Monetary Policy Review August 2007:
Export earnings rise in first half
The improved performance in the external sector in 2007 reflected in
both higher trade and financial flows. Export earnings grew by 12.9 per
cent during the first half of 2007 underpinned by the highest monthly
value in 2007, US dollars 675 million in June, the Central Bank said
yesterday.
Meanwhile, impo- rts declined by 11.5 per cent in June due to the
decline in imports of petroleum, fertilizer, textile material, and other
consumer goods resulting a relatively lower import growth of 3.9 per
cent for the first half of the year.
The negative growth in imports against a background of rising exports
caused to improve the trade balance further by end June 2007. Worker
remittances, the second highest foreign exchange earner to the country,
increased by around 18 per cent to US dollars 1.3 billion during the
first half of 2007 helping to finance over 80 per cent of the trade
deficit in the first half of 2007.
The reduction in the trade deficit and worker remittances would have
favourable impact on current account balance for the first half of 2007.
The balance of payments has recorded an estimated surplus of US dollars
161 million by end July 2007, while the gross official reserves has been
estimated at US dollars 2.7 billion or 3.1 months of imports.
The external sector is expected to further improve with increased
inflows to the Government as well as to the private sector, supported by
the recent upward revision of Sri Lanka’s credit rating outlook to
‘Stable’ from ‘Negative’ by Standard & Poor’s, on the basis of the
improved macroeconomic performance, the Central Bank said.
Reserve money targets, both in terms of end-month and monthly
averages, for the first seven months of 2007, were comfortably achieved
as a result of the continuation of tight monetary policy stance.
The continuation of the tight monetary conditions would help
achieving the reserve money targets by the end of the year, thereby
further containing the demand driven inflationary pressures in the
economy. The growth in broad money supply is also expected to decelerate
to the desired level by end of the year, mainly due to the slowing down
of credit to the private sector.
The Central Bank policy measures have helped to maintain market
liquidity broadly in balance and, hence, to stabilise the market
interest rates further.
Inflation, which was decelerating during the recent months, increased
in July 2007 due to the revisions in administered prices to reflect
international prices. Accordingly, inflation as measured by the Colombo
Consumers’ Price Index (CCPI), increased by 17.6 per cent on a
point-to-point basis, as against the 13.0 per cent increase in the
previous month.
The continuing tight monetary policy will continue to subside the
demand driven inflation. |