External Sector Performance – November 2009
The trade deficit contracted for the 11th consecutive month in November 2009 by 24.4 per cent to US dollars 251 million, largely due to the
impact of the global economic crisis. This reflected a 5.0 per cent decline in earnings from exports and 11.6 per cent reduction in expenditure
on imports. On a year-on-year basis, cumulative earnings from exports and expenditure on imports declined by 14.7 per cent and 31.9 per cent
respectively during the first eleven months of 2009. Accordingly, the cumulative trade deficit decreased by 55.1 per cent to US dollars 2,468
million during the first eleven months of 2009 from US dollars 5,503 million in the corresponding period of 2008.
The deficit in the trade account was off-set by the higher inflows of workers’ remittances. During the first eleven months of 2009 workers’
remittances increased by 14.2 per cent to US dollars 3,035 million. As a result, workers’ remittances were US dollars 567 million (about 23 per
cent) in excess of the trade deficit.
The gross official reserves, with and without Asian Clearing Union (ACU) funds, were at US dollars 5,308 million and US dollars 5,228 million,
respectively, by end November 2009. This includes short-term net inflows to the Government Treasury bills of US dollars 262 million and
Treasury bonds of US dollars 1,068 million. Based on the previous 12 months average imports (US dollars 823 million per month), the gross
official reserves, without ACU funds, were equivalent to 6.4 months of imports.
Sri Lanka exchange controls to be relaxed in Feb01: CB Governor
(LBR Money) – The first part of a series of forex control relaxations announced in January will be implemented from February 01, Central
Bank Governor Nivard Cabraal said.
Cabraal announced a sweeping easing of existing exchange controls on January 04, as part of a monetary policy direction for 2010.
“We announced measures that will have to be put in motion over the year,” Cabraal told LBO.
The first relaxations are planned to come into effect from February 01, he said.
The relaxations would allow Sri Lankan citizens to take cash out and invest in banks and share markets or start businesses up to set limits,
which are yet to be announced.
Foreigners would also be allowed to buy local company debt. At the moment foreign investors are only allowed to buy government debt.
The announcement ran into a political storm with opposition activists charging that the easing of controls was aimed at allowing key members
of the ruling coalition to take out their ill gotten gains ahead of a presidential election set for January 26.
Corruption has become a key issue of the polls, with opposition candidate retired army general Sarath Fonseka promising emergency legislation.
Monetary Policy Review – January 2010
The annual average inflation continued to decline, reaching 3.4 per cent by December 2009 while inflation, as measured by the year-on-year
change in the Colombo Consumers’ Price Index (base=2002), increased to 4.8 per cent in December 2009. The gradual increase in inflation, on
an year-on-year basis, was expected, given the low base and the rebounding of international commodity prices along with the recovery in the
global economy. Nevertheless, projections of inflation for 2010 indicate benign inflationary pressures, enabling inflation to be in single digits
by year end.
The Central Bank eased its monetary policy stance during 2009 in view of the favourable outlook for inflation. Though some volatility has been
observed in the short term money market rates in recent weeks, market interest rates have declined to lower levels by end 2009 in response to
the monetary policy measures taken by the Central Bank. As a result, credit to the private sector, which contracted continuously during the
period from January to October 2009, indicated a positive turnaround in nominal terms in November. It is expected that this development would
be further strengthened along with activity in the domestic economy picking up in the period ahead.
Taking these developments into account, the Monetary Board, at its meeting held on 18 January 2010, has decided to maintain the policy interest
rates of the Central Bank at their existing levels.