• Letters

The Central Bank said last week that it has been able to successfully achieve quarterly targets for reserve money during the first nine months of 2007 though on the broad money growth it failed.

“The level of reserve money at end September 2007 was Rs. 256.7 billion, compared with the target of Rs.257.8 billion,” the Bank said.
“The broad money growth in July reached 19.9 per cent, exceeding the desired level,” the Bank added following the review of monetary policy in September.

It said the increase was due to the expansion in both the net foreign assets (NFA) and net domestic assets (NDA) of the banking system.
Within the NDA, private sector credit expansion, which remained a key concern on account of its adverse effect on money supply and inflation, has showed some deceleration, responding to the tight monetary policy stance of the Central Bank. Credit to the private sector has decelerated since May 2007 to reach 24 per cent at end July 2007 compared with the higher levels of around 26 per cent recorded previously.

“The maintenance of tight reserve money targets has raised all market interest rates sharply upwards so far during the year. The resulting slowdown in the growth of credit aggregates is expected to decelerate the growth in broad money and demand driven inflatioan in the future,” the Bank said.

According to the Bank the economy grew by 6.4 per cent during the second quarter of 2007, overtaking the growth of 6.1 per cent recorded in the first quarter. The growth was facilitated by the strong performance in the Industry and Services sectors as well as the recovery in the Agricultural sector.

It said the healthy performance in the external sector continued further with the exports recording the highest monthly growth in July 2007, while the increase in imports remained at a moderate level. The cumulative exports during the first seven months of 2007 grew at 15.8 per cent whereas cumulative import growth was 4.2 per cent. The higher expansion in exports over that of imports during the recent months has contributed to the gradual decline in the trade deficit, which narrowed by 15.6 per cent during the first seven month period.

Worker remittances, which expanded by 19 per cent over the same period, helped stem the expansionary effect of the trade deficit on the current account balance. Consequently, the balance of payments recorded a surplus of US dollars 151 million and the official reserves stood at US dollars 2,681 million (3.0 months of imports) by end July 2007.

Inflation, as measured by the point to point change in the Colombo Consumers’ Price Index (CCPI) declined till June 2007 to 13 per cent due to the impact of monetary policy tightening. However, the unexpected sharp increases in commodity prices in international markets as well as revision in administered prices caused the CCPI to surge again in July to 17.6 per cent before it declined to 17.3 per cent in August and in September.