The Monetary Board, at its meeting held on August 2, was of the view that the current monetary policy stance is appropriate and decided to maintain the policy interest rates of the Central Bank of Sri Lanka at their present levels.
In arriving at the above decision, the Monetary Board took into consideration current and expected developments in the domestic and international macroeconomic environment and the need to maintain inflation at mid-single digit levels over the medium term.
The outlook for global growth appears to be firming according to the latest update of the World Economic Outlook of the International Monetary Fund (IMF) in July 2017. The Sri Lankan economy is expected to record a modest recovery in the forthcoming quarters following the low growth witnessed in the first quarter of 2017.
The recovery of the agriculture related activities and the positive performance of the industry and services related activities together with the reinstatement of GSP+ facility are expected to contribute to economic growth.
The Colombo Consumer Price Index (CCPI, 2013=100) and the National Consumer Price Index (NCPI, 2013=100) based headline inflation (year-on-year) moderated at a faster pace in the recent months, in spite of supply side disruptions encountered in May 2017, mainly on account of the floods.
A similar trend was observed in core inflation as well during this period. Inflation is expected to ease further towards the end of 2017 and stabilise thereafter due to the tight monetary policy stance maintained since the end of 2015 and the dissipation of the ‘one-off’ impact of the tax structure on inflation. However, monetary expansion continued to remain high in May as well as in June 2017.
Meanwhile, private sector credit that was growing at an elevated level during 2016 and early 2017, indicates clear signs of deceleration in recent months, although at a slow pace.
In view of high nominal and real interest rates prevailing in the market, it is expected that growth of monetary and credit aggregates would moderate further during the remainder of the year.
In the external sector, export performance continued to improve in May 2017 led by agricultural exports.
However, the continued increase in expenditure on imports has caused a further widening of the cumulative trade deficit.
Tourist arrivals and earnings from tourism improved in June 2017, albeit at a slower pace, while workers’ remittances continued to slow during the first half of 2017 on account of prevailing economic and geopolitical uncertainties in the Middle East. Nevertheless, the capital market, both government securities and the Colombo Stock Exchange (CSE), witnessed a noticeable influx of foreign funds (on a net basis) from March 2017.
Meanwhile, Sri Lanka received the third tranche of the IMF-Extended Fund Facility (EFF) amounting to US dollars 167.2 million. Reflecting these developments, gross official reserves stood at US dollars 6.7 billion as at end July 2017.
Renewed investor confidence and anticipated direct investment inflows are expected to further strengthen the external sector outlook.
Meanwhile, the Sri Lankan rupee depreciated against the US dollar by 2.6 per cent by end July 2017.
The Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 7.25 per cent and 8.75 per cent, respectively.
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