Monetary Policy Press Conference

Review of the Monetary Policy Stance

Review No. 02 of 2018

04 April 2018

Economic Research Department

Central Bank of Sri Lanka

1
 Review No. 02 of 2018

Monetary Policy Decision:

Standing Lending Facility Rate (SLFR) of the Central Bank is
reduced by 25 basis points

Standing Lending Facility Rate (SLFR) 8.50%

Standing Deposit Facility Rate (SDFR) 7.25%

Statutory Reserve Ratio (SRR) 7.50%

2
 Real Sector
Real GDP growth for 2017 was below expectations…
• Sri Lankan economy grew by 3.1% in 2017 compared to 4.5% in 2016

Quarterly Growth Rates (%)

2015 2016 2017

Economic Activity Q1 Q2 Q3 Q4 Annual Q1 Q2 Q3 Q4 Annual Q1 Q2 Q3 Q4 Annual

Agriculture, Forestry and
Fishing 4.3 8.8 5.9 0.4 4.7 -4.4 -5.6 1.4 -6.2 -3.8 -4.4 -3.1 -3.0 7.1 -0.8

Industries -1.4 4.6 3.6 2.5 2.2 13.9 0.7 2.4 5.6 5.8 3.6 5.6 3.9 2.7 3.9

Services 6.4 7.5 6.8 3.5 6.0 3.3 3.3 5.7 6.2 4.7 4.3 2.7 2.8 3.2 3.2

GDP 3.9 7.1 5.9 3.3 5.0 5.9 1.9 4.5 5.4 4.5 3.4 3.0 2.9 3.2 3.1

Annual GDP Growth

▪ Agriculture activities contracted by 0.8%
6.0
affected by adverse weather conditions 5.0 5.0
5.0 4.5
▪ Growth in Industry activities at 3.9% was
4.0 3.4
supported by the expansion in
Per cent

3.1
3.0
manufacturing , construction and mining
and quarrying activities 2.0

1.0
▪ Services sector growth at 3.2% was driven by
financial services ,wholesale and retail trade 0.0
2013 2014 2015 2016 2017
and other personal service activities
Source: DCS

3
 Headline inflation has declined further with the normalisation of supply
conditions, while core inflation remained checked in recent months…
10 Movements in Inflation (y-o-y) Colombo Consumers' Price Index CCPI (2013=100)
16 Y-o-Y Inflation - Food and Non Food
8 14 14.4
6 12
Per cent

4.2 10

Per cent
4 3.4 8
3.2 6 5.1
2 2.0 4 4.2
2 3.7
0 0
(2) -2

May-17
Apr-16

Jun-16

Feb-17
Jan-16

Jan-17
Mar-16

May-16

Jul-16

Mar-17
Apr-17

Nov-17

Mar-18
Sep-16

Nov-16
Dec-16

Dec-17
Jan-18
Aug-16

Jul-17
Aug-17
Sep-17
Feb-16

Jun-17
Oct-16

Oct-17

Feb-18
Jan-16

Dec-16
Mar-16

Sep-17
Jul-17
Apr-16
May-16

Jan-17
Jul-16

Mar-17
Apr-17
May-17

Nov-17
Sep-16

Nov-16

Dec-17

Mar-18
Jun-16

Aug-16

Aug-17

Jan-18
Feb-16

Feb-17
Oct-16

Oct-17
Jun-17

Feb-18
Headline (Y-o-Y) based on CCPI Headline (Y-o-Y) based on NCPI All Items Inflation Food Inflation Non Food Inflation
Core (Y-o-Y) based CCPI Core (Y-o-Y) based NCPI

Headline Inflation (%) National Consumer Price Index NCPI (2013=100)

Dec-16 Sep-17 Dec-17 Jan-18 Feb-18 Mar-18 18 Y-o-Y Inflation - Food and Non Food
15.7
based on CCPI (2013=100) 14
Y-o-Y 4.5 7.1 7.1 5.8 4.5 4.2 10

Per cent
Annual 3.7
4.0 5.8 6.6 6.6 6.4 6.1 6
average 3.2
2
based on NCPI (2013=100) 2.8
-2
Y-o-Y 4.2 8.6 7.3 5.4 3.2 -
Annual -6
4.0 6.8 7.7 7.6 7.2 -

Jul-16

Dec-17
Jan-16

Mar-16
Apr-16
May-16

Nov-16

Jan-17

Mar-17
Apr-17
Dec-16

May-17

Jul-17

Nov-17
Feb-16

Aug-16

Jan-18
Sep-16

Sep-17
Jun-16

Oct-16

Jun-17

Aug-17
Feb-17

Oct-17

Feb-18
average
Core Inflation (%)
Dec-16 Sep-17 Dec - 17 Jan-18 Feb-18 Mar-18 All Items Inflation Food Inflation Non Food Inflation
based on CCPI (2013=100)
Y-o-Y 5.8 6.0 4.3 3.5 3.5 3.4 • Fall in food prices along with favourable base effect
Annual would cause inflation to decelerate further
4.4 5.8 5.9 5.6 5.3 5.0
average
based on NCPI (2013=100) • Inflation is projected to be within the targeted levels
Y-o-Y 6.7 4.6 2.7 2.1 2.0 - during 2018, even after accounting for the impact on
Annual inflation from possible administered price adjustments
5.9 5.7 4.9 4.5 4.1 - in the near term.
average
4
Reflecting the impact of higher imports, the trade deficit further
expanded in January 2018…
• Export earnings rose by 11.6% (y-o-y) to USD Trade Balance 2016-2018
965 mn in January 2018 driven by higher
0
volumes and increased export prices
▪ Tea, Food, beverages and tobacco, -200

petroleum products and rubber -400

products contributed significantly to

USD mn
the increase in export earnings -600

▪ Coconut, printing industry products, -800

spices, unmanufactured tobacco
exports declined -1,000

2016 2017 2018

• Import expenditure increased by 12.0% -1,200
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
(y-o-y) to USD 2,014 mn in January 2018

▪ High dependence on thermal power along with rising fuel prices led to an increase in
fuel imports
▪ Fertiliser, gold, vehicles and rice imports also contributed significantly to higher
import expenditure
• The trade deficit increased to USD 1,049 mn in January 2018 (USD 934 mn in January 2017).

5
Tourist earnings and workers remittances helped offset the
increase in the trade deficit…

Tourist Arrivals 500 Tourist Earnings

• Jan-Feb 2018: increased by 13.8% (y-o-y) to 400

474,542
300
• Earnings estimated at USD 880.1 mn

USD mn
200
Average Monthly Tourist Arrivals (2014-2018 Jan-Feb)
100

2014 2015 2016 2017 2018

0

Mar
Feb

May

Aug

Oct

Dec
Apr

Nov
Sep
Jan

Jun

Jul
2016 2017 2018
First Two
144,227 160,894 195,989 208,439 237,271
months
Workers’ Remittances
8,000 7,018 7,242 7,164
6,980
Monthly 7,000 6,407

Avg. 127,263 149,865 170,903 176,367 - 6,000

per year 5,000

USD mn
4,000
3,000
2,000 1,268 1,309
1,000
Workers’ Remittances 0

• Jan-Feb 2018: increased by 3.2% (y-o-y) to USD

1,309 mn
6
 The rupee depreciated by 1.7% up to 04 April 2018…
Rs/USD 158 Rs.155.4869
156 04 April 2018
154
152
150
148
146
144
142

Mar-17
Dec-15

Jan-16

Mar-16

Apr-16

May-16

Jul-16

Sep-16

Nov-16

Jan-17

Dec-17

Jan-18

Mar-18
Aug-16

Dec-16

Apr-17

May-17

Jul-17

Aug-17
Feb-16

Sep-17
Jun-16

Oct-16

Jun-17

Oct-17

Nov-17
Feb-17

Feb-18
LKR Movement Against Other Currencies
• Real effective exchange rates (REER) indices recorded a gradual
adjustment increasing the country’s competitiveness up to 04
2017 April’18
• The Central Bank has purchased USD 403.5 mn (net) up to 03
April 2018 Currency App(+)/Dep(-) App(+)/Dep(-)
– 2017: Net purchases amounted to USD 1,664 mn US dollar -2.0% -1.7%
• Foreign investments in the CSE, which recorded a net inflow of
Pound sterling -10.5% -6.2%
USD 47.7 mn by 27 March 2018 reversed to a net outflow of USD
6.8 mn as of 03 April 2018 due to a one-off foreign sale Euro -13.5% -4.4%
– 2017: Net inflows to CSE amounted to USD 279 mn Japanese yen -5.1% -7.1%
• Foreign investment in the Government Securities market
Indian rupee -7.5% - 0.3%
recorded a net outflow of USD 39 mn up to 2 April 2018
– 2017: Net inflow amounted to USD 440.6 mn

Gross official reserves stood at USD 7.9 bn as at end February 2018, covering 4.4 months of imports
7
Fiscal performance in 2017 and outlook for 2018…
• Key highlights for 2017 are surplus in primary account, increase in tax revenue, reduction in
current expenditure and decline in debt to GDP ratio
• However, the Budget deficit increased to 5.5% of GDP in 2017 as against a target of 4.6% due
to lower than expected revenue mobilisation
Primary Balance Current Account Balance Budget Deficit
2.0 1.0 1.0 0.5 -
1.0 0.0
- (2.0)
% of GDP

% of GDP
% of GDP
(1.0) (0.2) (1.0) (4.0)
(0.8) (0.7) (0.6) (0.7)
(2.0) (1.5)
(2.0) (1.2) (6.0) (4.8)
(3.0) (5.4) (5.7) (5.4) (5.5)
(4.0) (2.9) (2.3) (8.0)
(3.0) (7.6)
2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
2013 2014 2015 2016 2017 2018
Prov. Est. Prov. Est.
Prov. Est.

• Primary balance recorded a surplus • Current Account Deficit increased • Budget deficit increased to 5.5% of
of Rs. 2.1 bn in 2017 as against a to 0.7% of GDP in 2017 from 0.6% GDP in 2017
deficit of Rs. 29.4 bn in 2016 in 2016
Government Revenue 30 Government Expenditure Outstanding Debt
20 100
15.6 77.7 78.8 77.6 75.2
14.2 13.8 20.9 20.4 70.8 71.3
15 13.3 1.3 20 19.6 19.4
17.3
% of GDP

11.9 11.5 1.9 1.2 17.4

% of GDP

% of GDP
0.9 5.4 4.8 5.3 32.4 34.0 35.5
1.4 1.4 4.9 30.9 30.0
10 4.8 4.6 50
12.4 12.3 12.6 14.3 10
5 10.5 10.1 12.6 12.8 15.5 14.8 14.5 15.2 45.3
40.0 41.3 44.9 42.1
0 0 0
2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
Prov. Est. Prov. Est. Prov. Est.
Tax Revenue Non Tax Revenue Recurrent Capital Domestic Debt Foreign Debt

• Tax revenue increased to 12.6% of GDP in • Total expenditure and net lending • Total Outstanding Debt to GDP ratio
2017 from 12.3% of GDP in 2016. Total declined to 19.4% of GDP in 2017 from declined to 77.6% in 2017 from 78.8% in
19.6% in 2016
revenue declined to 13.8% of GDP in 2017 2016
from 14.2% in 2016 • Current expenditure reduced to 14.5% of
GDP in 2017 from 14.8% of GDP in 2016
8
 Growth in money supply continued to moderate…
• Broad money (M2b) growth moderated to 16.2% (y-o-y) in February 2018
from 16.8% in January 2018 and 16.7% in December 2017
 NCG increased substantially by Rs. 77.2 bn during the first two months of 2018.
(The increase in 2017 was Rs. 196.4 bn)
 Credit to public corporations, which declined by Rs. 7.5 bn in January 2018,
increased by Rs. 17.1 bn in February 2018 (The increase in 2017 was Rs. 19.2 bn)

Y-O-Y Growth of Broad Money (M2b) 40

Contribution to Year-on-year growth of Broad Money
25 (M2b)
30
19.8 19.2
20 17.8 20
16.7 16.2
18.0 17.9
10

Per cent
15 16.2
Per cent

10
-10

5 -20
Jun-15

Jun-16

Jun-17
Mar-16

Dec-17
Mar-15

Dec-15

Dec-16

Mar-17

Sep-17
Sep-16
0 Sep-15
Net Foreign Assets Credit to the Private Sector
Apr-15

Apr-16

Apr-17
Dec-15

Dec-16

Dec-17
Aug-15

Aug-16

Aug-17
Feb-15

Jun-15

Oct-15

Jun-16

Oct-16

Jun-17

Oct-17
Feb-16

Feb-17

Feb-18

Credit to Public Corporations Claim on Government (net)

Other Items (net) Broad Money (M2b) growth

9
Private sector credit growth moderated further…

• Private sector credit growth decelerated to 14.6% (y-o-y) in February 2018 from 15.2% in
January 2018 and 14.7% in December 2017

Credit granted by Commercial Banks to the Private Sector

120

100 30

Per cent
78.7
Rs. bn

80
59.9 58.2
20
60
43.6 14.6
40
10
20

0 0
Jan-16
Jan-15

May-16
May-15

Jul-16

Jan-17

Nov-17

Jan-18
Jul-15

May-17

Jul-17
Mar-16

Nov-16

Sep-17
Mar-15

Nov-15

Mar-17
Sep-15

Sep-16

Monthly change in credit (Absolute terms) Growth of credit (y-o-y)

• Credit to the private sector would increase by around 13.5% in 2018 (Rs. 650 bn)

10
Most market interest rates have stabilised at high levels…
15 Weekly AWPR Movement of Selected Market Interest Rates
16
14
13 14 14.03
12 12 11.41
11.55

Per cent
11 11.10
Per cent

10
10 9.00
8
9
8 6
7 4
6
5
May-15

May-16

May-17
Jan-15
Mar-15

Jan-16
Mar-16

Jan-17
Mar-17

Jan-18
Mar-18
Jul-15

Nov-15

Jul-16

Nov-16

Jul-17

Nov-17
Sep-15

Sep-16

Sep-17
Monthly AWPR AWDR AWFDR AWLR

• Yields on government securities, which displayed a • An undue increase in short term market interest
sharp downward adjustment from peak levels in rates was observed recently, requiring the Central
2017, showed an increasing trend in 2018 Bank to take corrective operational measures

Treasury Bill Rates 10 Movements in Short Term Market Rates

12
11
10
9.69
8
%
9
8.52
Per cent

8 8.17

7
6
6
5

5-Mar-18
8-Aug-17

11-Nov-17

30-Nov-17
27-Aug-17

15-Sep-17

19-Dec-17

7-Jan-18

14-Feb-18

24-Mar-18
26-Jan-18
1-Jul-17

20-Jul-17

4-Oct-17

23-Oct-17
24-Jan-16

25-Mar-16

24-Sep-16

24-Jan-17

26-Mar-17

25-Nov-17
25-Sep-17
25-May-16

25-Jul-16

26-May-17

25-Jan-18
26-Jul-17
24-Nov-16

27-Mar-18

91-day 182-day 364-day Policy Corridor AWCMR Average Weighted Repo Market Rate
Real interest rates have increased sharply with the decline in the
inflation rate which could adversely impact investment…

Real Interest Rates - AWLR and AWDR Real Interest Rates - AWNLR and AWNDR
12 12

10 10

8 8

Per cent
Per cent

6 6

4 4

2 2

0 0
Jan-16

Mar-16

Jan-16

Mar-16
Mar-17
May-16

Jul-16

Sep-16

Nov-16

Jan-17

May-17

Jul-17

Sep-17

Nov-17

Jan-18

Mar-18

May-16

Jul-16

Mar-18
Sep-16

Nov-16

Jan-17

Mar-17

May-17

Jul-17

Sep-17

Nov-17

Jan-18
Real AWLR Real AWDR Real AWNDR Real AWNLR

Real rate = nominal rate - annual average inflation Real rate = nominal rate – Y-o-Y inflation

12
Views of the Monetary Board

• Favourable trends in the monetary sector and developments in

inflation and the inflation outlook along with subdued economic
growth, support some relaxation of monetary policy
• The narrower policy rate corridor is expected to help the Central Bank
to maintain short term interest rates at desirable levels with less
volatility

• However, risks arising from global economic developments and

fiscal slippages will be closely monitored by the Central Bank

13
Review of the Monetary Policy Stance : Meeting No. 02 of 2018 18
Review of the Monetary Policy Stance – Meeting No. 06 of 2017

Thank you