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.