NSB bond issue strengthens market confidence
Achieving 7.5 percent economic growth rate this year, is a realistic
target Central Bank (CB) officials reiterated last week.
In its September monetary policy review, the monetary board said that
the gradual increase in GDP growth confirms the potential of the economy
to achieve the target this year and the economy is recovering from the
deceleration observed in 2012.
A highway |
Sri Lanka's economy expanded by 6.8 percent in real terms in the
second quarter of 2013 compared to the 6.0 percent growth in the first
quarter. The growth in the second quarter was led by sustained high
momentum in the industrial sector and a recovery in the services sector.
Despite a setback in the agriculture sector. Along with the
normalisation of domestic economic activity, the expected recovery in
the global economy would provide further impetus to the growth momentum
of the economy, the report said.
Sri Lanka's external sector remained stable, supported by the
improving trade deficit, foreign inflows in the form of earnings from
tourism, worker remittances, foreign direct investments (FDI), foreign
debt capital to the banking sector and foreign investments in Government
securities.
However, some volatility was observed in the domestic foreign
exchange market recently, which could be attributed to the likely
tapering off of Quantitative Easing (QE) in the United States affecting
emerging markets.
Meanwhile, the expected proceeds of the international bond issued by
the National Savings Bank (NSB) have strengthened market confidence and
displayed that the recent episode of rupee depreciation was mostly
speculative.
While supporting financing of the savings-investment gap, the receipt
of the proceeds of the NSB bond would further enhance the gross official
reserves facilitating the achievement of the year end target of $ 7.0
billion.
The reduction in the Central Bank's policy rates in May 2013 followed
by the reduction in the SRR in July have eased conditions in the
domestic credit markets, thereby bringing down market interest rates.
The downward movement of short-term interest rates has begun to permeate
to interest rates of longer term loans and this trend is expected to
gather momentum over the coming months, further reducing the borrowing
costs of economic agents.
Benefited by these developments, credit extended to the private
sector by commercial banks, in absolute terms increased by Rs. 28.5
billion in July 2013, although on a year-on-year basis, credit growth
decelerated to 8.4 percent in July compared to 8.9 percent in June, due
to the base effect. Reflecting the expansion of credit to the private
and the public sectors, broad money (M2b) growth in July was 16.4
percent, higher than the average monetary expansion of 15 percent
targeted for 2013.
Continued fiscal consolidation by the government and greater
financial discipline of public corporations are expected to reduce the
public sector's reliance on banks, thereby passing the benefit of
monetary easing to the private sector. With regard to inflation, the
outlook continues to remain favourable. So far during the year,
inflation has benefited from the absence of upward pressures from
international commodity prices and increased domestic food supplies
along with favourable weather conditions and subdued demand pressures.
Accordingly, inflation, as measured by the year-on-year change in the
Colombo Consumers' Price Index (2006/07=100), increased marginally to
6.3 percent in August from 6.1 percent in the previous month, while core
inflation remained unchanged from the previous month at 3.1 percent.
Taking into account the developments discussed above, the Monetary
Board at its meeting on September 16, noted that the current monetary
policy stance is appropriate, and accordingly, decided to maintain the
Repurchase rate and the Reverse Repurchase rate of the Central Bank at
7.00 percent and 9.00 percent. |
