Economic growth on track as projected – Central Bank

[July 14, 2005 - 5.15 GMT]

Sri Lanka’s economy is shaping up along the projected growth levels, the Central Bank said Wednesday.

The Central Bank of Sri Lanka announced in its monthly monetary policy review for July 2005 that the economy's progress had led the bank to retain its key policy interest rates at current levels for a further one month.

Full text of the Review:

Monetary Policy Review – July 2005

Having reviewed the recent economic developments and projections, the Monetary Board has decided to maintain the policy interest rates of the Central Bank at their current levels and to conduct open market operations aggressively to mop up excess liquidity from the market. The following is an assessment of the factors that were taken into consideration in arriving at this decision. 

Developments in economic activities in all major sectors in the economy indicate a continuation of the growth momentum in line with the projections for the year. The agriculture sector is recovering firmly with the continuation of favourable weather conditions. Paddy production, which recorded an all-time high level during Maha 2004/2005, is expected to increase in Yala 2005 too.  Tea and rubber production is likely to improve further and an improvement in coconut production is expected during the second half of 2005. Fish production too is recovering gradually. The industrial sector has shown a steady improvement benefiting from the strong external as well as domestic demand and the apparel industry will further benefit from the concessions granted under the GSP+ scheme by the European Union.  The growth in the services sector is continuing with major sub sectors such as port services, telecommunications, tourism and transport showing improved performance.  The removal of Sri Lanka from the war-risk list will further boost the growth in port activities. 

Within the external sector, export earnings in the first five months of 2005 increased by 11.4 per cent, reflecting the improved performance of all three major export categories.  Expenditure on imports increased by 8.6 per cent during this period. The growth in imports being less than the growth in exports, has improved the trade balance. Private remittances have increased by 27 per cent during the first five months of the year.

Due to the improvement in the trade balance, higher private remittances, the recovery of earnings from tourism, official inflows to the government and the debt relief, official international reserves have increased, giving greater stability to the domestic foreign exchange market. Gross official reserves increased to around US dollars 2,370 million by end June 2005 from US dollars 2,196 million by end December 2004. Benefiting from these factors, the Rupee has appreciated against the US dollar by 4.5 per cent so far during the year. 

Inflation has continued to moderate due to the improvements in supply conditions as well as the monetary policy actions taken so far. The point-to-point change in the Colombo Consumers’ Price Index (CCPI) declined continuously from 15.9 per cent in February 2005 to 9.4 per cent by June 2005, while the point-to-point change in the Sri Lanka Consumers’ Price Index (SLCPI) declined from 18.0 per cent in January to 13.2 per cent in May 2005.

The absorption of a large part of the excess liquidity on a permanent basis through outright sales of Treasury bill holdings of the Central Bank and restraining purchases of Treasury bills from the primary market, helped reduce excess liquidity in the money market.  The Central Bank increased its policy interest rates by 25 basis points in May 2005 and by a further 50 basis points in June 2005.  Short-term money market interest rates have adjusted upwards following the policy rate increases in May and June 2005.  

Monetary policy measures taken thus far have helped contain the level of reserve money, which is the principal operating target of monetary policy, to the targeted level in June 2005.  Broad money growth remains at around 19 per cent mainly due to the increase in credit to both the public sector and the private sector, but may moderate due to the lagged effects of monetary policy measures.   

Considering these developments, the Monetary Board has decided to maintain the policy interest rates of the Central Bank at their current levels and to conduct open market operations aggressively to mop up excess liquidity from the market.

The release of the next regular statement on monetary policy is scheduled for 17 August 2005.       

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Last Updated Date: July 14, 2005 - 5.15 GMT