High growth in 2006: CB

In its annual report for 2006 the Central Bank on Friday declared that GDP grew by 7.4 per cent, the highest since 1978 while the unemployment rate of 6.5 per cent was the lowest ever.

“The economic expansion was commendable as it was achieved amidst several major challenges: the highest international oil prices; escalation of terrorist activity; increased counter terrorism measures; natural disasters such as floods and landslides; need to accelerate the post tsunami reconstruction; and intense competition for exports,” the Bank said adding that the country’s per capita income rose to US$1,355.

The conduct of monetary policy in 2006 was aimed at containing high money and credit expansion to reduce the threat of surging demand driven inflationary pressures, while supporting the continued growth momentum of the economy. “Therefore, the tightening of monetary policy was continued while minimising the build up of excess liquidity in the market by absorbing excess liquidity on a day-to-day basis as well as on a permanent basis through aggressive open market operations,” the Bank said.

It said a Monetary Policy Consultative Committee (MPCC) was established at the beginning of 2007 to utilise the expertise and insight of stake holders and economists representing the private sector in the decision making process of the Bank. These measures were instrumental in decelerating monetary expansion and the Bank has already been able to achieve the reserve money targets set for the first quarter of 2007.

It said the agriculture sector continued its recovery in 2006, benefiting from the strengthening partnership between public and private sectors together with favourable weather. Paddy output in 2006 recorded a new high level of 3.3 million metric tons benefiting from favourable weather and subsidised fertiliser. However, farmers continued to face marketing problems as the Government led paddy purchasing scheme faced several constraints.

“The achievement of an 8-10 per cent growth rate in the medium-term also critically depends on the establishment of a vibrant services sector catering to the needs of globalised industry, trade and commerce,” the statement said.

Total revenue in 2006 reached 17.0 per cent of GDP compared to 16.1 per cent in the previous year. Tax revenue continued its increasing trend for the third consecutive year amounting to 15.3 per cent of GDP compared to 14.2 per cent in 2005 responding to the Government’s attempts in the areas of tax policy, tax administration and timely enactment of relevant legislation. Public investment remained high at 6.3 per cent of GDP.

The Bank said, however, the Government exceeded its target on recurrent expenditure due to higher than budgeted expenditure on national security, humanitarian relief, salaries and wages, pensions and fuel and fertiliser subsidies. Consequently, the recurrent expenditure to GDP ratio increased to 19.5 per cent from 18.7 per cent in the previous year.

With the ending of the debt moratorium granted by foreign lenders, the debt service indicators reverted to their pre-tsunami levels. Nevertheless, a number of debt service indicators improved compared to pre-tsunami levels.