liquidity surplus of
Gross Stage 3 Loans Ratio of 17.8 per cent Rs. 151.5 billion as at end 2023, compared to
at end 2023 compared to 17.4 per cent at Rs. 86.9 billion recorded as at end 2022.
end 2022. Stage 3 Loans classification where
LFCs were required to adopt 120 days past Customer deposits continued to dominate
the due date for classification of Stage 3 loans the liabilities of the LFCs sector accounting
was tightened to 90 days instead of the earlier for 55.3 per cent. The deposits increased
classification of 120 days on 01 April 2023. by 8.2 per cent (Rs. 70.8 billion) to Rs. 935.3
Meanwhile, the sector reported an impairment billion, while borrowings declined by 17.9 per cent
coverage ratio of 32.5 per cent for Stage 3 (Rs. 57.8 billion) to Rs. 264.6 billion during 2023.
loans at end 2023. Accordingly, the net Stage
3 Loans Ratio improved to 12.0 per cent by end 24 Regulatory restrictions such as deposit caps, lending caps, freeze acceptance of new
deposits, and caps on granting new loans have been imposed on LFCs which were
2023 from 12.3 per cent as at end 2022. non-compliant with the minimum core capital requirement and/or capital adequacy
requirements.

59
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Specialised Leasing Company (SLC) despite a marginal reduction in the ratio to

1
22.3 per cent by end 2023 from 23.2 per cent
There was only one SLC with an asset base reported by end 2022.
of Rs.1.2 billion and loans and advances of
Rs. 0.7 billion by end December 2023. Its Licensed Microfinance Companies
gross and net Stage 3 loans ratios stood at 57.8
The Licensed Microfinance Companies
per cent and 33.6 per cent, respectively. PAT of
(LMFCs) sector consisted of 4 companies
this SLC reduced by 94.3 per cent from Rs. 1.1
and reported 18.2 per cent growth of its
billion in 2022 to Rs. 0.1 billion in 2023 due to
asset base, reaching Rs. 11.7 billion by end
reduced net interest income. 2023. Micro loans accounted for the largest
Primary Dealer Companies in share of total assets and amounted to Rs. 8.9
Government Securities billion by end 2023 in comparison to Rs. 7.4
billion by end 2022, reporting a growth of 8.4
By end 2023, there were 5 LCBs25 and 5
per cent. The total deposit base of the sector
Primary Dealer Companies (PDCs)26 active
grew by 31.7 per cent in 2023 to Rs. 812.8
in the government securities market as
million in 2023 from Rs. 648.3 million in 2022.
Primary Dealers (PDs). Total assets of PDCs
The core capital level of the sector was Rs. 2.6
increased by 105.7 per cent to Rs. 270.8 billion
billion and all LMFCs were in compliance with
in 2023, compared to Rs.131.7 billion in 2022.
the minimum prudential regulations.
The total investment portfolio of government
securities amounted to Rs. 261.9 billion by end Unit Trusts
2023, which recorded a year-on-year increase The number of Unit Trusts (UTs) in operation
of 107.7 per cent from that of Rs. 126.1 billion increased to 84 as at end 2023 from 80
recorded in 2022. reported as at end 2022 while recording
PDCs reported a PAT of Rs. 35.8 billion a significant increase in total assets.
during 2023 compared to that of Rs. 1.7 The number of UT management companies
billion reported during 2022, indicating a remained unchanged at 16 as at end 2023
significant increase in profitability due to compared to end 2022. The funds of the UTs
increase in interest income, capital gains were dominated by Money Market Funds and
and increased revaluation gains. ROA and Income Funds jointly accounting for 84.9 per
ROE of PDCs enhanced to 25.7 per cent and cent of the UT industry. Total assets of the UTs
139.3 per cent, respectively, by end 2023 from increased significantly by 171.0 per cent to
3 per cent and 19.9 per cent, respectively, Rs. 406.5 billion by end 2023 from Rs. 150
recorded in 2022. Equity of PDCs increased billion at end 2022. The number of units issued
by 142.4 per cent mainly due to profits earned also increased to 13,371 million as at end
during the year. The Risk Weighted Capital 2023 from 6,283 million reported as at end
Adequacy Ratio of PDCs was well above the 2022. In addition, the total number of unit
minimum required amount of 10 per cent holders increased to 93,450 at end 2023 from
67,912 reported as at end 2022. The share of
25 Excluding Pan Asia Banking Corporation (participation in government securities at investments in government securities by UTs as a
primary auction was suspended w.e.f. 15.08.2017).
26 Excluding Entrust Securities PLC (participation in government securities at primary percentage of total assets significantly increased
auction has been restrained w.e.f. 24.07.2017. A creditor winding up was filed
by one of the unsecured investors and on 17.06.2022 the winding up order was to 77.2 per cent as at end 2023 from 56.7
given by the courts. However, the winding up case is still pending before the courts
due to other legal proceedings), and Perpetual Treasuries Ltd. (business was initially per cent reported as at end 2022. Meanwhile,
suspended on 06.07.2017 and extended for a further period of 06 months
w.e.f. 05.01.2024) investment in equity as a share of UT assets

60
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

decreased to 4.5 per cent as at end 2023 insurance increased to 252.0 per cent by end

1
compared to 7.9 per cent as at end 2022. 2023 from 210.0 per cent a year ago. In long
term insurance, CAR improved to 358.0 per cent
Insurance Sector
from 303.0 per cent, a year ago.
The insurance sector, which comprises
long term and general subsectors, showed Employees’ Provident Fund
mixed performance during 2023. The The net worth of the Employees’ Provident
sector comprised 28 companies in operation Fund (EPF) significantly increased by 11.5
as at end 2023, of which 14 operated as per cent, year-on-year, by end 2023
exclusive long term insurance companies and compared to end 2022. This growth is
12 as exclusive general insurance companies, attributed to the income generated through
while 2 as long term and general insurance the prudent investments of the Fund. The total
businesses. In addition, 78 insurance brokering liability to the members also increased by
companies were in operation as at end 2023. 12.9 per cent during this period. Meanwhile,
The insurance sector recorded an increased total contributions received for the year 2023
gross written premium (GWP) in 2023 compared increased by 8.2 per cent, while the total
to 2022. During the year, GWP in the long amount of refunds disbursed to the members
term and general insurance sectors grew by and their legal heirs significantly increased
12.9 per cent and 3.4 per cent, year-on-year. by 32.4 per cent. Consequently, the net
Insurance penetration in the country, measured contribution of the Fund was reported at a
by annualised GWP as a percentage of GDP negative Rs. 5.3 billion in 2023, compared to a
was only 1.0 per cent by end 2023. Assets positive contribution of Rs. 31.6 billion recorded
of the long term insurance sector expanded in 2022.
whilst assets of the general insurance sector
The total investment income of the Fund
contracted. Asset growth of the long term
amounted to Rs. 469.3 billion in 2023,
insurance sector was 22.6 per cent (year-on-
registering a notable increase of 48.6 per
year) whilst the assets of general insurance
cent compared to Rs. 315.8 billion in 2022.
contracted by 4.2 per cent (year-on-year) at
Interest income continued to be the predominant
end 2023. However, given the higher asset
source of income for the Fund, growing by
base of the long term insurance sector, total
26.7 per cent to Rs. 442.4 billion in 2023 from
insurance sector assets grew by 14.7 per cent,
Rs. 349.3 billion in 2022. However, dividend
year-on-year, in 2023. Profitability of general
income witnessed a decline of 60 per cent to
insurance sector was low in 2023 compared
Rs. 3 billion in 2023, compared to Rs. 7.5
to 2022. Profit before tax of the long term
billion in 2022. Despite a substantial increase
insurance sector grew by 30.6 per cent in 2023
in the prices of goods and services, the Fund
compared to 2022. However, profit before tax
successfully maintained the operating expenses
of general insurance sector decreased by 25.6
to gross income ratio at 0.49 per cent in 2023.
per cent during this period. Similarly, return on
Nevertheless, the tax expenditure of the Fund
assets and return on equity of general insurance
increased due to increased investment income
deteriorated during 2023 compared to the
during 2023.
previous year whilst the same indicators for long
term insurance improved. During the period EPF chose to pursue the Debt Exchange
under review, the capital position of both long option after carefully considering the two
term and general insurance sectors improved. alternatives provided under the DDO
Capital Adequacy Ratio (CAR) of general operation. On 04 July 2023, the Ministry of

61
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table Five-year Performance to 75,485 as at end 2023 from 68,488 as at

1.25 Summary of EPF

1
end 2022. The total member balance of the
Item 2019 2020 2021 2022 2023*
Net Worth of the Fund (Rs. bn) 2,540.4 2,824.3 3,166.1 3,459.9 3,857.4 ETF decreased by 0.2 per cent and reached
Total Liability to the Members (Rs. bn)
Total Contributions (Rs. bn)
2,497.6 2,767.8
157.2 150.7
3,066.9 3,380.6 3,817.9
165.7 194.6 210.6
Rs. 458.5 billion as at end 2023. The total
Total Refunds (Rs. bn) 126.3 109.7 118.2 163.0 215.9 contributions received to ETF increased by 7.4
Net Contribution (Rs. bn) 30.9 41.0 47.5 31.6 (5.3)
Interest Rate on Member Balance (%) 9.25 9.00 9.00 9.00 13.00 per cent (year-on-year) and reached Rs. 37.1
Total Number of Member Accounts (mn) 19.4 19.8 20.3 20.4 20.9
Active Number of Member Accounts (mn) 2.9 2.6 2.5 2.7 2.7
billion, while total benefits paid to members
* Provisional Source: EPF Department, Central Bank of Sri Lanka
increased by 53.0 per cent (year-on-year) and
reached Rs. 38.3 billion during 2023.
Finance, Economic Stabilization and National
Policies announced the DDO operation, offering 1.5.3 Performance of Financial
two options for Superannuation Funds. The first Markets
option allowed EPF to exchange a minimum
required amount of its existing Treasury bonds Domestic Money Market
for 12 new series maturing between 2027 and Liquidity shortage in the domestic money
2038. This exchange would subject EPF to an market declined considerably by end 2023.
income tax rate of 14 per cent per annum on This was due to liquidity injections through
its taxable income derived from the Treasury foreign exchange purchases of the Central
bond portfolio. Alternatively, if EPF chose not Bank, liquidity provision through term reverse
to exchange its existing Treasury bonds, a fixed repurchase auctions to LCBs, reduction in the
30 per cent tax rate would be applied to the SRR and liquidity provision through the Liquidity
taxable income generated from its Treasury Assistance Facility (LAF) to certain licensed
bond portfolio. After carefully considering these banks. The permanent liquidity injection through
options, the Monetary Board of the CBSL, acting SRR reduction during 2023 was around Rs. 200
as the custodian of the EPF, chose to pursue the billion. In addition, the Central Bank conducted
Debt Exchange offer. This decision, made with a outright auctions to purchase Treasury bonds
long-term perspective and in the best interest of from secondary market and injected Rs. 8.5
the Fund's members, involved the EPF tendering billion liquidity on a permanent basis. Therefore,
Rs. 2,667.5 billion face value of Treasury bonds the market liquidity indicated an asymmetric
for Debt Exchange. distribution in 2023, where certain domestic
banks recorded liquidity deficits while most
Employees’ Trust Fund
Figure Open Market Operations, Standing Rate Corridor and
The total assets of the Employees’ Trust 1.29 Behaviour of Money Market Interest Rates during 2023
500 18
Fund (ETF) increased by 11.9 per cent, 400
16
300
year-on-year, to Rs. 520.5 billion at end 200
100
14
12
2023. Investments made by the ETF increased 0
Rs. billion

Per cent

-100 10
-200
by 8.3 per cent. Out of these investments, 93.8 -300
-400
8
6
per cent was invested in government securities -500
-600 4

as at end 2023. ETF managed to earn a return

-700
2
-800
-900 0
on investment of 12.3 per cent on its member
29-Oct-23

28-Nov-23

28-Dec-23
29-Sep-23
30-Aug-23
31-Jul-23
3-Mar-23
2-Jan-23

1-Feb-23

2-May-23

1-Jun-23
2-Apr-23

1-Jul-23

balances in 2023. Out of 15.5 million member

accounts of the ETF, only 2.5 million accounts Overnight Repo
Overnight Reverse Repo
Short-Term Repo
Short-Term Reverse Repo
Long Term Repo
Long Term Reverse Repo

were active as at end 2023. The number of Standing Deposit Facility

SDFR (RHS)
Standing Lending Facility
SLFR (RHS)
Overnight Liquidity
AWCMR (RHS)

employers contributing to the fund increased Source: Central Bank of Sri Lanka

62
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

foreign banks recorded a notable liquidity secondary market yield curve indicated signs

1
surplus. Daily average transaction value in the transitioning to the regular shaped curve
call money market decreased to Rs. 8.6 billion by the end of 2023. Further, liquidity in the
in 2023 from Rs. 15.7 billion in 2022. However, secondary market of government securities
daily average transaction value in the repo marginally improved during 2023 which was
market increased to Rs. 14.4 billion in 2023 observed through increased daily average
from Rs. 6.8 billion in 2022 indicating increased trade volumes and daily average number
preference for collateralised lending by financial of trades in the market. Accordingly, during
2023 daily average trade volumes and daily
institutions.
average number of trades increased to Rs 25.7
Domestic Foreign Exchange Market billion and 80.6 respectively, from Rs 12.5
billion and 39 recorded in 2022. However, the
The rupee appreciated by 12.1 per cent secondary market transactions were skewed
against the US dollar during 2023. The towards short term maturities. During 2023, a
USD/LKR exchange rate, which was 363.11 at net foreign inflow of US dollars 210 million into
end 2022, was at 323.92 at end 2023. The the government securities market was recorded
Central Bank has allowed the exchange rate to despite a net foreign outflow of US dollars 216
be determined by market forces since 07 March million during the second half of 2023.
2023. Meanwhile, domestic FX market liquidity
conditions improved following the gradual Equity Market
relaxation of the mandatory FX sales requirement The domestic equity market demonstrated
by licensed banks to the Central Bank and a mixed performance during 2023 in terms
inflows under the IMF-EFF. These developments of price indices, market capitalisation and
caused market participants’ anticipation daily turnover. Overall, both All Share Price
of further appreciation and induced more Index (ASPI) and Standard & Poor’s Sri Lanka
conversions of remittances and export proceeds. 20 (S&P SL20) indices demonstrated positive
However, rupee depreciation pressures surfaced momentum throughout the year. The increase
during the early part of the second half of 2023 in price indices was significant following the
as banks bought FX in the domestic market
announcement of the DDO perimeter excluding
to cover their FX liabilities as the Government
the banking sector during July-August period.
was settling US dollar denominated Sri Lanka
However, the movement of the indices stalled
Development Bonds held by banks in rupees
towards the end of 2023 with a negative
under the DDO programme. However, Central
Bank interventions in the FX market reduced Figure Movements of Price Indices and
the pressure on the rupee, and the exchange 1.30 Market Capitalisation
rate stabilised. Further, trading volumes in the 15,000 6,000
5,500
domestic FX inter-bank market increased by 13,000
5,000

56.7 per cent to US dollars 15.0 billion in 2023

11,000
Index Value

4,500
Rs. billion

9,000 4,000
compared to US dollars 9.6 billion recorded in 7,000 3,500

2022. 5,000
3,000
2,500

Government Securities Market

3,000
2,000
1,000 1,500
Jan
Feb
May
Jun
Aug
Sep
Oct
Dec
Jan

Jun
Jul
Aug
Oct
Nov
Dec
Feb

May
Jun
Jul
Sep
Oct
Nov
Jan
Feb
May
Jul
Aug
Sep
Nov
Dec
Mar

Mar
Apr

Mar

Apr

In line with policy rate reductions, secondary 2020 2021 2022 2023

market yields also decreased resulting in Market Closed

Market Capitalisation (RHS)
Circuit Breakers Activated
ASPI
S&P SL20 Index
a downward shift in the yield curve. The Source: Colombo Stock Exchange

63
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Figure
Foreign Participation in CSE
companies in the CSE, collectively raising Rs.
1.31

1
34.6 billion. This marked a notable increase
140
120
from the Rs. 12.7 billion raised in 2022, spread
100 across 10 IPOs by 4 companies. Notably,
80 debentures featuring both fixed and floating
60
interest rates were issued during the year. The
Rs. billion

40
20 fixed interest rates varied from 13.50 to 29.50
0 per cent, compared to the previous year's range
-20
of 15.42 to 28.00 per cent.
-40
-60
2016 2017 2018 2019 2020 2021 2022 2023 1.5.4 Financial Inclusion
Foreign Purchases Foreign Sales Net Foreign Purchases
Source: Colombo Stock Exchange The Central Bank continued to promote
financial inclusion during 2023. However,
movement in ASPI owing to proposed tax
the enactment of the CBA resulted in a
amendments, increased food inflation and
discontinuation of the Central Bank funded loan
upward revision of energy prices. Accordingly, schemes for Micro, Small and Medium Sized
ASPI and S&P SL20 indices grew by 24.9 per Entrepreneurs (MSMEs) and the decision of the
cent and 15.7 per cent respectively, during the Governing Board to phase-out loan schemes
year 2023 while market capitalisation enhanced carried on behalf of the Government will further
by 9.7 per cent and stood at Rs. 4,233.3 billion scale down the MSME lending activities of the
by end 2023. The Colombo Stock Exchange Central Bank. Promoting financial inclusion
(CSE) recorded an average daily turnover of Rs. has become one of the statutory functions of
1,696.81 million in 2023, which was a 43 per the Central Bank. Further, Phase I of National
cent decline compared to Rs.2,972.3 million Financial Inclusion Strategy (NFIS) will be
recorded in 2022. Foreign participation in the concluded in 2024 and the Central Bank
domestic equity market in terms of net foreign expects to implement the Phase II of the NFIS
purchases declined in 2023 compared to the from 2025. A comprehensive Financial Literacy
previous year. Accordingly, the market recorded Roadmap for Sri Lanka has been developed
Rs. 4.3 billion (approximately US dollars 13.27 and will be launched in May 2024 with the
million) net foreign inflows during the year objective of improving the financial behaviour
2023 compared to an inflow of Rs. 30.6 billion of the public. Moreover, the Central Bank
(approximately US dollars 74.3 million) recorded conducted awareness programmes during the
during the previous year. year to enhance financial literacy throughout the
country.
Corporate Debt Securities Market
1.5.5 Financial Infrastructure
Commercial Paper (CP) issues were less in
2023 compared to 2022. During 2023, only
Payment and Settlement Systems
Rs. 1.3 billion was raised through CPs compared In 2023, Sri Lanka’s economy witnessed
to Rs. 2.0 billion raised through CPs in 2022. a significant acceleration in digitalisation,
The interest rates of CPs varied between 17.0 evident from sustained high growth in
and 26.5 per cent during 2023 compared to retail payment systems. This trend reflects a
the range of 11.0 to 36.0 per cent reported in growing preference for digital payment methods
the previous year. Throughout 2023, 16 IPOs in the country. The success of this shift can be
of corporate debentures were launched by 5 attributed to the Central Bank's digital payment

64
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
1.32 Retail Transactions

300

250

200
Volume of Retail Transactions
14

12
Value of Retail Transactions

1
10

Rs. trillion
Million

150 8

6
100
4
50
2

0 0
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023

Cheques Online Bulk Payments (SLIPS) Instant Payments and Fund Transfers (CEFTS) Payment Cards

promotion policy as well as strategies developed carried out through more traditional other
by the National Payments Council (NPC), the payment instruments such as payment
industry consultative committee on payment and cards and cheques. Transactions carried out
settlement systems. through the Real Time Gross Settlement (RTGS)
To ensure the smooth functioning of system, which enables large value transactions
payment systems, the Central Bank for individuals and corporates, as well as
implemented policies to ensure continuous interbank transactions, continued to increase.
system availability and sufficient liquidity Due to the significant improvement in market
in order to meet the growing demand for liquidity observed in 2023, transactions related
digital payment channels. The increasing
to the Intraday Liquidity Facility, which facilitates
popularity of online real time fund transfers
participants intraday liquidity requirements for
among the public led to the country's Instant
RTGS operations and the Standing Lending
Payment System, i.e., Common Electronic
Fund Transfer Switch (CEFTS), recording the Facility, which is settled through the RTGS
highest growth among digital payment systems system, decreased in both value and volume.
in 2023. Accordingly, CEFTS based payment Further, embarking on a policy of regional
channels including LankaPay Online Payment integration of payment systems, LANKAQR was
Platform (LPOPP), which facilitates payments to integrated with Unified Payments Interface (UPI)
government institutions such as tax payments in India and UnionPay International in China in
and customs duties directly from bank accounts, 2023, enabling visitors using those systems to
LANKAQR transactions, and JustPay, which seamlessly pay via LANKAQR in Sri Lanka.
allows customers to pay by linking multiple bank
accounts to any mobile payment app, including The Central Bank ensured payment and
Fintech apps, as well as payment card use settlement systems stability via closely
experienced a significant growth in 2023. monitoring market trends, taking swift policy
During the year 2023, there was a notable decisions when necessary and increasing
shift towards online instant payments via stakeholder awareness as appropriate to
CEFTS, as value of instant payments and mitigate the emerging risks in the payment
fund transfers surpassed transactions sector in the country. Accordingly, the Central

65
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Bank continues to develop the digital payment Legal Reforms Related to the

1
infrastructure in close coordination with the Financial Sector
industry. This effort aims to ensure that Sri Lanka
During September/November 2023, CBA
possesses an inclusive and competitive payment
and Banking (Special Provisions) Act, No.
industry that supports both the stability of the
17 of 2023 (BSPA) were enacted and came
financial system and the economic recovery.
into operation. Amendments to the Banking
Anti-Money Laundering and Act No. 30 of 1988 were introduced for further
Countering the Financing of strengthening and streamlining the provisions
Terrorism and currently it is under submission to the
Parliament. Further, during the year 2023, the
Money Laundering and Terrorism Central Bank provided technical assistance to
Financing (ML/TF) present substantial risks the Ministry of Finance in drafting of the Micro
to a nation's financial stability, causing Finance and Credit Regulatory Act and Financial
distrust, market distortions, regulatory Asset Management Companies Act. Other
complexities, reputational damage, and legal reforms undertaken during the year 2023
systemic hazards. In 2023, the Central include drafting of amendments to the Finance
Bank through the Financial Intelligence Unit Business Act, No. 42 of 2011; Finance Leasing
(FIU) carried out its duties mandated by the Act, No. 56 of 2000; Payment and Settlement
Financial Transactions Reporting Act, No. 6 Systems Act, No. 28 of 2005; Foreign Exchange
of 2006 (FTRA), by receiving and analysing Act, No. 12 of 2017; and drafting of a new law,
1,369 Suspicious Transaction Reports (STRs) namely, Trading Clearing and Netting Act (TCN
and disseminating 236 STRs to LEAs/RAs. Act) for development of the Capital Market.
Under the risk based supervisory approach, Financial Consumer Protection
FIU conducted 23 onsite inspections, resulting
in issuance of 15 show cause letters and 13 In 2023, the Central Bank implemented a
significant initiative aimed at fortifying the
penalty letters to Financial Institutions (FIs),
financial consumer protection framework
collecting Rs. 21.2 million as penalties. Further,
for Financial Service Providers under its
in September 2023, FIU published the 2021/22
regulatory purview. The new Regulations
National Risk Assessment (NRA) on ML/TF,
on Financial Consumer Protection, No. 1 of
outlining significant threats, vulnerabilities, and
2023 was issued under Section 10(c) of the
risks encountered by Sri Lanka. Following the
Monetary Law Act, No. 58 of 1949 (MLA) on
NRA findings, the National AML/CFT Policy for
8 August 2023. The strengthened framework
2023-2028 was prepared and approved by
encompasses comprehensive measures
the Cabinet of Ministers. Aiming at preparing designed to enhance transparency, fairness,
the key stakeholders for the AML/CFT Mutual and responsible business conduct within the
Evaluation in 2025, Institution-wise Action financial sector, thereby fostering a more
Plans were prepared and shared among the resilient and consumer-centric financial system.
stakeholders for implementation. Furthermore, a In addition to the robust two-tier complaint
Task Force for AML/CFT was appointed by the handling procedure, these Regulations also
Cabinet of Ministers to monitor the progress of provide necessary authority and framework for
the implementation of these Action Plans. the Central Bank to carry out market conduct

66
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

supervision, which is one of the effective Regulation and Supervision of

1
mechanisms available for the regulators in Foreign Exchange
supervising financial consumer protection and
As the government agent for implementing
the Regulations will come into force gradually
the provisions of the Foreign Exchange
in 2024. These steps by the Central Bank are
Act, No. 12 of 2017, the Central Bank
aimed at maintaining the integrity and stability of
is held responsible for regulating and
the financial system while prioritising the welfare
promoting foreign exchange transactions
of financial consumers in Sri Lanka.
of the country. Throughout the year,
Deposit Insurance and Resolution significant enhancements were made to the
Authority Export Proceeds Monitoring System (EPMS), a
collaborative effort with the Sri Lanka Customs,
The Central Bank has been designated as
Licensed Banks and selected large exporters
the authority responsible for the resolution
aimed at capturing relevant information to
of financial institutions under Section
monitor repatriation of export proceeds into
62 of CBA. Accordingly, the Central Bank
Sri Lanka, as per the Rules on “Repatriation of
contributed to the enactment of the BSPA and
Export Proceeds into Sri Lanka” issued under
established the Deposit Insurance and Resolution
the Monetary Law Act No. 58 of 1949. These
Department for the efficient exercise of its
measures helped in reaching an export proceed
resolution powers strengthening the Central repatriation figure of US dollars 14,997 million,
Bank's resolution authority and enhancement of of which US dollars 4,009 million was converted
the financial system stability framework through into Sri Lanka rupees, thereby providing liquidity
the administration of a Deposit Insurance to the domestic foreign exchange market.
Scheme, aligning with global standards.
Further, the activities of Restricted Dealers
The Sri Lanka Deposit Insurance Scheme (RDs) who are authorised to engage in
(SLDIS) was re-established under the money changing business, underwent
provisions of BSPA to uphold the public stringent monitoring. As a result, the
confidence in the financial system and to performance of such RDs notably improved, with
promote and contribute to the stability of a figure of US dollars 388 million deposited into
the financial system. The SLDIS comprised 63 the banking system as compared to that of US
Member Institutions and had paid compensation dollars 159.8 million in 2022.
of Rs. 505.0 million during 2023 upholding
Credit Information
the confidence of the depositors in the financial
system safety net. Further, the Government The CRIB continued to play a pivotal role
of Sri Lanka, the World Bank and the Central in mitigating default risk of the Financial
Bank are engaged in the Financial Sector Institutions and fortifying the financial
Safety Net Strengthening Project which aims sector's resilience. Accordingly, CRIB credit
at strengthening the financial and institutional scoring provides a holistic assessment of
capacity of SLDIS in line with international best individuals' creditworthiness beyond traditional
practices for development of an effective deposit metrics which empowers borrowers to
insurance system which is vital for financial proactively manage their credit profiles and
sector performance and system stability. enables lenders to expedite lending decisions

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 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

BOX 4

1
Market Conduct Supervision:
Upholding Trust in the Financial System
Introduction laws and regulations of FSPs and take appropriate
Recent financial debacles and crises, even in several enforcement actions to ensure full compliance. In
advanced and well-regulated economies over the risk-based approach, supervisors focus on risk
the past couple of decades, have highlighted the analysis and mitigations. Accordingly, the risk-based
criticality of upholding the trust and confidence approach of MCS is more forward looking and the
of public, especially financial consumers, on supervisory activities are fine tuned according to the
financial institutions, financial authorities and risk levels identified prior and during the supervisory
the financial system as a whole. Hence, financial cycle.
authorities around the world have been compelled
Main Supervisory Tools
to reinforce and reshape the scope and approaches
to the financial system oversight function with an MCS encompasses a range of supervisory tools
increased focus on widening financial inclusion such as media watch and product reviews,
and strengthening the financial consumer thematic reviews, mystery shopping and calls, self-
protection provided to the financial consumers by assessments by FSPs and direct engagement with
Financial Service Providers (FSPs). In this context, FSP leadership focusing on market conduct risks
strengthening the financial consumer protection and controls to emerging issues, validating specific
framework through effective regulations, supervision, practices, and gauging control adequacy. These
and consumer empowerment is becoming one of tools collectively facilitate supervisors to have an
the priorities of financial authorities worldwide. effective MCS.
For example, as per the 2022 Global State of
Financial Inclusion and Consumer Protection
Survey conducted by the World Bank, out of 113 Figure The Market Conduct Supervision
B 4.1 Process
responded jurisdictions, 109 jurisdictions have
regulations on financial consumer protection. Constant Monitoring
Market Monitoring
Information
Market Conduct Supervision Pre-Planning

Market Conduct Supervision (MCS) is one of the Onsite Examination Offsite Supervision
1. Developing a plan 1. Analysis of Reports
pillars of financial consumer protection and is used 2. Conducting 2. Conducting
by regulators in achieving the overarching goal 3. Reporting 3. Reporting
4. Follow-up 4. Follow-up
of market integrity and trust among depositors, 5. Adjusting the plan 5. Adjusting the plan
6. Recording data 6. Recording data
borrowers, investors, stakeholders, and the public, Reporting, Monitoring &
contributing to financial system stability and Enforcement
Source: Central Bank of Sri Lanka
economic growth. A comprehensive or full scope
MCS involves a continuous review of FSPs' products,
services, systems and procedures, and practices
The Market Conduct Supervision of the Central
with prompt corrective and enforcement actions.
Bank
Despite some similarities in its goals, approach
process, MCS is different from prudential supervision Pursuing the development of global financial
of financial institutions in terms of its concepts and consumer protection regulations, the Central Bank
focus areas and tries to provide fair outcomes for established the Financial Consumer Relations
both financial consumers and FSPs. Department (FCRD) in 2020 and issued the
Regulations on Financial Consumer Protection,
MCS Approaches No. 01 of 2023, under Section 10(c) of the then
As MCS is designed and implemented under Monetary Law Act in August 2023, covering
different operating environments and structures, all financial institutions under its purview. The
two main approaches can be adapted to suit the Regulations, which will be fully effective from August
regulatory objectives, resources, and skill levels 2024, integrate and strengthen the existing customer
as well as the development of the industry and protection frameworks issued under different statutes
economy as a whole. In a compliance-based and empower the Central Bank to supervise the
approach, supervisors focus on non-compliance with market conduct of FSPs regulated by it.

68
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

With the empowerment by the Regulations, the market conduct supervisory manual integrating

1
Central Bank has arranged to commence its MCS its supervisory approach, tools, and process with
under a risk-based approach while giving due required details and is expected to commence
consideration to the reported non-compliances and the first full scope MCS during second half of
malpractices of FSPs. As a precursor to MCS, FCRD 2024. Going forward, the Central Bank expects
conducted a thematic review on the complaint to have greater co-operation from market conduct
handling mechanism of FSPs. The assessment supervisors in other countries and international
helped set the background for the MCS process networks such as Alliance for Financial Inclusion
while providing an opportunity for FSPs to improve (AFI) and the International Financial Consumer
their internal redress mechanism. Protection Organisation (FinCoNet) to gain
necessary experience and expertise for effective
Conclusion and Way Forward implementation of MCS contributing to a more
As countries navigate through increased risk resilient and stable financial system upholding the
and complexities of modern financial products trust and confidence of the financial consumers. 1
and services, upholding public confidence in the
financial system is a key element in achieving References

financial inclusiveness and system stability. A robust 1. An Introduction to Developing a Risk-Based Approach to Financial
MCS as the main mechanism in regulating financial Consumer Protection Supervision (2022) - World Bank
consumer protection always fosters fair treatment for 2 Establishing
. a Financial Consumer Protection Supervision Department (2021)
– World Bank
financial consumers and responsible market conduct
3. Financial Consumer Protection and New Forms of Data Processing
of FSPs. This will pave the way for increased public Beyond Credit Reporting (2018) – World Bank
trust in the overall financial system. 4 Good Practices for Financial Consumer Protection (2017) – World Bank
5. Market Conduct Supervision in Small Countries: The Case of Armenia
In this regard, the Central Bank is developing (2013) – World Bank

the necessary mechanisms, competencies, and 6. Market Conduct Supervision of Financial Services Providers A Risk-
Based Supervision Framework (2016) - Alliance for Financial Inclusion
procedures for conducting MCS of FSPs in 7. Market Conduct Supervision – A Toolkit (2023) - Alliance for Financial Inclusion
terms of the Regulations No. 01 of 2023. As 8. The Global State of Financial Inclusion and Consumer Protection (2022) - World
of 2023, the Central Bank has developed a Bank

based on reliable predictive models. CRIB also movable assets in Sri Lanka. This framework
focuses on leveraging advanced technology will protect the rights of all types of regulated
to analyse lending market data, providing financial institutions, encouraging them to
insights into future market developments, provide financing on moveable collateral.
changes in consumer behaviour, and evolving
1.6 Fiscal Sector Developments
societal needs. Users of lending institutions
have full access to this value-added analytical 1.6.1 Key Fiscal Balances
product offered by CRIB for objective and
Despite the challenging socio-political
structured evaluation of SMEs and MSMEs.
environment, the stellar fiscal performance
Further, to enhance financial inclusivity and
in 2023, driven by stringent consolidation
encompass the informal sector, which lacks measures such as revenue enhancement
comprehensive credit data and documentation, and expenditure rationalisation, noticeably
CRIB is exploring alternative data sources. These enhanced key fiscal balances, ensuring the
sources, such as insurance data, utility payments continuation of the IMF-EFF programme
and telecommunications payments, and and bolstering overall macroeconomic
e-commerce data are considered formal data stability. Accordingly, the primary balance,
sources for assessing reputational collateral. which excludes interest payments from the
Moreover, the enactment of the Secured overall deficit and reflects the discretionary
Transactions Act (STR Act), will create a secure component of fiscal policy, recorded a surplus of
transaction lending framework to mortgage 0.6 per cent of GDP (Rs.173.3 billion) in 2023,

69
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Table Summary of Government Fiscal interest payments, the same in GDP terms
Operation

1
1.26 narrowed marginally. The overall budget deficit
Item 2022 2023 (a) 2023/2022 narrowed to 8.3 per cent of GDP (Rs. 2,282.3
Absolute
Change
%
Change
billion) in 2023, in comparison to 10.2 per
Rs. million cent of GDP (Rs. 2,460.0 billion) recorded in
Total Revenue and Grants 2,012,589 3,074,324 1,061,735 52.8 the preceding year. The initial estimate for the
Total Revenue 1,979,184 3,048,822 1,069,638 54.0
Tax Revenue 1,751,132 2,720,563 969,431 55.4 overall deficit was 7.9 per cent of GDP
Non Tax Revenue 228,052 328,259 100,207 43.9
Grants 33,405 25,502 (7,903) (23.7) (Rs. 2,404.0 billion).
Expenditure and Net Lending 4,472,556 5,356,591 884,035 19.8
Recurrent
Interest Payments
3,519,633
1,565,190
4,699,679 1,180,046
2,455,600 890,410
33.5
56.9
1.6.2 Government Revenue,
o/w Domestic
Foreign
1,436,569
128,621
2,332,208
123,391
895,639
(5,230)
62.3
(4.1)
Expenditure, and
Capital and Net Lending 952,923 656,912 (296,011) (31.1) Net Lending
o/w Public Investment 1,014,293 932,745 (81,548) (8.0)
Current Account Balance -1,540,448 -1,650,857
Primary Balance -894,777 173,332 Reflecting Government's commitment to
Overall Fiscal Balance -2,459,967 -2,282,267
Total Financing 2,459,967 2,282,267 (177,700) (7.2) fiscal consolidation, a substantial increase
Foreign Financing
Domestic Financing
424,822
2,035,145
494,655 69,833
1,787,612 (247,533)
16.4
(12.2)
in government revenue was recorded in
As a Percentage of GDP (b) both nominal terms and as a percentage
Total Revenue and Grants 8.4 11.1 of GDP in 2023, compared to 2022.
Total Revenue 8.2 11.0
Tax Revenue 7.3 9.8 Accordingly, in nominal terms government
Non Tax Revenue
Grants
0.9
0.1
1.2
0.1
revenue recorded a year-on-year growth of
Expenditure and Net Lending 18.6 19.4 54.0 per cent, while in GDP terms revenue
Recurrent 14.6 17.0
Interest Payments 6.5 8.9 increased by 2.8 percentage points to 11.0 per
o/w Domestic 6.0 8.4
Foreign 0.5 0.4 cent of GDP in 2023. Numerous tax reforms
Capital and Net Lending
o/w Public Investment
4.0
4.2
2.4
3.4
implemented in the second half of 2022 and
Current Account Balance -6.4 -6.0 in 2023 supported the expansion in revenue
Primary Balance -3.7 0.6
Overall Fiscal Balance -10.2 -8.3 collection. The significant rise in tax revenue
Total Financing 10.2 8.3
Foreign Financing 1.8 1.8 was mainly due to the increased collections
Domestic Financing 8.5 6.5
from income taxes, VAT, excise duties, import
(a) Provisional Source: Ministry of Finance,
(b) GDP estimates (base year 2015) released by Economic Stabilization and duties, and Special Commodity Levy (SCL). The
the Department of Census and Statistics on National Policies
15 March 2024 have been used. Social Security Contribution Levy (SSCL) that was
introduced in October 2022 also contributed
compared to the deficit of 3.7 per cent to this increase in government revenue. The
(Rs. 894.8 billion) recorded in 2022, significant increase in income taxes in 2023 was
overachieving the Quantitative Performance
Criteria (QPC) set under the IMF-EFF Figure Composition of Government
1.33 Revenue - 2023
arrangement. A primary surplus was recorded
last in 2018, and since 1950 the country has
registered a primary surplus only in six years. Income Taxes
29.9% Fees and
Charges
Maintaining a positive primary balance is crucial 4.8%
Non
for fostering fiscal sustainability and effectively VAT
22.8%
Tax
Revenue

controlling the accumulation of debt. In the 10.8% Profits and Dividends

2.5%

meantime, although the current account27 deficit Excise Duties

15.4%
Rent and Interest Income
1.1%

widened in nominal terms on account of higher

PAL
5.8% Other
Import Duties Tax Revenue 2.4%
3.4% 89.2%
Other Taxes
12.0%
27 The current account balance represents the difference between the total revenue and
Source: Ministry of Finance, Economic Stabilization and National Policies
the total recurrent expenditure.

70
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Figure
1.34 Government Revenue, Expenditure and Key Fiscal Balances

1
Government Revenue Government Expenditure
3,500 14
6,000 25
11.9 11.0 21.0 19.4
3,000 12 20.0
328 5,000 19.4 18.6 657
20
2,500 10
8.7 1,005
8.3 8.2 4,000 953
Rs. billion

Rs. billion
% of GDP
15

% of GDP
2,000 8
156 228
3,000 774 815
493
1,500 6 913
151 159 2,721 717 685 2,456 10
2,000 552 1,565
1,000 4
1,735 1,751 980 1,048
1,298 901 5
1,217 1,000
500 2
974 1,015 1,139 1,239
848
0 0 0 0
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Pro.
Pro. Expenditure on Goods & Services Interest Payments
Tax Non Tax Total Revenue (RHS) Subsidies & Transfers Capital Expenditure & Net Lending
Total Expenditure & Net Lending (RHS)

Key Fiscal Balances (% of GDP)

Tax reforms implemented in the second half of
2019 2020 2021 2022 2023 Pro.
2022 and in 2023 resulted in a notable growth
0.6
in government revenue in 2023, while
rationalisation measures enabled the
Government to rein in expenditure to some
(3.4)(3.4)
(4.4)
(3.7) extent, despite the increased domestic interest
(5.7) (6.0) payments. Fiscal consolidation measures led to
(6.4)
(7.5) (7.3) a notable improvement in fiscal balances,
(8.3)
(9.0) especially with a primary surplus being record-
(10.2)
(10.7) ed after a five years period and for the sixth
(11.7)
time since 1950.
Current Account Balance Primary Balance Overall Fiscal Balance
Source: Ministry of Finance, Economic Stabilization and National Policies

achieved through key policy measures including year. Excise duty structures on liquor, cigarettes,
revisions to the personal income tax structure in petrol, and diesel were revised several times
terms of the tax-free threshold, tax rates, and tax during 2023 leading to the revenue collection
brackets, mandatory registration requirement from excise duties to increase from 1.4 per
for specific professionals under the Inland cent of GDP in 2022 to 1.7 per cent of GDP
Revenue Department (IRD), upward revision of in 2023. International trade related taxes,
the standard corporate income tax rate, and including import duties and SCL, exhibited a
the elimination of concessionary rates related to substantial year-on-year growth in nominal
corporate income taxes. Consequently, income terms due to upward revisions to the rates during
tax collection increased from 2.2 per cent of 2023. However, when measured in GDP terms,
the GDP in 2022 to 3.3 per cent of GDP in their increase was only marginal, constrained by
2023. Meanwhile, the incremental adjustment subdued imports due to restrictions on
of the VAT rate in two phases during 2022, non-urgent imports maintained during most
coupled with the downward revision to the VAT part of 2023, and reduced affordability. At the
registration threshold in the latter part of the same time, the collection from SSCL amounted
same year that widened the tax net related to to 0.8 per cent of GDP in 2023. Revenue from
VAT, contributed to the notable growth in VAT Ports and Airports Development Levy (PAL)
collection in 2023. Accordingly, VAT revenue and Cess levy experienced a decline during
collection increased to 2.5 per cent of GDP in the year under review due to the steps taken in
2023 from 1.9 per cent of GDP in the preceding 2023 to gradually phase out both para tariffs.

71
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

Meanwhile, non-tax revenue also increased addition, overreliance on domestic financing

1
during 2023 both in nominal and real terms, due to the Government's limited access to
mainly driven by higher revenue collection from foreign financing also contributed to the rise in
sources such as fees and charges, as well as domestic interest cost. Interest cost accounted
profit and dividend transfers from State Owned for 80.5 per cent of the total government
Enterprises (SOEs). According to the initial revenue and 45.8 per cent of total government
budget estimates for 2023, total revenue was expenditure in 2023 compared to 79.1 per
projected to be 12.5 per cent of GDP, with tax cent and 35.0 per cent recorded in 2022,
revenue and non-tax revenue estimated at 11.3 respectively. Meanwhile, expenditure on pension
per cent and 1.2 per cent of GDP, respectively. payments rose considerably during 2023, with
Despite the notable improvement in revenue the increased retirements during the year due
collection in 2023 compared to the previous to revisions implemented in the preceding year
year, there was an underperformance of revenue in relation to reducing retirement age for public
relative to the initial ambitious budget estimates sector employees from 65 to 60. Further, free
for 2023. The realised revenue for 2023 medicine, and implementation of the Aswesuma
amounted to 88.4 per cent, with realised tax Welfare Benefit Scheme contributed for the
revenue standing at 86.9 per cent of the initial increase in subsidies and transfers. On the other
projections. This shortfall could be attributed to hand, salaries and wages declined marginally
faster deceleration in inflation than anticipated in in nominal terms as well as in GDP terms, as
the budget, continued subdued import demand, a result of freezing of new recruitments to the
exchange rate appreciation, and issues related public sector and sizeable retirements of public
to revenue administration. Tax measures such as servants from the workforce. Meanwhile, capital
the upward revisions to the income tax structure expenditure and net lending recorded a notable
have led to an increase in the share of direct decline both in nominal terms as well as GDP
tax collection, reaching 33.5 per cent in 2023 terms. This reduction was primarily attributed to
compared to 30.5 per cent in 2022. a significant decrease in net lending, caused by
the settlement of the on-lending facility provided
The total expenditure and net lending
to CPC in 2022 through the Indian Credit Line.
increased both in nominal terms and as a
Capital expenditure excluding the impact of
percentage of GDP, mainly driven by the
net lending as a percentage of GDP increased
substantial escalation in domestic interest
to 3.3 per cent in 2023 from 3.0 per cent in
expenditure, despite the notable reduction
2022. According to the initial budget estimates
in capital expenditure and net lending.
Accordingly, in nominal terms, government Figure Composition of Government
expenditure recorded a year-on-year growth of 1.35 Recurrent Expenditure - 2023
19.8 per cent, while in GDP terms expenditure Interest Payments
52.3%

increased only by 0.8 percentage points in Pensions

7.9%

2023. The significant nominal rise in domestic Transfers to Samurdhi

Households
1.9%
interest expenditure was influenced by elevated Transfers to
Public Institutions
19.4%
Fertiliser Subsidy
and Corporations 1.1%
domestic interest rates stemming from tight 2.0%

Other Goods Other

monetary conditions prevailed until June 2023 and Services
6.4%
8.5%

Salaries and Wages

and high risk premia attached to government 20.0%

securities amidst uncertainties over DDO. In Source: Ministry of Finance, Economic Stabilization and National Policies

72
 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

for 2023, total expenditure was projected decreased to 2.5 per cent of GDP (Rs. 692.3

1
to be 21.2 per cent of GDP, with recurrent billion) in 2023, down from 6.0 per cent of GDP
expenditure and capital expenditure and net (Rs. 1,440.2 billion) in 2022. Net domestic
lending estimated at 16.8 per cent and 4.4 per financing from the banking sector experienced
cent of GDP, respectively. The Government's a significant contraction, with a net prepayment
efforts in curbing non-urgent and non-essential of 0.02 per cent of GDP (Rs. 6.4 billion).29 This
expenditure through the continuation of reduction was offset by non-bank sources, which
expenditure rationalisation measures kept total accounted for 6.5 per cent of GDP (Rs. 1,798.5
expenditure in check, preventing recurrent billion) in 2023. Meanwhile, the share of net
expenditure rising far above the budget foreign financing in total net financing increased
estimates, despite higher than expected domestic to 21.7 per cent in 2023, in comparison to
interest payments. 17.3 per cent in the preceding year. The net
foreign financing in 2023 includes gross funds
1.6.3 Financing the Budget Deficit received under the two tranches of the IMF-EFF
In 2023, the Government continued to rely facility, which was granted as budget support.
primarily on domestic sources to finance Additionally, notable receipts were received from
the budget deficit, largely due to existing other multilateral agencies such as ADB and
constraints in accessing international the International Development Association (IDA)
capital markets. Accordingly, net domestic of the World Bank. These funds were provided
financing accounted for 78.3 per cent of the in support of the Government's economic
total debt financing during the period under stabilisation programme and to support
review. Although this share has slightly reduced expenditure on social safety nets.
compared to the past two years, where it Sovereign rating agencies maintained their
exceeded 100 per cent in 2021, the current downgraded rating status for Sri Lanka due
percentage still remains relatively high in to the standstill on selected foreign debt
comparison to the 62.3 per cent and 57.5 per service payments. Accordingly, Fitch Ratings
cent recorded for 2019 and 2018, respectively, and S&P Global Ratings maintained the long
when similar restrictions were not in effect. Once term foreign currency Issuer Default Rating (IDR)
the impact of the transactions in relation to for Sri Lanka at RD (Restricted Default) and SD
the DDO operation is eliminated, the total net (Selective Default), respectively. Moody’s Ratings
domestic financing was predominantly sourced maintained the long term foreign currency issuer
through Treasury bills, reflecting a strong market credit rating at 'Ca' (Stable). In the meantime,
preference for short term instruments over long the announcement of the DDO operation
term instruments due to uncertainties and higher prompted the international sovereign credit
Treasury bill rates prevailed during the first rating agencies to downgrade the ratings of
half of the year.28 In 2023, net financing from local currency domestic debt of the Government,
Treasury bills amounted to 7.5 per cent of GDP while the same were upgraded with the
(Rs. 2,058.6 billion), up from 6.7 per cent of successful completion of the DDO operation.
GDP (Rs. 1,608.2 billion) recorded in 2022.
29 In contrast to the contraction recorded in net domestic financing from the banking
Conversely, net financing from Treasury bonds sector under this section, NCG figures given under the Monetary Sector Develop-
ments of this Chapter show an expansion. This discrepancy can be attributed to the
timing of recording the debt transfer associated with CPC's public guaranteed debt
to the central government debt stock which was accounted for in the banking sector
28 During the year, Sri Lanka Development Bonds and Central Bank Provisional Ad- records only in 2023, despite being transferred by end 2022 as per the records of
vances were settled as part of the DDO operation. Ministry of Finance.

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 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

1.6.4 Central Government Debt Government settled the outstanding stock of

1
and Public Debt 30 Rupee Loans, while the outstanding balance of
the government guaranteed foreign currency
Central government debt as a percentage debt stock of CPC, which was absorbed into
of GDP declined to 103.9 per cent by end central government debt by end December
2023 from 114.2 per cent in 2022, primarily 2022, remains unchanged by end of 2023.
due to the notable growth in nominal GDP Meanwhile, the decrease in foreign debt in
driven by high inflation and the impact nominal terms by end 2023 compared to
of currency appreciation on foreign debt. end 2022 was due to the appreciation of the
Accordingly, domestic debt and foreign debt as rupee against major foreign currencies. The
a percentage of GDP declined from 62.5 per parity related reduction of foreign debt in 2023
cent and 51.8 per cent, respectively, in 2022 to amounted to Rs.1,431.4 billion. However, the
61.7 per cent and 42.1 per cent, respectively, decline in the rupee value of the foreign debt
in 2023.31 However, nominal value of the total stock was partially offset by funds received
debt32 increased by 4.4 per cent driven solely from multilateral organisations, including the
by a rise in domestic debt, while outstanding two tranches of the IMF-EFF facility received
foreign debt, valued in domestic currency, in March and December 2023. In previous
decreased from the levels observed in 2022. IMF programmes, IMF financing was treated
The nominal increase in total domestic debt as a liability of the Central Bank. However,
reflects the substantial financing needs fulfilled in the latest arrangement, which focused on
from the domestic market amidst limited foreign providing budget support to the Government,
financing options. The share of medium and proceeds are transferred to the Government,
long term domestic debt as a percentage of total thereby being treated as a liability of the
domestic debt increased to 74.2 per cent by the Government, increasing the overall central
end of 2023 from 65.7 per cent at the end of government debt. As of end 2023, the relative
December 2022. This change was primarily due share of outstanding foreign debt of the central
to the conversion of the Central Bank's Treasury government decreased to 40.6 per cent of total
bill holding and provisional advances to the central government debt, compared to 45.3 per
Government into longer term Treasury bonds cent recorded at the end of 2022.
under the DDO operation, increasing the share The outstanding public debt33 decreased to
of medium to long term debt, thereby extending 110.8 per cent of GDP at end 2023 from
the maturity period of the debt stock, assist in 119.2 per cent of GDP at end 2022, in line
lowering the Gross Financing Needs (GFN) for
the Government. This is crucial in achieving 33 The outstanding public debt includes debt of the central government and public
guaranteed debt.

debt sustainability targets agreed with the IMF.

Figure
Furthermore, during the first half of 2023, the 1.36 Outstanding Central Government Debt
27,492 28,696 119
30 Government Debt Statistics are presented net of bank deposits of the Government. 27,000 115
114.2
111
Percentage of GDP

31 As per the guidelines of compiling government debt statistics in the Manual of 11,644
22,000 107
Government Finance Statistics 2014 of the IMF, non-resident holding of debt have 17,614
12,458
103.9 103
been classified as foreign debt while resident holdings of debt have been classified 17,000 15,117 99
Rs. billion

100.0
as domestic debt. 96.6
95
6,517
32 In the context of ongoing discussions on external debt restructuring, the outstanding 12,000 6,052 91
central government debt as at end 2022 and end 2023 excludes several debt service 15,034 17,052 87
payments that became overdue after 12 April 2022, the date on which the Interim 7,000 11,097 83
9,065 79
Policy regarding the servicing of Sri Lanka’s external public debt was announced by
2,000 75
the Ministry of Finance, Economic Stabilization, and National Policies. These debt 2020 2021 2022 2023 Pro.
service payments comprise overdue interest payments of affected debt, which are
deemed to be capitalised as per the Interim Policy. Further, the balance as at end Domestic Foreign Debt/ GDP (RHS)
December 2022 excludes the value of certain coupon payments in relation to Sri Sources: Ministry of Finance, Economic Stabilization and National Policies
Central Bank of Sri Lanka
Lanka Development Bonds that became overdue from April 2022 till end 2022.

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 MACROECONOMIC DEVELOPMENTS AND CONDITIONS OF THE FINANCIAL SYSTEM

Table
Outstanding Government Debt (a) (b)

1
1.27

Rs. billion
Item 2022 2023 (c)
Domestic Debt (d) 15,033.9 17,051.9
By Maturity Period
Short Term (e) 4,267.7 3,616.2
Medium and Long Term (f) 9,882.1 12,646.9
Other Domestic (g) 884.1 788.7
By Institution (h)
Bank (h) 8,525.7 9,102.8
Non Bank (h) 6,164.0 7,506.3
Repurchase Transaction Allocations (i) (j) 344.1 442.7
Foreign Debt (k) (l) 12,458.2 11,644.1
Multilateral 3,611.6 3,817.0
Bilateral and Commercial 8,846.6 7,827.1
By Currency
SDR 1,604.7 1,737.1
US Dollars 8,716.9 7,943.9
Japanese Yen 979.6 819.4
Euro 417.4 396.6
Other 739.6 747.1
Total Outstanding Central Government Debt 27,492.0 28,695.9
Public Guaranteed Debt (m) (n) 1,180.7 1,931.3
Public Debt 28,672.7 30,627.3
As a percentage of GDP (o)
Total Outstanding Central Government Debt 114.2 103.9
Domestic Debt 62.5 61.7
Foreign Debt 51.8 42.1
Public Guaranteed Debt 4.9 7.0
Public Debt 119.2 110.8

Sources: Ministry of Finance, Economic Stabilization and National Policies

Central Bank of Sri Lanka
(a) As per the guidelines of compiling government debt statistics in the Manual of Government Finance Statistics 2014 of the IMF, non resident holdings of outstanding SLDBs have been
classified under foreign debt and resident holdings of outstanding ISBs of the Sri Lankan Government have been classified under domestic debt. Further, debt statistics are presented
on net basis (net of deposits).
(b) The outstanding central government debt as at end 2022 and end 2023 excludes several debt service payments that became overdue after 12 April 2022, the date on which the
Interim Policy regarding the servicing of Sri Lanka’s external public debt was announced by the Ministry of Finance, Economic Stabilization and National Policies. These debt service
payments comprise of overdue interest payments of affected debt which are deemed to be capitalised as per the Interim Policy. Further, the balance as at end December 2022
excludes the value of certain coupon payments pending settlement in relation to Sri Lanka Development Bonds that became overdue from April 2022 till end 2022.
(c) Provisional
(d) From 2023 onwards, domestic debt compilation method was changed and is based on the data confirmed by the Ministry of Finance, Economic Stabilization and National
Polices.
(e) Excludes Treasury bills held by non resident investors
(f) Excludes Treasury bonds held by non resident investors
(g) Data from 2022 includes outstanding balance of the government guaranteed foreign currency debt of the Ceylon Petroleum Corporation that was absorbed into central government
debt.
(h) Institution wise classification was revised from Annual report 2022 based on the records of the Central Depository System
(i) Includes security holdings under Repurchase agreements for which absolute ownership could not be established
(j) Holdings under repurchase transactions with respect to Open Market Operations, have been allocated to the respective Licensed Commercial Bank or Standalone Primary
Dealer
(k) Foreign loan debt statistics and classification of foreign debt for 2022 and 2023 are prepared based on the data sourced from the Commonwealth Secretariat Debt Recording and
Management System (CS-DRMS) maintained by the Ministry of Finance, Economic Stabilization and National Policies, and extracted on 09 March 2023, 10 March 2023 and 26
February 2024.
(l) From December 2022 onwards, several outstanding project loans which were previously classified under Ceylon Electricity Board, Airport and Aviation Services Ltd. and Sri Lanka
Ports Authority were absorbed into central government debt.
(m) Compilation of public guaranteed debt is based on data received from the Ministry of Finance, Economic Stabilization and National Policies as of 29 February 2024.
(n) Includes an international bond amounting to US dollars 175 million issued by the SriLankan Airlines in June 2014. This was matured in June 2019 and re-issued for a period of 5
years.
(o) GDP estimates (base year 2015) released by the Department of Census ad Statistics on 15 March 2024 have been used.

75
 CENTRAL BANK OF SRI LANKA | ANNUAL ECONOMIC REVIEW 2023

with the reduction in central government efforts in negotiating with private debt holders to

1
debt in GDP terms. In absolute terms, the total restructure external commercial debt, complying
outstanding public debt increased to with comparability of treatment and the agreed
Rs. 30,627.3 billion at end 2023 from debt sustainability targets.
Rs. 28,672.7 billion at end of 2022, which was
an increase of 6.8 per cent, year-on-year. 1.6.5 Central Government Debt
Service Payments
The Government successfully implemented
the DDO operation in 2023 with the aim The total debt service payments increased
of achieving debt sustainability alongside to 15.4 per cent of GDP in 2023 from 12.5
other measures in this regard. Accordingly, per cent of GDP in 2022, mainly driven by
eligible Sri Lanka Development Bonds the increased domestic interest payments.
(SLDBs) holdings were converted into five new Domestic debt services rose to 13.7 per cent
variable coupon Sri Lanka rupee denominated of GDP in 2023 compared to 10.4 per cent in
Treasury bonds while Treasury bonds held by 2022, marking a nominal increase of
Superannuation Funds were converted into Rs. 1,283.1 billion. At the same time, the rise in
new Treasury bonds featuring medium to long domestic amortisation payments was associated
term maturities. Furthermore, outstanding with increased settlement of Treasury bonds,
Treasury bill holdings of the Central Bank and an increase of Rs. 468.7 billion during 2023
outstanding provisional advances from the compared to 2022. In comparison, a decrease
Central Bank to the Government were converted in foreign debt service payments to 1.7 per cent
into ten new step down fixed coupon Treasury of GDP in 2023 from 2.0 per cent of GDP in
bonds and into twelve existing Treasury bills. 2022 was recorded due to continued suspension
The successful implementation of the DDO of certain foreign debt commitments following
operation has led to the conversion of short the Government’s debt standstill announcement
term debt maturities into medium to long term in 2022.
maturities, thereby mitigating refinancing risk
while lengthening the average time to maturity Figure Central Government Debt Service
1.37 Payments (As a Percentage of GDP)
of the domestic debt portfolio. Spreading 18
repayment obligations over an extended 16 15.4

period alleviates immediate financial pressures 14 13.5

12.4 12.5
and facilitates the establishment of a more 12 11.0

manageable and sustainable debt structure.

Per cent

10
8.7
Meanwhile, the Government is actively engaging 8
8.3 8.2

with external creditors to negotiate relief on 6

4
external debt. Accordingly, an Agreement
2
in Principle (AIP) has been reached with the 0
Official Creditors Committee (OCC) and China 2020 2021 2022 2023 Pro.
Foreign Interest Payments Foreign Amortisation Payments
EXIM Bank, leading to the current process of Domestic Interest Payments Domestic Amortisation Payments
Government Revenue Total Debt Service Payments
signing a Memorandum of Understanding Sources: Ministry of Finance, Economic Stabilization and National Policies
(MOU). The Government also continues its Central Bank of Sri Lanka

76