Download Monetary Policy Review – August 2007

CENTRAL BANK OF SRI LANKA
Communications Department
30, Janadhipathi Mawatha, Colombo 1.
Tel : 2477424, 2477639,2477420
Fax : 2346257, 2477739
E-mail:[email protected]; [email protected]
PRESS RELEASE
Date: 2007-08-14
Issued By: Economic Research Department
Monetary Policy Review – August 2007
The improved performance in the external sector in 2007 reflected in both higher
trade and financial flows. Export earnings grew by 12.9 per cent during the first half of
2007 underpinned by the highest monthly value in 2007, US dollars 675 million in June.
Meanwhile, imports declined by 11.5 per cent in June due to the decline in imports of
petroleum, fertilizer, textile material, and other consumer goods resulting a relatively
lower import growth of 3.9 per cent for the first half of the year. The negative growth in
imports against a background of rising exports caused to improve the trade balance
further by end June 2007. Worker remittances, the second highest foreign exchange earner
to the country, increased by around 18 per cent to US dollars 1.3 billion during the first
half of 2007 helping to finance over 80 per cent of the trade deficit in the first half of 2007.
The reduction in the trade deficit and worker remittances would have favourable impact
on current account balance for the first half of 2007. The balance of payments has recorded
an estimated surplus of US dollars 161 million by end July 2007, while the gross official
reserves has been estimated at US dollars 2.7 billion or 3.1 months of imports.
The external sector is expected to further improve with increased inflows to the
government as well as to the private sector, supported by the recent upward revision of
Sri Lanka’s credit rating outlook to ‘Stable’ from ‘Negative’ by Standard & Poor’s, on the
basis of the improved macroeconomic performance.
Reserve money targets, both in terms of end-month and monthly averages, for the
first seven months of 2007, were comfortably achieved as a result of the continuation of
tight monetary policy stance. The continuation of the tight monetary conditions would
help achieving the reserve money targets by the end of the year, thereby further
containing the demand driven inflationary pressures in the economy. The growth in
broad money supply is also expected to decelerate to the desired level by end of the year,
mainly due to the slowing down of credit to the private sector. The Central Bank policy
measures have helped to maintain market liquidity broadly in balance and, hence, to
stabilise the market interest rates further.
Inflation, which was decelerating during the recent months, increased in July 2007
due to the revisions in administered prices to reflect international prices. Accordingly,
inflation as measured by the Colombo Consumers’ Price Index (CCPI), increased by 17.6
per cent on a point-to-point basis, as against the 13.0 per cent increase in the previous
month. Consequently, the annual average rate of the CCPI also moved up to 17.2 per cent
from 17.0 per cent during the same period. The upward revision of the price of kerosene
in response to escalating international petroleum prices and increase in transport prices
coupled with the increase in price of bread following the hike in international wheat grain
prices were the main contributory factors to the increase in the price level. Such increases
in price levels cannot be addressed through monetary policy measures. However,
revisions in administered prices, particularly the domestic fuel prices would eventually
contribute to contain the future inflationary pressures through its favourable impact on
the fiscal management.
The continuing tight monetary policy will continue to subside the demand driven
inflation.
The release of the next regular statement on monetary policy is scheduled for 14
September 2007.