• Counterbalancing current account deficit, maintaining inflation and more
• The Central Bank of Sri Lanka (CBSL) has set a new course for 2025, focusing on inflation control, financial stability, and structural reforms to address economic vulnerabilities. 
• A relevant report was presented last Wednesday (8) at the CBSL by its Governor Dr. Nandalal Weerasinghe.

Inflation control remains a priority

A key part of the CBSL’s policy agenda is maintaining inflation at 5%, consistent with the Flexible Inflation Targeting (FIT) framework. 

After a deflationary period caused by supply-side adjustments, inflation is projected to return to positive levels by mid-2025. The CBSL’s focus will be on ensuring this transition occurs without undermining growth, according to Dr. Weerasinghe.

In order to achieve this, the CBSL plans to optimise its Statutory Reserve Requirement (SRR) framework and refine liquidity forecasting to align with international best practices. Through the implementation of a structured Open Market Operation (OMO) auction schedule, the bank aims to stabilise short-term interest rates, further supporting inflation management and credit growth. 

These measures have been designed to create a monetary environment conducive to investment and consumer confidence, according to the CBSL.

External sector stability in focus

In 2025, Sri Lanka’s external sector is expected to undergo notable changes, including the anticipated relaxation of vehicle import restrictions. While this could lead to a current account deficit after two years of surpluses, the CBSL plans to counterbalance it with policies aimed at bolstering foreign reserves and maintaining exchange rate stability.

A key initiative will be the introduction of a benchmark spot exchange rate to guide market participants and enhance transparency. The CBSL will also continue to build foreign reserves, targeting foreign exchange inflows through improved exports, services trade, and workers’ remittances. Advanced portfolio management strategies will be employed to diversify reserve assets and mitigate associated risks.

Strengthening financial system resilience

The CBSL has outlined measures to enhance the resilience of Sri Lanka’s financial sector. Among these is the Bank Recapitalisation Strategy, designed to ensure compliance with capital requirements and promote consolidation among licensed banks. The strategy’s success will be monitored through semi-annual reviews of board-approved recapitalisation plans.

For Non-Bank Financial Institutions (NBFIs), Phase II of the Masterplan for the Consolidation of Finance Companies will be implemented from 2025 to 2028. This phase will focus on strengthening the resilience of standalone finance companies. Regulatory amendments to the Finance Business Act and Finance Leasing Act will further tighten oversight, ensuring systemic stability.

Macroprudential measures, such as stress-testing frameworks, will be expanded to monitor vulnerabilities in both the banking and non-banking sectors. Additionally, the CBSL will identify and announce Domestic Systemically Important Banks (DSIBs) and Domestic Systemically Important Finance Companies (DSIFCs), enhancing oversight of critical financial institutions.

Sustainable finance initiatives

The CBSL is set to launch the Sustainable Finance Roadmap 2.0 in 2025, emphasising the integration of Environmental, Social, and Governance (ESG) considerations in financial practices. This roadmap will guide financial institutions in aligning with global sustainability standards while addressing local challenges.

Capacity-building initiatives, including training on green finance taxonomy, will support stakeholders in adopting sustainable practices. The CBSL also plans to review the regulatory framework for sustainable financing to close gaps and align with updated Basel Core Principles. 

Advancing payment systems and consumer protection

Digital payment systems are a focal point of the CBSL’s modernisation efforts. In 2025, the Government Digital Payment Platform (GDPP) will be operationalised, allowing real-time payments for Government services. This initiative follows the successful rollout of a Real-Time Gross Settlement (RTGS) system in 2024, which aligns with ISO 20022 standards.

Plans to extend the Common Electronic Fund Transfer Switch (CEFTS) will improve access to digital payments, particularly for Government transactions. Security enhancements for payment applications and public awareness campaigns on digital payment benefits will also be prioritised to increase adoption and trust.

Financial consumer protection will see advancements, with the CBSL issuing directives on fees, charges, and penalties to ensure fairness. A centralised database of financial product information will be made accessible to consumers, enabling informed decision-making. 

Public debt and fiscal coordination

The CBSL’s role in public debt management is set to diminish following the establishment of the Public Debt Management Office (PDMO) in 2024. 

This transition resolves long-standing conflicts of interest, allowing the CBSL to focus exclusively on monetary policy and financial stability. The PDMO is expected to streamline debt management, contributing to fiscal discipline and sustainability.

Coordination between the CBSL and Government will remain crucial, particularly in aligning fiscal and monetary policies. Quarterly meetings of the Coordination Council will address macroeconomic challenges, ensuring cohesive policy implementation. 

Modernising internal operations

Internally, the CBSL is prioritising technological advancements to optimise efficiency and decision-making. An ICT solution will modernise infrastructure, streamline processes, and improve data management. Cybersecurity enhancements will safeguard operations, while the introduction of a Risk Appetite Framework (RAF) will strengthen risk management practices.

Efforts to enhance transparency and accountability are also central to the CBSL’s strategy. Improved dissemination of statistical data and active stakeholder engagement will ensure that policy decisions are well communicated and understood.

Challenges and opportunities ahead

While the CBSL’s roadmap addresses many critical areas, challenges remain. 

The anticipated current account deficit, coupled with global economic uncertainties, could strain external stability efforts. The success of financial sector reforms will depend on effective implementation and stakeholder buy-in. 

Furthermore, creating sustainable finance practices in a traditionally conservative financial ecosystem will require significant cultural and operational shifts.