By Hiran H.Senewiratne

(The Island/ANN)--The recent tax reductions which were introduced to stimulate the economy are likely to support lower inflation and higher economic growth in the short term but they are a major challenge to long term stability, Central Bank Governor Dr. Indrajit Coomaraswamy said.

" The government should have a structure that stabilizes the economy without allowing the economy to overheat. This fiscal stimulus package should help the country to accelerate the economy in the medium to long term perspectives,  Coomaraswamy told  his last monthly monetary policy meeting at the Central Bank yesterday. The Governor said the government is relaxing its monetary policy in a situation where the external environment is favourable towards the country, the stance of the US Federal Reserve is passive and inflation in the country is at a stable level of six percent.

He said that he  was of the view that greater clarity with regard to the  medium term fiscal path of the government is required to assess the impact on the economy over the medium term.

'Given the current and expected conditions in the domestic economy and financial market, the Monetary Board was of the view that the continuation of the current monetary policy stance is appropriate, he said.

The Governor added - 'Economic growth is predicted to be modest during the remainder of the year, with likely sub-par growth in Industry and Services activities as implied by leading indicators. I forecast 2019 growth would be three percent  but IMF says it's around 2.7 percent.

'Despite near term volatilities, inflation is expected to remain in the desired range of 4-6 percent in the near term as well as the medium term.

'External sector performance was buoyed by the cumulative contraction of the trade deficit over the first nine months of 2019, largely driven by the decline in import expenditure.

'The Sri Lankan rupee has appreciated against the US dollar by 1.0 percent thus far during the year. Gross official reserves are estimated at US dollars 7.8 billion at end October 2019, providing an import cover of 4.7 months.

'The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank will remain at 7.00 percent and 8.00 percent respectively.

'The Central  Bank Monetary Board arrived at this decision following a careful analysis of current and expected developments in the domestic economy and the financial market as well as of the global economy.'