Sri Lanka expects to graduate to the "Upper Middle Income" category by 2016 and the Central Bank will fashion its macroeconomic policies accordingly to avoid the Middle Income Trap, the head of the country's monetary authority said on Thursday.
Central Bank Governor Ajith Nivard Cabraal explained that as some countries have stagnated at this middle income level, Sri Lanka's medium term macroeconomic strategy will need to focus on avoiding this "Trap".
Presenting the Central Bank's policy direction and work plan for the upcoming year "Road Map for Monetary and Financial Sector Policies for 2014 and Beyond" for the eighth consecutive year, Cabraal said Sri Lanka for the new year targets a 7.8 percent growth in the country's GDP while maintaining inflation at mid-single digit levels.
"Now we are a US$67 billion economy. We expect the economy to grow 7.8 percent this year and to gradually expand it to 8.5 percent in 2016," he said.
However, the predicted growth could slow down due to external factors such as uncertain weather conditions, geopolitical tensions and slower growth in global demand.
Central Bank is confident that inflation could be contained at around 5% or below, in the medium term and it is expected to be 4-6% during 2014.
The Road Map 2014 presentation comprised an assessment of the macroeconomic developments in the previous year, policy direction for 2014 and for the medium term, particularly to ensure a smooth transition into the post-US$ 4,000 per capita Upper Middle Income era.
Reducing trade deficit from current 12.8 percent of GDP in 2013 to 11.6 percent of GDP in 2014 and continuous improvement in productivity are some other goals set for 2014.
The monetary authority expects the budget deficit to narrow substantially in 2014 to 5.2% of GDP from 5.8% in 2013. By 2016, the fiscal deficit is expected to be reduced to below 4% of GDP.
Noting that Sri Lanka aims to achieve a US$ 100 billion economy, the head of the monetary authority said it would demand a significant improvement in the productivity levels of the current workforce.
In the fiscal sector, the major reforms implemented in the recent past are expected to enhance revenue mobilization and in the medium term, revenue is expected to reach 15 to 16% of GDP with the expected improvements in the tax base and tax administration, and greater tax compliance.
The maintenance of foreign reserves at desirable levels will enable the Central Bank to prudently manage market dynamics and any impending risks, Central Bank head said.
The current account is expected to record a surplus in 2014, after 26 years, reflecting the rebound in revenue and the rationalization of recurrent expenditure. It is expected to improve faster than anticipated in the past due to increased inflows from workers' remittances, tourism and the service exports will mitigate the impact of trade deficit.
Cabraal expressed hope that state-owned enterprises will become more viable in the year.
"We hope performance of SriLankan Airlines, Ceylon Petroleum Corporation and Ceylon Electricity Board is going to change and this would create enormous impact on the well-being of the country," he said.
The Governor said the Central Bank is in a position to steer the economy along a more stable and sustainable path while maintaining economic and price stability and financial system stability to support sustainable and inclusive growth this year.