Sri Lanka private sector credit growth expands, Policy rates to be maintained: Central Bank

July 24, 2015 (LBO) – Sri Lanka Central Bank says credit to the private sector by commercial banks grew by 17.6 per cent, year-on-year, in May 2015, given the low interest rate environment in the Island.

In absolute terms, credit to the private sector expanded by 48.6 billion rupees in the month of May and by 150 billion rupees on a cumulative basis during the first five months of the year.

Driven by the expansion in private sector credit along with increased bank borrowings by the public sector, broad money supply (M2b) increased by 15.4 per cent on a year-on-year basis in May 2015, compared to 13.9 per cent recorded in the previous month, the regulator said.

Year-on-year headline inflation has remained below one per cent from February 2015 largely reflecting the downward revision of domestic energy prices and the reduction in prices of selected consumer items.

In June 2015, the year on year inflation remained at near-zero levels recording 0.1 per cent in June 2015 compared to 0.2 per cent in the previous month.

Annual average inflation also continued to moderate further to 1.7 per cent in June 2015 from 1.9 per cent in the previous month.

Meanwhile, indicating well contained underlying demand pressures, core inflation also remained low at 2.8 per cent in June 2015 on a year-on-year basis compared to 2.6 per cent in the previous month.

Central Bank projects that the current level of inflation will continue in the next few months mainly reflecting the benefit of downward adjustments in administered prices of fuel and energy.

With regard to the external sector, increased expenditure on imports relative to earnings from exports widened the trade deficit in May 2015.

Gross official reserves, which stood at 6.8 billion US dollars at end May 2015, are estimated to have increased to 7.5 billion US dollars by end June 2015 largely representing the receipt of the proceeds from the International Sovereign Bond and Sri Lanka Development Bond issuances.

At the same time, other regular inflows such as earnings from tourism and workers’ remittances also supported the external sector during this period.

In addition to the 400 million US dollars made available to the Central Bank of Sri Lanka by the Reserve Bank of India (RBI) in April 2015, the Central Bank entered into another currency swap agreement with RBI on 17 July 2015 enabling the country to draw a further amount of 1.1 billion US dollars.

“The availability of this new facility strengthened the resilience of the external position of the country while supporting greater stability of the exchange rate.” Central Bank said.

Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00 per cent and 7.50 per cent, respectively.