Tackling inflation, a key challenge - CB

By Azhar Razak

The Central Bank of Sri Lanka (CBSL) last week said that given the uncertain outlook for global commodity prices, especially with regard to oil, the key challenge ahead would be to maintain inflation at a low and stable level.

“Although the recently implemented policy measures would moderate growth and ease demand pressures to some extent, monetary policy will need to continue to focus on restraining demand pressures to maintain inflation at a mid-single digit level,” the island’s monetary authority highlighted in the CBSL Annual Report 2011 released last week.

The report noted that managing supply side shocks to ensure an adequate domestic food supply would also be required to complement demand management strategies whilst developing quality seed varieties to suit local conditions, expanding cultivation to different agro climatic zones to ensure uninterrupted supply, increasing storage facilities and improving supply chains to ensure a reasonable price for producers and consumers are some areas that may need to be addressed in this regard.

“The weak recovery in the global economy as well as geopolitical uncertainties in Sri Lanka’s traditional export markets is likely to affect export growth. Demand for exports needs to be improved through diversification of both markets and products. Also, foreign inflows must be strengthened, particularly in the areas of service inflows and FDIs through appropriate policies and macroeconomic environment,” CBSL identified.

It further added that high oil prices in international markets can have a significant impact on an oil dependent economy like Sri Lanka pointing out that policies need to be put in place to mitigate the impact of high oil prices by promoting energy efficient production technologies, increasing the use of renewable energy sources and energy conservation.

“Moreover, a price mechanism that reflects movements in international energy prices may need to be considered to help avoid the need for large adjustments of domestic energy prices while lessening the burden on public enterprises,” the Report suggested.

Meanwhile, the report cautioned that since substantial decline in unemployment is expected to tighten labour market conditions, policies need to be put in place to improve labour productivity and to address structural rigidities in the labour market while increasing capital intensity to deal

with any manpower shortages.

“Attention should also be paid to realign Sri Lanka’s education system to generate a human capital base with the skills necessary to sustain this new growth momentum,” it further pointed out.