The floating exchange rate system has served well in the conduct of monetary policy. As in the past, the Central Bank interventions in the foreign exchange market would be limited to building up the international reserve position and to stabilise any undue fluctuations in the foreign exchange market due to excess or shortage of international currencies. As per available international data, the global economy is projected to grow at around 5 per cent in 2006 and is expected to moderate to around 4.7 per cent in 2007. Sri Lanka’s major export markets such as the United States of America (USA) and the Euro area and other trading partners are also expected to grow at healthy rates. It is therefore likely that the continuation of favourable global economic conditions will generate healthy external demand for Sri Lanka’s goods and services. Based on the external and internal factors, the Sri Lankan economy is expected to grow by 7.5 per cent in 2007. Growth is also expected to be broad-based, with all three sectors, Agriculture, Industry  1  Broad Money (M2b) is complied consolidating the operations of the Central Bank and operations of domestic banking units and off shore banking units (OBUs) of commercial banks. 2  The money multiplier is the amount of money created by an additional unit of reserve money. BIS Review8/2007  7  and Services, poised to grow at healthy rates.
In keeping with its primary objective, the Central Bank has also been very concerned about the inflationary impact of the regular use of Central Bank’s Reverse Repo window by some commercial banks which appear to use such window as a convenient instrument of regular funding. We wish to clearly discourage this practice in 2007 and therefore, with effect from 1st January 2007, the Reverse Repo facility of the Central Bank will not be made available on days when there is a liquidity surplus in the commercial banking system, according to our estimates. We would also closely monitor the Banks that seek this facility regularly to ascertain whether they are doing so because of any structural deficiencies that they are suffering from. 4  BIS Review 8/2007  We also noted that the financial sector grew with increased resilience, possibly benefiting from robust economic growth and a rather favourable external environment. Profitability, capital funds and asset quality of banks improved, leading to strengthening of capacity of the financial sector to absorb shocks. In the meantime, interest rates across markets rose in response to gradual tightening of monetary policy; turnover in the foreign exchange market recorded substantial increases; and market capitalisation and price indices in the equity market continued to improve.