Sri Lanka holds rates; private credit at 26.5-pct

ECONOMYNEXT – Sri Lanka’s central bank said it was holding rates unchanged in April, awaiting the result of higher interest rates.

Banks gave 53.7 billion rupees in credit to private business in February.

"Going forward, a gradual slowdown in money and credit expansion is expected in the period ahead, as the recent monetary policy measures are expected to have an impact on the economy with some time lag," the central bank said.

Analysts say if the central stops rejecting bids at primary auctions of Treasury bills and stops repaying maturing bills with printed money as it had been doing in the past, monetary policy would be tight.

As far as possible overnight liquidity should not be allowed to go into surplus and if there are any inflows, central bank’s bill holding should be sold down to mop up cash so that banks borrow overnight at 8.0 percent.

The full statement follows:

Headline inflation, as measured by the Colombo Consumers’ Price Index (CCPI, 2006/2007=100), declined to 2.0 per cent on a year-on-year basis in March 2016 from 2.7 per cent in February 2016, mainly due to the decline in food inflation. On an annual average basis, CCPI based headline inflation edged up to 1.1 per cent in March 2016 from 0.9 per cent in the previous month.

Year-on-year headline inflation, based on the National Consumer Price Index (NCPI, 2013=100), was 2.2 per cent in March 2016 compared to 1.7 per cent in the previous month, and was 2.4 per cent on an annual average basis. Meanwhile, the CCPI based core inflation, which reflects underlying demand pressures in the economy, declined to 4.5 per cent in March 2016 from 5.7 per cent in the previous month, on a year-on-year basis.

In the monetary sector, broad money (M2b) recorded a year-on-year growth of 19.8 per cent in February 2016, compared to 19.1 per cent in the previous month, driven by the expansion in domestic credit aggregates. Credit granted to the private sector by commercial banks, which is the largest category of domestic credit, increased by 26.5 per cent in February 2016, on a year-on-year basis, compared to 25.7 per cent in January 2016, while in absolute terms, credit granted to the private sector grew by Rs. 53.7 billion during the month of February 2016.

Meanwhile, market interest rates have risen reflecting the tight monetary conditions in the economy. Going forward, a gradual slowdown in money and credit expansion is expected in the period ahead, as the recent monetary policy measures are expected to have an impact on the economy with some time lag.

In the external sector, the decline in expenditure on imports in February 2016 has been greater than the decline in earnings from exports, thereby narrowing the deficit in the trade account by 11.7 per cent, year-on-year.

Earnings from tourism are estimated to have increased by 22.8 per cent in March 2016, while workers’ remittances recorded a healthy increase of 8.3 per cent in February 2016. Gross official reserves are estimated to have stood at US dollars 6.2 billion by end March 2016 compared to US dollars 6.6 billion at end February 2016, and the Sri Lanka rupee remained broadly unchanged against the US dollar thus far during 2016.