Ajith Nivard Cabraal: Road map for monetary and financial sector policies in
2007 and beyond
Speech by Mr Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka, at the Central Bank
International Conference hall, Colombo, 2 January 2007.
* * *
1. Introduction
Your Excellencies, Members of the Monetary Board, Deputy Governors, Ladies and Gentlemen,
At the outset, I wish to extend a warm welcome to all of you and wish you a very happy new year. As
we mark the new year 2007, we thought it would be appropriate and timely for the Central Bank to
enunciate its policies as well as the rationale therefor, so as to enhance policy predictability and
transparency. We shall also take this opportunity to indicate our policy targets and share our latest
available information in relation to the economy, upon which our analysis and targets have been
based.
The Central Bank of Sri Lanka was established in August 1950 under the Monetary Law Act No. 58 of
1949, and the Act sets out two inter-dependent core objectives. These are the attainment of the
economic and price stability and the maintenance of the financial system stability.
Today, the Central Bank follows a monetary targeting policy framework in conducting monetary policy
to attain Economic and Price Stability, i.e., to achieve a sustainable, low and predictable level of
inflation. Such an outcome, among others, is a prerequisite to achieving sustainable economic growth
and development. The key policy instrument used in this endeavour is the establishment of policy
interest rates for borrowing (Repurchase Rate) and for lending (Reverse Repurchase Rate) that
operates through the Bank's Open Market Operations. The Central Bank conducts Open Market
Operations to keep the level of Reserve money in the system at an appropriate level, while it uses the
Statutory Reserve Ratio (SRR) on commercial bank deposit liabilities to further support the monetary
policy.
Financial System Stability, the other core objective of the Central Bank, is achieved through the
regulation and supervision of financial institutions, the overseeing of the financial infrastructure which
includes critical payment and settlement systems, as well as keeping a close watch on the financial
markets as a whole. To achieve this objective, the Central Bank employs a series of prudential and
regulatory measures.
In addition to the core objectives, the Central Bank provides policy advice to the Government and
vital state sector enterprises to strengthen macroeconomic stability and to enhance growth prospects.
The Bank also undertakes several agency and ancillary functions, which include managing the
Foreign Reserves of the country, Public Debt and Employees' Provident Fund (EPF). Further, the
Central Bank plays a key role in broadening the financial infrastructure and strengthening the small,
medium and microfinance sectors in the country.
2. Outline of today's statement
The policy statement presented today for the year 2007 and beyond focuses on several areas.
First, it sets out an account of the developments in the economy and the conduct of monetary policy
and financial sector policies in the year 2006. It also presents an evaluation of the key sectoral
developments in 2006, the policy measures taken and the expected impact of such measures on the
country's macro-economic environment.
Second, it examines the challenges in meeting monetary policy objectives and financial stability
in 2007 and beyond.
Third, the statement provides a detailed account of the Central Bank's monetary policy strategy in
2007 and beyond, as a major mechanism to drive the economy along a low - inflationary/high - growth
path, supported by a series of other policies and strategies.
Fourth, it discloses the policies for financial system stability in 2007 and beyond.
Fifth, it presents the identified policies for strengthening the economy, through the encouragement
of high savings and investment.
While we hope you would find our statement of interest, we wish to mention that, in the light of any
unexpected external and internal developments, we may sometimes deviate from the strategies or
targets as explained today. In such an event, we would, at that time, communicate our reasoning for
such deviations for your understanding as well.
3. Developments in the economy
As is already known, the Sri Lankan economy achieved a growth of 8 per cent in the first half of 2006,
and a growth of 7.5 per cent in the third quarter of 2006, Overall, it is very likely that the economy
would have grown at over 7 per cent in 2006.
These values are laudable because they have been achieved in the face of several major challenges,
particularly high international oil prices and an escalation of security concerns during the year.
Notwithstanding such challenges, all major sectors of the economy grew at healthy rates.
The Agriculture sector continued its expansion with growth recorded in all sub sectors, except tea.
Remarkable growth in rubber and coconut, fast recovery in the fish production, record harvests of
paddy in the Maha season 2005/2006, supported the growth in the agricultural sector.
The Industry sector continued to grow, benefiting from the rapid global economic growth and strong
domestic demand. Weather, favourable to hydropower generation, also contributed to the substantial
growth in this sector.
The Services sector growth was dominated by the telecommunication services, port services,
domestic and international trade, and financial services.
Figure 1: GDP Growth and Sectoral
Contribution to Growth
10
8
6
4
cent
2
Per
0
-2
-4
2001 2002 2003 2004 2005 2006 F
Agriculture Industry
Services GDP Growth
At the same time however, inflation began to increase since April 2006 due to rising demand
pressures in the economy. The point-to-point change in the Colombo Consumers' Price Index (CCPI)
which is popularly considered as "inflation", has been increasing since April 2006 and the CCPI
increased by around 19 per cent during each of the last two months. Although it was noted that a part
of the increase was due to very high prices in vegetables, affected by extreme weather conditions, we
noted with concern that core inflation too, which is a measure of inflation directly caused by demand
pressures, had also risen to 15 per cent by November 2006. These pressures were somewhat
aggravated by supply side developments, such as the upward adjustments in administered prices,
increases in prices of some of the imported consumer items, and adjustments in import tariffs
applicable to some consumer food items. Such factors, of course, would essentially cause a one-time
price increase and would necessarily contribute to long term inflation only if such impact is
accommodated by continuing monetary expansion.
In the meantime, we observed with satisfaction that increased economic activities had led to lower
unemployment during the year. The Labour force grew by approximately 1.0 per cent to 8.1 million by
end 2005, and was expected to increase further to 8.2 million by end 2006. As a consequence, the
unemployment rate declined to a level of 7.2 per cent in the first quarter 2006 and to its lowest level of
6.3 per cent in the second quarter 2006.
Savings and investment, both recorded upward trends. Domestic private savings in 2006 has now
been projected to increase to 19.4 as a percentage of GDP. National savings are also projected to
increase, resulting from increased savings by non-resident Sri Lankans as evidenced by the high
growth in migrant worker remittances. The Investment to GDP ratio is also expected to improve from
26.5 per cent in 2005 to 29.0 per cent in 2006, and Private sector investment, which accounts for
about 87 per cent of total investment, is estimated to increase by 31.4 per cent. Public sector
investment too is projected to rise by 7.5 per cent as a result of growing construction activity in
highways, roads, infrastructure facilities, community development projects, and tsunami related
reconstruction and rehabilitation projects.
The performance in the External sector improved with the continued expansion in international trade
and growing global demand. During the first ten months of 2006, exports grew by 6.5 per cent and
Imports by 15.8 per cent with a higher growth in intermediate and investment goods. The outlay for
petroleum imports increased by 29.6 per cent during this period due to the soaring oil prices. For the
year as a whole, export growth is projected at 7 per cent and import growth at 15.4 per cent.
An aspect of the economy which caused some concern in the year was that the trade deficit widened
to US dollars 2,955 million. As the result, the Current Account also recorded a deficit of US dollars
1,038 million in the first nine months of 2006. It reflects the imbalance between national savings and
investment, which needs to be addressed by encouraging greater savings. Such Trade and Current
Account deficits were financed through net inflows to the capital and financial accounts. It was also
observed that Sri Lanka could reasonably and comfortably afford a bulk of the additional foreign
exchange cost on account of high oil prices in the first nine months of 2006 as a result of the higher
migrant worker remittances and foreign currency denominated loans obtained by the government from
external and domestic sources. Worker remittances increased by US dollars 338 million in the first
ten months and foreign currency denominated debt rose by US dollars 404 million by end
November 2006. The higher quantum of worker remittances was, to some extent, facilitated by the
active promotion campaigns launched by the Central Bank with the support of the Sri Lanka Foreign
Employment Bureau, overseas job agencies, foreign missions and the state banks and we believe that
the impact of such initiatives would be further felt in the next few years as well.
During this year, a remarkable increase was also seen in foreign direct investments. All in all,
these factors contributed towards the overall balance of payments (BOP) surplus which is
estimated to exceed US dollars 150 million during 2006.
Figure 2: Gross Official Reserves
3,000
2,500
2,000
mn
1,500
USD
1,000
500
2000 2001 2002 2003 2004 2005
2006P
It is useful to recollect that since moving to the "Floating exchange rate" regime in 2001, the gross
official reserves have continued to increase except in 2004 when the country was hit by the
sudden increase in oil prices. As of now, the gross official reserves have been sufficient to meet about
3 months of average imports in the recent years despite the rising expenditure on oil imports.
We also note that according to the overall policy vision announced in the "Mahinda Chintana", the
Government's commitment to reduce the budget deficit to a sustainable level in the medium term has
been made clear. In that context, the fact that the total revenue during the first nine months of 2006
increased, and thereby led to an improved Revenue/GDP ratio is laudable. In addition, it was noted
that several measures were introduced by the Government to rationalise recurrent expenditure,
especially adjusting domestic fuel prices to reduce the burden on the Government. Nevertheless, the
Government has had to resort to borrowings from the banking sector to meet shortfalls in the face of
many challenges, and in order to avoid such a situation in the future, it would be highly desirable to
further improve the Revenue generation and collection process in 2007 and beyond.
Another key fiscal indicator, namely recurrent expenditure as a ratio of GDP recorded a value of 14.0
per cent during this period. Capital expenditure and net lending also increased by 28.2 per cent during
this period. The main contributors to this increase were the acceleration of infrastructure development
and tsunami related reconstruction activities. All in all, the overall budget deficit in the first nine months
of 2006 reached 6.0 per cent of GDP, while the budget deficit in 2006 is estimated to be 8.7 per cent
of GDP.
In relation to the outstanding debt stock of Government, we note with satisfaction that it is
expected to decline to 93.1 per cent of GDP by end 2006 from 93.9 per cent as at end 2005. The
outstanding government debt to GDP ratio is also expected to decline in the medium term in line with
the path enunciated in Fiscal Management (Responsibility) Act.
We could also report that the tight monetary policy stance adopted from end 2004 was further firmed
in 2006 to curtail high growth in monetary and credit aggregates to contain rising inflationary
pressures. Accordingly, the Central Bank raised its policy interest rates by 25 basis points in June
2006, 12.5 basis points in July 2006, 50 basis points in September 2006, and a further 37.5 basis
points in December 2006: a total of 125 basis points during the year. This is in addition to the increase
of policy rates by 175 basis points during 2004 and 2005. At the same time, the Central Bank has also
been conducting Open Market Operations aggressively, to manage the liquidity position in the market
to be within the reserve money targets.
Figure 3: Repo, Reverse Repo and Call
Money Rates
15.00
13.00
Cent
11.00
Per
9.00
7.00
5.00
08-Jul-06 29-Jul-06
21-Jan-06 17-Jun-06
11-Feb-06 15-Apr-06 09-Sep-06 30-Sep-06 21-Oct-06
31-Dec-05 04-Mar-06 25-Mar-06 19-Aug-06 11-Nov-06 02-Dec-06
06-May-06 27-May-06
Repo Rate
Reverse Repo Rate
Weighted Average Call Money rate (Tax Adjusted)
Responding to the tight monetary policy measures adopted thus far, market interest rates have
increased, thereby discouraging excessive consumption and borrowing for such purposes. In turn, this
has led to a deceleration in the high growth in the money supply. We believe that the tight monetary
policy exercised by the Central Bank was instrumental in pulling back the growth in Reserve money
from 20 per cent at end 2004 to 17 per cent by end August 2006. This decrease would have naturally
led to a corresponding deceleration in broad money growth in the future, although in absolute terms,
the growth in broad money remained uncomfortably high, around 19-20 per cent, during January to
June 2006, a legacy of the high reserve money growth in the past.
In keeping with its primary objective, the Central Bank has also been very concerned about the
inflationary impact of the regular use of Central Bank's Reverse Repo window by some
commercial banks which appear to use such window as a convenient instrument of regular funding.
We wish to clearly discourage this practice in 2007 and therefore, with effect from 1st January 2007,
the Reverse Repo facility of the Central Bank will not be made available on days when there is a
liquidity surplus in the commercial banking system, according to our estimates. We would also closely
monitor the Banks that seek this facility regularly to ascertain whether they are doing so because of
any structural deficiencies that they are suffering from.
We also noted that the financial sector grew with increased resilience, possibly benefiting from robust
economic growth and a rather favourable external environment. Profitability, capital funds and asset
quality of banks improved, leading to strengthening of capacity of the financial sector to absorb
shocks. In the meantime, interest rates across markets rose in response to gradual tightening of
monetary policy; turnover in the foreign exchange market recorded substantial increases; and market
capitalisation and price indices in the equity market continued to improve.
Figure 4: Ratio of Capital Funds to Total Assets
of LCBs
8.0
7.0
6.0
Cent
5.0
Per 4.0
3.0
2.0
1.0
0.0
2000 2001 2002 2003 2004 2005
Sep06
Figure 5: Non Performing Advances to Total
Advances of LCBs
18
16
14
12
cent
per
1086420
2001 2002 2003 2004 2005 Sep-06
It would also be noted in the year 2006, several important measures were taken to strengthen and
improve the efficiency of the financial sector, improve risk management, enhance access to finance,
strengthen the payment and settlement system as well as supervision and regulation. Banks were
required to include market risk in the computation of capital adequacy to ensure that they are
adequately capitalised to meet any adverse fluctuations in market prices and are not vulnerable to any
unanticipated shocks. Prudential norms for classification and valuation of bank investment portfolios
were further strengthened. To improve the safety and efficiency in the payments and settlements
systems, the Central Bank also drafted a payment system policy in consultation with the National
Payment Council to declare a public policy regarding the regulatory framework.
As is well known, the Central Bank manages the Employees' Provident Fund (EPF). It does so by
receiving member contributions, maintaining member accounts, investing funds and paying benefits to
members. The total assets of the EPF grew by 13 per cent to Rs.439 billion during the 12 months
ending June 2006. Total contributions and refunds during this period amounted to Rs.16 billion and
Rs.13 billion, respectively. The total investment portfolio consisted mainly of government securities at
98 per cent, while the total income for the first half of 2006 amounted to Rs.25 billion.
The Central Bank also manages the Public Debt to ensure that the Government's financing needs and
its payment obligations are met at the lowest possible cost over the medium to long term, consistent
with a prudent degree of risk. During 2006, the Central Bank took several measures to strengthen the
management of public debt by:
•
Increasing the capital requirements, introducing a risk based supervision system and
supervision activities to strengthen the Primary Dealer System and financial sector stability
• Introducing on-line data reporting to enhance the transparency in trading government
securities
•
Facilitating capacity building of market players
• Permitting subscription upto 5 per cent of Treasury bonds by foreign investors
• Assisting the government to raise foreign currency commercial debt through syndicated
loans from the international market
•
Developing a comprehensive debt consolidation strategy
• Introducing a new debt instrument named Sri Lanka Nation Building Bonds for the Sri
Lankan working community living abroad thereby offering them an opportunity to contribute
funds towards infrastructure development in the country.
In 2006, in order to create a more conducive external sector environment for both local and foreign
investors, the Exchange Control Department also initiated the following several measures:
•
Facilitating non-resident investments in government securities
•
Introducing two new foreign currency accounts to expand incentives available for
professionals who earn foreign exchange and for the suppliers of inputs to BOI companies
who help to save foreign exchange.
•
Authorized dealers have been permitted to open and operate Treasury Bond Investment
External Rupee Accounts (TIERA) in commercial banks in Sri Lanka, in order to facilitate the
fund transfers in purchasing treasury bonds by non-residents.
4. Challenges in meeting price and economic stability and financial system stability in
2007 and beyond
Sri Lanka, being a small open economy, continues to face external shocks arising from global political
and economic developments, domestic disturbances and natural disasters. At the same time, while the
emergence of South Asia as a new force in the world economy would provide new opportunities for Sri
Lanka to achieve higher economic growth, the geopolitical uncertainties that would impact global
economic stability would probably pose a threat to meeting external sector targets in 2007 and
beyond, and therefore would need close monitoring.
Two of the more significant challenges that would have to be faced in 2007 would be the impact of
possible high and volatile international oil prices, as well as the security concerns in the country.
The impact of high oil prices is manifold. It increases the import bill: widens the current account deficit:
adversely impacts on the exchange rate stability; raises domestic fuel prices causing a serious supply
side shock; and raises both headline and core inflation since domestic inflation becomes adverse with
the demand pressure in the economy and supply side shocks. At a time when the entire world is
strengthening its security capabilities to meet the threat against terrorism, Sri Lanka too would need to
address the prevailing situation. At the same time, it is important that the business community
continues with its investment plans in Sri Lanka because the very concerns regarding security
provides a certain "discount" which could be of advantage in a highly competitive global business field.
External and internal shocks and vulnerabilities may also thrust fresh challenges to financial system
stability. Hence, it would be useful to consider a few such shocks and risks as well.
The continuing high growth in private sector credit could also pose threats to price as well as financial
system stability. First, it could deteriorate the quality of the assets of commercial banks and that
situation could increase the risk of high non-performing loans in the future. Second, such expansion of
credit could generate inflationary pressures in the economy through increased aggregate demand.
With the rapid and intense integration of the Sri Lankan economy with global financial markets, money
laundering, terrorist financing and pyramid schemes could threaten financial stability.
Therefore, continued regulatory vigilance and timely interventions would be necessary to avoid and/or
mitigate any harmful effects of all such threats.
It should also be noted that a continuing high budget deficit could also pose a formidable challenge in
the conduct of monetary policy, as such deficit requires borrowings by the Government from the
banking system, making it difficult to maintain the monetary expansion along a pre-determined, tight
path.
As seen from the case studies of many successful countries, rapid infrastructure development is a
strong contributory factor towards achieving sustainable high growth. However, the timely mobilisation
of necessary resources for infrastructure development while maintaining budget deficits and debt at
reasonable levels would be particularly challenging for a developing country like Sri Lanka.
At the same time, maintaining a comfortable and reasonable level of foreign currency reserves in order
to be able to mitigate the impacts of external shocks is also a challenging task for any developing
country. Needless to say, it is vital to manage the foreign reserves at an appropriate level, while
ensuring that the exchange rate fluctuations are within reasonable limits, in order to enhance the
confidence in the economy.
These and other challenges would need to be faced by our country and it is clear that our policies and
actions would have to be so designed in order to deal with, and respond to, such challenges if we are
to be successful.
5. Monetary policy strategy in 2007 and beyond
Monetary policy is the mechanism that is used by central banks all over the world to direct an
economy along a non-inflationary, growth path. Such policy would ideally be supported by a series of
other policies and strategies as well. The policy framework adopted by the Central Bank of Sri Lanka
is a monetary targeting framework with reserve money as the operational target and broad
money (M2b) as the intermediate target1.
Such targets are carefully computed and set after taking into consideration, the potential growth and
after assessing the liquidity needs of the economy to move along the projected growth path while
keeping inflationary pressures in check. The veracity and accuracy of the values derived from the
computation of the demand for money and the value of the money multiplier2 are important
prerequisites for effective monetary targeting.
In that context, it is important to note that in Sri Lanka, there is a stable relationship between the
operational target, i.e., reserve money, and the intermediate target, i.e., broad money, with the money
multiplier consistently remaining around 5 during the recent past. The long-term relationship of
monetary aggregates and inflation also indicates that money would be a useful leading indicator for
inflation. Hence, we believe that monetary targeting could continue to be an effective framework for Sri
Lanka in the short to medium term.
In 2001, Sri Lanka moved to a "Floating exchange rate" regime thereby allowing market forces to
largely determine the exchange rate. The floating exchange rate system has served well in the
conduct of monetary policy. As in the past, the Central Bank interventions in the foreign exchange
market would be limited to building up the international reserve position and to stabilise any undue
fluctuations in the foreign exchange market due to excess or shortage of international currencies.
As per available international data, the global economy is projected to grow at around 5 per cent in
2006 and is expected to moderate to around 4.7 per cent in 2007. Sri Lanka's major export markets
such as the United States of America (USA) and the Euro area and other trading partners are also
expected to grow at healthy rates. It is therefore likely that the continuation of favourable global
economic conditions will generate healthy external demand for Sri Lanka's goods and services.
Based on the external and internal factors, the Sri Lankan economy is expected to grow by 7.5 per
cent in 2007. Growth is also expected to be broad-based, with all three sectors, Agriculture, Industry
and Services, poised to grow at healthy rates. The government's planned infrastructure projects in the
areas of road development, port and airport development, power generation and social infrastructure
development, would also facilitate sustainable and broad-based growth.
The external sector is expected to perform well in 2007 recording an overall balance of payments
surplus of about US dollars 200 million, boosting the level of official reserves to US dollars 2,650
million or about 3 months of imports. Export growth is expected to continue in 2007 at around 10 per
cent, benefiting from continuing high growth in the global economy, and opportunities offered by Free
Trade Agreements. Imports are projected to grow at a higher rate of 12 per cent, reflecting increased
demand for intermediate and investment goods.
The Government's Medium Term Macro Framework (MTMF) enunciated in the Fiscal Management
Report 2007, indicates that the overall deficit in 2007 will be contained at around 7.2 per cent of GDP.
To meet this target, adjustments have to be introduced in the areas of enhancing revenue through
additional measures and improved tax administration, rationalisation of current expenditure and
improvements in the government debt management. Public investment will also need to be maintained
at a high level to provide complementary capital for private sector investment.
In this background, the growth in Reserve money and Broad money for 2007 will need to be clearly
targeted to support the smooth functioning of the economy while preventing the build-up of inflationary
pressures and expectations.
Accordingly, the 2007 Monetary Programme has been designed to accommodate the expected
economic growth of 7.5 per cent and the BOP surplus of US dollars 200 million while aiming to contain
inflation at 8.5 per cent, as measured by the GDP deflator. It is also assumed that the velocity and
multiplier would be around 2.52 and 5.2 respectively.
While a significant moderation in inflation as measured by the Colombo Consumers' Price Index
(CCPI) is expected during the year, the Central Bank would be closely monitoring the CCPI behaviour
in order to respond effectively to any unfavourable developments. While we believe that the tightening
of monetary policy during the year should be mainly directed to contain private sector credit growth to
a moderate degree, it is hoped that government borrowings from the banking sector too will be limited
to the budgeted target of Rs. 16.7 billion. On the supply side, the expansion of production together
with improved distribution systems is expected to have a favourable impact on prices. With regard to
the key external factors, we anticipate that international prices of major non-fuel consumer imports
would decline during the year while the impact of international oil prices on the economy will be
contained to some degree through appropriate hedging mechanisms.
Based upon the aforementioned assumptions and trends, the Reserve money target for end 2007 has
been computed by allowing the necessary increase from that as targeted at the end 2006 value to
accommodate the expected GDP growth of 7.5 per cent, inflation of 8.5 per cent, and an extra 1.6 per
cent to cover the change in velocity, a total of 17.6 per cent. The Broad money (M2b) target too, has
been computed by applying the properties of the Quantity Equation, the inflation target and expected
economic growth3.
The Reserve money growth will be facilitated by two major developments, the change in the Net
Foreign Assets and the change in the Net Domestic Assets of the Central Bank. The Net Foreign
Assets of the Central Bank have been determined by the expected BOP surplus of US dollars 200
million.
As already explained, the planned monetary programme requires the Reserve money growth to be
maintained at 17.6 per cent from the targeted level of Reserve money as at the end of 2006. At the
same time, the expected reserve build up of the Central Bank indicates an increase in Net Foreign
Assets of the Central Bank by Rs. 21 billion while the Net Credit to the Government from the Central
Bank will increase by Rs 11.5 billion, which includes provisional advances of Rs 12.5 billion, and a
decline of Treasury bills by Rs. 1.0 billion.
Table 2
Indicative targets for broad money
(M2b)
Rs. billion
Dec. 2006 2007 Targets
Target Estimates Mar Jun Sep Dec
Broad Money (M2b) 1,175.6 1,221.6 1,274.9 1,291.4 1,315.9 1,383.2
Point to Point Change % 15.0 19.5 19.2 19.0 17.9 13.2
The programme also allows for a Broad money growth of 17.6 per cent from the targeted level of
Broad money at end 2006. This will reflect an increase in Net Foreign Assets of the banking system of
US dollars 200 million, and increase in private sector credit by Rs 147.3 billion (15.5 per cent) and net
credit to Government by Rs 16.7 billion. To maintain the overall increase in net credit to the
Government at Rs 16.7 billion, net credit to the Government from commercial banks would need to be
maintained at Rs 5.2 billion.
The Central Bank expects to direct economic activities and outcomes within its control to meet the
Reserve money and Broad money targets. Such activities would include changes to the policy interest
rates if considered necessary, conduct of open market operations, moral suasion, public
communications and other available actions. Regular reviews of the general policy stance will also be
made and intensive public awareness campaigns would be used to manage inflation expectations.
In response to our policy measures and actions, we believe that both headline inflation and core
inflation would moderate. It is also our belief that inflation will respond over the months in the manner
as set out in the charts that follow, but nevertheless we shall be watching developments with very
keen interest.
Figure 6:
Figure 7: Forecast of Core Inflation 2007-2008
30
25
20
15
10
5
0
Jul.06 Jul.07 Jul.08
Jan.06 Jan.07 Jan.08
Oct.06 Oct.07 Oct.08
Apr.06 Apr.07 Apr.08
Lower Bound Upper Bound
The Monetary Programme for 2008 and beyond will be based on the high growth path targeted by the
government in the medium term, and containing money supply to maintain inflation at a low level. In
this context, inflation will be targeted to gradually decrease to a level of 4 per cent within a 10 year
time period. Such a target would be in line with the Government's 10 year plan. The achievement of
such a target will be facilitated by continued economic growth resulting from high public and private
investment and savings, improving competitiveness, gradually rationalised expenditure which leaves
sufficient funds for development work, and reducing the budget deficit resulting in low demand
pressure. Needless to say, the Central Bank will actively support strategies that ensure such
outcomes.
In addition, transparency of monetary policy decisions and operations will be maintained to enhance
the policy effectiveness and during the year we will also seek the views and advise of experts in the
field of economics and on macroeco