Prospects good for 2007

Prospects for 2007 are promising, with economic growth estimated to reach 7.5 per cent, inflation moderating with the implementation of required monetary and fiscal policy measures and external trade and balance of payments continuing to improve, the Central Bank said last week.

It said the financial system will strengthen further while providing the necessary services for the real sector activities.

These ‘facts’ are contained in the Bank’s “Recent Economic Developments - Highlights of 2006 and Prospects for 2007” which was released with the budget. The report says the Sri Lankan economy achieved a commendable growth of 8 per cent in the first half of 2006, while satisfactorily overcoming several challenges. The economy is poised to grow above 7 per cent in 2006. All three sectors of the economy grew at healthy rates. Inflation rose due to the excessive demand pressure exacerbated by temporary shortages in supply, but shows signs of responding to the tight monetary policy stance, it said.

The tight monetary policy stance adopted from end 2004 was further firmed in 2006 to curtail high growth in monetary and credit aggregates to contain rising inflationary pressures. Increased economic activities have lowered unemployment. The unemployment rate declined to 7.2 per cent in the first quarter 2006 and further to 6.3 per cent in the second quarter 2006. External sector performance improved with the continued expansion in international trade. In 2006, exports continued to grow at a healthy rate while imports also grew by higher rate expanding the trade deficit. Aided by the high growth in worker remittances and inflows from foreign currency denominated debt, the overall balance of payments (BOP) recorded a surplus of around US dollars 150 million during the first half of 2006.

According to the revised estimates, the overall deficit in 2006 would be 8.7 per cent of GDP, which is lower than the original estimate of 9.1 per cent. Meanwhile, the tight monetary policy stance continued to address inflation and lower inflation expectations. Responding to the tight monetary policy measures adopted thus far, the market interest rates have increased, thereby discouraging excessive consumption and borrowing for such purposes.