Economy moves towards a higher growth trajectory - Central Bank

The economy has moved towards a higher and sustainable growth trajectory, said the Central Bank (CB) in its monetory policy review of March released last week.

The strong growth potential of the economy is emphasised by broad-based GDP growth in all three sectors of the economy in 2013.

It is well sustained with low and stable inflation and the economy grew by 7.3 percent in 2013 compared to 6.3 percent in 2012, the report said.

Excerpts from the monetary policy review:

According to recently released data from the Department of Census and Statistics, the final quarter of 2013 recorded a GDP growth of 8.2 percent and a surge in performance in the Agriculture and Industry sectors, while the Services sector growth indicated some moderation.

During the year, the Industry sector showed a robust growth of 9.9 percent, while the Agriculture and Services sectors recorded growth rates of 4.7 percent and 6.4 percent.

Substantiating the deceleration in consumer price inflation during the year, the GDP deflator for 2013 recorded 6.7 percent, declining from 8.9 percent in 2012.

Buttressed by subdued demand conditions and improved domestic supply of most food items, consumer price inflation remained at mid-single digit levels in February 2014 recording the 61st consecutive month in single digits.

Year-on-year headline and core inflation moderated in February recording 4.2 percent and 3.1 percent compared to 4.4 percent and 3.5 percent in January. Looking ahead, inflation is expected to remain at mid single digits throughout 2014.

Although the outlook for inflation remains encouraging from a demand perspective, the Central Bank will continue to closely monitor possible supply disruptions resulting from the drought experienced in certain parts of the country.

In the external sector, earnings from exports grew by 23.2 percent, year-on-year, during January 2014, thus sustaining its growth momentum, which commenced in June 2013. Expenditure on imports increased by 7.9 percent during the month.

Reflecting the recovery in exports and the muted growth in imports, the trade deficit contracted by 5.9 percent in January 2014 to US $ 756 million. Inflows, on account of workers’ remittances recorded a healthy increase in January 2014 while earnings from tourism gathered momentum during the first two months of 2014.

Further, supported by net inflows to the Government securities market, valuation gains, and proceeds from the international Sovereign bond issuance in January, gross official reserves increased to US $ 8.0 billion as at end January 2014, which is equivalent to 5.3 months of imports.In the monetary sector, broad money (M2b ) expanded by 16 percent in January 2014, primarily due to higher net credit to the government (NCG) as credit flows to the private sector and public corporations contracted.

NCG from the banking system increased by around Rs. 68.3 billion in January 2014, but is expected to decline in February with the use of proceeds from the Sovereign bond.

Credit to the private sector by commercial banks moderated, growing only by 5.2 percent in January 2014 in comparison to 7.5 percent in December 2013, largely due to the settlement of short term advances by corporates during the second quarter of the year, supported by declining market lending rates, sufficient liquidity levels and increased demand for exports from advanced economies.

The Monetary Board, at its meeting on March 20, was of the view that the current monetary policy stance is appropriate and, therefore, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.50 percent and 8.00 percent.