Healthy economic growth in second quarter

Rasika SOMARATHNA

COLOMBO: The Central Bank’s Monetary Policy Review released yesterday indicated a healthy improvement in the economy, during the second quarter of 2007, by overtaking the growth margin of 6.1 per cent recorded in the first quarter.

The report attributed the growth to the strong performance in the industry and services sectors as well as the recovery in the agricultural sector.

The review also showed that the improved performance in the external sector continued further with exports recording the highest monthly growth in July 2007.

The increase in imports remained at a moderate level with the cumulative exports during the first seven months of 2007 showing a growth of 15.8 per cent whereas cumulative import growth was 4.2 per cent.

The report also suggested that higher expansion in exports over that of imports during the recent months had contributed to the gradual decline in the trade deficit, which narrowed by 15.6 per cent during the first seven months.

The healthy growth of worker remittances which went up by 19 per cent over the same period helped to stem the expansionary effect of the trade deficit on the current account balance, the report said.

Thus the balance of payments had recorded a surplus of US $ 151 million and the official reserves stood at US $ 2,681 million (3.0 months of imports) by end July 2007.

Inflation which declined till June 2007 to 13 per cent due to the impact of monetary policy tightening showed an unexpected increase of 17.3 per cent in July, with commodity prices in international markets as well as revision in administered prices going up.

The quarterly targets for reserve money had been able to achieve by the Central Bank during the first three quarters of the year, with the level of reserve money at end of September being Rs. 256.7 billion, compared with the target of Rs. 257.8 billion.

The broad money growth in July too exceeded the desired level reaching 19.9 per cent with the increase being attributed to the expansion in both the net foreign assets (NFA) and net domestic assets (NDA) of the banking system.

Within the NDA, private sector credit expansion, which remained a key concern on account of its adverse effect on money supply and inflation, has showed some deceleration, responding to the tight monetary policy stance of the Central Bank.

The report showed that the Credit to the private sector has decelerated since May 2007 to 24 per cent at end of July compared with the higher levels of around 26 per cent recorded previously.

The maintenance of tight reserve money targets has raised all market interest rates sharply upwards so far during the year.

The resulting slowdown in the growth of credit aggregates is expected to decelerate with the growth in broad money and demand driven inflation in the future, the report suggested.