By Imesh Ranasinghe    The Central Bank of Sri Lanka (CBSL) forecasts Non-Performing Loans (NPLs) as a percentage of all bank loans to reach 8% in 2022, from 4.5% in 2021, while it expects the economy to contract by around 8%, in a revision to its previous forecast of a 7.5% contraction. Speaking at the Monetary Policy Review, CBSL Governor Dr. Nandalal Weerasinghe said the CBSL is working with banks to minimise the economic contraction’s impact on the banking sector as NPLs will rise as a result of the contraction, and added that the NPL ratio is forecasted to be 8% for 2022. He said the economy would contract by around 8% this year, surpassing the CBSL’s previous forecast of a 7.5% contraction. He added that a sharper contraction of the economy means recovery can be faster from next year onwards, as Sri Lanka could start to recover in the second half of 2023, with attention to external factors such as a possible global recession, and the possibility of Sri Lanka maintaining normal economic conditions while sectors such as tourism make a fast recovery. Further, the Governor said, inflation could peak at 65% in September, revising the CBSL’s previous forecast of 70%, even after the electricity rate hike. Accordingly, the latest near-term forecast of headline inflation shows a faster deceleration compared to the previous monetary policy review, mainly due to downward revisions to administered prices and their second-round impact, together with the moderation in certain food prices and the stability in the exchange rate. With subdued aggregate demand pressures resulting from tight monetary and fiscal conditions, expected improvements in domestic supply conditions along with the anticipated normalisation in global food and other commodity prices, and the favourable statistical base effect, headline inflation is expected to moderate going forward, and is projected to stabilise in the desired range over the medium term, as per the CBSL. Dr. Weerasinghe said that the overnight liquidity deficit has now reached below Rs. 500 billion, from over Rs. 600 billion in the last few months. “In our daily market operations, we pump liquidity on a daily basis to address or meet deficits in the bank system, which is also improving,” he said, adding that another reason for the liquidity deficit in the banks in the past was the currency in circulation, which was increasing at a very fast rate, but has now started to decelerate as the currency outside the system has started to return to banks, resulting in the easing of the liquidity situation. Moreover, he added, once the foreign currency liquidity starts to improve, it will also improve the rupee liquidity.   Non-performing loans as percent of all bank loans is 8% NPL  

• Central Bank predicts 3.5% increase in NPL from previous year

• Economy expected to contract by 8%, surpassing 2021’s 7.5%