We recommend the readers to review the Bank's performance detailed in this Annual Report alongside the global and local developments and projections outlined below, since it offers the underlying context for a comprehensive understanding.

Global economy

In 2023, the global economy exhibited resilience amid several significant challenges, including the ongoing recovery from the COVID-19 pandemic, geopolitical tensions resulting from Russia's invasion of Ukraine and the cost-of-living crisis. Despite these hurdles, the global economic recovery remained robust, with inflation falling faster than anticipated from its peak in 2022. This decline in inflation was attributed to favourable supply-side developments and central bank tightening measures, which helped to anchor inflation expectations.

Economic growth exceeded expectations in the second half of 2023, particularly in the United States and several major emerging market economies. Both government and private spending contributed to this upswing, supported by real disposable income gains and a supply-side expansion characterised by increased labour force participation and resolution of pandemic-era supply chain issues.

However, geopolitical tensions, such as the conflict in Gaza and Israel and ongoing warfare in Ukraine, posed risks to the global recovery. Continued attacks in key trade routes and potential supply disruptions threatened to generate adverse shocks to the global economy, particularly in terms of food, energy and transportation costs.

Looking ahead to 2024, global growth is projected to reach 3.1%, with a slight increase to 3.2% in 2025. Despite this positive outlook, forecasts remain below historical averages due to factors such as elevated central bank policy rates to combat inflation and fiscal tightening amid high debt levels. Global headline inflation is expected to decrease to 5.8% in 2024.

Although the likelihood of a hard landing has diminished, policymakers face the challenge of managing inflation while supporting economic growth. This requires a careful calibration of monetary policy and, in many cases, a renewed focus on fiscal consolidation to address budgetary concerns and curb the rise of public debt.

Targeted structural reforms are also deemed necessary to enhance productivity growth and debt sustainability, as well as to facilitate the transition to higher income levels. Additionally, efficient multilateral coordination is essential for debt resolution and climate change mitigation efforts to mitigate the adverse effects of these challenges on the global economy.

World Economic Outlook Projections (% change)

Sri Lankan economy

Despite facing multiple crises, the Sri Lankan economy has achieved a degree of macroeconomic stability through adherence to the IMF program and its recommendations. Moving forward, the focus is on timely implementation of agreements and resolving issues with external private creditors to restore the country’s debt sustainability over the medium term.

Key priorities for the government include advancing revenue mobilisation, aligning energy pricing with costs, strengthening social safety nets, rebuilding external buffers, safeguarding financial stability, eradicating corruption and enhancing governance, all in line with IMF expectations.

The IMF has emphasised that the Central Bank of Sri Lanka should maintain its focus on a multi-pronged disinflation strategy to safeguard the credibility of its inflation targeting regime, despite challenges posed by the increase in VAT to 18% in 2024 from 15% in 2023.

After bringing inflation down to 12% in June 2023, the Central Bank began relaxing its policy rates in June 2023 to stimulate economic growth. Positive economic growth was recorded in the third quarter of 2023, following consecutive contractions since the first quarter of 2022.

Credit to the private sector staged a recovery in June 2023 after a full year of negative growth, indicating a potential revival in economic activity. The external sector has shown resilience, with stability largely restored in 2023 supported by improved foreign exchange inflows.

Despite challenges, the banking sector continued to operate amidst adverse conditions in 2023, reflecting its resilience in navigating the recent economic crisis. Overall, concerted efforts are underway to address economic challenges and foster sustainable growth in Sri Lanka.

Bangladesh economy

Bangladesh has emerged as a significant player on the global economic stage. Over the past decade, the country has witnessed remarkable economic growth while making strides in improving various socio-economic indicators. The agricultural sector remains a cornerstone of the economy, contributing significantly to GDP through key products such as rice and jute. Additionally, Bangladesh has solidified its position as a global leader in the garment industry, with the Ready-Made Garments (RMG) sector driving exports and employment opportunities. The services sector, including information technology and remittances, has also become a vital contributor to economic growth.

Despite these achievements, Bangladesh faces persistent challenges such as growing demand for infrastructure and widespread income inequality. However, the government's commitment to foreign investments, infrastructure development and social programs underscores its dedication to achieving sustainable development goals. Bangladesh's economic resilience, demonstrated during times of global adversity, positions it for continued growth and diversification.

In 2023, Bangladesh experienced a strong recovery from the COVID-19 pandemic, but its post-pandemic recovery was disrupted by challenges such as rising inflation, financial sector vulnerabilities, external pressure and global economic uncertainties. Despite these hurdles, the country remained on track to graduate from the Least Developed Country (LDC) status by 2026 and aimed to achieve upper middle-income status by 2031.

The ready-made garment industry continued to be the powerhouse of Bangladesh’s economy, contributing over 80% of total exports. However, challenges such as lower demand among western consumers, geopolitical conflicts and labour unrest impacted export earnings. Additionally, rising fuel costs and energy production deficits strained government finances, leading to the depletion of foreign exchange reserves.

To address these challenges and spur economic growth, Bangladesh focused on increasing investment-to-GDP ratios and implementing various infrastructure development projects. Projects such as the Rooppur Nuclear Power Plant, Metro Rail project in Dhaka and Padma Bridge have significantly improved connectivity and infrastructure across the country. Furthermore, the government aimed to enhance climate resilience through increased investments in adaptation measures.

Looking ahead to 2024, Bangladesh aims to moderate its GDP growth ambitions in light of potential challenges in the export sector. However, solid growth records and proactive policy measures are expected to sustain the country's economic momentum. Despite subdued performance in the capital market and challenges in trade financing, Bangladesh remains resilient and poised for continued growth and development.

Banking sector

In 2023, the Sri Lankan banking sector navigated through a challenging economic landscape marked by multiple crises, including the impact of the COVID-19 pandemic and the need for adherence to IMF programs. Despite these challenges, the sector achieved a degree of macroeconomic stability, with efforts focused on implementing IMF recommendations and restructuring initiatives.

Key highlights of the Sri Lankan banking sector in 2023 include:

• Loans and advances experienced a contraction on a year-on-year basis, while deposits recorded an increase, indicating mixed performance in credit and liquidity indicators.
• Profit After Tax of the banking sector significantly increased, attributed to a decline in new impairment allocation by banks, FCY denominated Government securities in particular, reflecting improved financial health.
• Efforts were made towards strengthening corporate governance frameworks to align with international best practices and enhanced transparency and accountability.

The Bank’s performance compared to the Banking Sector

Looking ahead to 2024, the Sri Lankan banking sector aims to build upon the progress made in 2023 and address ongoing challenges while capitalising on emerging opportunities.

The outlook for 2024 includes:

• Implementation of the Roadmap for the Restructuring and Recapitalisation of Nine Large Banks to ensure strong and adequately capitalised institutions.
• Proposed amendments to the Banking Act to further strengthen the legal and regulatory framework of licensed banks.
• Establishment of Business Revival Units in licensed banks to support the recovery of businesses, particularly Small and Medium Enterprises (SMEs) and corporates.
• Encouragement of consolidation among small and mid-sized banks to enhance scale, efficiency and financial strength.
• Revision and enactment of a new Payment and Settlement Systems Act to facilitate the expansion of payment innovations and digital transactions.

The Sri Lankan banking sector is poised to navigate through uncertainties and challenges in 2024 with resilience and adaptability, driven by concerted efforts to strengthen regulatory frameworks, enhance corporate governance and foster financial stability and growth.