Growth in exports in September, trade deficit narrowing

The economy, which grew by 6.2 per cent during the first half of the year, is expected to yield an annual growth of around 6.7 per cent for the year the Central Bank said yesterday.

This growth would be supported by the strong performance in the telecommunications and port services sub-sectors and recovery in the Agriculture sector.

Exports in September have recorded a growth of 19.2 per cent, benefiting particularly from the impressive performance in the agriculture sector, led by exports of tea.

The rising international commodity prices have caused the import expenditure also to increase compared with the previous month. However, the higher growth in exports over that of imports has led to the narrowing of the trade deficit during the January-September period compared with the same period of 2006.

The Central Bank has thus far been able to achieve its quarterly growth targets for reserve money as well as the indicative target for October 2007.

The tight monetary policy measures adopted by the Central Bank have helped contain the growth in the money supply, though it still remains above the desired level. As expected, credit to private sector has decelerated in September to its lowest level thus far in 2007 and this decelerating trend is expected to persist during the remaining months, thereby moderating the excessive expansion in the broad money supply.

Inflation, as measured by the point to point change in the Colombo Consumers' Price Index (CCPI) which increased by 17.3 per cent in September, surged to 19.6 per cent led by the high international commodity prices including petroleum prices.

However, inflation is expected to moderate when the one-off impact of such increases are diminished, supported by domestic supply improvements as well as the continuous containment of demand pressures in the economy through the tight monetary policy stance adopted by the Central Bank.

With the inflow of US dollars 500 million from the debut international sovereign bond issue, both interest rates and exchange rates have now stabilised. The excess liquidity has also been siphoned off through open market operations.

To neutralise any build up of demand pressures in the economy and curtail the demand driven inflation arising from excess liquidity, the maintenance of liquidity at a desirable level is warranted and therefore, the required steps in this regard would be taken by the Central Bank as and when necessary.