EconomyNext – Sri Lanka’s central bank held policy rates steady in December with inflation at low single digits, though a pick-up in credit has started to pressure the currency.
The spot US dollar has slipped to 131.95/132.00 levels in December from 130.22/25 level in early September before strong positive credit growth started.
Strong credit growth is also pushing up imports and widening a trade gap.
The Central Bank said in October also private credit grew by 42 billon rupees, taking credit growth to 5.1 percent during the preceding 12 months, with a contraction in gold-backed loans ending.
Global commodity prices including, oil and foods have been falling with the US Federal Reserve ending is deadly quantity easing activities. Analysts say farmers will soon set up a cry for price support to prevent the poor and hungry from benefitting.
Sri Lanka last week cut fuel prices, which are state administered and not market priced.
Consumer prices rose 1.5 percent in the 11 months to November compared to 1.6 percent in October.
"The recent decline in crude oil prices in the international market is likely to impact inflation and inflation expectations favourably," the Central Bank said in its December monetary policy review.
"Going forward, continued improvements in macroeconomic fundamentals would bolster market confidence and nurture positive investor sentiments enabling the maintenance of a high sustainable growth rate in the medium term."
The central banks said the balance of payments – the gap between total foreign inflows and outflows which is reflected in foreign reserves collected – will be higher than in 2013 and official reserves will be at "comfortable levels".
There are however about 350 billion rupees of liquidity dammed up temporarily though term repo auctions, which will hit the balance of payments once credit growth picks up, analysts say.
Low interest rates, central banks profits transfers and repayments to the International Monetary Funds will also make it more difficult to collect reserves, analysts say.