In consultation with government, we also initiated actions to implement liability management exercises on future debt obligations based on the newly enacted Active Liability Management Act (ALMA). The liberalisation of foreign exchange transactions was advanced with the introduction of the Foreign Exchange Act No. 12 of 2017 (FEA). Procedures for inward capital flows were further simplified and streamlined for smooth transferring of funds for investment, while limits for outward capital flows were enhanced in selected areas giving local investors access to a wider global market. As a facilitator, the Central Bank continued its development finance and regional development activities during 2018 with the broad aim of enhancing inclusive and balanced economic growth and financial inclusion in the country. Progress was made in formulating the National Financial Inclusion Strategy. Further, the Central Bank worked towards improving Sri Lanka’s global position with regard to the implementation of Anti-Money Laundering and Countering 9  the Financing of Terrorism regulations and we entered into new MOUs with several government bodies and institutions during 2018. We are working towards Sri Lanka being removed from the Financial Action Task Force’s (FATF) ‘grey list’ by mid 2019. A number of measures have also been taken in the pursuit of greater accountability and transparency. In particular, following the recommendations of the Presidential Commission of Inquiry to Investigate, Inquire and Report on the Issuance of Treasury Bonds, measures are being taken to strengthen several laws applicable to the Central Bank.

The government and the Central Bank introduced several short-term measures to address the pressure in the external sector, although the external sector developments once again highlighted the need for structural reforms to boost the tradable sector, particularly by enhancing merchandise and services exports in the medium to long run. The external sector was also affected by political instability during the latter part of 2018. Political developments, compounded by concerns regarding fiscal slippage in the lead up to the elections, were significant causal factors in the decisions of all three major rating agencies to downgrade Sri Lanka’s sovereign ratings. This, in turn, negatively affected investor confidence. 6  However, such downgrading only on the premise of heightened political uncertainty and anticipated rather than actual fiscal slippage cannot be justified as there was no solid evidence of a deterioration in macroeconomic policies or fundamentals. This was evidenced by the good progress made in completing the fifth review of the Extended Fund Facility (EFF) of the International Monetary Fund (IMF) until 26 October 2018. Sri Lanka continued to receive the assistance under the EFF and we received the fifth tranche of the programme in June 2018. We look forward to the successful completion of the IMF EFF programme in 2019. We are optimistic that the staff level agreement reached in principle with the IMF on the fifth review will proceed to the next level. Although the government continued its efforts towards fiscal consolidation, the performance on the fiscal front was rather mixed in 2018.