Global recovery, an impetus to domestic economy- Cabraal

Last year was the most difficult year for Sri Lanka as a result of global economic crisis as well as internal issues, the war in the North-East reached to its peak with high inflation, declining of reserves to the lowest level and difficult balance of payment situation in the early part of the year, said the Governor of Central Bank (CB), Ajith Nivard Cabraal.

At the launching of Road Map 2010 the monetary and financial sector policies for 2010 and beyond, Cabraal said that Sri Lanka’s economy grew by 2.6% in the first three quarters of the year, and is expected to grow by 3.5% in 2009 although the negative impact of the global economic crisis hindered growth prospects.

The successes achieved by enormous challenges such as controlling inflation, managing reserves at a time of great uncertainties, dealing on exchange rates, facing global recession, dealing with high security threats and destabilising efforts and countering misconceptions and direct negative interventions. The coordinated and timely policy action taken by the Government and the Central Bank was the key to success.

During the first nine months of 2009 the Government’s recurrent expenditure in terms of GDP increased to 16.5% from the original target of 15.8%. The Government adopted many measures to maintain the budget deficit at 7% of GDP in 2009, the Governor said.

He said, achieving economic and financial stability was intensely tough. In 2007 and 2008 we adopted stringent monitory policy measures. These measures delivered the desired results, evidenced by recorded low level of inflation by the end of 2009. Since final quarter of 2008 CB eased monetary policy and market interest rates declined. New situation is expected to facilitate economic activity leading to higher economic growth.

Maintaining financial system stability was even tougher. Globally hundreds of banks and financial institutions failed. To bailout them many governments and central banks pumped billions of dollars, Euro, Yen and Sterling Pounds and even nationalized financial institutions.

However, Sri Lanka was able to ensure functioning of financial markets at no cost. We maintained stability in our financial infrastructure and the payments and settlements systems too.

Cabraal said that the gradual recovery of the global economy and the end of the civil conflict will provide a strong impetus to the domestic economy in 2010 and beyond. The expected medium term GDP growth rate is 7-9%.

On the external front, exports and imports are projected to increase in the medium term, thereby generating higher economic activities. Despite the expected increase in workers’ remittances and higher inflows to the services account, the current account is expected to record a deficit less than 3% in the medium term. However, capital and financial inflow to the capital account (both from private sector and government sector) will be more than adequate to finance the deficit in the current account. CB also expects a BOP surplus over the medium term.

On the fiscal front, overall budget deficit is expected to reduce over the medium term. The improvement in the financial position of both the government and public corporations is expected to release resources to the private sector.

This is pivotal to achieving the 7-9% economic growth projected in the medium term.

The monetary program for 2010 has been designed in the light of this medium term framework relating to real external and fiscal sectors. According to the targets, monetary aggregates have been based on a level commensurate with 7% real GDP growth rate and a 6% GDP deflator for the year

Average reserve money targets will continue to be the operating framework. Broad money supply is expected to grow on average 14.5% in 2010. Annual average growth in reserve money is also targeted at 14.5%

Inflation is expected to be continued within single digit in 2010. The monetary policy strategy has to be guided by the trends in underline inflation. Hence a proper measure of core inflation is imperative and there are several weaknesses in the current core inflation measures. Therefore, a series of alternative core inflation measures based on different approaches are now being reviewed, Cabraal said. (GW)