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Economic outlook positive despite inflation

Published on Ceylon Today | 2017-09-27

By Kamal Kandewatta

Considering the improved economic growth and official reserves in the second quarter of the year, FC research expects more positive signs in the economy, despite the possibility of rising inflation.
Inflation is expected to have upward pressure towards October and beyond with the floods in May 2017 affecting the supply in the current growing season. Though FC analysts haven’t accounted for the impact of the recent drought, it will also contribute to rising inflation in agricultural products due to possible supply side shortages. Overall, FC predicts inflation to remain around the 6.0% mark throughout the year.

Also the FC read on interest rates, suggest that policy rates are likely to remain unchanged as the year passes. Improved economic growth and health signals that the current monetary policy is appropriate and no change is required.
According to data, GDP growth in the second quarter of the year was 4.0% whereas growth during the same period last year was just 2.4%.

Growth was mainly attributed to industrial and service activities that recorded higher growth rates of 5.2%YoY and 4.5%YoY respectively. FC interpreted this growth was “better than expected”.
Though concerns are raised over extensive credit growth of the private sector in the last few years, FC research expects private sector credit would grow further, towards year end to 16% from the estimated 14% figure. However, they admit that overall credit is likely to remain under check of the regulators. If credit growth continues, private consumption and investment will increase, facilitating further economic growth.

Commenting on the improved official reserve base, during the first half of the year, FC research stated Foreign Reserves were now at ”comfortable levels”.

The official forex reserves rose to USD 7.7 billion in August 2017 which is the highest figure so far this year. This increase was mainly facilitated by the USD 550 million syndicated loan and forex purchases by the CBSL in the market. Following the purchase of USD 344.7 million in July, CBSL bought USD 200 million worth forex in August from the market. The external balance of the country would improve following this improvement in forex reserves.

Over all the economic performance of the country can be expected to improved during the second half of the year despite the difficulties that curtailed the targeted economic performances in the first half.

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