Surge in SL motor vehicle imports raises concerns, erodes into foreign reserves
View(s):The rapid increase in the imports of consumer durables including motor vehicles in recent months driven by credit available at low interest rates, among other things, has raised some concerns, the banking regulator said this week.
Gross official reserves, which stood at US$7.5 billion at end June, are also estimated to have decreased to $6.8 billion by end July.
“The Central Bank is closely monitoring these developments in order to ensure that credit continues to be available to support productive economic activity while avoiding excessive expansion in credit in the period ahead,” the Central Bank (CB) said in its monetary policy review for August. The expansion in private sector credit in the first half of the year was largely due to higher disbursements of credit to the industry and services sectors.
Economists have expressed concern that imports have sharply risen while exports have been affected by the CB protecting the rupee against international pressure. Most other currencies have weakened against the US dollar. The surge in vehicle imports, particularly small cars, has been partly attributed to a salary hike, more disposable income in the hands of the people which then also resulted in consumerist tendencies in recent months.
The CB said headline inflation remained in negative territory for the second consecutive month, recording -0.2 per cent in August on a year-on-year basis. Headline inflation, on an annual average basis, moderated further to 1.0 per cent in August 2015 from 1.3 per cent in the previous month.
Meanwhile, core inflation, which reflects the underlying price movements in the economy, increased to 3.9 per cent in August on a year-on-year basis, from 3.5 per cent in the previous month. Going forward, the inflation outlook and expectations remain favourable for the remainder of the year, supported by improved domestic supply conditions and subdued global commodity prices, the CB said.
Although some pressures in the short term interest rates were observed along with declining liquidity levels in the domestic money market, most market interest rates continue to remain at low levels.
Supported by the prevailing low interest rates, the year-on-year growth of credit extended to the private sector by commercial banks accelerated to 19.4 per cent in June compared to 17.6 per cent in May 2015. Credit disbursed in absolute terms increased by around Rs. 55 billion in June, while on a cumulative basis, credit to the private sector increased by around Rs. 205 billion during the first half of 2015 compared to a decline of Rs. 53 billion during the corresponding period in 2014.
In the external sector, increased expenditure on imports relative to earnings from exports widened the trade deficit in the month of June as well as on a cumulative basis during the first half of the year. However, regular inflows of remittances and earnings from tourism continued to support the current account balance.
The CB said reserves are expected to increase during the remainder of the year with higher inflows arising from improved business outlook and investor confidence along with the realisation of the remaining proceeds of the currency swap arrangement with the Reserve Bank of India (RBI).
“Reflecting the domestic and global developments, the Sri Lankan rupee has depreciated by 2.3 per cent to Rs. 134.30 against the US dollar so far during the year,” the statement added. Taking the above developments in the economy into consideration, the Monetary Board, at its meeting held on August 31 was of the view that the current monetary policy stance is appropriate. “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 per cent and 7.50 per cent, respectively,” the statement said.