January 04, (LBO) – Sri Lanka’s Central Bank has set itself tight targets to limit money printing, contain runaway inflation and stabilize the economy in 2007 and has called for fiscal restraint from the government to help meet its objectives.
But the bank warns that its commitment to keep to monetary targets was under threat from high budget deficits.
“It should also be noted that a continuing high budget could also pose a formidable challenge in the conduct of monetary policy, as such deficits requires borrowing by the government from the banking system, making difficult to maintain the monetary expansion along a pre-determined, tight path,” Governor Cabraal said.
In the medium term Central Bank says it can bring inflation down to 4 percent if the government keeps to its announced ten year fiscal plan, which envisages sharp reductions in the deficit.
“The achievement of such a target will be facilitated by the continued economic growth resulting from high public and private investment and savings, improving competitiveness, gradually rationalized expenditure which leaves sufficient funds for development work, and reducing the budget deficit resulting in low demand pressure,” Cabraal said.