Central Bank Governor Ajith Nivard Cabraal says the optimistic forecast is for the Sri Lankan economy to grow by 4.5 percent to 5 percent, while the pessimistic forecast expected growth by 2.5 percent to 3.5 percent growth, based on the gloomy world economic outlook predicted by agencies such as the IMF, World Bank and Asian Development Bank)."

"One is a pessimistic forecast where the economy is expected to grow by 2.5 percent to 3.5 percent. This is based on the gloomy world economic outlook predicted by agencies (such as the IMF, World Bank and Asian Development Bank)," Cabraal told journalists at the launch of the Central Bank’s Annual Report yesterday.

The CB Governor told journalists at the launch of the Central Bank’s Annual Report yesterday that the optimistic forecast is for the economy to grow by 4.5 percent to 5 percent. "Despite the global economic situation, Sri Lanka is placed in a unique position which we feel will help the economy grow a bit faster. This is because we believe that the country’s economic growth will be driven by domestic factors notwithstanding the affects of global economy."

With the war expected to end soon and peace restored to the entire country, Cabraal said more tourists and investments will begin to flow in. Also, the dormant economies of the conflict areas will also be able to contribute to the country’s economy.

"In the past when people spoke of the economy they said: ‘If there wasn’t a war’. Very soon they will no longer have to say this and we are confident that these domestic developments will allow Sri Lanka’s economy to do much better," Cabraal said.

World economic crisis sinks its teeth…

The Central Bank’s report said Sri Lanka’s economy had grown by 6 percent in 2008, despite the oil and food price shocks experienced during the first half the year and growth falling to 4.3 percent during last quarter because of the second round affects of the global financial crisis on Sri Lanka’s real economy.

"This is a commendable achievement considering this is the fourth consecutive year that Sri Lanka had been able to maintain growth of 6 percent or more," Chief Economist of the Central Bank, Dr. Nandalal Weerasinghe said.

At the beginning of 2008, Central Bank predicted that exports would grow by 10 percent and imports by 15 percent. By the end of September, exports maintained the forecasted trajectory and grew by 10.1 percent but imports increased sharply by 34 percent caused by the high oil and food prices experienced during the first half of the year.

After September 2008 the crisis in the global economy sunk its teeth into Sri Lanka.

The exchange rate

"There has been a lot of debate on the exchange rate issue. But the Central Bank only resorted to intervene to prevent undue fluctuations of the exchange rate. During the first part of the year when foreign inflow came the rupee would have appreciated to about Rs. 100 against the dollar. We intervened to prevent this from happening," Dr. Weerasinghe said.

He said when the global financial crisis began to tell on the economy the Central Bank intervened by using its reserves to prevent the rupee from depreciating sharply.

Governor Cabraal said the Central Bank has always adopted a flexible exchange rate regime.

"But no Central Bank would tolerate wide fluctuations to its currency and therefore we intervened where necessary. But we have a greater understanding now and there is greater space to revert to a market determined exchange rate," he said.

Critics say the Central Bank depleted its reserves trying to maintain an artificial exchange rate.

"But what must be understood is that reserves are meant to be used at a time of crisis and that is exactly what we did. And now we will rebuild the reserves," Cabraal said.

Monetary Policy

The Central Bank’s tight monetary policy and falling commodity prices have brought down the point-to-point change in inflation to 5.3 percent in March 2009, after peaking at 28.2 percent in June 2008.

Cabraal said this would give the Central Bank more space to loosen its monetary policy to further stimulate the economy.
Dr. Weerasinghe pointed out that the global financial crisis did not affect the domestic financial system but the problems to its stability were caused by the recent scandals of unauthorized finance companies.

"We are looking at changes to the Banking Act and Finance Companies Act which will give us more regulatory powers. We would be able to take strong action if there are discrepancies on governance issues, he said.