The Central Bank of Sri Lanka in its Monetary Policy Review highlighted the need to give priority to strengthen the public enterprise reform program among other measures to contain expansion of domestic credit. The Monetary Board noted with caution that the high monetary and credit growth should be arrested to prevent further inflationary pressures being built up.

"Accordingly, the daily Open Market Operations will be used to absorb liquidity more actively. Furthermore, the adjustment of administered prices of fuel, electricity and transport, enabling a reduction in the borrowings of public corporations, would also facilitate containing expansion in domestic credit.

The Board also emphasised the necessity for expediting mobilisation of concessional foreign assistance to cover tsunami related expenditure, as available domestic resources are limited," the Central Bank said. It also said Monetary aggregates have been growing at a higher rate than the desired rate mainly due to the continuous expansion of credit to the private sector as well as to the public sector.

"A major contributory factor for the public sector credit expansion has been the losses incurred by the Ceylon Electricity Board and the Ceylon Petroleum Corporation, which will continue to incur losses amounting to about Rs. 2.5 billion per month," the Central Bank said. Having reviewed the current and projected economic developments, the Monetary Board has decided to maintain the policy interest rates of the Central Bank of Sri Lanka at their current levels and to absorb excess liquidity in the market through aggressive daily open market operations.

"The growth momentum of the economy is expected to continue in 2005 with a projected rate of around 5.5 per cent. The negative impact of the tsunami disaster, particularly on the fisheries and tourism sectors, is likely to be temporary in view of the expected faster recovery.

The services sector will continue to be the main driver of growth with significant contributions from telecommunications, port services and transport sectors. The industrial sector is projected to post a stronger performance. On account of the post-tsunami reconstruction activities, the construction sector is likely to expand at a faster rate. The agricultural sector is also envisaged to record a higher output.

On the external front, the export growth is expected to continue in 2005, while the total value of imports is estimated to grow at a faster rate on account of imports for relief, rehabilitation and reconstruction. The Sri Lankan rupee has appreciated against the major currencies so far in 2005, and is expected to remain stable with the realization of the expected inflows.