Treasury Secretary Dr. P. B. Jayasundera says the annual average rate of inflation would not exceed 8 percent this year.

"We have brought down inflation to low levels as the costly adjustments we made paid dividends and the annual rate of inflation would not go beyond seven to eight percent," he said.

The annual rate of inflation peaked at 23.4 percent in October 2008 and declined gradually to reach 3.1 percent in January this year and has picked up since to reach 3.9 percent in June.

Tight monetary policy of the Central Bank to curtail demand driven inflation drove up interest rates which hit the private sector and curtailed their access to credit while the government continued to borrow at rates lower than the market.

Earlier this year, the bank said the government and public institutions must borrow from external sources leaving room for private sector credit growth which was crucial to doubling the country’s per capita income. It also warned against reckless spending of the government, which could threaten the low inflation and low interest rate environment.

Sri Lanka has consistently missed its budget deficit targets. Last year, the deficit reached 9.9 percent of GDP from an estimated 7 percent.

"The government is planning fiscal adjustments because the private sector would need space to raise finances to fund large scale projects. For example blue chip companies would want to make investments in the tourism sector and raise funds," Dr. Jayasundera said, speaking at a breakfast meeting organised by the IT and BPO trade chamber, SLASSCOM, last week.(Island)

He also said the government was planning to slash corporate and personal income taxes with the next budget in a bid to increasing private investments.