CB unmoved by sceptics; sticks to its optimism

Thursday, 12 January 2012 00:45 - - {{hitsCtrl.values.hits}}

The Central Bank appeared to be unmoved by scepticism over its upbeat outlook for 2012, which was reiterated yesterday following the January monetary policy review leaving policy rates unchanged.

UNP MP and Consultant Economist Dr. Harsha de Silva as well as Standard Chartered Bank have separately questioned some of the upbeat 2012 forecasts.

However, Central Bank’s statement following the review yesterday contained some of the salient points of the 2012 and Beyond Roadmap presented by Governor Nivard Cabraal early last week.

The CB said in the third quarter of 2011, GDP grew by 8.4%, with all three sectors – Agriculture, Industry and Services – contributing towards that growth performance. GDP growth in 2011 is estimated to be around 8.3%. In the meantime, the significant structural changes that have taken place in the Sri Lankan economy over the last several years are expected to provide the momentum for the economy to grow by about 8% in 2012, even in the midst of the slowdown in global economic activity.

Continued development efforts aimed at improving economic and social infrastructure are expected to augment the productive capacity of the country and thereby enable the realisation of the country’s growth potential. Improvements in infrastructure would also help eliminate supply bottlenecks, thus helping to reduce price pressures.

As inflation is expected to remain around mid-single digit levels in 2012, broad money (M2b) is expected to grow by around 15% in 2012, as announced in the Road Map for Monetary and Financial Sector Policies for 2012 and Beyond.

The ongoing structural changes in the economy are also likely to be reflected in the external sector, with earnings from tourism projected to increase to US$ 1.2 billion, migrant worker remittances expected to increase to US$ 6.5 billion, Foreign Direct Investment (FDI) projected to record US$ 2 billion and inflows of debt capital to the private sector also expected to increase significantly in 2012.

On the fiscal front, preliminary estimates indicate that the government has contained the fiscal deficit to a level within the revised target of 7% of the GDP in 2011. It is expected that the Government would bring down the fiscal deficit to 6.2% of the GDP in 2012, thereby augmenting the resource availability to the private sector further.

Taking into consideration theseand money supply (see box story) developments, the Monetary Board is of the view that the present policy framework does not require any adjustment and accordingly, at its meeting held on 10 January 2012, decided to maintain the bank’s policy interest rates unchanged at their current levels, i.e., the repurchase rate at 7% and the reverse repurchase rate at 8.50%.

The release of the next regular statement on monetary policy will be on 9 February 2012.