Export earnings drop 3.4 percent

Headline inflation, on a year-on-year basis, declined further to -0.3 percent in September from -0.2 percent during July and August.

On an annual average basis, headline inflation continued its moderation, recording 0.7 percent in September compared to 1.0 percent in the previous month. The impact of the sharp downward adjustments to administratively determined prices at end 2014 and the beginning of 2015, improved domestic supply conditions, favourable global commodity prices and subdued inflation expectations supported the persistence of near-zero levels of headline inflation.

Nevertheless, reflecting the firming up of aggregate demand conditions, core inflation increased to 4.2 percent in September, on a year-on-year basis, from 3.9 percent in the previous month. Headline inflation is expected to remain comfortably in low single digit levels by end 2015 despite the impact of the depreciation of the Sri Lankan rupee against major currencies on inflation.

On the external front, the cumulative expenditure on imports amounted to US $ 12,559 million during the first eight months of 2015, broadly unchanged compared to the corresponding period in 2014, while earnings from exports declined by 3.4 percent to US $7,147 million.

Non-oil imports continued its increasing trend throughout the year. Although the trade deficit narrowed in August, it has widened in the first eight months of the year on a cumulative basis. Earnings from tourism in the first nine months is estimated to have grown by 18.8 percent on a cumulative basis, while workers' remittances also recorded a marginal growth of 1.8 percent in the first eight months of the year.

The rupee has depreciated by around 7 percent against the US dollar so far in 2015. The real effective exchange rate indices have also adjusted, supporting the external competitiveness of the economy. The Central Bank's decision to allow greater flexibility in the determination of the exchange rate and the expected realisation of other inflows to current and financial accounts are likely to strengthen the resilience of the external sector.

Meanwhile, gross official reserves, which stood at US $6.5 billion at the end of August, are estimated to have increased to US $ 6.8 billion by end September 2015. Gross official reserves are expected to increase further during the remainder of the year with the anticipated long term external financial inflows to the government.

In the monetary sector, the year-on-year growth of broad money (M2b) accelerated further to16.8 percent in August from 16.2 percent in the previous month, driven by the expansion of credit extended to the private and public sectors by the banking system.

Credit granted to the private sector by commercial banks increased by 21.3 percent on a year-on-year basis in August compared to the increase of 21.0 percent in the previous month. In absolute terms, the expansion of private sector credit during August was Rs. 64.7 billion, and the cumulative increase during the first eight months of 2015 was Rs. 310.5 billion.

Some stability in short term interest rates was observed, and most market interest rates continued to remain at low levels. The effects of the policy measures taken by the Central Bank and the government recently to address emerging imbalances in certain sectors of the economy are yet to be reflected in macroeconomic data, although there are some indications that these measures are beginning to take effect.

In the meantime, the Central Bank will continue to monitor developments in aggregate demand conditions of the economy to ensure sustained economic and price stability.

The Monetary Board will maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00 percent and 7.50 percent.