Sri Lanka's Central Bank on Wednesday lowered the economic growth forecast this year to 7.2% from an earlier projection of 8%. The decision to change the forecast after a meeting on Tuesday by the Monetary Board was exclusively reported in the Sunday Times last week. Sri Lanka's economy is going through troubled times, exacerbated by rising government spending and a global financial crisis particularly affecting the country's main export markets, economists said.
In a statement issued on Wednesday on the monthly monetary review, the Bank (CB) said improved investor confidence led to an expansion in domestic economic activity, resulting in a substantial increase in imports last year.
"This in turn, led to a higher than expected deficit in the trade account of the balance of payments. Broad money growth (also) continued to remain high in January 2012 with broad money (M2b) increasing by 20.1 %, year-on-year, with credit obtained by both the private sector and the public sector contributing to this growth." It said year-on-year growth of credit obtained by the private sector continued to be high at 34.3 % in January 2012. Referring to policy measures it took last month to tackle the rising trade deficit, the CB said these measures while leading to the achievement of the desired outcomes, will also impact on the rapid pace of growth in domestic economic activity, particularly due to the resultant higher energy costs, decline in credit flows, and lower import related activity. It said it expects inflation in 2012 to remain subdued at mid-single digit levels.
The CB said, "given that significant inventories of vehicles have built up with dealers of motor vehicles over the past few months, banks and other financial institutions may also prudently consider the limitation of credit for the import of motor vehicles, which would, in turn, lead to the easing of pressure on import expenditure." The CB however didn't change the Repurchase and Reverse Repurchase rate which remain at 7.50 % and 9 %, respectively.