Sri Lanka’s economy will contract 3.9 percent 2020 hit by a Coronavirus shock, and the central bank will continue with ‘accommodative’ policies to push growth, Central Bank Governor W D Lakshman said.

“With observed developments in the fourth quarter, we expect the economy to record an annual contraction of around 3.9 per cent,” Governor Lakshman said delivering a 2020 roadmap for central bank activities in 2021 in virtually.

“The Central Bank is of the view that continued support through monetary and fiscal interventions is essential to provide adequate impetus to the economy amidst the challenging domestic and global macroeconomic conditions.

“Therefore, the Central Bank will continue the prevailing accommodative monetary policy stance in 2021 to ensure the envisaged recovery of economic activity.”

Sri Lanka’s economy was estimated to have expanded by 1.5 percent in the third quarter with Coronavirus controlled, after a steep dip in the second quarter with Coronanviris lockdowns.

The International Monetary Fund forcasted 4.6 contraction.

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The central bank also provided credit guarantees and re-finance for distressed private firms and loosened regulations of banks at a time when credit was negative.

Governor Lakshman said inflation was likely to be low and the central bank was aiming for 4-6 percent inflation in 2021 with activity mutes.

“It is well known that the Sri Lankan economy has been operating well below its potential for the past several years, and the outbreak of COVID-19 exacerbated this condition,” Governor Lakshman said.

“Growth-conducive policy measures introduced in 2020, we believe, would take a while to be effectively transmitted to the real economy.

“To catch up with the lost momentum and to sustainably realign itself with the envisaged high growth path the economy would need some time.

Until the economy reaches its full potential, it is unlikely that there would be any notable domestic demand pressures, despite the large monetary expansion witnessed at present.

“The Central Bank will continue to remain vigilant but is confident that inflation will remain within the targeted range of 4-6 per cent over the medium-term.

“Inflation risks could emanate from exogenous factors such as increases in global petroleum prices and the possible improvement in global demand as well as pressures that could emanate from domestic supply-side factors.

Other analysts however had warned that Sri Lanka’s tendency to target inflation while operating a pegged exchange rate regime which is called ‘flexible inflation targeting’ with a ‘flexible exchange rate’ tends to trigger a balance of payment crisis before domestic credit and activity to take off sufficiently either to create growth or inflation.