Whilst expressing confidence over the outlook for 2012 the Central Bank in its 2011 Annual Report says that the key challenge facing Sri Lanka in 2012 is managing the numerous risks arising from global developments.
It said given the uncertain outlook for global commodity prices, especially oil, the challenge ahead would be to maintain inflation at low and stable level. Though recent policy measures would moderate growth and ease demand pressure to some extent, monetary policy will need to continue to focus on restraining demand pressures to maintain inflation at mid-single digit level. Managing supply side shocks to ensure an adequate domestic food supply would also be required to complement demand management strategies, the Central Bank said.
It also said that Sri Lanka’s sustained growth momentum has taken the country to a high growth trajectory placing the country among the middle income economies in the world. Against this background, challenges, which can have a downside risk on potential growth become focal to economic policy management.
Here are some key highlights of Central Bank’s recommendations
- Diversification of export products and markets: So as to improve demand for exports since weak recovery in global economy and geopolitical uncertainties in Sri Lanka’s traditional export markets are likely to affect export growth
- Higher foreign inflows: Inflow must be strengthened, particularly in the areas of service inflows and FDIs through appropriate policies and macroeconomic environment
- A price mechanism for oil: A mechanism that reflects movements in international energy prices may need to be considered to help avoid the need for large adjustments of domestic energy prices while lessening the burden on public enterprises
- Energy conservation and efficiency: Policies need to be put in place to mitigate the impact of high oil prices by promoting energy efficient production technologies, increasing the use of renewable energy sources and energy conservation
- Labour market reforms: The substantial decline in unemployment is expected to tighten labour market conditions. Policies need to be put in place to improve labour productivity and to address structural rigidities in the labour market whilst increasing capital intensity to deal with any manpower shortages. Reforms to ensure sustainability of pension funds and greater elderly care facilities
- Education reforms: Attention should also be paid to realign Sri Lanka’s education system to generate a human capital base with the skills necessary to sustain this new growth momentum
- Improvements to public transportation system: Existing system insufficient to accommodate the growing demand both in terms of quantity and quality forcing public to opt for more expensive and inefficient private modes of transportation
- Revenue and expenditure reforms: To create fiscal space necessary to support higher economic growth
- Tourism: Support for infrastructure development, capacity expansion and skills development and preserving the environment
