Financial Times

Central Bank continues interest rate policies
The Monetary Board of the Central Bank said last week that it would continue with the same interest rate policy after having reviewed the recent economic developments and prospects.

In a statement, it said the expansion in economic activities last year is expected to strengthen further in 2006 with better performance in all key sectors. The improvement in the agricultural sector in 2005 is expected to continue in 2006 as well with the favourable weather conditions and improved water levels in the major reservoirs.

Industrial sector output is expected to benefit from the sustained external demand, the expansion in capacity and improved market access. Value addition from power generation is projected to increase as a result of the higher proportion of hydropower generation.

The robust performance in the services sector in 2005 with the improved performance in port services, telecommunication, trade, and financial services sub-sectors is expected to continue in 2006, the bank statement said.
International trade is expected to expand further in 2006 benefiting from the sustained external demand. The volume of monthly tea exports reached the highest ever record of 24.9 million kg in January 2006 on the back of higher demand from Russia/Commonwealth of Independent States and Syria. The total export earnings from tea increased by 4.0 per cent to US dollars 67 million in January 2006.

Although the trade deficit may widen in 2006 with a higher growth in imports, the continuation of the growth in private remittances, which grew by 26 per cent to US dollars 213 million in January 2006, would help in containing the current account deficit. With the increased inflows to capital and financial accounts, the balance of payments (BOP), which recorded a surplus of US dollars 501 million in 2005 is estimated to have registered a surplus of about US dollars 100 million by end February 2006. Accordingly, the gross official reserve of the Central Bank is estimated to have increased to US dollars 2.7 billion (3.6 months of imports) by end February 2006. The total reserves of the country reached US dollars 4.2 billion (5.6 months of imports) as at end January 2006.

The high growth in money supply has been decelerating. Reserve money growth was contained at around 15 per cent in February. Broad money supply, which increased at a higher rate largely due to the higher expansion in the private sector credit, has decelerated at a slower pace from the peak of 21.5 per cent in October 2005, to 20 per cent by January 2006 and is expected to decelerate further with the continuation of the current monetary policy stance. This would help mitigate inflationary pressures further, the bank said.

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