Avurudu adjustment

Wednesday, 13 April 2011 00:00 - - {{hitsCtrl.values.hits}}

The Central Bank (CB) yesterday responded to increasing inflation by raising its reserve ratio by one percentage point to eight per cent to absorb excess liquidity.

Releasing the monetary policy review for April, CB noted that one of the reasons for the inflation was increased credit flows to the private sector that expanded by 29.7%. Inflation has been on the increase following supply shocks due to floods at the beginning of the year.

Last month inflation hit 8.6%, the highest in two years, raising fears that it could lead to secondary issues such as salary hikes.

“While the excess liquidity in the domestic money market remains a concern, left unchecked, it could further expand monetary aggregates, leading to higher inflation than originally envisaged. Thus, the Monetary Board considers it prudent to pull back any build-up of demand-side pressure on inflation and ensure continued monetary stability,” the CB statement said.

The impact of disruptions to the supply of domestic agricultural crops in January and February has subsided, the CB remarked adding that the CCPI declined in absolute terms by 0.3 per cent in March 2011.

“However, on a year-on-year basis, the CCPI increased from 7.8 per cent in February 2011 to 8.6 per cent in March 2011, while annual average inflation increased marginally to 6.2 per cent in March. Harvesting of paddy in major growing areas is in progress while the seasonal vegetable harvest and fish production have also started to reach the market. These positive developments would mitigate the effect of higher festive demand on prices in April.”

It speculated that although domestic petroleum and gas prices were adjusted to reflect the high international energy prices, the impact of the adjustment on inflation is expected to be low. However, CB observed that persistently high and volatile international energy prices remain a concern for domestic economic and price developments.

The Monetary Policy review continued with, positive trends in the external sector that were seen in 2010 continued into 2011. Earnings from exports increased impressively by 72.4 per cent in January 2011, while expenditure on imports also grew. Worker remittances as well as earnings from tourism also continued to increase.

Meanwhile the International Monetary Fund (IMF) completed the sixth review of the Sri Lanka Stand-By Arrangement (SBA) and the seventh tranche of the facility to the value of approximately US$ 218.3 million was disbursed on 4 April 2011.

Reflecting these improvements, the gross official external reserves (without ACU) currently remain around US$ 7.1 billion (equivalent to 6.2 months of imports), while the Sri Lanka rupee continues to remain stable against the US dollar.

According to the Central Bank, revenue collection during the first two months improved while net domestic financing was kept under control. Simplifications to the income tax structure that came into effect on 1 April are expected to improve revenue collection further.