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The Central Bank held policy rates steady yesterday but raised a warningon loans to State-Owned Enterprises (SOEs) and slowing remittances, despite growing public reserves.
“The recent expansion in credit obtained by state-owned business enterprises poses a risk to the behaviour of overall domestic credit, reflecting the need to address concerns in relation to the financial performance of key SOEs,” the Central Bank said in its latest Monetary Policy statement.
Credit to SOEs rose to Rs.557 billion in April 2017 from Rs.495 billion in December 2016 as oil prices rose and a drought forced more thermal generation of electricity, reversing a trend of the Ceylon Petroleum Corporation (CPC) paying back its loans.
However, since May, oil prices have begun to ease, though they remain at much higher levels than in 2016 and the Central Bank was optimistic it would continue to see a reduction.
Remittances also declined by 15.6% to $487.9 million in April though the decrease for first four months of the year was 6.3% at $2.2 billion. The Central Bank acknowledged that further declines would depend on how the Qatar crisis would play out where an estimated 150,000 Sri Lankans work.
“The decision of the Monetary Board is consistent with the objective of maintaining inflation at mid-single digit levels over the medium term and thereby facilitating a sustainable growth trajectory. According to the provisional estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy has grown by 3.8% (year-on-year) in the first quarter of 2017,” the Monetary Policy statement said.
Growth in the first quarter was weighed down by the impact of unfavourable weather conditions, particularly on agriculture related activities. The performance of industry related activities was largely driven by the continued expansion in construction, while services related activities recorded a moderate growth. The economy is expected to recover during the second half of the year.
Following the increasing trend in the first quarter of 2017, year-on-year headline inflation, based on both Colombo Consumer Price Index (CCPI, 2013=100) and National Consumer Price Index (NCPI, 2013=100), moderated during the months of April and May, as envisaged.
Core inflation has also displayed a similar trend. As the impact of the revisions to the tax structure and weather-related supply disruptions is expected to dissipate in the period ahead, inflation is projected to moderate to mid-single digits by the end of 2017, and stabilise thereafter, it added.
Monetary expansion remained at elevated levels by end April, driven by the expansion in domestic credit channelled to both the public and private sectors from the banking system. The growth of credit to the private sector continued to decelerate gradually.
A further deceleration in the growth of credit to the private sector is anticipated, given the prevailing high nominal and real lending rates in the market. The recent expansion in credit obtained by State-Owned Business Enterprises (SOBEs) poses a risk to the behaviour of overall domestic credit, reflecting the need to address concerns in relation to the financial performance of key SOBEs. Meanwhile, a decline in Net Credit obtained by the Government (NCG) was observed in the month of April.
The continuation of the Government’s revenue-based fiscal consolidation process and inflows to the government on account of foreign borrowings appear to have reduced the pressure on interest rates in the Government securities market substantially.
Despite improved export performance in March and April, a sustained increase in import expenditure resulted in a wider cumulative trade deficit. Tourism related foreign exchange inflows grew on a cumulative basis, and the decline in tourist arrivals observed in the month of May is expected to be temporary.
A net foreign inflow was observed in the Government securities market since March, while inflows to the Colombo Stock Exchange (CSE) also displayed a positive trend.
The Central Bank continued to absorb foreign exchange from the domestic market since March to build up international reserves. In line with these developments and the successful issuance of the International Sovereign Bond as well as the receipt of syndicated loan proceeds by the Government, gross official reserves improved to above $ 7billion by mid-June 2017. Meanwhile, the Sri Lankan rupee has depreciated against the US dollar by 2.3% during 2017 up to 21 June.
Against this backdrop, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 7.25% and 8.75%, respectively.