Sri Lanka needs better budgets for low inflation: central bank

Jan 03, 2008 (LBO) – Sri Lanka’s central bank governor Nivard Cabraal said better budgets were needed to lower inflation, as heavy government borrowings made it difficult to conduct effective monetary policy. “The conduct of a successful monetary policy, while facing a high budget deficit is a challenging task,” he said in a speech outlining the bank’s monetary policy roadmap for 2008, “as the borrowings by the government from the banking system to finance such deficit, often makes it highly difficult and complex to maintain the monetary expansion along a pre-determined, tight path.”

For 2008, the Central Bank gave up achieving low inflation despite having a legal obligation to maintain ‘price stability’ and said price increases would be in double digits.

Inflation would be between 10 to 11 percent in a best case scenario and 12 to 14 percent in a worst case scenario in 2008. Cabraal’s statement came hours before the government announced that it was formally pulling out of a ceasefire with the Tamil Tigers.

Central Bank inflation forecasts are based on the actions of independent entities raising the possibility that some of its estimates may go wrong, Cabraal said.

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