Monetary policy operations were made more market based and active, especially after the introduction of the independent float of the exchange rate in 2001. Monetary policy has concentrated on stability, while promoting economic growth. However, monetary expansion was somewhat above the expected path in 2004. The relatively higher monetary expansion during 2004 was mainly driven by the higher expansion in credit to the private sector as well as to the public sector. Responding to these developments, the Central Bank tightened its monetary policy by raising policy rates in the fourth quarter of 2004. The policy focus was on market stability in the immediate aftermath of the tsunami. Subsequently, after ensuring market stability, the Central Bank has conducted open market operations aggressively to mop up excess liquidity. The Central Bank will continue to mop up liquidity in the coming months. Monetary growth is expected to be contained to 15 per cent in 2005. Monetary policy will focus on restraining inflationary pressure. An area that has experienced rapid growth since liberalisation is the financial sector. This has not only contributed to economic growth in its own right, but has also facilitated growth in other sectors. The Central Bank has actively promoted financial sector stability and development by assisting in the deepening of markets, creation of new instruments and strengthening of the regulatory framework. Prospects and challenges The foregoing forms the background for the economic policies of the government. I would now like to highlight several challenges that have to be faced.
Sunil Mendis: Economic performance, prospects and challenges Speech by Mr Sunil Mendis, Governor of the Central Bank of Sri Lanka, at the Donor Conference, Kandy, 15-17 May 2005. *  *  *  Introduction Honourable Minister of Finance, representatives of the donor community and friends, Sri Lanka has achieved considerable economic progress in the past few decades. Per capita income has increased, taking Sri Lanka into the category of a low middle income country. Many years of government focus on meeting the social needs of the people have enabled Sri Lanka to achieve human development indicators well beyond countries with comparable levels of income, in fact, similar to those of more developed middle income countries. The structure of the economy has been diversified from its earlier concentration on primary agricultural commodities, making the economy more resilient to internal and external shocks. Overall macroeconomic management has been reasonably sound, although achieving a better balance has sometimes been a challenge due to external and internal shocks. However, despite these positive developments, many weaknesses remain, posing strong challenges to policy makers.