The Central Bank Monetary Board has noted that the economy is currently operating at a level below its potential but as per the available indicators, the economy is likely to recover from the effects of adverse weather conditions in the past two years and benefit from the expected boost in external demand and foreign direct investment inflows.
Improvements in the trade front, including the execution of new trade agreements supported by increased private investment driven by structural reforms, are also likely to provide the necessary impetus for the economy to achieve its potential in the medium term.
On the fiscal front, available indicators suggest that the government has been able to record a marginal surplus in the primary fiscal balance in 2017 after several decades. However, the overall fiscal performance is expected to have deviated from the envisaged path, mainly due to increased expenditure on flood and drought related relief measures and some slippages in revenue collection.
Meanwhile, with the considerable slowdown in food inflation, headline inflation as measured by the year-on-year change in Colombo Consumer Price Index (CCPI, 2013=100) declined sharply in January 2018. It is expected that the National Consumer Price Index (NCPI, 2013=100) will also register a substantial decline in January 2018, and both headline and core inflation will stabilise in the desired mid-single digit levels during the remainder of 2018.