Devalued rupee widens trade deficit to US$ 6m

by Lalin Fernandopulle

Foreign remittances from expatriate workers will further plummet this year due to the aggravating Middle East crisis fuelled by violence by the Islamic State, said economic analysts who predicted a bleak year for emerging economies with the anticipated slow down in economic growth in developed countries.

According to Central Bank sources, foreign remittances from Sri Lankan expatriates came down significantly last year. Remittances dropped from over US$ 7 billion in 2014 to around US$ 6.4 billion in 2015.

An estimated 1.7 million Sri Lankans are employed abroad - 59.7 percent males and 40.3 percent females. Foreign remittances account for a major source of revenue to the country.

However, Central Bank Governor Arujuna Mahendran was optimistic last week, when speaking to the media, on the economic performance of the third quarter 2015 that Sri Lanka has the potential to record 6.5 percent economic growth this year despite a tough year forecast by the World Bank and the International Monetary Fund.

The IMF in its latest World Economic Outlook foresees lower global growth compared to last year with modest growth in advanced economies and a slow down in emerging markets reflecting weakness in certain emerging economies and oil exporting countries. The Fund predicts growth to be around 3.1 percent in 2015 and 3.6 percent in 2016.

According to Central Bank sources, economic growth recorded for the first three quarters of last year was 5.2 percent. Analysts cast doubts as to whether the growth rate of over seven percent predicted by the Central Bank had been achieved in 2015.

The Governor said setting up special economic zones was vital to boost foreign direct investments which is key to drive economic growth.

‘We lack this vital factor of special economic zones which will facilitate foreign investments as in most advanced economies,” Mahendran said.The Governor did not rule out IMF assistance to boost foreign reserves though he said it was adequate for four months of imports.

“Negotiations will commence when the IMF team arrives next month,” he said.

Deputy Governor Dr. Nandalal Weerasinghe said export revenue which dwindled last year will pick up with the incentives provided in the 2016 Budget.

According to a Central Bank release, the decline in expenditure on imports in October 2015 was greater than the decline in earnings from exports, narrowing the deficit in the trade account by 6.8 percent, on a year-on-year basis, to US dollars 791 million.

However, on a cumulative basis, the trade deficit during the first ten months of the year widened by 2.5 percent to US dollars 6,936 million reflecting the continued increase in non-oil imports.

Meanwhile, earnings from tourism during the first eleven months of 2015 are estimated to have grown by 18.1 percent, while workers’ remittances grew marginally by 0.8 percent in the first eleven months of the year. Gross official reserves, which stood at US dollars 6.5 billion at end of October 2015, are estimated to have increased to around US dollars 7.3 billion by end November 2015.

Reflecting domestic and global developments, the Sri Lanka rupee has depreciated by 8.8 percent against the US dollar in 2015. External sector policies already implemented need to be further supported by some monetary policy tightening.

If the current excess liquidity in the domestic money market continues to remain high for anextended period, it could lead to an undue expansion in monetary aggregates, fuelling future inflation in the economy. In that respect, it is appropriate to restrain the build-up of demand-side pressure on inflation to ensure continued monetary and price stability. Accordingly, the Monetary Board will raise the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50 percent from the reserve week from January 16.

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

The year-on-year growth of broad money (M2b) continued to expand at a high rate of 17.0 percent in October 2015 compared to 16.0 percent in the previous month, driven by the expansion of credit extended to the private and public sectors by the banking system.

Among the contributory factors, credit granted to the private sector by commercial banks increased by 26.3 percent, year-on-year, compared to 22.2 percent in the previous month. Tentative data for November 2015 also showed that credit flows to the private sector continue to expand at a high rate.Excess liquidity in the domestic money market continues to remain high, fuelling monetary expansion.

Headline inflation increased to 3.1 percent, on a year-on-year basis, in November 2015 from 1.7 percent in October 2015. On an annual average basis, headline inflation increased to 0.9 percent in November 2015 compared to 0.7 percent in the previous month. Following a similar trend, headline inflation based on the National Consumer Price Index (NCPI, 2013 = 100) also increased to 4.8 percent, on a year-on-year basis, in November 2015 from 3.0 percent in October 2015. Reflecting the firming up of aggregate demand conditions in the economy, the CCPI-based core inflation rate registered 4.3 percent, on a year-on-year basis. Core inflation measures, based on the NCPI, also suggest rising underlying inflationary pressures in the economy.