Sept 16, 2007 (LBO) – A World Bank economist said Sri Lanka should trim the budget deficit if it wanted to achieve eight percent economic growth and monetary policy should be tightened to reduce inflation. All this will take its toll on future growth.
“Unfortunately I think policy makers are not quite clear about what the objectives are in terms of setting the interest rates, the exchange rate,” Senior World Bank economist Ismail Radwan in Colombo said in an interview with ETV’s Lanka Business Report program.
The key weapon against inflation is interest rates, says Radwan who has been tracking the Sri Lankan economy since 2001 in World Bank’s South Asia Finance and Private Sector unit.
If you want to reduce inflation you will increase interest rates.
By presenting a monetary road map in January this year the Central Bank for the first time committed to an inflation target of 10 percent by year end.
I think Central Bank is going to really struggle to meet that target, predicts Radwan.
The problem is when it is out [of line], peoples’ expectations are set about inflation. Once this happens it’s very difficult to break the cycle.