The series of policy measures, adopted by the government to stabilize the economy in the wake of a surge in trade deficit that exerted pressure on international reserves, will moderate the economic performance, the Secretary of the Finance and Planning Ministry Dr. P. B. Jayasundera said Wednesday.
Consequently, Sri Lanka's economy will grow at a more moderate rate of 7 percent in 2012, he predicted.
Dr. Jayasundera was delivering a lecture on "Sri Lankan Economy in Perspective" at the Sri Lanka Economic Summit 2012 organized by the Ceylon Chamber of Commerce at the Cinnamon Grand in Colombo.
He said the medium term priorities of the Government will be to revert back the economy to 8 percent growth path with lower inflation of around 6 percent.
Sri Lanka earlier in the year implemented several policies to arrest the ballooning trade deficit which has risen to US$ 10 billion in 2011.
"These adjustments are not easy, neither politically nor economically. However, they have produced significant positive results," he said.
"While, these measures will certainly be required to stabilize the economy in the immediate run, they will moderate the economic performance," the Finance Secretary pointed out.
He explained that although those measures were effective in the short run, the large trade deficit cannot be resolved only by relying on exchange rate, interest rate and on conventional macroeconomic policy instruments but requires a comprehensive policy strategy that consists of structural changes and institutional strategies to alter export and import mix in the country's economy.
The flexibility in the exchange rate has helped exports and import replacement industries, but will reduce trade, banking, leasing, finance, and to some extent constructions as their import content is high, he explained.
The impact of drought on agriculture and power generation will reduce the value addition from these sectors, he further noted.
Although the monetary policy strategies and supply side initiatives have targeted to keep inflation at single digit level, inflation is like to be in upper single digit level in the next few months, he predicted.