Performance criteria for June successful - Monetary Policy Review

The deficit in the trade balance has expanded partly reflecting the higher international commodity prices that have pushed up expenditure on imports to a higher level. However, Sri Lanka's exports have continued to perform well in 2011, and earnings from tourism as well as foreign exchange inflows on account of workers remittances are expected to increase further this year.

These increased foreign exchange earnings would help cushion the deficit in the current account, the Monetary Policy Review of July 2011 issued by the Central Bank said. The report said that performance criteria for June 2011 as per the IMF-SBA have been successfully met.

According to the report the Sri Lankan economy expanded by 7.9 percent in the first quarter of 2011, sustaining its high growth momentum in the previous year into 2011 as well.

The expanded productive capacity of the economy will help enhance supplies of food as well as other commodities, helping to bring down consumer prices, which results in headline inflation reducing from the April 2011 peak level.

Inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (base=2006/07) was 7.1 percent in June 2011, compared to 8.1 percent in May 2011. Annual average inflation was 6.7 percent in June 2011.

The pass-through of higher international commodity prices into domestic prices partly accounted for the recent increases in core inflation, as measured by the core inflation index that excludes fresh food, energy, transport, rice and coconut from the CCPI (base=2006/07).

Nevertheless, headline inflation is expected to decline further in the coming months as price developments as a result of continued domestic supply side improvements are expected to offset price adjustments due to movements in international commodity prices.

Average broad money growth during the first five months of 2011, at 17.9 percent, has been higher than expected mainly due to the rapid growth of credit obtained by the private sector. However, it is expected that there would be a deceleration in the expansion of credit obtained by the private sector during the remainder of the year, due to some saturation, helping subdue monetary expansion in the ensuing period.