Financial Times

Central Bank says pressure on prices, exchange rate easing
The Central Bank left its benchmark interest rates unchanged at its monthly monetary policy review last week despite a higher-than-expected growth in money supply, saying that anticipated increased foreign aid inflows, lower global oil prices and improved agricultural production should ease pressure on the exchange rate and prices.

The Central Bank Monetary Board said in a statement that it left the Repurchase (Repo) rate and Reverse Repurchase (Reverse Repo) rate unchanged at 7.50 percent and 9.00 percent, respectively, "to allow for the recent policy rate increase to feed through the economy".

It noted that after the mid-November upward revision of the Central Bank's policy rates by 50 basis points, the weighted average call market rates increased by 42 basis points to 9.28 percent from 8.86 percent while several banks have made corresponding adjustments to interest rates charged on overdrafts and short-term loans. The average weighted prime lending rate (AWPR), which was 9.58 per cent for the week ending 12 November 2004, increased by 64 basis points to 10.22 per cent by end-November.

However, interest rates on savings deposits and long-term loans are yet to adjust, the bank said. The pressure on prices from supply side factors such as the drought, which adversely affected domestic food production, and high import prices, particularly of petroleum imports, is expected to ease with the improvement in weather conditions and the decline in international oil prices, the Central Bank said.

"The pressure on the exchange rate is expected to ease in the coming months with expected increase in foreign inflows," it also said. Higher export earnings and improved performance of agriculture would also help.

Up to December 10, 2004, the rupee had depreciated by 7.7 per cent against the US dollar and was going at Rs.104.84 per US dollar. The rupee also depreciated against the Sterling pound by 14 percent, the Japanese yen by 9.5 percent, the euro by 12.6 percent and the Indian rupee by 10.7 percent during this period.

Export earnings increased by 36 percent to US $582 million in October 2004, outperforming the five percent growth in October 2003. "This is the second highest export value ever recorded in a month," the Central Bank said.

During the first ten months, export earnings increased by 12 percent to US $4,725 million, while expenditure on imports expanded by 20 percent to US $6,429 million. Accordingly, in the first ten months, the trade deficit grew by US $564 million to US $1,704 million compared to the deficit in the first ten months of 2003.

The overall balance of payments, which recorded a deficit of US $245 million in the first nine months of 2004, is expected to improve significantly by the year-end due to foreign loan disbursements to the government from Japan (US $100 million) and the ADB (US $35 million) as well as the receipt of US $100 million as proceeds from an international bond issue by Sri Lanka Telecom.

Gross official reserves, which declined to US $1,929 million (three months of imports) at end-October 2004, are estimated to have improved to around US $2,080 million (3.1 months of imports) by December 10 with the receipt of foreign inflows to the government.

The total reserves of the country at end-October 2004 amounted to US $3,070 million (4.8 months of imports). The Central Bank also said monetary and credit aggregates continue to rise at a faster rate than originally projected.

"The increase in money supply has been mainly on account of an increase in credit to the domestic sector, i.e., to the private and public sectors." The next regular statement on monetary policy is to be released on January 13, 2005.

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