The recent depreciation of the exchange rate, which would enhance exports, while curtailing nonessential imports, is expected to have a favorable impact on the trade balance, the Central Bank said in its September Monetary Policy Review released recently. With the Central Bank’s decision to allow greater flexibility in the determination of the exchange rate, so far in 2015, the rupee has depreciated by around 7 percent against the US dollar.
Such improvement, together with regular inflows of workers’ remittances and earnings from tourism along with other inflows to the services account would help narrow the deficit in the current account balance and strengthen the resilience of the external sector.
Meanwhile, the gross official reserves, which stood at US dollars 6.8 billion at end July 2015, are estimated to have decreased to US dollars 6.4 billion by end August 2015. However, official reserves are expected to increase during the remainder of the year with the expected long-term external financial flows to the government.
According to the Department of Census and Statistics (DCS), the Sri Lankan economy is estimated to have grown by 6.7 percent during the second quarter of 2015, recording a growth rate of 5.6 percent for the first half of 2015 compared to 1.3 percent recorded in the corresponding period of 2014.
Economic growth during the second quarter has been largely supported by the improved performance in the Services sector along with positive contributions from the Industry and Agriculture sectors.
Taking the developments in the economy into consideration, the Monetary Board, at its meeting held on 25 September 2015, was of the view that the current monetary policy stance is appropriate and hence decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00 percent and 7.50 percent, respectively.
Headline inflation, on a year-on-year basis, remained in the negative territory at -0.2 percent for the second consecutive month in August 2015. Headline inflation, on an annual average basis, moderated further to 1.0 percent in August 2015 from 1.3 percent in the previous month.
Meanwhile, core inflation increased to 3.9 percent in August 2015 on a year-on-year basis, from 3.5 percent in the previous month. However, annual average core inflation remained unchanged since June 2015 recording 2.8 percent in August 2015. Going forward, headline inflation is expected to remain comfortably within 2.0-3.0 percent by year end, supported by improved domestic supply conditions and subdued global commodity prices.
In the monetary sector, broad money (M2b) recorded a year-on-year growth of 16.2 percent in July 2015, driven entirely by the expansion in domestic credit aggregates. While credit granted to the private sector by commercial banks increased by 21.0 percent, on a year-on-year basis, in absolute terms, credit granted to the private sector in July 2015 was Rs.40.9 billion totaling to Rs.245.9 billion during the first seven months of 2015.
The increased credit flows to the private sector have been sustained mainly due to prevailing low market interest rates amidst low inflation environment.
Going forward, the Central Bank said it will continue to be vigilant on the overall trends in the growth of credit as well as monetary aggregates and take preemptive measures in the case of emerging risks threatening the maintenance of price stability on a sustainable basis.