CB targets for 2009:

Five percent growth

Hiran H.Senewiratne

The Sri Lankan economy demonstrated its resilience by recording a real growth of 6 percent in 2008 in the midst of unprecedented and unfavorable developments globally and domestically said Central Bank (CB) Governor Ajith Nivard Cabraal.

“The CB is targeting an economic growth between 4.5 to 5 percent for this year and is optimistic to achieve the target as all economic fundamentals are in place,” Cabraal said at a media conference where it released the annual report of the Central Bank of Sri Lanka for the year 2008.

He said in the midst of these extraordinary challenges, the Central Bank continued its focus on achieving the two key objectives, namely, economic and price stability and financial system stability during the last year.

The Bank’s monetary policy strategy, which is mainly based on restricting monetary expansion through quantitative targeting, demonstrated its effectiveness by recording the sharpest ever deceleration of year on year inflation from 28.2 percent in June 2008 to 5.3 percent by end March 2009, he said.

Cabraal also said that tumbling global food and energy prices and allowing such price reduction to pass through to domestic prices, together with favorable supply side shocks by way of higher domestic agriculture production, also reinforced the monetary policy efforts in achieving price stability.

“Despite the tight monetary policy restraining the expansion in domestic demand and the looming global recession decelerating external demand, agricultural production recorded a favorable development,” Governor said.

He said that continuation of the implementation of major infrastructure development projects also supported the economy to maintain around 6 per cent economic growth for the fourth consecutive year.

Benefits of the continuation of high economic growth were reflected both in the lowest ever levels of unemployment and poverty recorded recently, he said.

The Central Bank Governor also said that prudential regulations and timely action by the Central Bank enabled to maintain financial system stability despite looming threats arising from excessive domestic credit expansion in the past, high interest rates resulting from the tight monetary policy, and the collapse of a domestic illegal deposit taking institution linked to a major financial institution.

“Although the domestic financial sector did not have any adverse impact from the global financial crisis due to the lack of exposure to toxic assets, domestic commercial banks faced the challenges posed by drying up of external credit lines for their operations,” he said.

Central Bank Chief Economist Director of Economic Research Dr Nandalal Weerasinghe said that during the first part of the year, food and energy crises in the global economy was threatening the macroeconomic stability by way of sharply widening trade and current account deficits, raising inflation to the highest ever levels since 1980s.

He said that has exerting pressures on fiscal balances due to tax exemptions arising from duty waivers granted in order to minimise the impact of high food and energy prices on domestic cost of living coupled with high defense expenditure and the cost of rehabilitation, resettlement and reconstruction of the Eastern Province. Economic activities will also be extended to the North he said.