Trade deficit declines in first seven months
The Sri Lankan economy performed strongly during the second quarter
of 2014 with a real GDP growth of 7.8 percent compared to the 7.6
percent in the first quarter of 2014. The growth in the second quarter
was led by robust performance in the Industry sector, while the
Agriculture and Services sectors complemented the overall economic
The growth of 7.7 percent in the first half of 2014 augurs well in
meeting the expectations for the year. The low inflation environment
continued as inflation remained benign in August 2014 with year-on-year
(y-o-y) headline inflation at 3.5 percent and core inflation at 3.9
On an annual average basis, headline inflation was at 4.5 percent
while core inflation was at 3.2 percent. Looking ahead, the positive
impact of the recent reduction in administered prices for energy and
fuel is expected to be reflected in price levels from October.
Accordingly, inflation is projected to remain at around 3-4 percent by
end year, compared to the previously envisaged range of 4-5 percent. The
external sector remained buoyant with the momentum derived from
increased earnings from exports of goods and services and workers’
remittances during July 2014.
Although the trade deficit during the month widened particularly as a
result of higher expenditure on petroleum imports in July 2014, on a
cumulative basis, the trade deficit in the first seven months of this
year recorded a decline compared to the corresponding period in 2013.
Along with these developments, continued inflows to the financial
account resulted in an estimated surplus of over US$ 2 billion in the
balance of payments (BOP) during the first seven months of the year. So
far during the year, the Central Bank has absorbed over US $ 1 billion
from the domestic foreign exchange market and gross official reserves
remained above US $ 9 billion, equivalent to around 5.9 months of
imports. In addition to the foreign reserves, the Central Bank also
enjoys access to a further CNY 10 billion, equivalent to US $ 1.6
billion, as a result of the bilateral Currency Swap agreement entered
into with the People’s Bank of China on September 16, 2014.This Swap
facility, which is of a tenor of three years and renewable, is expected
to further strengthen the external stability of the Sri Lankan economy.
The growth of broad money (M2b) moderated in July 2014 to 11.9
percent (y-o-y) from 13.3 percent in the previous month, although net
foreign assets (NFA) of the banking system continued to improve.
On an aggregate basis, public corporations repaid debt to the banking
system during the month, while net credit to the government (NCG) from
the banking sector increased.
The growth of credit to the private sector from commercial banks
remained moderate during July 2014.
In recent months the credit extended to the private sector by
commercial banks has remained modest in spite of the continued easing of
monetary policy, resulting in the accumulation of a large amount of
excess liquidity in the domestic money market.
Such liquidity must ideally be used for productive economic
activities instead of remaining unused for a considerable length of time
in the system.The Monetary Board has also noted that the excess funds
have been placed by several commercial banks on a continuous basis with
the Central Bank under its standing deposit facility window, although
such window has been essentially designed to provide an opportunity for
OMO participants to deposit their excess liquidity at infrequent
intervals to tide over temporary liquidity excesses.In that background,
an appropriate monetary policy action needs to be implemented to address
these concerns, particularly in view of continued low levels of
inflation and benign inflation expectations.
Accordingly, the Monetary Board on September 22, decided to limit the
access of OMO participants to the Standing Deposit Facility (SDF) of the
Central Bank at the present applicable SDF Rate of 6.50 percent to a
maximum of three times per calendar month, and any deposits at the SDF
window exceeding three times by an OMO participant to be accepted at a
reduced interest rate of 5.00 percent per annum. This measure which came
into effect on September 23 will continue until further notice. For the
remainder of September, access to OMO at the SDFR will be limited to
twice per participant. The daily auction facility was suspended from
September 23 until further notice. The Standing Lending Facility Rate (SLFR)
will remain unchanged at 8.00 percent.
The measures would encourage commercial banks to use the substantial
amounts of excess liquidity to enhance the flow of bank credit to the
private sector at more reasonable interest rates, and thereby support
the growth momentum of the economy, given the low inflation environment.