Imports, credit growth curtailed, external sector strengthened - Central Bank

Policy measures implemented in February and March this year, aimed at reducing the high import growth and the high credit expansion are yielding expected results, the Central Bank (CB) stated in its monetary policy review last week.

In the external sector, preliminary estimates indicate the desired deceleration of expenditure on imports in June 2012 and a corresponding decline in the deficit in the trade account in the second quarter of 2012. In the monetary sector, year-on-year growth of broad money has decelerated from 22.9 percent in April to 20.5 percent in June 2012.

At the same time, the growth of credit extended to the private sector by commercial banks has declined from 18.1 percent in the second half of 2011 to 11.4 percent the first half of 2012.

The global economic conditions continue to worsen with the recovery of US and European economies remaining sluggish. However, these adverse global conditions are not likely to affect the Sri Lankan economy more than what was anticipated at the time of revising the economic growth forecast for 2012 downward to 7.2 percent.

“The amount of credit that could still be disbursed in the second half of the year by licensed banks even with the credit ceiling in place, could comfortably support the revised economic growth path.

In that context, the growth estimates still seem to be within reach, notwithstanding the gloomy global conditions,” a spokesman for the Central Bank said.

Meanwhile, cumulative net inflows to the Colombo Stock Exchange and net foreign investments in the Government securities market up to end July 2012, have exceeded $ 205m and $ 842m.

With the receipt of the final tranche of the IMF-SBA facility of $ 414m , the proceeds of the successful fifth International Sovereign Bond issue of $1 b in July 2012, and other foreign inflows, gross official reserves are estimated to have risen to around $ 7.1b by end July 2012. The reserve level is equivalent to an import cover of 4.2 months, and the strengthened external sector position is likely to attract further foreign investment flows as estimated.

“The economy is on track to realise the macroeconomic targets as envisaged.

However, inflation has picked up with year-on-year inflation, which has remained at single digit levels for the past 3 1?2 years, increasing to 9.8 per cent in July 2012, from 9.3 per cent in the previous month, although annual average inflation has continued to remain at around six per cent since February 2012.