Monetary policy target for June achieved

The Monetary policy of the Central Bank of Sri Lanka is to achieve one of its core objectives, i.e., economic and price stability. Price stability is achieved by influencing changes in the broad money supply which is linked to the reserve money of the Central Bank.

An increase in reserve money is the fresh money released to the economy by the Central Bank. Accordingly, the Central Bank sets operating targets for the quantum of reserve money in its monetary policy.

Each year, the anticipated increase in reserve money is injected into the economy by way of increases in net foreign assets (NFA) and net domestic assets (NDA) of the Central Bank. When the Central Bank purchases the inflows of foreign currency into the country's banking system, it increases the NFA of the Central Bank, and thereby raises the reserve money.

Further, through the purchase of Treasury bills by the Central Bank at the primary Treasury bill auctions and secondary market from commercial banks through open market operations and by granting provisional advances to the government, the Central Bank causes an increase in the NDA and thereby raises the reserve money.

The level of reserve money is established, based on the anticipated economic growth and expected inflation for that year. During the recent past, an annual increase of reserve money of around 15 per cent had been estimated, based on the aforementioned fundamentals.

However, by December 31, 2006, with the higher than anticipated economic growth of 7.4 per cent, reserve money expanded by around 21 per cent, to Rs. 239 billion, as against the original target of Rs. 227 billion, an increase of Rs. 12 billion.

The increase in reserve money in 2006 was also reflected in the increase in both NFA and NDA of the Central Bank.

NFA increased by around Rs. 33 billion mainly due to the purchases of foreign currency proceeds from the government received by way of loans and grants.