Fiscal stimulus should be structured not to overheat economy: CB Governor

Nov 29, 2019 (LBO) – The government is to make a policy statement as to how the recently introduced fiscal stimulus would be accommodated within a stable framework, Central Bank Governor Indrajit Coomaraswamy said.

“The government will be making a statement as to how this would be accommodated within a stable framework,” Governor Coomaraswamy told reporters attending his last monetary policy press briefing.

Tax relief measures announced by the government are expected to boost economic activity in the short term, supported by improved investor confidence and accommodative monetary policy.

Coomaraswamy said an appropriate policy mix, which utilizes the available limited policy space prudently, would support the economy to reach as well as enhance its potential over the medium term.

“If you look at monetary aggregates like credit growth there is absorptive capacity, so there is a rationale for a fiscal stimulus package but it is important that this package is structured in such a way that it doesn’t overheat the economy.”

The announced tax revisions and planned public sector wage increases could have a direct upward impact on aggregate demand in 2020.

“You need a certain level of aggregate demand to boost growth but that aggregate demand must not be excessive. That’s why you will get a policy statement from the government very soon as to how you are going to ensure that this infusion of demand into the system won’t be excessive,” he said.

“If it is not excessive, we should get a boost to growth in the short term and some reduction in inflation but the challenge is to maintain that momentum to make sure to grow in the medium to long term and maintain inflation at a low and stable level.”

Related: Recent tax cuts support short term but greater fiscal clarity needed for medium term: CBSL