According to the provisional estimates of the Department of Census and Statistics (DCS), the economy expanded at the moderate pace of 4.0 per cent, year-on-year, in the second quarter of 2017, in comparison to 3.8 per cent year-on-year growth in the first quarter of 2017.
Economic growth continued to be affected by extreme weather conditions and weak external demand. In terms of value addition, key growth drivers in the first half of the year were construction, mining and quarrying, financial service activities, and wholesale and retail trade.
Although disruptions to near term growth prospects continue, forward looking indicators show improved medium term prospects, which are likely to be realized with the envisaged structural reforms and expected inflows of foreign investments.
Projections indicate that inflation will revert to the envisaged mid-single digit levels by end 2017 and stabilize thereafter, underpinned by tight monetary conditions that have been in place from the beginning of 2016.
The growth of credit extended to the private sector by commercial banks has shown a gradual deceleration since July 2016, responding to the prevailing high nominal and real interest rates in the domestic market.
So far during the year, net credit extended to the government (NCG) by the Central Bank has declined sharply, although NCG by the banking sector has been high. A moderate expansion of credit to public corporations has also been observed during the year.
However, the expansion in the net foreign assets (NFA) of the banking sector, as a result of the buildup of NFA of the Central Bank and the reduction in foreign liabilities of commercial banks, caused broad money (M2b) growth to remain at elevated levels.
Meanwhile, deposit and lending rates appear to have stabilized, partly in response to the recent decline in yields on government securities.
In the external sector, earnings from exports maintained its positive growth for the fifth consecutive month in July 2017.
Tourist arrivals and associated foreign exchange inflows grew on a cumulative basis. Workers’ remittances also increased in July 2017, although declining on a cumulative basis during the year owing to sluggish economic performance and geo-political uncertainties in the Middle East.
The rupee denominated government securities market and the Colombo Stock Exchange (CSE) continued to attract foreign inflows. Amidst these developments, the Central Bank cumulative purchases of foreign exchange from the domestic market exceeded US dollars 1.1 billion on a net basis, and gross official reserves improved to around US dollars 7.3 billion by 21 September 2017 from US dollars 6.0 billion at end 2016.