Inflation sharply up last month

Inflation in Sri Lanka -- measured on a point-to-point change in the Colombo Consumers’ Price Index (CCPI) -- rose sharply to 17.2 per cent last month ‘reflecting demand pressure in the economy and capturing the upward revision in administered prices such as electricity, tobacco and liquor, and increase in prices of imported goods in the consumer basket, the Central Bank said last week.

It said the 12-month moving average of inflation increased to 11.8 per cent in October 2006. “This increase in the CCPI due to the upward revision of administered prices would be only a one-time increase in prices, but would bring beneficial results by way of better fiscal management by eliminating or reducing the subsidy component of the government budget, which otherwise has to be funded by borrowing from the banking sector. Hence, it complements efforts to combat long term inflation by the Central Bank,” the statement said after the Monetary Board met on Monday to review interest rate policy.

It said the growth in private sector credit still remains high and the Monetary Board “has observed with concern, the current demand pressure in the economy, higher inflation and the regular use of Reverse repo facilities by some banks leading to high credit expansion. In that context, the Central Bank has cautioned commercial banks against using the Reverse Repurchase facility excessively as it contributes to high credit and monetary expansion.”

The statement said a steady improvement has been seen in economic activity across all major sectors. The performance of the agriculture sector further increased with the improved paddy harvest, higher rubber and coconut output and the recovery in fish production. During the first eight months of 2006, the growth in the industrial sector gained momentum following the expansion in both exports and domestic market oriented industries. The increased hydro-power generation with favourable weather and the continued robust expansion in the construction sector supported the industrial sector expansion. The services sector continued to experience high growth benefiting from the expansion in telecommunications, port services, banking, insurance, real estate sector and tourism related activities.

It said cumulative exports grew by 8.8 per cent during the first nine months of 2006 while cumulative imports increased by 17.4 per cent. The resulting trade deficit, which widened due to higher growth in imports than exports, was offset by other inflows to the current account and the capital and financial accounts. Private remittances are estimated to have risen by 23 percent during the first nine months of 2006 while foreign direct investments (FDI) during the first eight months reached US$340 million and the government received loans and grants amounting to US$596 million during this period. Accordingly, the balance of payments is estimated to have recorded a surplus of US$ 140 million by the first week of November 2006. The country’s gross official reserves stood at US$2.47 billion by November 9.

The statement said that the Monetary Board has decided to maintain the policy interest rates of the Central Bank at its current levels and to continue with the conduct of open market operations to decelerate the monetary expansion to the desired path. The release of the next regular statement on monetary policy is scheduled for December 15.