- Single-digit inflation maintained for 11th consecutive year; range of 4-6% targeted for 2020
Central Bank yesterday revealed that the economy in 2019 is likely to have grown by 2.8% whilst the country had managed to maintain single digit inflation for the 11th consecutive year.
“The economy grew at a slow pace of 2.6% in real terms in the first nine months of 2019. The rate of growth for the whole year is likely to be around 2.8%,” Central Bank Governor Prof. W.D. Lakshman said yesterday at the launch of 2020 Road Map.
“The Sri Lankan economy faced significant challenges in 2019, emanating from movements in the global economy as well as domestic developments,” he said, whilst noting even in the years immediately preceding 2019, economic growth was sluggish, with the country failing to maintain the high growth momentum observed in the immediate aftermath of the end of the internal conflict.
In 2019, the Governor said fiscal and monetary measures put in place in the past to stabilise balance of payments and fiscal balances, and adverse consequences of the Easter Sunday terrorist attacks, combined with the then prevailing political uncertainties have substantially weighed down on the performance of the Sri Lankan economy.
The spillover effects of the Easter Sunday attacks in particular were felt across almost all spheres of economic activity, especially in the second quarter of the year. Consequently, below potential economic growth performance continued through 2019.
Policy uncertainty led to weak investor confidence and low levels of investment. Recurring natural disasters worsened conditions. The inability to address structural issues leading to a weak production economy, has caused this persistent slowdown.
On the inflation front, the country has experienced single digit levels of inflation for the past eleven years. This is an achievement we in the Central Bank are rightly proud of, given its mandated role to ensure economic and price stability in the country.
Sri Lanka appears to have broken off from its post-1977 history of highly volatile, often double digit levels of inflation. Behind these inflation achievements however, lies conditions of subdued aggregate demand. This implies a negative output gap that needs to be filled urgently by utilising the available policy space.
On the inflation front, the Governor said the country has experienced single digit levels of inflation for the past 11 years. “This is an achievement we in the Central Bank are rightly proud of, given its mandated role to ensure economic and price stability in the country,” he added.
However he noted that behind these inflation achievements however, lies conditions of subdued aggregate demand. “This implies a negative output gap that needs to be filled urgently by utilising the available policy space,” he said.
The monetary policy framework of the Central Bank, in the recent past, has been one of flexible inflation targeting. This is a subject of ongoing intellectual debate around the world. The Central Bank will continue to improve its policy framework in this area, with due emphasis on monetary stability for real sector growth.
The maintenance of mid-single digit levels of inflation is an essential component of macroeconomic stability; it will protect vulnerable sections of the population; equally, perhaps more, important at times of low inflation, is shared, employment-creating production growth.
He told the 2020 Road Map launch that the Central Bank expects to pursue its resolve to maintain inflation within a range of 4-6% through a transparent, coherent, and accountable monetary policy framework going forward.
“Maintaining inflation at stable levels would help improve economic prosperity of Sri Lanka. In this regard, the Central Bank will continue its dialogue with fiscal authorities,” Prof. Lakshman said. Adjustments to the Monetary Law Act to align it with global best practices are also envisaged.
Improving Central Bank governance, enhancing its independence, transparency and accountability, as well as enhancing fiscal-monetary coordination to achieve price stability, are all extremely desirable features. At the same time, financial sector oversight and macro prudential policies are to be strengthened to ensure financial system stability, the Governor said.
It was pointed out that in the coming years, as the country progresses towards a higher growth trajectory, close monetary-fiscal coordination was essential to sustain price stability – the conducive platform for further growth.
“In this context, the Central Bank will work closely with fiscal and other Government authorities to ensure a sustained improvement in the production economy and generate productive employment opportunities. Changes in demand conditions will of course be monitored with a view to undertaking proactive policy measures to ensure low and stable levels of inflation,” the Governor added.