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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka August inflation seen near record high on drought, rupee

Sri Lanka August inflation seen near record high on drought, rupee

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Malika1990

Malika1990
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Aug 30, 2012 (LBT) - Sri Lanka's annual inflation rate may have accelerated to near record high of 10.2 percent year-on-year in August as an extended drought pushed up food prices and as a weaker rupee aggravated import bills. The sharp dip in the rupee currency along with higher foodprices drove annual inflation in the $59 billion economy to a 42-month high of 9.8 percent last month.

The rupee has depreciated 16.8 percent since November, making imported inflation a serious threat. The country imports most essential food commodities as well as fuel. Consumer goods accounted for 20 percent of last year's total $20 billion import bill. "We haven't seen an improvement in (food) supply due to the continued drought," one analyst said on condition of anonymity. "The import prices are yet to factored in, though rupee has been more or less flat (in August)."

Food accounts for more than 40 percent of the basket of items used to compile inflation figures. The government has reduced import taxes of selected essential goods since last month and the central bank has said supply shocks will taper off with expected monsoon rains next month.

Central Bank Governor Ajith Nivard Cabraal told Reuters last week that annual inflation in August is unlikely to hit double digits because of steps that have been taken by the government. The International Monetary Fund in its latest staff assessment report (link.reuters.com/juw69s) has said that the current monetary policy stance is appropriate, and a tightening bias should be maintained in the near term until further evidence of diminishing inflation pressures and credit demand emerges.

The central bank in August kept its key policy rates unchanged after raising them twice since February to two-year highs, saying a spike in inflation was due to adverse weather conditions and the resulting disruptions to domestic food supplies.
http://www.lbt.lk/news/economic/2536-accelerating-inflation

Malika1990

Malika1990
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Aug 30, 2012 (LBO) - Consumer prices in Sri Lanka's capital Colombo rose 9.5 percent in August 2012, easing slightly from 9.8 percent in July, with the index falling in absolute terms in the month, state statistics office said.

The Colombo Consumer Price Index fell 0.6 percent during the month with the food and non-alcoholic beverages components in the index falling 1.1 percent.
Sri Lanka's inflation accelerated from low single digits after the island's soft-pegged Central Bank, sterilized foreign exchange sales with printed money, worsened a credit bubble and made the rupee fall nearly 18 percent over the past year.

However bank credit is now easing. Past experience has shown that inflation eases as credit slows or contracts following a balance of payments crisis, especially if the exchange rate also strengthens.

Sri Lanka's exchange rate however has not strengthened despite strong capital inflows, because the monetary authority had bought the dollars and created liquidity, preventing a strengthening of the exchange rate.

Analysts have urged the Central Bank to gently sterilize foreign exchange purchases (reversing the cycle that occurs in a balance of payments crisis), and push the exchange rate up to bring inflation down.

The Central Bank has sterilized some of the inflows with the outstanding Treasury bill stock falling by about 20 billion rupees over the past three months indicating that no major demand pressure has been added to the economy by the monetary authority.

Currency depreciation inflates the price of traded goods (imports and exports) and eventually feeds into the non-trade sector.

There are emerging signs that the depreciation is getting entrenched in the price structure of the island and feeding into the non trade sector, which analysts say underlines the urgency for the central bank to strengthen the exchange rate.

Sri Lanka's renewable power producer earlier this week called for higher tariffs to be paid to them by the power utility as capital cost of equipment increased due to currency depreciation.

The central bank has insisted that it can keep inflation below 10 percent by the end of the year.
http://www.lbo.lk/fullstory.php?nid=99153604

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