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| Sunday, 18 December 2005 |
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Favourable economic environment to continue in 2006 The favourable economic environment is expected to continue in 2006 as the domestic environment will remain favourable due to the continuing ceasefire agreement, improved political stability and the continuation of the favourable weather conditions, states a report by the Central Bank of Sri Lanka titled "Recent Economic Developments Highlights of 2005 and Prospects for 2006". It said that since the next drought cycle is not expected until 2008 agriculture and hydropower production are expected to expand further. The effective implementation of tsunami related reconstruction could further boost aggregate demand and output. Global economic developments are also expected to remain benign in 2006 although some downside risks are posed by rising oil prices. The implementation of the reforms and economic growth is projected to be broadbased with the expected recovery in the fisheries and leisure sectors. The agriculture sector is expected to grow by 1.9 percent while the industry and service sectors are estimated to grow at higher rates of 6.0 percent and 7.1 percent. Inflation is expected to moderate in 2006 in view of the expected favourable developments in demand and supply factors and policies. Among the demand factors an early containment of the monetary and credit expansion is critical in ensuring this moderation. On the supply side the expansion of production together with improved distribution systems is expected to have a favourable impact on prices. However, the looming risk of higher oil prices could exert inflationary pressures. The report sates that the country's external sector is also expected to improve further in 2006, recording an overall BOP surplus for the second consecutive year thereby increasing the country's external reserves and reducing pressure on the exchange rate. Critical to this favourable outcome are the stability of oil prices, the continuing recovery in industrial countries, the faster realisation of expected tsunami related financing and the effective utilisation of available foreign assistance. The fiscal outcome for 2006, based on the estimated outcome of 2005 and the government's medium term policy direction enunciated in the budget, indicates that the overall deficit in 2006 could be below 8 percent of GDP. To achieve this revenue has to be enhanced further through additional measures and expenditure has to be rationalised. Public investment also has to be enhanced to support higher economic growth. Appropriate monetary and fiscal policies are required to contain the expansion in domestic credit to achieve the monetary targets. The growth in money supply is to be maintained at around 14-15 percent, which is consistent with the expected GDP growth of around 6 percent and the increase in the GDP deflator of around 8 percent. |
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