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| Sunday, 18 January 2004 |
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| News Business Features Editorial
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6% growth expected for 2004 The Central Bank, in its monthly review of macro-economic developments, said the economy has performed broadly in line with the targets for 2003. Projections for 2004 expect a continuation of these favourable developments, although there are some possible downside risks. The bank has decided to maintain its policy rates at current levels, i.e. the Repo Rate at seven per cent and the Reverse Repo rate at 8.50 per cent. The economy grew by 5.6 per cent in the first three quarters of 2003, spurred mainly by growth in the Services sector although the Industry and Agriculture sectors also recorded growth during this period. Indications are that the annual growth target of 5.5 per cent for 2003 will be realised. The economy has been projected to grow by six per cent in 2004. However, the achievement of this target would depend on several factors, such as moving ahead of the peace process and the settlement of the current impasse. The other significant downside risk is the possibility of a widespread drought, which could adversely affect agricultural production and power supply. A positive factor in the external sector is the strong economic growth in the United States. Consumer price inflation as measured by all consumer price indices ended the year within the target indicated at the beginning of the year. Prudent monetary management, fiscal consolidation and improved domestic production and supply of key consumer goods enabled a faster decline in prices of domestically produced goods and services, while lower international prices of consumer items and a relatively stable exchange rate have kept the increase in import prices at a low level as in the previous year. However, in the last couple of months of 2003, the month-to-month increase of the CCPI and the SLCPI have been faster than the historical average, implying higher inflationary pressures in the future. Consumer price inflation in 2004 is expected to be around the levels in 2003. The annual average increase in prices is projected at four to six per cent (depending on the price indices used). There is some risk of higher inflation particularly from excessive wage increases, higher petroleum prices and a widespread drought. The latter two factors would contribute to an increase in energy prices, thereby adversely affecting all economic sectors. Higher domestic demand and a continued rise in tourism could also exert further upward pressure on prices. The implicit price index, i.e., the GDP deflator, has been projected to be slightly higher than consumer price inflation, at around seven per cent in 2004, compared to a projection of approximately 7.1 per cent in 2003, reflecting the expected impact of wage increases in 2004. Exports and imports have picked up in 2003, buoyed by the recovery in both the domestic and global economies. However, during the 10 months to October 2003, the trade deficit increased marginally compared to the corresponding period in 2002. The improvement in the balance of payments, supported by higher foreign exchange inflows, increased the liquidity in the foreign exchange market, enabling the Central Bank to purchase US$ 375 million from the market in 2003. Consequently, at end-December 2003, gross official reserves had increased by around US$ 620 million to US$ 2,320 million, i.e. around 4.2 months of imports. Total reserves at end-November were US$ 3,025 million, i.e. around 5.5. months of imports. Sri Lanka's external sector is expected to improve further in 2004, recording an overall BOP surplus for the fourth consecutive year, thereby increasing the country's external reserves and reducing pressures on the exchange rate. However, recovery in industrial countries, strengthening of foreign investor confidence and effective utilisation of foreign assistance are critical to realising these favourable outcomes. |
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