CB keeps rate steady on IMF funds

Sticking to predictions the Central Bank yesterday kept key policy rates steady despite rising inflation following the increase of VAT in May while private sector credit grew 28.1% in April when compared to 27.7% in March 2016. 

According to provisional estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy grew by 5.5 %, in real terms, in the first quarter of 2016 compared to the growth of 2.5 % recorded in the last quarter of 2015. Economic growth was mainly supported by the expansion of Industry and Services related activities, which grew by 8.3 % and 4.9 %, respectively, during the first quarter of 2016 in value added terms. Meanwhile, Agriculture related activities recorded a moderate growth of 1.9 % during this period. The growth rate recorded in the first quarter was broadly in line with expectations for the year, the Central Bank recapped in its monetary report. 

As anticipated, inflation increased in the month of May reflecting the impact of the increase in Value Added Tax (VAT) and the removal of certain exemptions applicable on VAT and Nation Building Tax (NBT), as well as the supply side disruptions due to adverse weather conditions.

Accordingly, the Colombo Consumers’ Price Index (CCPI, 2006/2007=100) based headline inflation increased to 4.8 %, year-on-year, in May 2016 from 3.1 % in the previous month, while the National Consumer Price Index (NCPI, 2013=100) based headline inflation also increased to 5.3 %, year-on-year, in May 2016 from 4.3 % in the previous month. Core inflation as measured by both CCPI and NCPI also increased in May 2016 mainly reflecting the impact of revisions made to the tax structure by the government. In spite of these transitory price movements, inflation is expected to moderate in the period ahead and remain in mid-single digits in the medium term supported by appropriate demand management policies.

“In the monetary sector, the year-on-year growth of broad money (M2b) decelerated to 18.2 % in April 2016 compared to 18.9 % recorded in March 2016. The expansion in credit to the private sector and the government remained key drivers of broad money growth, while credit Economic Research Department to public corporations recorded a repayment during the first four months of the year,” the monetary report said. 

 Credit extended to the private sector by commercial banks grew by 28.1 %  in April 2016 on a year on-year basis, although in absolute terms, disbursements in April 2016 were limited to Rs. 27.4 billion compared to Rs. 87.7 billion in the previous month. Short term money market rates displayed some stabilisation, while the upward trend observed in other retail market interest rates continued reflecting the gradual transmission of the monetary policy measures that were taken previously, amidst low levels of rupee liquidity in the domestic money market.

On the external front of the economy, the deficit in the trade account contracted by 2.4 % during the first four months of 2016, on a year-on-year basis, as the decline in imports was greater than the contraction in exports. Earnings from tourism were estimated to have increased by around 18.4 % during the period from January to May 2016, while workers’ remittances increased by 4.7 % during the period from January to April 2016. Gross official reserves were estimated at $ 5.6 billion by end May 2016.

Meanwhile, the Executive Board of the International Monetary Fund (IMF) approved a three year Extended Fund Facility (EFF) of SDR 1.1 billion (approximately $  1.5 billion) for Sri Lanka on 03 June 2016 to support the balance of payments (BOP) position and the broad  economic reform agenda of the government. 

“Following the approval of the IMF-EFF and the resultant improvement in market sentiments, the Sri Lankan rupee appreciated against the US dollar so far during the month of June 2016. Going forward, the EFF and other multilateral and bilateral credit facilities, along with the planned structural reforms and the realisation of the envisaged nondebt-creating capital inflows, are expected to strengthen the country’s external position. The expected improvements in the fiscal sector will also assist the Central Bank policies in maintaining macroeconomic stability on a sustainable basis,” it said.