Jan 082014
Sri Lanka to change inflation index to cover whole nation
Sri Lanka will change its inflation index to change the basket of items and broaden coverage to the whole nation rather than just the capital city, the state-run statistics office said yesterday

he index change – the third in seven years – follows calls for revision of the existing one from the International Monetary Fund (IMF) and complaints about official statistics from opposition politicians.

“The current index does not reflect the whole country,” D.C.A. Gunawardena, Head of the Department of Census and Statistics, told Reuters. It represents only 17 percent of the Sri Lankan population.”

He said the change will be made this year and that the base year for calculating the consumer price index will be 2010. The current Colombo Consumer Price Index (CCPI) was introduced in June 2008 with a base year of 2006/7.

The statistics department chief said the basket of goods measured will vary depending on the area, but did not give details on how the basket will change.

In its latest country report in May 2013, the IMF said there was need for an “All Sri Lanka” index instead of a Colombo index.

Under the current index and a previous one, Sri Lanka has had single-digit inflation since February 2009.

The IMF, in its May report, said Sri Lanka’s national accounts “suffer from insufficient data sources and undeveloped statistical techniques” and the method for deriving gross domestic product at constant prices was “not satisfactory”.

The multilateral lender has said it has been using the government’s official historic data for its own estimates. Opposition politicians have criticised President Mahinda Rajapaksa’s government, saying it has overstated growth estimates and given unrealistic inflation figures with an aim of getting lower rates on foreign loans and attracting foreign investors. Official figures show Sri Lanka’s economic growth has been more than 6.3 percent every year since 2009.

One opposition Member of Parliament, Anura Kumara Dissanayaka, said in December the statistics office had manipulated the 2013 first quarter economic growth rate to be 6.0 percent rather than 5.4 percent. Gunawardena rejected the assertion as “totally baseless”.

Central Bank Governor Ajith Nivard Cabraal said the country has a “very sound system” of data collection.


Nov 182013
Economy grows 7.8% in 3Q
The Census and Statistics Department data showed the Sri Lankan economy grew 7.8 percent in third quarter (3Q) this year, accelerating from 6 percent and 6.8 percent recorded in 1Q and 2Q respectively.

The 3Q is the first full quarter after the Central Bank cut its key policy rates in May by 50 basis points to show high growth rates.

The growth of the US $ 59 billion Sri Lankan economy slowed down to 6.8 percent in 2012 from 8 percent growth in two consecutive years.

After the surprise 50 basis point rate cut again in October, Central Bank Governor Ajith Nivard Cabraal said the economy was well on track to achieve its full year target of 7.5 percent.

The data showed the agricultural sector expanding by a healthy 7 percent, recovering from the 0.5 percent contraction in the corresponding quarter in 2012.

Meanwhile the industry sector grew by 8.1 percent as against the 7.3 percent growth in 3Q’12. The services sector grew by 7.9 percent compared to 4.6 percent growth in 3Q12.

The economists have often pointed out the irrational use of demand management policies such as interest rates and exchange rates to accelerate the economy as they have always proved futile in the past.

They have called for tough structural changes in export growth, reforms to SOEs, effective tax administration and tariff reform to increase government revenues, enhanced revenue mobilization to support capital expenditure and improvements in the general business climate to maintain 8 percent growth for a sustained period.

The structural composition of t he economy by and large remained unchanged. The agricultural sector contributed 11.1 percent to the overall GDP while the Industry and the Services’ sector shares remained 29.9 percent and 59.0 percent respectively.

The sub sectors under the agricultural sector; paddy, livestock, other food crops and minor export crops grew by 56.5 percent, 8.3 percent, 8.3 percent and 2.9 percent respectively.

Among the contracted sectors are tea (5.1 percent), rubber (28.1 percent), coconut (32.3 percent) and fishing (9.9 percent).

All the sub sectors under the industry showed growth. The manufacturing, mining & quarrying, electricity, gas & water and construction sub sectors grew by 6.8 percent, 12.5 percent, 11.2 percent, and 10 percent respectively.

The hotels and restaurants sector growth was the highest under services with 13.6 percent. This is followed by transport & communication (11.8 percent), export trade (9.1 percent), import trade (7.5 percent), domestic trade (6.3 percent), government services (3.6 percent), private services (7.0 percent) and banking, insurance & real estate (6.7 percent).

Jul 242013
July monetary policy on hold; long-term lending rates to ease
The Monetary Board of t he Central Bank (CB) yesterday decided to keep the current monetary policy on hold leaving the repurchase rate and the reverse repurchase rate at 7 percent and 9 percent, respectively.

The Central Bank Governor recently told Wall Street Journal that a relaxation in the monetary policy further is likely in September or October subject to the direction of inflation.

Despite the 50 basis point rate cut in May, the headline inflation eased to 6.8 percent in June from 7.3 percent a month earlier. The governor’s hopes for a third round of easing to spur economic growth was based on the monetary authority’s expectations of inflation to remain in single digit levels for the remainder of the year.

This is due to the expected supply side improvements and the absence of demand-driven inflation.

Meanwhile, the Central Bank also expects the interest rates of long-term loans to the private sector to further decrease in the ensuing months.

In fact, despite the two rounds of easing measures in December 2012 and May 2013, the commercial banks were slow in bringing down their lending rates and as a result, the Central Bank went to the extent of cutting the interest rates on delayed payment of credit card balances from 4 percent to 24 percent.

However, ex-Central Banker and veteran economist W.A. Wijewardena recently argued that the Central Bank had chosen the wrong interest rate to tame the banks. As a consequence of this move, he even cautioned of accumulation of unpaid credit card balance in the system just like in South Korea in 2007, which can threaten the stability of Sri Lanka’s financial system.

As the commercial banks seemed little responsive to the Central Bank’s advice, the CB went on to reduce the statutory reserve ratio in June, which is believed to have released at least Rs.45 billion to the system.

The Central Bank however said that a downward movement was observed in Treasury yield rates, as well as in the short-term lending and deposit rates of major commercial banks.

Jul 162013
CB signals another rate cut in Sep/Oct
Nearly two months into a policy rate cut in May, the Central Bank Governor, Ajith Nivard Cabraal has signaled again another round of monetary easing in September or October, a decision that appears to be dependent on inflation expectations.

“If we feel very confident with the events of the next few months, then we would feel a little more inclined to relax further,” Cabraal was quoted as saying to The Wall Street Journal this Monday.

If the Central Bank cuts key policy rates as it says, it would be the third round of monetary easing within a matter of 9 months.

Following the policy easing that began last December, cutting 25 basis points, the Central Bank again lowered the rates by 50 basis points in May, leaving the repo rate at 7.00 percent and reverse repo rate at 9.00 percent.

According to analysts, Monday’s statement by the Central Bank Chief will again bring uncertainty about future rate cuts and therefore speculation is likely to lead the financial markets as the higher than expected rate cut in May, which signaled a stable policy-rate environment for the remainder of the year.

“It appears that the Governor has again gone back on his words where he justified the higher than expected rate cut in May was to ‘reduce uncertainty in the market’ over future cuts,” an analyst said on the grounds of anonymity.

Meanwhile, an ex-Deputy Governor of the Central Bank, Dr. W.A Wijewardena recently forewarned of the consequences of further monetary easing.

He noted that in a relaxed monetary policy environment, the cheaper credit will be mostly absorbed by the consumptionrelated imports in an open economy such as Sri Lanka, leading to Balance of Payment (BoP) problems.

As he further explained, the resultant BoP deficit then will have to be financed with foreign reserves. Once all the foreign reserves are exhausted, with no more left to defend the rupee, the country will have to allow the rupee to go for a free-fall.

Therefore he believes the relaxation of the monetary policy to stimulate the economy in a background of cost increases will surely invite inflation.

Meanwhile, NDB Stockbrokers also cautioned that aggressive policy rate cut in May followed by the reduction of the Statutory Reserve Requirement (SRR) by the commercial banking system may insert inflationary pressure and push headline inflation beyond 10 percent over the next 12 months.

Follow me on Twitter

Featuring YD Feedwordpress Content Filter Plugin