COLOMBO: Sri Lanka’s economy is expected to grow 7.8 percent this year, with an inflation target of between 4-6 percent and a lower interest rate regime, the head of the central bank said.

The central bank also announced plans to merge banks and non-banking financial firms to strengthen financial stability.

Central Bank Governor Ajith Nivard Cabraal said Sri Lanka’s economy expanded 7.2 percent last year, compared with 6.4 percent in 2012.

“Now we are a $67 billion economy. We expect the economy to grow 7.8 percent this year and to gradually expand it to 8.5 percent in 2016,” Cabraal told a forum in Colombo while revealing the monetary and financial policies for 2014.

The central bank’s policy statement seen by Reuters also showed it expected the country to reduce the trade deficit to 11.6 percent of gross domestic product (GDP) or $8.97 billion this year, compared with a 12.8 percent deficit last year.

The current account deficit is also expected to improve, decreasing to 2.4 percent of GDP in 2014 from last year’s 3.9 percent. The balance of payments surplus is seen more than doubling to $1.5 billion this year from an estimated $700 million last year.

Cabraal said the country’s tolerable range of inflation in 2014 would be between 4 percent and 6 percent and thereafter it would be between 3 percent and 5 percent until 2016.