Sri Lanka's central bank maintained its monetary policy stance, as expected, and said the country's economy was poised for a stronger performance on the back of a recovery in the external sector, sustained momentum in construction and manufacturing, and low and stable inflation.
The Central Bank of Sri Lanka kept its Standing Deposit Facility Rate (SDFR) at 6.50 percent and the Standing Lending Facility Rate (SLFR) at 8.0 percent. The central bank rejigged its policy framework in January with the SDRF rate replacing the previous benchmark repo rate.
Sri Lanka's headline inflation rate was steady at 4.2 percent in March and February and the central bank expects inflation to remain in mid-single digits throughout the year although there might be some price pressures from supply disruptions linked to drought.
The central bank targets inflation of 4-6 percent this year and 3-5 percent in 2015 and 2016. In 2013 the central bank cut the benchmark rate by 100 basis points to boost economic growth, which rose to 7.3 percent in 2013 from 6.3 percent in 2012.
But the central bank said credit to the private sector only grew by a modest 4.4 percent in February from the same month last year, down from 5.2 percent in January. Credit obtained by public corporations declined further in February and continued fiscal consolidation, together with the proceeds of a sovereign bond issue in April is expected to ease the public sectors reliance on bank financing in coming months.
"The resulting release of funds for private investments bolstered by sufficient market liquidity levels would provide the necessary stimulus to strengthen private sector activity and in turn, as expected, expand credit growth from the second quarter onwards," the bank said.
Sri Lanka's Gross Domestic Product expanded by an annual 8.2 percent in the fourth quarter of 2013, and the central bank has forecast 7.8 percent growth for 2014.
Inflows of workers' remittances rose significantly in February and earnings from tourism also rose in the first quarter, the bank said, adding that gross official reserves were estimated at around US$ 8.0 billion at the end of February, the equivalent of 5.3 months of imports. Reserves are expected to rise further with the proceeds of this month's $500 million sovereign bond.