Sunday Observer Online


Sunday, 31 January 2016





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Government Gazette

Inflation down in December

Broad money supply (M2b) continued to expand at a high rate with year-on-year growth of 17.2 percent in November 2015, following the growth of 17.0 percent in the previous month. In November 2015, the net foreign assets (NFA) of the banking sector improved with the receipt of the proceeds of the International Sovereign Bond (ISB) of US dollars 1.5 billion issued on October 27, 2015.

The issuance of the ISB also facilitated a reduction of net credit obtained by the government (NCG) from the banking sector during November, while credit obtained by public corporations also declined. Credit extended to the private sector by commercial banks remained the key driver of broad money growth, recording an increase of 27.0 percent (year-on-year) in November 2015, compared to the growth of 26.3 percent in October.

In absolute terms, the monthly increase in private sector credit was Rs. 91.2 billion, leading to a cumulative expansion in private sector credit of Rs. 647.7 billion during the first eleven months of 2015.

To arrest the possible build-up of demand pressures on inflation through excessive credit creation, the Central Bank increased the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of commercial banks by 1.50 percentage points to 7.50 percent from January 16, 2016. Accordingly, excess rupee liquidity in the domestic money market, which averaged around Rs. 90 billion in December 2015 and in the first two weeks of January 2016, declined to around Rs. 42 billion, on average, thereafter.

The increase in SRR also induced an upward adjustment in market interest rates, and the growth of credit extended to the private sector by commercial banks is expected to decelerate in the period ahead, albeit with a time lag.

In spite of the high growth of broad money, inflation remained subdued supported by low international commodity prices and broadly favourable domestic supply conditions.

The Colombo Consumers' Price Index (CCPI, 2006/2007=100) based headline inflation decelerated to 2.8 percent, on a year-on-year basis, in December 2015 from 3.1 percent in November 2015, and annual average headline inflation was 0.9 percent.

Headline inflation based on the National Consumer Price Index (NCPI, 2013=100) decelerated to 4.2 percent, on a year-on-year basis, in December 2015 from 4.8 percent in the previous month, and registered a value of 3.8 percent on an annual average basis.

The CCPI based core inflation edged up in December 2015, recording 4.5 percent, on a year-on-year basis, in comparison to 4.3 percent in the previous month.

On the external front, export earnings contracted by 9.3 percent in November 2015 causing a cumulative decline of 4.4 percent during the first eleven months of the year. Import expenditure also recorded a decline of 11 percent in November 2015, and the cumulative decline in expenditure on imports was 2.1 percent during the first eleven months of 2015.

Reflecting these developments, the deficit in the trade account narrowed for the fifth consecutive month in November 2015.

Nevertheless, on a cumulative basis, the trade deficit expanded marginally by 1.0 percent to US dollars 7,566 million during the first eleven months of the year. Earnings from tourism are estimated to have increased by 17.8 percent during 2015, although workers' remittances declined by 0.5 percent during the year, mainly reflecting a decline of receipts from the Middle East.

Gross official reserves were estimated at US dollars 7.3 billion by end 2015, while the Sri Lanka rupee, which depreciated by 9.0 percent against the US dollar in 2015, recorded a marginal appreciation thus far during 2016.

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.


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