Tax reductions likely to support low inflation and higher economic growth, a challenge long term, says Central Bank Governor

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The recent tax reductions introduced to stimulate the economy are likely to support lower inflation and higher economic growth in the short term but they are a major challenge to long term stability, says Dr. Indrajit Coomaraswamy, Central Bank Governor.

Addressing the monthly monetary policy meeting at the Central Bank on Thursday, Nov. 28, Dr. Coomaraswamy said that the government should have a structure that stabilizes the economy without allowing the economy to overheat. This fiscal stimulus package should help the country to accelerate the economy in the medium to long term perspectives.

The Central Bank Governor also said the government is relaxing its monetary policy in a situation where the external environment is favourable towards the country, the stance of the US Federal Reserve is passive and inflation in the country is at a stable level of six per cent.

He also said that he was of the view that greater clarity with regard to the medium term fiscal path of the government is required to assess the impact on the economy over the medium term.

Following are excerpts of the CB Governor’s speech:

“Given the current and expected conditions in the domestic economy and financial market, the Monetary Board was of the view that the continuation of the current monetary policy stance is appropriate.

Economic growth is predicted to be modest during the remainder of the year, with likely sub-par growth in Industry and Services activities as implied by leading indicators. I forecast 2019 growth would be three per cent but IMF says it’s around 2.7 per cent.

Despite near term volatilities, inflation is expected to remain in the desired range of 4-6 per cent in the near term as well as the medium term. External sector performance was buoyed by the cumulative contraction of the trade deficit over the first nine months of 2019, largely driven by the decline in import expenditure.

The Sri Lankan rupee has appreciated against the US dollar by 1.0 per cent thus far during the year. Gross official reserves are estimated at US dollars 7.8 billion at end October 2019.

The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank will remain at 7 per cent and 8 per cent respectively.

The Central Bank Monetary Board arrived at this decision following a careful analysis of current and expected developments in the domestic economy and the financial market as well as of the global economy.”