Central Bank of Sri Lanka : Monetary Policy Review, January 2014

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Economic Research Department 02-01-2014 12-12-2012

Press Release

Monetary Policy Review - January 2014

The continued easing of monetary policy through 2013 amidst low and stable inflation has brought about the desired macroeconomic outcomes. Available leading indicatorsshow that real GDP growth is set to record around 7.2 per cent growth for 2013. Monetary aggregates moved towards the projected path. Both current and capital accounts of the Balance of Payments (BOP) improved, resulting in a stronger exchange rate and an international reserve position. Meanwhile, both headline and core inflation moderated further, reaching 4.7 per cent and 2.1 per cent (Y-o-Y), respectively, in December 2013. Average headline and core inflation for 2013 were at 6.9 per cent and 4.4 per cent, respectively, compared to 7.6 per cent and 5.8 per cent, respectively, in 2012.

Broad money (M2b) growth decelerated to 16.7 per cent (Y-o-Y) in November 2013 bringing the average growth of broad money to 16.5 per cent, down from 20.2 per cent during 2012. Responding to the reduction in market interest rates and improved business confidence, credit obtained by the private sector from commercial banks increased by Rs. 22.2 billion during the month of November 2013 following the increase of Rs. 27.2 billion observed in October.Accordingly,in addition to the funds raised by the private sector through domestic and international debt and equity markets and borrowing from other domestic financial institutions, credit extended by commercial banks to the private sector during January-November 2013 amounted to Rs. 160.6 billion. Public corporations continued to repay the banking sector for the third consecutive month, resulting in credit to public corporations declining by Rs. 18.8 billion in November 2013. Net credit to the Government also declined by Rs. 3.5 billion during the month, as expected.

In the external sector, earnings from exports, which increased by 24.7 per cent (Y-o-Y) in November 2013, exceeded US dollars 1 billion for the second consecutive month, resulting in cumulative earnings of US dollars 9.4 billion during January-November 2013. With cumulative expenditure on imports declining by 2.5 per cent to US dollars 17.2 billion, the cumulative trade deficit contracted by 10.7 per cent to US dollars 7.8 billion during the period. Increased inflows from services exports and workers' remittances strengthened the current account further while substantial foreign capital inflows resulted in the BOPrecording a surplus of over US dollars 700 million in 2013 compared to the surplus of US dollars 151 million in 2012.Reflecting the improved external sector performance, Gross Official Reserves increased to US dollars 7.1 billion (provisional) by end 2013. The Sri Lankan rupee strengthened gradually since earlySeptember 2013, having effectively faced the global market turmoil caused by the announcement of possible tapering of quantitative easing by the US Federal Reserve.