The sustained high deficits of rupee liquidity in the domestic money market compelled the Central Bank to reduce the Statutory Reserve Ratio (SRR) applicable on all rupee deposits of commercial banks in November 2018, while increasing policy interest rates to neutralise the impact on interest rates due to the permanent liquidity injection arising from the reduction in SRR. We followed this cautious approach with the broad aim of stabilising inflation at 5  mid single digit levels and anchoring inflation expectations to enable the economy to reach its potential in the medium term. In the external sector, the growth in export earnings was outpaced by the expansion in import expenditure, although earnings from tourism, workers’ remittances, foreign direct investment (FDI) and debt related inflows to the government helped cushion the balance of payments (BOP) to some extent. The BOP experienced significant pressure on account of foreign exchange outflows caused by tightening global financial conditions and the strengthening of US dollar in view of monetary policy normalisation, particularly in the United States, as well as the widened trade deficit. Similar to the pressure that was observed in other emerging market economies, these developments resulted in a sharp depreciation of the Sri Lankan rupee particularly during the second half of the year. The Central Bank intervened in the domestic foreign exchange market at times to prevent disorderly adjustments in the exchange rate, while allowing demand and supply forces of the forex market to determine its level and direction.

Measures were also taken to reform the operations relating to the issuance of government securities, introduce a new investment policy framework for the EPF, strengthen internal audit and introduce the code of conduct for employees and the members of the Monetary Board. The procurement process for several forensic audits is underway, and forensic audits are to be conducted by entities with global practice. In a challenging global and domestic environment, the Central Bank is steadily improving its policy frameworks to mitigate possible risks and thereby achieve its broad objectives of economic and price stability and financial system stability. Our actions would be effective and yield desired outcomes only if certain conditions are met, especially the commitment of the government to macroeconomic stability. Given the prevailing low growth trajectory, growth promoting policies and structural reforms are much needed priorities for the government. This must, however, be done without disrupting the fiscal consolidation process. For this to happen, the enabling environment must be 10  created for the private sector to play a more active role. We need consistent and predictable policies from the government and a more dynamic and entrepreneurial mindset from businesses. Government’s initiatives aimed at improving the economic and social infrastructure of the country, enhancing productivity, up- scaling skill levels of the labour force as well as expanding domestic production capacity are vital elements to support an accelerated and sustainable level of economic growth, while maintaining a continued low inflation environment.