* BOP in US$ 305mn surplus by August
* Official reserves US$ 7bn
* Inflation to stay within single-digit range
* Export fall moderate
* Private sector credit growth down, govt. borrowings higher
A policy u-turn by the Central Bank earlier this year is bearing fruit with credit growth easing and the balance of payments reporting a surplus, an optimistic Central Bank said in its monthly monetary policy review yesterday (23), downplaying the impact of the global economic crisis and surging government borrowings.
The Central Bank announced it would keep key policy interest rates tight to contain inflation with private sector credit growth easing considerably although government borrowings from the domestic banking sector was growing at a higher pace.
Private sector credit growth reached 28.7 percent year-on-year in August, falling below 30 percent since March 2011. New loans to the private sector amounted to Rs. 14 billion in August after averaging Rs. 31.5 billion each month during the first seven months of this year.
The Central Bank said government borrowings were growing at a higher rate, but did not give out any numbers.
Total outstanding debt of the government reached Rs. 6,161 billion as at end July 2012, the Central Bank said in a separate report, growing by Rs. 1,027.6 billion during the seven month period this year. According to the 2012 budget, the government’s borrowing limit for the full year is Rs. 1,104 billion.
According to the 2012 budget, the government’s debt requirement for 2012 was Rs. 776.2 billion from domestic sources and Rs. 327.8 billion from external sources. However, by end July 2012, the domestic debt component grew by Rs. 381.6 billion from end December 2011 while foreign debt surged by Rs. 646 billion.
The estimates are based on expectations that the budget deficit would reach 6.2 percent by the year’s end. However, by end July the deficit reached 5.56 percent of GDP.
Yesterday, Central Bank said inflation would remain at single digit levels going forward.
The Balance of Payments recorded a US$ 305.9 million surplus by end August with official reserves reaching US$ 7 billion.
The Central Bank said export earnings fell moderately while imports fell substantially.
It said the global recession would impact negatively on emerging and developing economies.
The full text of the Central Bank’s Monetary Policy Review for October 2012 follows:
"The tight monetary policy measures implemented by the Central Bank to moderate private sector credit expansion continued to prove effective and the overall private sector credit growth moderated substantially to 28.7 per cent, year-on-year in August, falling below 30 per cent for the first time since March 2011," the Central Bank said.
"In absolute terms, the expansion of credit in August was Rs. 14 billion compared to the average monthly increase of Rs. 51.8 billion in the first quarter of 2012. Despite the slowdown of credit to the private sector, broad money growth in August was higher than the previous month, reflecting higher public sector borrowing.
"Year-on-year inflation declined for the second consecutive month reaching 9.1 per cent in September. While short term pressures on inflation arising from recent revisions to administratively determined prices and uncertain global supply conditions remain elevated, the tight monetary policy stance is expected to prevent second round effects of supply side factors entrenching into future inflation, and thereby help maintain inflation at mid-single digit levels over the medium term.
"In the meantime, the global economy continued to recover at a slow pace, although the US economy showed some positive signs, supported by the recent stimulus measures implemented by the Federal Reserve. Further, the protracted economic downturn in the euro area has weakened the demand for their imports.
"With 7.4 per cent GDP growth projected for the third quarter, the Chinese economy has also showed some signs of slowdown. In view of these setbacks to the global economic recovery, the IMF has revised its outlook for global growth to 3.3 per cent in 2012, and 3.6 per cent for 2013. This slowdown is likely to have a negative impact on emerging markets and developing economies, which mainly depend on external demand.
"Reflecting such trend, growth of Sri Lankan exports too has decelerated during the last six months, albeit moderately, whilst demand management measures introduced in early 2012 have resulted in imports falling substantially. With the resultant improvement in the trade balance, together with other inflows, the balance of payments has recorded a surplus of US dollars 305.9 million by August, and helped to raise the current level of official reserves to US dollars 7 billion, which is equivalent to around 4.3 months of imports.
"Taking into account the developments discussed above, the Monetary Board of the Central Bank of Sri Lanka was of the view that the current monetary policy stance is appropriate, and decided, at its meeting held on 22 October 2012, to maintain the policy rates of the Central Bank unchanged at their current levels. Accordingly, the Repurchase rate and the Reverse Repurchase rate would remain at 7.75 per cent and 9.75 per cent, respectively," the Central Bank said.
The repurchase rate applies to overnight deposits of excess rupees of commercial banks with the Central Bank, and the reverse repurchase rate applies to overnight borrowings by commercial banks from the Central Bank.