Pressure on inflation from global food prices, rising crude oil

The significant rise in international food prices, further exacerbated by the spiralling prices of crude oil, has exerted upward pressure on the inflation of many countries, particularly from the second half of 2007.

In Sri Lanka too, inflation, as measurd by the point-to-point change in the New Colombo Consumers’ Price Index - CCPI (N), reached 21.6 per cent in February compared with 20.8 per cent recorded in January 2008 while the annual average inflation also moved up to 17.0 per cent in February from 16.4 per cent in January, the Central Bank said in its Monetary Policy Review for March.

Reserve money, it said, has been within a tight growth path since 2007 achieving its respective quarterly targets and is poised to be well within the first quarter target for 2008. The lagged effects of the more disciplined movement in reserve money has gradually been observed in broad money, the growth of which, has decelerated to 15.8 per cent by end January 2008 from the higher rates in the range of 20-22 per cent seen in 2007. The deceleration in the broad money supply has resulted from a decline in domestic credit, which comprises of credit to both the public and private sectors. The expansion in credit to the private sector continued its deceleration and reached 18.3 per cent at end January while net credit to the government from the banking sector has declined by Rs. 10.5 billion during the month. However, the increased utilisation of credit by public corporations, particularly the Ceylon Petroleum Corporation in the face of rising international oil prices, remains a concern.

The increased inflow of foreign exchange so far during 2008 has further strengthened the external reserves and stablised the exchange rate.

The Central Bank has absorbed around US$357 million from the market. Subsequently, the gross official reserves are estimated to have increased to US$3.6 billion, which is sufficient to finance 3.7 months of imports.