Sri Lanka to grow at 7.2%

Thursday, 15 March 2012 01:15 - - {{hitsCtrl.values.hits}}

The Central Bank yesterday downgraded Sri Lanka’s 2012 growth forecast to 7.2% from 8%, but in a move that was unexpected by the market, kept its policy rates unchanged.

The new projections come at the time when the rupee has hit record lows and the Central Bank is struggling to maintain high reserves. The statement announcing the new growth forecast also cautioned that Sri Lanka would be curbed by lower imports, higher energy costs and decline in credit flows.

The downgrade was necessary due to the high trade deficit, which doubled to US$ 9.7 billion last year due to rapid expansion of domestic economic activity.

“The main risk for the economy was emanating from the trade deficit, which is mainly because of high import growth,” Central Bank Governor Ajith Nivard Cabraal told Reuters. “Now we are addressing the source of imbalance effectively.”

Interestingly, the Central Bank forecast is lower than the International Monetary Fund revision of 7.5% that matched Standard Chartered Bank while Fitch Ratings put it between 7.5%-8%.

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.

“These 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, with the general public also being encouraged to actively conserve energy, thereby reducing expenditure on petroleum imports to some extent,” it said.

Further, given that significant inventories of vehicles have built up with dealers of motor vehicles over the past few months, banks and other financial institutions may also prudently consider the limitation of credit for the import of motor vehicles, which would, in turn, lead to the easing of pressure on import expenditure.

In the light of the above-mentioned expected results due to the various policy measures on the monetary as well as macroeconomic landscape, the Monetary Board was of the view that its current monetary policy stance is adequate to appropriately deal with the issues at hand.

Therefore, the Monetary Board decided to maintain the bank’s policy platform unchanged for the time being, and accordingly, the Repurchase rate will remain at 7.50 per cent, the Reverse Repurchase rate at nine per cent and the Statutory Reserve Ratio at eight per cent.