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The Central Bank has reviewed the current economic developments and the prospects for 2003 and is of the view that the performance is in line with the annual targets announced in its Annual Report 2002.

All consumer price indices indicate a declining trend in inflation as projected. The annual average change in the Colombo Consumers' Price Index (CCPI) decreased from 10 per cent in January to 9.5 per cent in May, while the point to point change decreased from 13.6 per cent to 6.0 per cent. The Colombo District Consumer Price Index (CDCPI) showed a similar trend, with the annual average change decreasing from 6.5 per cent to 4.8 per cent and the point to point change decreasing from 5.2 per cent to 2.5 per cent.

The more comprehensive Sri Lanka Consumer Price Index (SLCPI), now being computed by the Department of Census and Statistics, recorded a decline in the annual average from 9.6 per cent in January to 7.6 per cent in April, and a decline in the point to point change from 7.2 per cent in January to 3.6 per cent in April. Market expectations, as reflected in bid yields on government securities and in the forward premia for foreign exchange transactions, also reflect a reduction in inflationary expectations.

The economic growth in 2003 was projected at 5.5 per cent. The recent floods are likely to have some downward impact on this projection. However, initial assessments indicate that the impact of the floods on economic growth in 2003 would be marginal.

Available information indicates that agricultural performance has generally been good in the first quarter of 2003. The Maha paddy crop is estimated to have increased and reached a record level of production. The output of tea and rubber have shown an increase over Q1, 2002, although the output of coconut continued to decline due to the lagged effect of the drought in 2002. The recent floods are likely to have some dampening effect on the output of tea, rubber and paddy in the second and third quarters, but a recovery is expected in the latter part of the third quarter an in the fourth quarter.

Industrial production has been picking up. The monthly industrial production, which declined by 2.4 per cent in the first three months of 2002, has increased by 4.8 per cent in the first quarter of 2003. The impetus to output has come mainly from the export sector, with growth being evident in the textile and apparel sector, rubber based industries, plastics and diamonds. Improvements in the international market and higher export orders after the Iraq war have supported this growth. Exports, in US dollar terms, have increased by 12.8 per cent in the first four months of 2003, in contrast to a decrease of 16 per cent in the corresponding period in 2002. Similarly, imports have increased by 12.7 per cent in this period, in contrast to a decrease of 12.9 per cent in 2002. Intermediate goods and investment goods have increased by 20 per cent and 12 per cent respectively, indicating the potential for increased exports in the future.

Provisional data on the fiscal performance up to March 2003 indicate that government revenue has been slightly higher than projected. Total government expenditure has also exceeded projections due to higher expenditure on the public investment programme.

The foreign exchange market has been stable. The rupee has depreciated against the US dollar, which is the main currency used for international trade, only by 0.5 per cent in the first five months of 2003. However, the declining domestic inflation has enabled Sri Lanka to maintain its international trade competitiveness. Continuing increases in foreign remittances and capital inflows, including inflows to the stock market, have ensured liquidity in the foreign exchange market, despite an increase in the trade deficit. This has enabled the Central Bank to purchase around US dollars 112 million from the market to build up its reserves. Total gross international reserves at end April 2003 amounted to US dollars 2,699 million (equivalent to around 5 months of imports), while gross official reserves had risen to around US dollars 1,934 million at end May 2003.

Monetary expansion has been in line with projections, while the level of reserve money has been within the targets set in the monetary programme. Interest rates have gradually declined during the first five months of 2003. The Central Bank has reduced its policy rates by a total of 150 basis points in this period. This, together with the availability of liquidity in the market and cautious borrowing by the government, has supported the decline in interest rates.

Information received from the Donors Meeting in Tokyo is extremely positive, indicating donor confidence in the policies being adopted by Sri Lanka. The substantial amount of aid offered would support the government's rehabilitation efforts and economic reforms. Having examined the foregoing developments, the Central Bank is of the view that no change in its current monetary policy stance is warranted at present. The Bank will continue to monitor economic developments carefully and change its monetary policy stance as appropriate. The next regular statement on monetary policy would be made on July 09, 2003.

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