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| Sunday, 18 May 2003 |
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| News Business Features Editorial
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Economic recovery expected to continue The economic recovery, which commenced in 2002 is expected to continue this year as well, the Central Bank said. It made this prediction based on currently available information on production, exports and imports on its Monetary Policy Review for May, made as part of its Open Market Operations (OMO). The fiscal performance so far shows that it would be in line with annual targets. On the external front, in addition to an increase in both imports and exports in the first two months of the year, foreign exchange inflows through services remittances, capital inflows and portfolio inflows have continued. This had provided both liquidity and stability to the foreign exchange market. It has also enabled the Central Bank to purchase around US$ 100 million from the market in the first four months of 2003, to augment official foreign reserves. Consequently, Sri Lanka's official foreign reserves have risen to around US$ 1,930 million by end April, equivalent to around 3.8 months of imports, a further improvement from the level of 3.3 months of imports that prevailed at end-2002. The foreign exchange market has deepened, as indicated by the level of activity. Premia on forward foreign exchange contracts indicate a market perception of continued stability in the foreign exchange market. The domestic rupee market has been liquid throughout this year, assisted by purchases of foreign exchange by the Central Bank, improved cash management by the Treasury and the active OMO of the bank. The availability of liquidity has brought greater stability to market interest rates. Consequently the rise in interest rates usually experienced during the April season when liquidity is in short supply,was avoided this year. Monetary expansion was moderate, at around 13 per cent by end-March, in line with the monetary programme for the year. Private sector credit has been growing, but marginally below the projected growth path. Reserve money is on target. The availability of liquidity, the reduction in the Central Bank's policy rates in January and cautious borrowing by the government have enabled a gradual reduction in market interest rates thus far this year, the bank said. As projected, inflation has been declining. Decreases have been recorded in the price indices in the past three months. The point to point increase of the Colombo District Consumer Price index, computed by the Central Bank, has declined from 5.2 per cent in January 2003 to three per cent in April, while the annual average index level has decreased from 6.5 per cent to 5.1 per cent during the same period. In the Colombo Consumers' Price Index, computed by the Department of Census and Statistics, the point to point change has come down from 13.6 per cent in January to 8.3 per cent in April, while the annual average has moved down from 10 per cent to 9.9 per cent. Market expectations of inflation are also on a downward trend, as reflected in the auction bid yields for government securities and the forward premia for foreign exchange transactions. Having reviewed the above, the experience under the new active system of OMO and the expected economic developments, the Central Bank is of the view that a reduction in its key policy interest rates is warranted. Accordingly, the Central Bank's Reverse Repurchase Rate was reduced to 10.25 per cent per annum from 11 per cent, while its Repurchase Rate was reduced to 8.25 per cent per annum from nine per cent. The bank expects these reductions to be reflected in other interest rates in the market, in particular the lending rates of financial institutions. Such a downward adjustment of interest rates by financial institutions is expected to encourage investments and promote economic recovery further. |
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