Financial Times

Central Bank leaves monetary policy unchanged
The Central Bank last week left its monetary policy unchanged in its monthly review of economic developments, saying that the performance of the economy was broadly in line with its original projections. The bank announced it would commence its new longer-term auctions shortly under its active open market operations window to mop up the "high excess liquidity in the financial system at present."

The turnaround witnessed in economic activity in 2002 has continued during the first half of 2003, the bank said in a statement. "The improvement in real economic activity, a stable macroeconomic environment and ongoing structural reforms have supported this growth momentum."

Excerpts from the statement are given below: The recently released data on growth indicate that gross domestic product (GDP) grew by 5.5 percent in the first quarter of 2003. This growth was driven mainly by the Services and Industry sectors, while the Agriculture sector also recorded a small positive growth rate.

The general declining trend in inflation seen from the beginning of 2003 continued in June with a fall in all price indices. The annual average change in the Colombo District Consumers' Price Index (CDCPI) declined from 4.8 percent in May to 4.4 percent in June. The Colombo Consumers' Price Index (CCPI) followed a similar trend, declining from 9.5 percent in May to 9 percent in June. The Sri Lanka Consumers' Price Index (SLCPI), which is reported with a one-month lag, also recorded a decline from 7.6 percent in April to 6.8 percent in May.

Declining inflationary expectations are reflected in falling yields on government securities across all maturities and in the reduction in forward premia on foreign exchange transactions.

In keeping with the requirements under the Fiscal Management (Responsibility) Act (FMRA), the government presented its Mid-Year Fiscal Position Report. Recurrent expenditure was kept well within the target by strict expenditure controls, lower interest costs and the ongoing ceasefire.

However, lower revenue collection was reported, primarily due to a reduction in collection of VAT and corporate taxes. The government has indicated that additional revenue raising measures would be implemented to offset this shortfall, and that the fiscal deficit for the year would be maintained at 7.5 percent of GDP.

It is very important to maintain the fiscal deficit at this level in order to achieve the targets under the macroeconomic stabilisation programme for 2003. The external sector has continued to grow, with both exports and imports growing at around 13 percent during the first five months of 2003.

Although this has caused a widening of the trade deficit, an increase in net inflows on the services and capital accounts has resulted in a surplus in the overall balance in the balance of payments.

This has helped to stabilise the exchange rate, and enabled the Central Bank to purchase $ 154 million from the market in the first six months of 2003, raising the country's gross official reserves to $ 1,990 million, equivalent to around 3.7 months of imports. Total gross international reserves, at $ 2,655 million, were equivalent to about 5.1 months of imports, at end May 2003.

Monetary aggregates have been in line with projections in the monetary programme. The growth in broad money in May was a moderate 12.8 percent, while reserve money has been within target. Government has reduced its liabilities to the banking sector, while credit to public corporations has not increased thus far in 2003.

Growth in credit to the private sector has been somewhat below expectations, but is seen to be picking up as the economic recovery gathers momentum. The rupee market has continued to be liquid. A gradual decline in interest rates has resulted during the first half of 2003 due to the decline in inflation and inflationary expectations, improvement in market liquidity, cautious borrowing by the government and the declining trend in international interest rates. The Central Bank reduced its policy rates by 150 basis points during this period.

FTA with US will boost local apparel sector
Isaac Dabah, CEO of leading US fashion house Gloria Vanderbilt, says an FTA between Sri Lanka and USA would be beneficial to the apparel businesses of both countries.

Dabah who met Commerce and Consumer Affairs Minister Ravi Karunanayake last week said this would open up the markets and as a result, apparel firms in both countries would be able to increase their businesses.

Gloria Vanderbilt is a division of the Jones Apparel Group, which is one of the leading Apparel chain in USA, with $ 4.5 billion annual turnover. The company is presently tied up with an apparel manufacturer in Sri Lanka and planning to expand their businesses with three more manufacturers soon.

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