Growth prospects brighten in 2009
Sri Lanka is poised to enter a more promising, yet economically
challenging era. Growth prospects in 2009, which were dampened by the
global downturn in economic activity, have now brightened.
Rising domestic demand along with the reconstruction and development
of areas liberated will help expand domestic production and thereby add
to the country’s output.
The foreign exchange market has also stabilised, as reflected by the
strengthening of the rupee over the past few days. With the continuous
decline in inflation and flexibility in the nominal exchange rate, the
real exchange rate has depreciated, improving the competitiveness of the
country’s external trade.
While inflows of private remittances during the first quarter of 2009
have been more than sufficient to finance the deficit in the trade
balance for the same period, there are indications of improved prospects
for Sri Lanka’s key exports such as garments and tea.
Inflation, as measured by the year-on-year change in the Colombo
Consumers’ Price Index (base=2002), continued its downward momentum to
reach 2.9 percent in April 2009, its lowest thus far.
Growth in the money supply also continues to be at benign levels. In
addition, external price pressures continue to be minimal. Therefore,
the outlook for domestic inflation continues to be favourable.
Year-on-year inflation is expected to bottom out during the next two
months and is projected to remain at single digit levels throughout 2009
and 2010. In view of the above discussed developments and the need to
further extend its support for economic activity, by taking steps to
augment credit availability at economical rates of interest, the
Monetary Board has decided to relax its monetary policy stance further.
Accordingly, it has been decided to (1) remove the Penal rate of
interest charged on the Central Bank’s reverse repurchase transactions,
(2) reduce the Reverse Repurchase rate by 25 basis points to 11.50
percent (3) remove restrictions on the number of times that a
participating institution can access the reverse repurchase standing
facility of the Central Bank at the Reverse Repurchase rate, and (4)
remove restrictions on the maximum amount that a Participating
Institution can place with the Central Bank under the repurchase
standing facility.
These policy measures will become effective immediately. With the
removal of the restrictions, the Central Bank will conduct its monetary
policy operations to maintain inter-bank interest rates stable within
the corridor formed by the Repurchase and Reverse Repurchase rates.
Market interest rates have begun to show a gradual decline in
response to the relaxation of monetary policy and the measures adopted
by the Central Bank to safeguard financial system stability.
It is expected that the Central Bank relaxing its monetary policy
stance further would aid market interest rates to decline further,
lowering the cost of borrowings and spurring economic activity.
Central Bank Monetary Policy Review -May 2009 |
