COLOMBO: Sri Lanka’s economic growth will rebound to 5.0 to 5.5 percent in 2018 from a below 4.0 percent in 2017 with more domestic and foreign private investment, Central Bank Governor Indrajit Coomaraswamy said.
Growth will have to be driven by domestic private investment and also larger flows of foreign direct investment coming from economic reforms of the government, he said presenting a road map for monetary policy during 2018.
Private investors need a stable macro-economic environment with predictable policies to operate and invest, Coomaraswamy said.
The central bank through its tighter policies had brought stability to the economy, and the exchange rate, creating conditions for investors to act, but growth has taken a hit.
Sri Lanka’s growth will fall to a ‘shade below 4-pct” in 2017, Coomaraswamy said.
The economy was hit by a drought floods, and the usual hangover from a monetary backed fiscal overspending in 2015 and 2016 (a Keynesian stimulus), which generated a balance of payments crisis.
In 2015 the central bank cut interest rates in April, in the wake of a disastrous 2015 deficit budget, released over 300 billion rupees of liquidity and printed over 250 billion rupees more, triggering capital flight and credit bubble that naturally spilled over to imports and busted the currency.
Coomaraswamy tightened policy by raising rates and also engaging in some credit restrictions which were not market oriented.
The government also tightened fiscal policy, raising taxes in 2016. Government spending is generally less productive than private spending as it is ‘other people’s money’ which tends to reduce long term benefits.