SL records high growth rate in ’11

Maintains single digit inflation:

Sri Lanka's economy recorded a high growth rate of 8 percent for the second consecutive year in 2011. The continued favourable performance of domestic supply also helped offset, to a large extent, the adverse impact of rising commodity prices in international markets. As a result, inflation remained at single-digit levels over the last 37 months, and by February 2012, year-on-year inflation as measured by the CCPI decreased to 2.7 percent while annual average inflation receded to 6.1 percent a Economic Research Department release said.

Against this background, domestic interest rates, having declined to single digit levels in 2009, had remained at relatively low levels until well into 2011, thereby supporting the investment momentum.

However, the improved investor confidence that led the expansion in domestic economic activity, also resulted in imports increasing substantially during last year.

This in turn, led to a higher than expected deficit in the trade account of the balance of payments. Broad money growth continued to remain high in January 2012 with broad money (M2b) increasing by 20.1 percent, year-on-year, with credit obtained by both the private sector and the public sector contributing to this growth. Year-on-year growth of credit obtained by the private sector continued to be high at 34.3 percent in January 2012.

In response to these developments, a series of policy measures were implemented by both the government and the Central Bank in February 2012, which were intended to deal with the challenge of lowering the trade deficit to a sustainable level, as well as to effectively remedy the resultant emerging imbalances in broad money growth, credit growth and import growth.

Nevertheless, such measures, while leading to the achievement of the desired outcomes, will also impact the hither to rapid pace of growth in domestic economic activity, particularly due to the resultant higher energy costs, decline in credit flows, and lower import related activity. In that background, the Central Bank's projections now indicate that Sri Lanka's GDP is likely to record a growth of 7.2 percent in 2012, from the earlier projection of 8 percent.

At the same time, the recent policy measures are expected to lead to a decline in aggregate demand which will have a moderating effect on prices, thereby offsetting to some extent, the supply side pressures on prices as a result of the recent upward adjustments to administered prices. As a consequence, the Central Bank expects inflation in 2012 to remain subdued at mid-single digit levels. The Central Bank also expects the recent policy measures to decelerate broad money growth during the course of 2012 towards the targeted levels, thereby further easing future inflationary pressures.

In the Central Bank's view, the new measures will also provide the opportunity for all stakeholders of the economy to search for new productivity gains in the use of petroleum and energy products in relation to both transportation and thermal power generation.