SL economy grew 5.6% in 1H, says Central Bank

Sri Lanka’s economy has grown by 5.6% in real terms during the first half of 2015, the Central Bank said.

Making a presentation on ‘Recent Economic Developments,’ Central Bank Economic Research Department Director K.M.M. Siriwardane said inflation expectations remained well anchored for the remainder of 2015 as well as for 2016, where headline inflation year-on-year (y-o-y) remained in negative territory since July 2015.

However, he said that there were some upward movements observed in core inflation y-o-y, but remained comfortably at low-single digit levels.

“The trade deficit contracted significantly in July 2015 and the expansion in cumulative trade deficit also decelerated. The deficit in the trade account of the BOP decreased by 32.3% y-o-y, to $ 602 million in July 2015. The cumulative trade deficit increased only by 6.0% y-o-, during July this year,” he said.

Total revenue in nominal terms increased by 12.9% to Rs. 605.6 billion during the first half of the year from Rs. 536.4 billion recorded during the same period in 2014. Total revenue as a percentage of estimated GDP increased to 5.4% from 5.2% recorded in the same period last year.

Siriwardane said that the total expenditure and net lending is estimated to be increased by 9.4% to Rs 1,007.5 billion during the first half of 2015, from Rs. 921.3 billion in the corresponding period of 2014, mainly due to increase in recurrent expenditure.

However, the total expenditure and net lending as a percentage of estimated GDP declined to 8.9% during the first half of 2015 compared to 9% recorded in the corresponding period in 2014.

Tourist arrivals, earnings and workers’ remittances increased during January to August 2015 recording a growth of 1.8% to $ 4,598 million, while tourist arrivals in the same period grew by 17.1% to 1,172,465. Workers’ remittances during January to August grew by 17.1% to $1,866.5 million.

The Central Bank has allowed greater flexibility in the determination of the exchange rate.

“The rupee depreciated against the dollar by 7.0% during 2015. Since 3 September, the rupee depreciated by 4.4% against the dollar to Rs.140.96. However, in the midst of global currency volatility, this adjustment has facilitated real effective exchange rate to remain competitive,” he explained.

Siriwardane said that the country’s gross official reserves remained at $6.4 billion by end August.

He went on to say that the overall budget deficit declined to 3.6% of GDP during the first half of 2015 from 3.7% recorded in the same period in 2014.

Noting that financing budget deficit was entirely financed through domestic sources, he said that in nominal terms, the overall budget deficit increased to Rs. 401.7 billion during the period under consideration from Rs. 377.7 billion in 2014.

The y-o-y growth of broad money (M2b) accelerated to 16.2% in July 2015 compared to 15.3 % in June 2015. The expansion in domestic credit to the private sector and the Government has caused broad money growth in July 2015.

He said that the credit obtained by the public sector has increased as Net Credit Growth (NCG) increased by Rs. 61.8 billion in July 2015, while cumulative increase in NCG for the first seven months of 2015 was Rs. 299.7 billion.

“Credit granted to public corporations by commercial banks declined by Rs. 6.9 billion in July 2015 and cumulative increase for the first seven months of 2015 was Rs. 29.7 billion.

Nevertheless, the growth of credit to the private sector has accelerated significantly. “The y-o-y growth increased to 21.0 % in July compared to 19.4 % in June 2015. In absolute terms, it is an increase of Rs 40.9 billion in July compared to Rs. 55 billion in June.” Credit by domestic banking units increased by Rs 44.5 billion, while credit by overseas banking units decreased by Rs. 3.6 billion. Cumulative increase in credit growth for the first seven months of 2015 was Rs. 245.9 billion. He said the growth of credit to the private sector is expected to return to the desired path in response to policy adjustments and also as a result of the base effect.

Observing some upward pressure on interest rates was observed although many rates remain at low levels. Thus the Central Bank took several policy measures to ensure macroeconomic/macro-financial stability such as requiring exporters to bring their exports proceeds within three months, allowing market forces to play a greater role in determining the exchange rate, imposing a maximum Loan to Value (LTV) ratio of 70% in respect of loans and advances granted for the purpose of purchase or utilisation of motor vehicles as a prudential measures.

Therefore Siriwardane said that the positive results of these proactive measures are expected to be reflected in macroeconomic developments in the period ahead.