Economy ticking well: CB

The Central Bank suggested yesterday that the economy was ticking well, encouraging it to leave policy rates unchanged.

The announcement post the August monetary policy review contained several positive macro-economic fundamentals whilst the Central Bank said it was closely monitoring the global uncertainties to ascertain the need for appropriate safeguard measures.

 

“As reflected by the leading economic indicators, the growth momentum of the economy is continuing with increased contribution to growth from all key sectors of the economy,” the Central Bank said yesterday.

The Colombo Consumers’ Price Index (CCPI) (2006/07=100), computed by the Department of Census and Statistics, recorded a year-on-year increase of 7.5% in July 2011 compared to 7.1% in June 2011, and an annual average increase of 7% in July 2011 in comparison to 6.7% in the previous month. However, with the continuous improvements in the supply of most food items, inflation is expected to moderate in the coming months.

Performance in the external sector has been encouraging with increased foreign trade, improved worker remittances and inflows to the services account, driven also by higher earnings from tourism. Foreign Direct Investment (FDI) inflows during the first half of the year amounting to US$ 413 million, were encouraging, and served to demonstrate that the target of US$ 1 billion set for 2011 is largely on track.

Gross official reserves (without ACU balances) increased to US$ 8,158 million by 16 August 2011 from US$ 6,610 million recorded at end December 2010. With increased inflows, the rupee has appreciated by 0.96% against the US dollar so far during the year.

With increased Government revenue and contained expenditure, the Government maintained the fiscal deficit target during the first half of 2011 in line with the budget. The overall deficit as a percentage of GDP during the first six months was also lower than that in the corresponding period in 2010.

The international sovereign bond issue of US$ 1 billion in July 2011 was oversubscribed by 7.5 times, reaffirming the confidence placed by investors in the Sri Lankan economy and indicating the opportunities available for Sri Lankan corporates to raise funds internationally.

At the same time, about one half of the proceeds from the bond issue was utilised to retire high cost domestic debt, while the government deposited the other half of the proceeds with the Central Bank to meet future debt repayment obligations.

Broad money (M2b) expanded by 20.7%, year-on-year, in June 2011 mainly driven by the increased demand for credit by all productive sectors of the economy, in particular, those in the Northern and Eastern Provinces.

Credit disbursed to the private sector increased by 34.4% on a year-on-year basis in June 2011. Such increase was higher than originally estimated, although this partly compensated the lower credit utilisation during the early months of last year.

Nevertheless, emerging uncertainties in advanced economies could decelerate global economic growth, thereby easing pressure on aggregate demand domestically, thus leading to the likely accomplishment of the Central Bank’s announced monetary targets. The Central Bank will continue to closely monitor the growth of monetary aggregates and will implement appropriate measures if demand-side pressures in the economy increase.

Considering these, the Monetary Board, at its meeting held on 18 August 2011, had decided to maintain the policy interest rates of the Central Bank at their current levels. Accordingly, the bank’s Repurchase rate remains at 7.00% while the Reverse Repurchase rate remains at 8.50%.

The release of the next regular statement on monetary policy will be on 16 September 2011.