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| Sunday, 20 February 2005 |
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Policy interest rates to be maintained - Central Bank The Monetary Board has reviewed the recent economic developments and projections and has decided to maintain the policy interest rates of the Central Bank of Sri Lanka at their current levels, a media release from the Central Bank said. The following is an assessment of the factors that were taken into consideration in arriving at this decision. With the continuing improvements in all the key sectors in the economy, the initial projections have revealed that the overall growth in 2005 would be around 5.5 per cent. The relief, rehabilitation and reconstruction work initiated by the government in the tsunami-affected areas will help mitigate the negative impact of the tsunami disaster, particularly in the fisheries and tourism sectors, which have already begun to recover. The services sector, which provided the main impetus to economic growth, will continue to play a leading role with the main contribution coming from transport, storage and telecommunications sectors. The agricultural sector is expected to see a turnaround in 2005 due to favourable weather conditions. The industrial sector output is expected to expand with the major contribution arising from the textile and apparel sector. A healthy growth is also expected in the construction sector mainly due to post tsunami reconstruction activities. The growth in export earnings is expected to continue in 2005, mainly benefiting from the expected global economic growth. The imports for relief, rehabilitation and reconstruction will further increase the total import bill in 2005. However, with the expected foreign financial assistance for tsunami-related expenditure, the increase in remittances, and foreign debt relief provided by donors, the overall balance of payments is projected to record a surplus in 2005, increasing the external reserves, thereby reducing the pressure on the exchange rate. Though the overall budget deficit is expected to be higher than the original target of 7.6 per cent in 2005 due to tsunami related expenditure, such expenditure will be financed through the receipt of concessional foreign assistance. The government's domestic borrowing requirement will be lower with the expected debt relief. Although inflation continued to rise in January 2005, inflationary pressures are expected to moderate somewhat in the next few months due to favourable supply side factors. On account of the higher than expected increase in credit to the private sector, monetary aggregates have been growing at a somewhat higher rate than the desired level. Growth in monetary aggregates by end December 2004 was 19.6 per cent. Overall growth in monetary aggregates is expected to be contained at around 15 per cent in 2005. Considering the need for facilitating expenditure relating to rehabilitation and reconstruction activities, the Monetary Board has decided that it is appropriate to leave the current monetary policy stance unchanged. Accordingly, the policy interest rates of the Central Bank of Sri Lanka,
i.e., the Repurchase rate and the Reverse Repurchase rate, will remain
unchanged at 7.50 per cent and 9.00 per cent. |
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