It reflects the imbalance between national savings and investment, which needs to be addressed by encouraging greater savings. Such Trade and Current Account deficits were financed through net inflows to the capital and financial accounts. It was also observed that Sri Lanka could reasonably and comfortably afford a bulk of the additional foreign exchange cost on account of high oil prices in the first nine months of 2006 as a result of the higher migrant worker remittances and foreign currency denominated loans obtained by the government from external and domestic sources. Worker remittances increased by US dollars 338 million in the first ten months and foreign currency denominated debt rose by US dollars 404 million by end November 2006. The higher quantum of worker remittances was, to some extent, facilitated by the active promotion campaigns launched by the Central Bank with the support of the Sri Lanka Foreign Employment Bureau, overseas job agencies, foreign missions and the state banks and we believe that the impact of such initiatives would be further felt in the next few years as well. During this year, a remarkable increase was also seen in foreign direct investments. All in all, these factors contributed towards the overall balance of payments (BOP) surplus which is estimated to exceed US dollars 150 million during 2006.
Good analytical tools, however, can be helpful even in this respect, by enabling the simulation of different alternative scenarios in a consistent manner. After this general introduction, let me now briefly speak about the progress we have so far achieved in forecasting at the Czech National Bank. We now have more than five years of experience with inflation targeting. The new regime was introduced in a challenging situation, after a period of currency turmoil in May 1997, which ended the fixed exchange rate period and resulted in higher inflation and rising inflation expectations. The economy needed a new nominal anchor in order to return to a disinflation path. Inflation targeting was chosen as “the best of all bad” alternatives at the time. Such a sudden switch from a fixed exchange rate system to inflation targeting required a radical and fast change in the central bank’s mentality. This was perhaps the biggest challenge that the CNB had to face. Over the past five years it has involved much work on improving our forecasting tools, leading to substantial development in our internal analytical processes. These changes culminated a year ago, when the CNB settled on a new forecasting process. This integrates expert judgement and short-term analyses - which were the key pillars of the CNB’s forecasting tool-kit in the first years of inflation targeting - with a small-scale macroeconomic model developed by the CNB’s staff with the assistance of the International Monetary Fund.