HSBC has revised its forecast for Sri Lanka overnight from 7.2 per cent to 8 per cent and was bullish about the country, Mr Frederic Neumann, HSBC's Co-Head of Asian Economics Research, has said. The IMF and the ADB too have predicted identical rates of growth but have warned that inflationary pressures will have to be tackled sooner than later.

Interacting over a conference call from Hong Kong, after releasing HSBC's first quarter Emerging Markets Index, Mr Neumann said that the Sri Lankan economy was performing “very well” after the restoration of peace which allowed investor confidence to grow. But he cautioned that as inflation accelerates, the Central Bank of Sri Lanka would need to initiate corrective action. He wanted the Bank to be “proactive and perhaps look at tightening monetary policy further.”

At the cost of sacrificing short-term growth, central banks will have to raise rates to make sure that “the economy is on the right track.” While agreeing that this could also mean job losses, he said that, pre-emptive tightening of monetary policy would also be an option in the second quarter, even at the cost of slowing down growth. But in countries such as India, Sri Lanka and the Philippines, he said the HSBC would “advocate tighter monetary policy but less aggressively than in places such as Korea and China.”

Fiscal measures

The other option, in place of tightening monetary policy, was to “look closely at fiscal measures.”

“Fiscal tightening, rather than monetary tightening, could also be done to keep inflation under check,” he said. Asked if he also suggested curtailing government expenditure and a check on subsidies, he said that this should also be looked at.

“If we look at India for example, they have curtailed subsidies for certain energy products and that was seen as a right move. This is not just fiscally prudent but it also helps to conserve energy and make the economy more energy efficient. I do think there is a scope for that.”

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