"This is what we are doing" : Cabraal
The IMF'S First Deputy Managing Director's comments evoked a 'happy' response from Sri Lanka's Central Bank Governor Ajit Nivard Cabraal who said this is what the Central Bank has been doing. "It you look at our roadmap announced on January 3 we are talking the same language - stretching the debt and raising liquidity in the market, etc, etc," he said, adding that "having too much in foreign reserves is not a good thing because it comes at high cost." The Governor's critics, mainly from the opposition and some independent economists, have slammed the Central Bank for adhoc policy-making particularly on the exchange rate. President Mahinda Rajapaksa in Budget 2012 announced a 3 % devaluation of the Sri Lanka rupee amidst complaints from exporters that an unrealistic rupee rate was negative to exports and also making Sri Lankan exports uncompetitive. Critics say the Central Bank has used over a billion dollars to sustain the rupee, thereby eating into the reserves which have fallen to over $6 billion from $8 billion at one time.
According to the Central Bank roadmap for 2012: -
Monetary Policy will be formulated so as to achieve mid-single digit rates of inflation, going forward into the medium term -Given that Sri Lanka is a developing country, it is unlikely that a target of a very low single-digit inflation would be optimum, as structural bottlenecks still persist.
-Broad money growth would be designed to accommodate the growth while ensuring the achievement of the mid- single digit inflation.
-Assuming favourable domestic supply conditions, international commodity prices remaining reasonably stable, and international crude oil prices remaining at around the current levels.
-Consumer price inflation based on CCPI is expected to be maintained at between 5 and 6% in 2012 .
-Inflation as measured by the GDP deflator is expected to be around 7.7% in 2011 compared to 7.3% in 2010.
-But, a moderation in price pressures is expected over 2012 thereby bringing down inflation as measured by the GDP deflator to around 6.5% in 2012 .
-The Balance of Payments is expected to record a surplus of around US$ 825 million.
-Although the deficit in the trade balance is likely to expand further, that will be cushioned by: Earnings from tourism projected at US$ 1.2 billion Worker remittances, projected at US$ 6.5 billion FDI, projected at US$ 2.0 billion -Higher inflows will help create a favourable investment climate in the country, which will, in turn, augment the country's growth potential.
-Policy interest rates will continue to serve as a key monetary policy instrument of the Central Bank and the policy interest rate corridor approach will be continued.
-The exchange rate will be viewed as a key stabilisation factor of the economy.
-Growth of broad money is targeted to be around 15%, on average, in 2012 -This growth of the money supply is believed to adequately facilitate the expansion of economic activity in the year ahead .Reserve money would be targeted to grow by around 15% on a daily average basis, in 2012 .Private sector credit is expected to moderate and reach around 16% .Foreign inflows will be actively encouraged to address the Savings-investment gap and will show a marked increase