CB Governor makes sense of what predictability is for those who complain of its lack

• Says predictability isn’t what people think it is, rather it is the price stability 
• Applauds people who endured hardships to achieve what is possible today in an end-of-year lecture
•  Issues dire warning to those who ponder backtracking from the reform process 
• Central Bank largely credited for conquering runaway prices at record time 

For businesses and investors consistently concerned about the lack of predictability in tax rates and interest rates, Central Bank Governor Dr. Nandalal Weerasinghe had a straightforward

response—what they perceive as predictability may not align with reality.
During a public lecture last Friday aptly themed ‘‘Sri Lanka’s Forward March Looking Past The Economic Crisis,’Dr. Weerasinghe said he often hears businesses complaining about the uncertainty regarding increasing tax rates and the fluctuating direction of interest rates.

The seasoned economist clarified that predictability in the economy doesn’t align with the perceptions of most businessmen and investors. Instead, it lies in maintaining stability in prices. 
In other words, ensuring price stability or inflation within the 4 to 6 percent range for the next 10 years is what guarantees predictability.
“What many people and industrialists say is that our policies are not predictable. They complain about the constantly changing tax rates, exchange rates and interest rates and ask how they can invest in such an environment,” Dr. Weerasinghe said.

“My argument is that, that is not what predictability is. What we need to have instead is stable inflation. Predictable inflation is what predictability is all about. If you can say with certainty that the inflation will remain at around 4 to 5 percent in the next 10 years, that is where the policy predictability lies,” he added. 
However, he said in order to maintain price stability which is the bedrock of an economy and the primary objective of any Central Bank, policy makers may have to tweak the tax rates, exchange rate, interest rates and other elements from time-to-time as nowhere in the world that all these policies stay still for many years. 

Dr. Weerasinghe is widely credited, even globally, for swiftly curbing runaway inflation in Sri Lanka and reducing it to single-digit levels from nearly 70 percent in September of last year.
The headline inflation in November came in at 3.4 percent from a year ago, according to the Colombo Consumer Price Index, the Central Bank’s preferred inflation gauge.
The Central Bank has projected medium-term inflation to hover around 5 percent, driven by the dissipation of base effects from last year and the anticipated impact of the increased Value-Added Tax rate starting from January next year.
While inflation has slowed and stays at benign levels, the prices continue to remain at sharply elevated levels amid sharp depreciation of the currency and higher taxes.

Inflation measures the rate of increase in the prices of a basket of goods and services in an economy compared to levels from a year ago. A decrease in inflation indicates that prices are still rising, although at a slower pace than before, rather than the prices themselves retracting from previous levels.
Therefore, in order to re-establish the economic wellbeing of the people who either became impoverished or lost their purchasing power during the last two years due to the red-hot inflation, Dr. Weerasinghe said the country needs to grow at least by between 4 to 5 percent annually for a sustained period.  
He stressed that tough and painful policy reforms that are currently being implemented are a necessary bitter pill to restore stability and restart recovery towards achieving an accelerated growth. 

He thus made it an opportunity to applaud the people who endured enormous hardships during this painful reform period to bring the economy to where it is today. 
While Dr. Weerasinghe was delivering his lecture last Friday, the Census and Statistics Department released Sri Lanka’s third quarter GDP data which showed a 1.6 percent growth, ending the nearly two year-long contraction, kindling hopes that the country could now look past the worst. 
However, he emphasised that this doesn’t mean everything is perfect, as there is still much work to be done in areas such as foreign debt restructuring to achieve a sustainable level of foreign debt. 

Most importantly, staying committed to the reform programme in the next four years under the current International Monetary Fund programme is crucial, he highlighted.
Sidestepping, he warned, would bring disastrous outcomes far worse than what the country went through. “We may not survive the next crash,” he cautioned, issuing a dire warning to those who might be contemplating on deviating from the reform agenda under a future government.