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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Tuesday, May 24, 2005

CB says economic growth momentum continues.

The Island: 17/05/2005" CB says economic growth momentum continues...Inflation on the rise despite Monetary Policy’s focus on containment

The Monetary Board has reviewed the recent economic developments and projections and has decided to continue open market operations more aggressively and to increase the Repurchase (Repo) rate and the Reverse Repurchase (Reverse Repo) rate by 25 basis points to 7.75 per cent and 9.25 per cent, respectively, from May 13, 2005, The Central Bank said. The following is an assessment of the factors that were taken into consideration in arriving at this decision.

The growth momentum in the Sri Lankan economy is continuing, the CB said. The recovery in the sectors that were affected by the tsunami disaster, particularly tourism and fisheries, is progressing satisfactorily. Paddy production has shown a significant improvement during the Maha season 2004/05, while tea production also increased during the first three months of the year. The performance of the agriculture sector is likely to improve further largely supported by favourable weather conditions. The industrial sector has benefited from the improved performance in apparel, processed food, cement, building materials, rubber based products and basic metal products. The increase in construction activity and increased hydropower generation also contributed to the industrial sector growth. The services sector continues to expand with healthy growth in telecommunications, port and transport services. Tourist arrivals have increased by 38 per cent in April 2005 compared to April 2004, indicating a faster recovery in tourism and related services.

The Central Bank reported that external trade expanded with export earnings increasing at a higher rate than the increase in expenditure on imports, but the exports figures were not provided in this press release. The improved performance of textile and garments and rubber based products contributed to the increase in export earnings during the first three months of the year. Expenditure on imports of consumer goods and intermediate goods increased, while expenditure on investment goods declined. The overall balance of payments (BOP) recorded a surplus of US dollars 179 million as at end March 2005. External reserves improved with the increased foreign currency inflows to the government and the private sector including non-government organisations. Gross official reserves stood at US dollars 2,210 million at end March 2005. In view of these developments, the rupee has appreciated against the US dollar by 4.7 per cent from December 31, 2004 to May 12, 2005, although the rate of appreciation of the rupee against the US dollar and other major currencies has decelerated since mid January 2005.

Inflation still remains high though it has declined marginally during March and April 2005. The point to point change in the Colombo Consumers’ Price Index (CCPI) declined to 14.0 per cent in April 2005 from 15.5 per cent in March 2005. Similarly, the point to point change of the Sri Lanka Consumers’ Price Index (SLCPI) too recorded a decline from 17.3 per cent in February 2005 to 16.5 per cent in March. The annual average growth in the CCPI continued to increase and recorded 11.9 per cent in April 2005 compared with 11.1 per cent in March 2005, while the SLCPI increased by 12.3 per cent in March 2005. In the remainder of the year, inflation is expected to decline further with appropriate monetary policy measures by the Central Bank for containing monetary expansion to the desired path, Central Bank said.

However, the CB has not provided the current figures of the consumer price indices for the month of May, but have said that inflation remains high.

In view of the high growth in monetary aggregates the Central Bank continued to conduct open market operations (OMO) more aggressively, mopping up excess liquidity both on a long-term basis and on an overnight basis. During April 01 - May 10, 2005 a sum of Rs. 19 billion was permanently sterilised by the Central Bank through its outright sales of Treasury bills in the secondary market. This was further strengthened by a planned programme of non-investing in a significant portion of maturing Treasury bills held by the Central Bank during the same period. As a result, Central Bank holdings of Treasury bills have declined from Rs. 75 billion as at end December 2004 to Rs. 52 billion by 10 May 2005. Correspondingly, excess liquidity and net domestic assets of the Central Bank, especially net credit to the government too declined. Consequently, the growth in reserve money, which is the intermediate target of monetary policy, declined from 20.9 per cent in December 2004 to 18.8 per cent by end April 2005. Reflecting these contractionary measures, market interest rates have also shown a gradual upward movement. The weighted average rate at the daily OMO Repo auctions has increased from 7.56 per cent as at end March to 7.95 per cent by 12 May 2005, while the weighted average call money rate has increased from 7.77 per cent to 8.35 per cent during this period.

Considering these developments, the Monetary Board has decided to continue open market operations more aggressively and to increase the Repo rate and the Reverse Repo rate by 25 basis points from 13 May 2005. Thus, the Repo rate and the Reverse Repo rate now stand at 7.75 per cent and 9.25 per cent, respectively. These measures would help to bring the monetary expansion to the desired path and reduce inflationary pressures and inflationary expectations in the economy.

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