Trade deficit contracts in May

The low inflation environment continued, with year-on-year inflation remaining benign in June 2014 recording its lowest level since February 2012, while the annual average inflation has trended downwards.

Headline inflation (y-o-y) for June 2014 recorded 2.8 percent from 3.2 percent in the previous month, while core inflation remained low at 3.5 percent in June, although marginally higher than 3.3 percent in May 2014.

Prices of some items in the food category increased, but the base effect and the decline in non-food prices have contributed to low inflation.

Year-on-year inflation is expected to remain within mid-single digit levels during the remainder of the year in spite of weather-related variations in agricultural produce.

In the external sector, the trade deficit contracted for the eighth consecutive month in May 2014 led by contraction in expenditure on imports while an increase in earnings from exports was observed mainly as a result of higher industrial and agricultural exports.

Inflows from workers' remittances and earnings from tourism continued to grow.

In the meantime, increased foreign inflows, on a net basis, were recorded due to investments in Government securities and inflows to the Colombo Stock Exchange and the private sector. Given the substantial foreign inflow, the Central Bank has absorbed around US $ 735 million from the domestic foreign exchange market by July 10, 2014.

Gross Official Reserves as at end of May 2014 remained strong at US $ 8.8 billion, equivalent to 5.9 months of imports. Broad money (M2b) recorded a y-o-y growth of 13 percent in May 2014. The improvement in net foreign assets (NFA) of the banking system largely contributed to the growth of broad money supply.

Indicating a positive trend, net credit to the government (NCG) contracted by around Rs.11.5 billion during the month, while credit to public corporations also recorded a marginal decrease.

Nevertheless, lower credit disbursements to the private sector by commercial banks along with the decline in pawning advances resulted in a deceleration of the growth of private sector credit by the banking sector to 2.2 percent (y-o-y) in May 2014.

As markets remained sufficiently liquid, the continued moderation of growth of credit to the private sector is deemed temporary in view of gradually adjusting bank lending rates.

The Central Bank will continue to encourage banks to use the available space to reduce market lending rates further while tightening the spreads to provide further stimulus to the private sector to demand credit from banks.

In support of credit granted on gold-backed loans, the Central Bank introduced a new credit guarantee scheme for pawning advances in June 2014 for Licensed Commercial Banks and Licensed Specialised Banks engaged in pawning activities, to provide enhanced levels of credit to customers.

This scheme would assist farmers, small business owners and the SME sector entrepreneurs who use pawning advances for their economic and business activities.

Several bank and non-bank financial institutions supervised by the Central Bank, have introduce investment instruments providing long-term benefits aimed at senior citizens who rely on interest income.

Such innovative financial products and schemes would provide the essential comfort to this segment of the population in a sustained low inflation environment.

The Monetary Board will maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at their present levels of 6.50 percent and 8.00 percent.