Financial Times

No change in interest rates - Monetary Board
The Monetary Board, despite growing market speculation of a rise in interest rates and a cash-strapped situation for the government, said last week that there was no need to change the Central Bank's policy interest rates at this time.

It said the statement of the new government's economic policy announced by the President a few days ago would "no doubt help to dispel some of the uncertainties in the market since February, arising from the political changes."

In a statement the board said the economy continues to be resilient and it would be desirable to maintain the momentum of economic growth.

Here are extracts of the situation:
The sectoral performance in the economy during the first few months of 2004 has been satisfactory with early indications of overall growth momentum continuing. In the agriculture sector, plantation agriculture showed strong growth but the Maha paddy output was affected by the drought. Industrial production continues to expand by around 6 per cent, with growth being recorded in both export and domestic oriented industries. In the services sector, port activity and telecommunications continue to record significant growth. The prolonged drought has significantly reduced the generation of hydropower. The share of thermal power generation has continued to rise, reducing the value addition in this sector.

Prices
At end May 2004, the 12-month moving average of the Colombo District Consumer Price Index (CDCPI) remained at the same level of 0.9 per cent as at end April 2004, indicating a halt in the declining trend in inflation. The point-to-point index of the CDCPI, which has been rising since March, increased from 1.9 per cent at end April to 3.1 per cent at end May. The Colombo Consumers' Price Index (CCPI) reflected a similar trend with the 12 month moving average at end May remaining at the same level of 3.7 per cent as a month ago, while the point to point index of the CCPI, which has been rising since February 2004, increased from 4.6 per cent in April 2004 to 5.9 per cent in May 2004.

External developments
International trade has continued to grow, with both exports and imports expanding significantly. Exports during the first quarter of 2004, in US dollar terms, grew by 14 per cent over the same period in 2003. Import growth was 19 per cent, of which 3 percentage points were due to increases in oil and wheat imports. A salutary development in this respect has been the higher growth in intermediate imports, excluding oil and wheat grain. During the first quarter of 2004, the trade deficit widened to US dollars 465 million from US dollars 336 million in the corresponding period in 2003.

Foreign remittances continue to increase but there have been delays in foreign inflows emanating from privatisation proceeds and official external financing. This has exerted some upward pressure on the foreign exchange market, creating excessive volatility. The Central Bank's intervention in the foreign exchange market during this period has helped to contain some of this volatility. The rupee has depreciated gradually against the US dollar by about 3 per cent up to the second week in June 2004. Gross official reserves, which stood at US dollars 2,329 million (4.2 months of imports) at end 2003, declined to US dollars 2,242 million (3.8 months of imports) at end April 2004. However, the country's total reserves (official reserves plus those of commercial banks) have risen from US dollars 3,218 million (5.8 months of imports) to US dollars 3,324 million (5.7 months of imports), during the same period. The overall balance of payments for 2004 is expected to show a surplus of about US dollars 170 million.

Fiscal Developments
In compliance with the Fiscal Management (Responsibility) Act, the government issued the Final Budget Position Report for 2003 in May. The fiscal deficit for 2003 was 8 per cent of GDP, in comparison to the budget estimate of 7.5 per cent. Although total expenditure was lower than budgeted, a shortfall in revenue collection led to a higher deficit.

An overall deficit of 6.8 per cent of GDP was envisaged for 2004 in the Budget of 2004. However, the pre-election Budgetary Position Report has indicated that the deficit is likely to be higher, at around 7.3 per cent.

According to information for the first quarter of 2004, the fiscal deficit was 2.6 per cent of GDP (Rs.51.8 billion) compared to 2.1 per cent (Rs.37.9 billion) during the comparable period in 2003. In financing the deficit, borrowings from domestic sources amounted to 2.1 per cent of GDP (Rs.41 billion) in 2004, compared to 1.9 per cent (Rs.38 billion) in 2003. The government has indicated its strong commitment to containing the budget deficit below 8 per cent of GDP in 2004.

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