MUMBAI - Sri Lanka expects slower expansion of its budget deficit as the government aims to sustain growth with a focus on exports and economic diversification with help from domestic and foreign investment, the central bank said on Thursday.
The central bank's assessment was published in a report on recent economic developments and prospects for 2022 ahead of the announcement of the annual budget for 2022 by the finance minister in Parliament on Friday.
"The expansion of the government budget deficit amidst the pandemic is expected to be curtailed along with the normalisation of activity and planned expenditure rationalisation measures," the bank said.
"Efforts of the government towards creating an export-oriented production economy and diversifying economic activities with the support of domestic and foreign investors are expected to help sustain the growth momentum of the Sri Lankan economy over the medium term and enhance its resilience," it said.
The Central Bank of Sri Lanka said it expected headline inflation to stay above targeted levels of 4-6% in the near term but it remained committed to maintaining it within the target range over the medium term with appropriate preemptive measures as and when required while supporting growth.
The bank also said heightened near-term vulnerabilities in the external sector and pressures observed in the financial system owing to the moderation of foreign inflows were being addressed by the government and central bank through coordinated efforts.
"The external current account balance is expected to improve over the medium term, supported by these efforts," it said.
It also added that foreign direct investment to large-scale projects and monetisation of non-strategic assets would help attract sizeable non-debt-creating foreign inflows and facilitate foreign currency debt servicing.
"Gross official reserves are expected to be enhanced to adequate levels in the period ahead, despite near-term volatilities," it said.
(Reporting by Swati Bhat Editing by Robert Birsel) ((firstname.lastname@example.org; twitter.com/swatibhat22; +91-22-68414381; Reuters Messaging: email@example.com))