Despite several rounds of monetary tightening measures taken so far this year, the country’s monetary authority thinks the money supply in the economy is still loose and the economy has still more room to grow under the existing monetary policy.
“There is enough money around for the economy to grow,” said the Central Bank Governor Indrajit Coomaraswamy.
Speaking at the post-monetary policy media briefing held yesterday, Dr. Coomaraswamy said there is a disparity between the amount of money circulating in the economy and the level of growth.
According to latest data available up to August, Sri Lanka’s broad money (M2b)—the total currency held by the public and demand, time and savings deposits held by the public in commercial banks—grew by 17.3 percent while the average M2b during the first eight months grew by 18.1 percent. Nevertheless, the gross domestic product (GDP) on a nominal basis is expected to grow around 10.5 percent for 2016.
“Which means there is plenty of space within the monetary policy stance for the economy to grow. That’s why the current situation (is) reflecting an accommodative position,” Dr. Coomaraswamy explained.
When a Central Bank keeps its key policy rates low to make it easier for businesses and individuals to borrow, it is referred to as ‘accommodative monetary policy’ and such a policy stimulates economic growth.
However, the real economy is expected to grow by between 5.0 percent to 5.5 percent during 2016 accelerating to 6.0 percent in 2017 and the inflation to be around 5.0 percent.
Despite the monetary policy remaining accommodative, the Central Bank earlier this week left the key policy rates unchanged as the monetary board felt the current monetary policy stance was appropriate as there was some deceleration in the private sector credit in August and the inflation staying subdued.
Sri Lanka’s private sector credit moderated to 27.3 percent or Rs.45.3 billion in August from a year ago, slowing from 28.5 percent or Rs.63 billion in July.
“There seems to be a further slowing down in September and October. In addition, our models are showing that private credit growth will taper down to somewhere around 20 percent by the end of the year,” the Governor noted.
According to the Central Bank data for first eight months, Sri Lanka’s private sector credit grew by a total of Rs.456 billion in comparison to Rs.311 billion during the same period in 2015.
Last year saw the private sector credit growing to a historic high of Rs.696 billion.