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| Thursday, 17 June 2004 |
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Economy continues to be resilient -Central Bank The Monetary Board has reviewed current and projected economic developments and is of the view that these conditions do not require a change in the Central Bank's policy interest rates at this time. The statement of the new government's economic policy announced by President Chandrika Bandaranaike Kumaratunga a few days ago would no doubt help to dispel some of the uncertainties in the market since February, arising from the political changes. The economy continues to be resilient and it would be desirable to maintain the momentum of economic growth. The following is an assessment of the factors that were taken into consideration in arriving at this decision, a media release from the Central Bank said. Real Sector The sectoral performance in the economy during the first few months of 2004 has been satisfactory. Early indications are that the overall growth momentum has continued. In the agriculture sector, plantation agriculture has shown strong growth, but the Maha paddy output has been affected by the drought. Industrial production continues to expand by around 6 per cent, with growth being recorded in both export and domestic oriented industries. In the services sector, port activity and telecommunications continue to record significant growth. Tourist arrivals rose significantly in the first two months of 2004, but witnessed a temporary decline in March and April. With a marginal recovery in May, the overall growth in tourist arrivals is expected to improve in the second half. The prolonged drought has significantly reduced the generation of hydropower. The share of thermal power generation has continued to rise, reducing the value addition in this sector. Consequently, the annual growth rate is expected to be between 5 - 5.5 per cent during 2004, which is marginally below the previously projected growth rate of 6 per cent. Acceleration of rehabilitation and reconstruction of the war affected areas could improve on this figure. Prices At end May 2004, the 12-month moving average of the Colombo District Consumer Price Index (CDCPI) remained at the same level of 0.9 per cent as at end April 2004, indicating a halting of the declining trend in inflation. The point to point index of the CDCPI, which has been rising since March, increased from 1.9 per cent at end April to 3.1 per cent at end May. The Colombo Consumers' Price Index (CCPI) reflected a similar trend with the 12-month moving average at end May remaining at the same level of 3.7 per cent as a month ago, while the point to point index of the CCPI, which has been rising since February 2004, increased from 4.6 per cent in April 2004 to 5.9 per cent in May 2004. The point to point change in the Sri Lanka Consumers' Price Index (SLCPI) too has increased from a negative 0.2 per cent in February 2004 to 1.2 per cent in March 2004, although the 12-month moving average has continued to fall from 1.5 per cent in February 2004 to 1.2 per cent in March 2004. Along with delayed price adjustments in the energy sector, inflation in 2004 is likely to be slightly higher, by about 1 percentage point, than initially expected. External Developments International trade has continued to grow, with both exports and imports expanding significantly. The strong recovery in the global economy has boosted exports. Exports during the first quarter of 2004, in US dollar terms, grew by 14 per cent over the same period in 2003. Industrial exports accounted for around 75 per cent of this growth. Import growth was 19 per cent, of which 3 percentage points were due to increases in oil and wheat imports. A salutary development in this respect has been the higher growth in intermediate imports, excluding oil and wheat grain. During the first quarter of 2004, the trade deficit widened to US dollars 465 million from US dollars 336 million in the corresponding period in 2003. Foreign remittances continue to increase, but there have been delays in foreign inflows emanating from privatisation proceeds and official external financing. This has exerted some upward pressure on the foreign exchange market, creating excessive volatility. The Central Bank's intervention in the foreign exchange market during this period has helped to contain some of this volatility. The rupee has depreciated gradually against the US dollar by about 3 per cent up to the second week in June 2004. Gross official reserves, which stood at US dollars 2,329 million (4.2 months of imports) at end 2003, declined to US dollars 2,242 million (3.8 months of imports) at end April 2004. However, the country's total reserves (official reserves and those of commercial banks) have risen from US dollars 3,218 million (5.8 months of imports) to US dollars 3,324 million (5.7 months of imports), during the same period. The rupee also depreciated against the sterling pound (6 per cent), the Japanese yen (0.8 per cent) and the Indian rupee (4 per cent), while appreciating against the euro (0.9 per cent). The 24-currency real effective exchange rate (REER) (1999=100) changed only marginally, maintaining the external competitiveness of the country at the same level. The overall balance of payments for 2004 is expected to show a surplus of about US dollars 170 million. Fiscal Developments In compliance with the Fiscal Management (Responsibility) Act, the government issued the Final Budget Position Report for 2003 in May. The fiscal deficit for 2003 was 8 per cent of GDP, in comparison to the budget estimate of 7.5 per cent. Although total expenditure was lower than budgeted, a shortfall in revenue collection led to a higher deficit. |
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