CB predicts 8.5 percent growth for 2011

Increase in revenue collection from import taxes:

Charumini de Silva

Central Bank Governor Ajith Nivard Cabraal said the Bank is predicting a growth of 8.5 percent for this year. The 61st annual report of the Monetary Board was submitted to the President and Finance and Planning Minister Mahinda Rajapaksa at the Central Bank yesterday. Speaking at the presentation of the annual report 2010 the Governor said the year 2010 showed a great improvement and it was a good year amidst many challenges that the country had to face in 2009.

“There might be sudden inflows and outflows of funds coming into the country. Thus, the Central Bank has invested on treasury bills and treasury bonds to form a reasonable amount of liquidity.

“The Central Bank encourages funds that have a long-term vision to maintain a reasonable exchange rate,” he said. The Governor said the Central Bank is confident that the country will enjoy a sustainable economic growth in the coming years despite the internal and external factors that are taking place. Central Bank Additional Director Swarna Gunaratna said external trade rebounded strongly in 2010 reversing the sharp contraction observed during the global recession of 2009.

Earnings from exports increased by 17.3 percent reflecting higher earnings from the industrial and agricultural sectors.

Expenditure on imports grew by 32.8 percent led by immediate good imports. As a result the trade deficit expanded to US $ 5,205 million in 2010. Although export earnings were volatile in early 2010, export earnings grew in the latter part of the year indicating a new growth path, despite the withdrawal of GSP+ concessions. A substantial increase in inward workers remittances to US $ 4.1 billion helped offset the trade deficit of US$ 1,498 million in 2010. In 2010, the Balance of Payment (BOP) recorded a surplus of US $ 921 million following a significantly higher surplus of US$ 2,725 million in 2009.

The financial inflows to the Government as well as to the private sector for long-term investment contributed to the surplus in the BOP. The external reserves of the country further improved to its highest levels by 2010 with US$ 6.6 billion. The pickup in domestic economic activity and the strong recovery in imports increased Government revenue in nominal terms above the original target set in the budget for 2010. Revenue as a percentage of GDP increased to 14.6 percent in 2010 from 14.5 percent in the previous year.

She said the rationalization of the tariff structure to four bands and the removal of the import duty surcharge as well as the reduction of effective taxes on various major imports, including motor vehicles caused a surge in import demand resulting an increase in revenue collection from import related taxes.

The total expenditure and net lending declined from 24.9 percent of GDP in 2009 to 22.9 percent of GDP in 2010.

The Central Bank eased its monetary policy stance further in 2010 by reducing the policy interest rates in the second half of 2010 to stimulate credit growth to support economic activities.

The Central Bank continued its efforts to manage liquidity, thereby stabilizing interest rates and guiding reserve money along the targeted path. By the end of 2010 overall liquidity in the money market amounted to Rs 124.3 billion compared to Rs 159.6 billion at the end 2009.