Sri Lanka’s post conflict economy is facing new emerging risks which would have to be mitigated, Central Bank Governor Ajith Nivard Cabraal said.

Inflation, unauthorised financial services and the unwise use of resources are emerging threats to the economy which saw its macroeconomic position erode due to the thirty-year conflict and poor fiscal discipline.

The UN-ESCAP, Asian Development Bank and HSBC have forecast Sri Lanka’s economy growth at 8 percent this year while the International Monetary Fund (IMF) has forecast growth at 7 percent.

Sri Lanka’s economy, which grew 3.5 percent in 2009, rebounded to 8 percent last year and the Central Bank believes it would grow 8.5 percent this year.

Per capita income which was US$ 2,014 in 2008 and US$ 2,057 in 2009 increased to US$ 2,399 in 2010 and the Central Bank believes it could reach US$ 4,000 by 2016 as economic activity across all sectors gain further momentum, especially in the North and East, where growth is expected at 13 percent during the next five years.

"With the expected continued increase in demand arising from higher income levels, there will be pressure on prices," the Governor said. "Hence the Central Bank would need to ensure that demand pressures are managed appropriately, in order to deal with such pressures," the Island reported quoting the Governor.

Inflation, the rate at which prices increase, peaked at a 27-month high when it reached 9.8 percent last April. However, the Central Bank and IMF maintain this was caused by supply factors and was not demand driven. The Central Bank earlier this month said inflation was expected to moderate from this month onwards, settling around 7 percent by the year’s end.

"Fortunately, the increasing inter-connectedness of districts driven by improving infrastructure, and the resultant free flow of goods, serves and factors of production would cushion such inflationary pressures," the Central Bank Governor said.

Earlier this year, the Central Bank increased the statutory reserve requirement of commercial banks to 8 percent of all deposits, in anticipation of a possible increase in demand pressure.

"The intense challenges to the economy this year are escalating oil prices and debt crises in Europe. However, we are confident that are forecasts would not have to be revised at this stage and we could maintain economic growth at 8.5 percent this year," the Governor added.


Governor Cabraal also said with income levels increasing, people would have to be cautious about the threat from unauthorised financial institutions.

"With higher levels of income in the hands of the people, there will be a search for higher interest rates for their savings. This could lead to risks of unauthorised financial services rushing in to offer high rates," he said.

He said the Central Bank would continue to conduct awareness campaigns in order to maintain systemic stability.

In context to the North and East, Cabraal said necessary skills should be developed to accommodate growing demand.

"Schemes have to be launched to improve human skills and also ensure there is smooth movement of all resources across provinces," he said.