Tuesday, 18 May 2004  
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No change in Central Bank's policy rates

The Monetary Board has reviewed current and projected economic developments and is of the view that a change in the Central Bank's policy rates is not warranted. The main factors taken into consideration in arriving at this decision are highlighted below, a media release from the Central Bank said.

Real Sector

Available indicators for the first quarter of 2004 indicate a mixed performance. The plantations crops, viz., tea, rubber and coconut, have shown marginal increases in output.

However, the impact of the drought has been felt on the paddy sector and initial estimates indicate that the Maha crop is likely to be significantly below the previous year's record Maha output.

The effect of the lower output has already been seen in the higher prices for paddy. The growth momentum in port activities and telecom sectors continued. The tourism sector recorded a 10.3 per cent growth during the first quarter of 2004.

The continuing recovery in the economies of industrial countries has helped to sustain the demand for Sri Lanka's industrial sector products and the monthly Industrial Production Index increased by 5 per cent during January - February 2004, in comparison to an increase of 4.6 per cent during January - February 2003.

Oil prices were at high levels. Market analysts project that prices will continue to remain high, not only affecting Sri Lanka directly, but also posing some concern with regard to the recovery in the world economy.

Prices

Although the 12-month moving average of the price indices showed a continued decline in inflation in April, the point to point changes indicate a bottoming out of the decline from a significantly low level, as expected.

The 12-month moving average of the Sri Lanka Consumers' Price Index (SLCPI) declined from 1.5 per cent in February to 1.2 per cent in March, while the point to point index increased from -0.2 per cent in February to 1.2 per cent in March.

Similarly the 12-month moving average of the Colombo Consumers' Price Index (CCPI) decreased from 3.9 per cent in March to 3.7 per cent in April, whereas the point to point change increased from 2.5 per cent in March to 4.6 per cent in April.

The Colombo District Consumer Price Index (CDCPI) reflected a similar trend with the 12-month moving average decreasing from 1.0 per cent to 0.9 per cent, while the point to point change increased from 0.5 per cent to 1.9 per cent between these two months.

External Developments

International trade has continued to grow, buoyed by the recovery in the international economy. Cumulative exports during January - February 2004 in US dollar terms, grew by 10.1 per cent, in comparison to an 8.2 per cent growth in the corresponding period in 2003.

Cumulative imports grew by 5.1 per cent during the same period, in comparison to a growth of 17.9 per cent during January - February 2003. An encouraging factor was that within imports, investment goods contributed heavily to the growth, reflecting the expansion in growth potential.

In the domestic foreign exchange market, there has been some volatility. The rupee had depreciated against the US dollar by 1.9 per cent from end 2003 to 10 May.

The Central Bank intervened in the market to reduce excessive volatility, as it had indicated it would, when the currency was floated in January 2001. The Bank's intervention has helped to stabilise the market.

The country's gross official reserves stood at US dollars 2,262 million at end March 2004, in comparison to US dollar 2,329 million at end 2003. Total external reserves at end March amounted to US dollars 3,313 million, in comparison to US dollars 3,218 million at end 2003.

Movements of other major currencies in the international market have been mixed. As a result, the Sri Lankan rupee had appreciated against the euro (4 per cent) and the Japanese yen (3.4 per cent) by May 10, although it had depreciated against the Sterling pound by 2.1 per cent.

The movement of the rupee against international currencies, and the continued fall in inflation, had improved Sri Lanka's international competitiveness, as measured by the real effective exchange rate (REER). By end April, the 24 currency REER had depreciated by 1.5 per cent.

Fiscal Developments

The Pre-Election Budgetary Report indicated that the fiscal deficit was expected to be 7.3 per cent of GDP in 2004. Revenue estimates for the first quarter indicate that the targets have been achieved.

The new government has indicated that the broad parameters of the budget for 2004 would be maintained.

The government has also indicated that, although some additional expenditure would be incurred for the fertiliser subsidy and recruitment to the public service, measures would be taken to increase revenue and reduce expenditure in other areas.

Financial Sector Developments

The growth in money supply at end March 2004 was approximately 16 per cent, in comparison to 15.6 per cent at end February, and was slightly above the projected growth rate of 14.5 per cent in the monetary program. The growth in private sector credit stood at 18.4 per cent at end March.

The increase in demand for currency seen towards the end of March and in mid April, caused by the election and the New Year season, had subsided by end April. Currency outstanding, which rose from Rs. 116.9 billion at end March to Rs. 120.4 billion on April 14, declined to Rs. 107 billion by end April.

Consequently, reserve money too, which had risen to around Rs. 170 billion by mid-April, had declined to around Rs.153 billion by end April.

Despite large changes in demand for currency, the fluctuations of short-term interest rates remained within a relatively narrow range benefiting from the active open market operations.

Average call market rates, which were around 7.60 per cent at end 2003, peaked at 7.87 at mid April before stabilising at around 7.50 per cent at end April.

Yield rates on 91 day and 364 day Treasury bills at the primary market have risen by about 44 to 47 basic points to 7.79 per cent and 7.71 per cent respectively, from end 2003 to end April, although a slight decline in rates was seen at the auctions on April 28 and May 3.

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