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Press Release
Issued By Economic Research Department
Date 06.07.2018

Monetary Policy Review: No. 4 – 2018

The Central Bank of Sri Lanka maintains policy interest rates at current levels

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 July
2018, decided to maintain policy interest rates at their current levels. Accordingly, the Standing
Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) remain at 7.25 per
cent and 8.50 per cent, respectively. The Board’s decision is consistent with stabilising inflation
at mid-single digit levels in the medium term, thereby contributing to a favourable growth
outlook for the Sri Lankan economy.

Inflation to stabilise at mid-single digit levels despite temporary supply side pressures

Headline inflation, as measured by the Colombo Consumer Price Index (CCPI) and the
National Consumer Price Index (NCPI), remained at low single digit levels, in spite of the transient
acceleration mainly arising from the upward revisions to prices of domestic petroleum products and
other administratively determined prices. Core inflation also remained subdued, and inflation
expectations remain favourable. Although pressures on domestic food supplies during the off-season
could exert some upward pressure on prices in the short term, inflation is expected to remain at the
desired mid-single digit levels during the remainder of the year and over the medium term,
underpinned by firmly anchored inflation expectations and appropriate policy adjustments.

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Economic growth remained subdued in the first quarter of 2018

According to the provisional estimates released by the Department of Census and Statistics
(DCS), the Sri Lankan economy grew by 3.2 per cent, year-on-year, in the first quarter of 2018,
compared to the revised annual growth rate of 3.3 per cent in 2017. Economic growth during the first
quarter of 2018 was mainly driven by the Services and Agriculture related activities while the Industry
related activities recorded a moderate growth. It is envisaged that the government’s continued
commitment to the implementation of structural reforms will help the economy to attain its potential
over the medium term, amidst fiscal consolidation. The sustained recovery in the global economy is
likely to support domestic economic growth, while the prevalence of a low inflation environment and
an appropriately valued flexible exchange rate are also expected to facilitate higher growth.

Interest rates remain high both in nominal and real terms, while growth in money supply
decelerated

Short term interest rates increased recently responding to the prevailing deficit liquidity
conditions in the domestic money market. Yields of short term government securities displayed mixed
movements in the recent past, while other market interest rates appear to have stabilised at elevated
levels. While appropriate open market operations will address short term liquidity concerns, it is
expected that nominal and real interest rates would gradually adjust downwards in line with the neutral
policy stance of the Central Bank and the prevailing low inflation environment.

Meanwhile, the year-on-year growth of broad money supply (M2b) decelerated in May 2018.
The growth of credit extended to the private sector by commercial banks too decelerated in the months
of April and May 2018, following the festive season-led credit expansion observed in March 2018.

External sector performance buoyed by strong foreign exchange reserve position

The moderation of earnings from exports alongside the increase in import expenditure resulted
in an expansion of the trade deficit over the first four months of 2018. The recent growth in imports
was largely driven by the importation of personal vehicles and gold, and the latter is expected to have
been addressed by the imposition of the customs duty on gold imports. Earnings from tourism and
workers’ remittances continued their positive growth momentum so far during the year. Tightening
global financial conditions prompted some outflows from the rupee denominated government
securities market and the secondary market of the Colombo Stock Exchange (CSE), although primary
market inflows resulted in a net overall inflow to the CSE so far during the year. Amidst these

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developments, the Central Bank recorded a net foreign exchange absorption of US dollars 141 million
from the domestic market in the first half of 2018. With the successful issuance of the International
Sovereign Bond (ISB) in April 2018, the receipt of the fifth tranche of the Extended Fund Facility
with the International Monetary Fund (IMF-EFF), receipts from the divestiture of the Hambantota
port and foreign exchange purchases of the Central Bank from the domestic market in early 2018, the
gross official reserve position is estimated to have improved to around US dollars 9.2 billion by end
June 2018, compared to US dollars 8.0 billion at end 2017. So far during the year, the Sri Lankan
rupee has depreciated against the US dollar by 3.6 per cent. Much of this depreciation was recorded
since late April, reflecting the broad based strengthening of the US dollar in the international market.
The Central Bank intervened in the domestic foreign exchange market to address speculative
behaviour in the foreign exchange market and the unwarranted volatility in the exchange rate.

Unchanged monetary policy stance to sustain inflation at mid-single digit levels

Based on the recent developments and outlook for key macroeconomic variables, the Monetary
Board of the Central Bank was of the view that the continuation of the current monetary policy stance
is appropriate. The Central Bank will remain vigilant on global market developments and possible
spillover effects, while continuing to closely monitor domestic real economic activity.

Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate
(SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels.

Monetary Policy Decision: Policy rates unchanged

Standing Deposit Facility Rate (SDFR) 7.25%

Standing Lending Facility Rate (SLFR) 8.50%

Statutory Reserve Ratio (SRR) 7.50%

INFORMATION NOTE:

A press conference with Governor Dr. Indrajit Coomaraswamy will be held today (06 July
2018) at 12 noon at the John Exter International Conference Hall (JEICH) of the Central Bank of Sri
Lanka.

The release of the next regular statement on monetary policy will be on 03 August 2018.

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Data Annexure:

Table 01: Real GDP Growth (Provisional)

Year - on - Year % Change

Economic 2016 2017 2018

Activities
First Second Third Fourth First
Annual Quarter Annual
Quarter Quarter Quarter Quarter

Agriculture -3.8 -4.4 -3.1 -3.0 7.1 -0.8 4.8

Industries 5.8 3.7 5.6 5.3 4.1 4.6 0.9

Services 4.7 4.3 2.7 2.8 3.2 3.2 4.4

GDP 4.5 3.4 3.0 3.2 3.5 3.3 3.2

Source: Department of Census and Statistics

Table 02: Inflation

Month Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18

Headline Inflation CCPI (2013=100) 7.1 5.8 4.5 4.2 3.8 4.0 4.4
(Year on year %
change) NCPI (2013=100) 7.3 5.4 3.2 2.8 1.6 2.1 -

Core Inflation CCPI (2013=100) 4.3 3.5 3.5 3.4 3.5 3.2 3.4
(Year on year %
change) NCPI (2013=100) 2.7 2.1 2.0 1.9 1.9 1.7 -

Source: Department of Census and Statistics

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 Table 03: Monetary Sector Developments (Provisional)

Outstanding Amount (Rs. billion) Year - on - Year % Change

Indicator
Jan Feb Mar Apr May Jan Feb Mar Apr May
18 18 18 18 18 18 18 18 18 18

Reserve Money 930 938 997 1,000 973 12.3 10.7 11.8 12.9 13.2

Broad Money (M2b) 6,378 6,451 6,607 6,692 6,671 16.8 16.2 16.4 16.8 15.0

Net Foreign Assets (NFA) 128 116 106 119 74 138.9 131.3 128.6 135.0 123.4

Net Domestic Assets (NDA) 6,251 6,335 6,500 6,572 6,597 8.0 7.0 7.5 8.2 7.8

Net Credit to the Government

(NCG) 2,221 2,246 2,278 2,322 2,324 5.1 2.4 2.9 5.3 3.8

Credit to Public Corporations (a) 528 546 557 581 608 -1.5 -1.4 -2.6 0.8 4.8

Credit to the Private Sector (a) 4,842 4,900 5,022 5,044 5,073 15.2 14.6 15.3 15.3 15.1

Broad Money (M4) 7,900 7,979 8,112 8,218 8,207 17.7 17.1 16.7 16.8 15.1

(a) Revised Source: Central Bank of Sri Lanka

Table 04: Interest Rates

End End End End End As at

Interest Rate (%) Dec 17 Mar 18 Apr 18 May 18 Jun 18 5 Jul 18

Policy Rates of the Central Bank

Standing Deposit Facility Rate 7.25 7.25 7.25 7.25 7.25 7.25

Standing Lending Facility Rate 8.75 8.75 8.50 8.50 8.50 8.50

Weighted Average Call Money Rate (AWCMR) 8.15 8.41 7.86 7.93 8.50 8.48

Treasury bill yields (Primary market)

91-day 7.69 8.17 8.10 8.34 8.32 8.35

182-day 8.30 - - 8.93 8.85 8.85

364-day 8.90 9.69 9.59 9.62 9.39 9.43

Lending Rates

Average Weighted Prime Lending Rate (Weekly) 11.55 11.55 11.21 11.42 11.33 -

Average Weighted Lending Rate (AWLR) 13.88 14.04 14.13 14.06 - -

Average Weighted New Lending Rate (AWNLR) 14.31 14.25 14.29 14.15 - -

Deposit Rates

Average Weighted Deposit Rate (AWDR) 9.07 9.00 8.98 8.91 8.92 -

Average Weighted Fixed Deposit Rate (AWFDR) 11.48 11.41 11.38 11.23 11.26 -

Average Weighted New Deposit Rate (AWNDR) 10.06 10.33 10.75 10.67 - -
Source: Central Bank of Sri Lanka