Sri Lanka economy is growing but needs monetary tightening

Apr 06, Colombo: Sri Lanka’s economy bounced back strongly in 2010 and poised for a healthy grow but the country needs tightening monetary policies and state enterprise and finance sector reforms to support the higher growth, the Asian Development Bank (ADB) said today.

The ADB says after last year’s rebound, the economy is expected to show continued high growth of 8.0% in 2011, supported by some strengthening in external demand, and maintain growth at that level in 2012.

Sustaining such performance will require fiscal consolidation, state enterprise and finance sector reforms, as well as flexible exchange rate management, the ADB suggested in its annual economic publication titled Asian Development Outlook 2011 (ADO 2011) released today.

The Asian financial institute predicts the services and industry to lead growth in 2011 while the agriculture is likely to be hampered by the floods earlier this year that damaged the rice and other crops.

The ADB warns that the rising global food and oil prices and a shortfall in domestic supply of agricultural produce due to the flooding will lead to rising inflation, but only up to around 8%.

The report questioned the Central Bank’s move in January to cut the interest policy rates in spite of the upward trend of inflation to relax monetary policies as an incentive for greater private investment.

“With the economy now on a higher growth trajectory and inflation pressures rising, however, monetary tightening may well be needed later in the year,” the ADB noted.

The ADB expects the budget deficit to come down to 6.8% of GDP from 8% in 2010. Implemented budget measures to simplify the tax system and move from tax concessions as the principal tool for attracting investment to increased economic activity will yield resilient revenues, the ADB says.

To achieve the government’s ambitious target of 5% of GDP deficit in 2012, it needs to take measures to close the loopholes in the tax system to improve efficiency in tax collection, the ADB suggested.

The report points out that the investment is still too low to achieve national development goals, and urged the government to take measures to substantially increase the private investment.

“The challenge for Sri Lanka will be enforcing different institutional and regulatory policy reforms in ways that are effective but without excessive bureaucracy,” the ADB concludes.

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