Sri Lanka holds rates, sees higher Q4 economic growth

   Sri Lanka's central bank maintained its policy rates, as expected, and said it expects economic growth in the final quarter of this year to speed up despite adverse weather that has affected agricultural output and global economic uncertainties.
    The Central Bank of Sri Lanka (CBSL), which has raised its two key rates by 100 basis points this year to slow growth in private sector credit, said a lower base in the fourth quarter of 2015 along with other favorable developments in leading economic indicators should result in higher growth.
    Sri Lanka's Gross Domestic Product grew by an annual rate of 4.1 percent in the third quarter of this year, up from 2.6 percent in the second quarter, as services grew by 4.7 percent and industry by 6.8 percent. Agriculture, however, contracted for the second consecutive quarter and fell by 1.9 percent due to adverse weather.
    Last month Indrajith Coomaraswamy said the CBSL expected growth this year to average just over 5 percent, up from 4.8 percent in 2015, and then accelerate to 6.3 percent next year.
    He also said the central bank was ready to ease its policy if growth slows, but didn't see any need for that as yet.
    The CBSL also said it expects inflation to remain in mid-single digits despite a marked rise in core inflation due to changes in government taxes.
    Sri Lanka's headline inflation, based on Colombo Consumers' Price Index (CCPI) rose to 4.1 percent in December from 3.4 percent in November while 4.1 percent in November while core inflation based on CCPI rose to 6.3 percent in December from 5.1 percent in November, the central bank said.
   "Despite these transitory movements, inflation is likely to remain at mid-single digits in the period ahead, on average," the CBSL said.
    As expected, credit extended to the private sector by commercial banks is decelerating and was up by 22.0 percent in October from 25.6 percent in September. However, in absolute terms, credit remains high at 79.0 billion, the CBSL said.
    Sri Lanka's rupee has been depreciating all year, accelerated by the sale of government securities by foreign investors, and was trading at 149.5 to the U.S. dollar today, down 3.6 percent this year.
    The central bank raised its two key rates, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) in February and July.  SLFR now stands at 7.0 percent and the SDRF at 8.50 percent.

   
  The Central Bank of Sri Lanka issued the following statement:

"According to the provisional estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy is estimated to have grown by 4.1 per cent during the third quarter of 2016 compared to the growth of 5.6 per cent in the corresponding period of the previous year. Services activities grew by 4.7 per cent, while Industry activities grew notably by 6.8 per cent during the third quarter of 2016. However, Agriculture related activities continued to report a contraction, for the second consecutive quarter, by 1.9 per cent, impacted by the adverse weather conditions that prevailed during the third quarter of 2016. Favourable developments in leading economic indicators as well as the lower base in the fourth quarter of 2015 are likely to steer economic growth upwards in the final quarter of 2016 in spite of the effect of adverse weather conditions and global economic uncertainties.
Headline inflation, as measured by the Colombo Consumers’ Price Index (CCPI, 2006/07=100), increased to 4.1 per cent, on a year-on-year basis, in December 2016 from 3.4 per cent in November 2016. In the month of November, headline inflation as measured by the National Consumer Price Index (NCPI, 2013=100), declined to 4.1 per cent, year-on-year, compared to 5.0 per cent in October 2016. Core inflation increased noticeably during December 2016 mainly reflecting the effect of government tax changes. Consequently, core inflation as per the CCPI accelerated to 6.3 per cent (year-on-year) in December 2016 from 5.1 per cent in November 2016, while core inflation based on NCPI increased markedly to 6.8 per cent in November 2016 from 5.7 per cent in October 2016. Despite these transitory movements, inflation is likely to remain at mid- single digits in the period ahead, on average.

In the monetary sector, year-on-year growth of credit extended to the private sector by commercial banks witnessed the anticipated deceleration, and was 22.0 per cent in October 2016 compared to 25.6 per cent in the previous month. However, the net increase in credit extended to the private sector, in absolute terms, remained high at Rs. 79.0 billion during October 2016. Meanwhile, credit to the public sector from commercial banks increased modestly in October 2016. Accordingly, broad money (M2b) growth decelerated to 17.8 per cent, on a year-on-year basis, in October from 18.4 per cent in September 2016. Rupee liquidity in the domestic money market returned to surplus levels in December, while market interest rates, which increased in response to monetary tightening measures adopted by the Central Bank, appear to have broadly stabilised during the month.
In the external sector, mainly due to the effect of a one-off increase in the expenditure on imports, the deficit in the trade balance increased substantially in October 2016. Earnings from tourism as well as workers’ remittances continued to grow at a healthy pace. Gross official reserves were estimated at US dollars 5.6 billion by end November 2016, while the Sri Lankan rupee has depreciated by 3.6 per cent against the US dollar thus far during the year.

Taking into consideration the developments discussed above, the Monetary Board, at its meeting held on 30 December 2016, was of the view that the current monetary policy stance of the Central Bank is appropriate. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.00 per cent and 8.50 per cent, respectively."

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