rm2013
TRANSCRIPT
1
2013 is the seventh consecutive year that the Central Bank is presenting its policy direction &
work plan for the upcoming period
2
2
• His Excellency the President, Mahinda Rajapaksa as the Minister of Finance for the excellent leadership and guidance given
• The Deputy Minister of Finance and Planning, Hon. Dr. Sarath Amunugama and the Former Deputy Minister of Finance and Planning, Hon. Geethanjana Gunawardene for their constant guidance and support
• The members of the Monetary Board, Dr. P.B. Jayasundera, Secretary to the Treasury, Mrs. Mano Ramanathan, Mr. Nimal Welgama and Mr. Neil Umagiliya for all their assistance, guidance and wise counsel
• Deputy Governors, Dr. Nandalal Weerasinghe, Mr. Ananda Silva and Mrs. Chandra Premaratne, Assistant Governors, Heads of Departments and all staff of the Central Bank who have worked with dedication, commitment and professionalism to fulfill the mandate of the Central Bank
• The Consultative Committees on Monetary Policy, the Financial System Stability and all other committees for the policy advice
Last year’s satisfactory results were due to the contributions of many, to whom sincere thanks are due…
3
Prior to presenting the policy direction and strategies
for 2013 and beyond, a review of the post-conflict period of
2010, 2011 and 2012* would be useful…
* Figures for 2012 are provisional
4
3
A major growth momentum has been witnessed in the first two years, 2010 & 2011, while a gentle deceleration in growth took place in 2012…
• “Peace” dividend has been clearly visible
• Remarkable performances have been witnessed in all key sectors of the economy
• Business confidence has been enhanced during the 3-year period
• Benign macro-economic fundamentals have been established across all vital sectors
6.2
7.0
6.3
4.3
1.6
2.1
4.2
6.1
7.1
8.5
8.0
8.6
8.0 8.1
8.5 8.3
7.9
6.4
4.8
6.8
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
200
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200
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2-Q
4 (
Est)
% Quarterly Economic Growth
5
By end 2011, the Sri Lankan economy had recorded remarkable progress amidst global challenges…
8.3% on top of 8.0% in 2010 (First time ever) High Economic Growth
29.9% of GDP Increased level of Investment
Declined to 6.7% (Annual Average) in December 2011 (Longest ever continuous period at single digits) Low Inflation
Historic low at 4.2% Decline in Unemployment
Exports grew by 22.4% and Imports by 50.7% Exports & Imports as a % of GDP: 17.8% & 34.3%, respectively Buoyant External Trade
Arrivals increased by 30.8% to 855,975 Earnings increased by over 44% to US$ 830 mn Tourism on an accelerator
Grew by 25% to US$ 5.1 bn Remittances continued to increase
US$ 1,066 mn Highest FDI recorded
US$ 6 bn at end year (3.5 months of imports) Foreign Reserves at comfortable levels
6.9% of GDP Decline in Budget Deficit
Along with improved business confidence, leading to high credit growth of 34.5%
Stable interest rates
A deficit of US$ 1,061 mn, mainly due to unprecedented import demand
Balance of payments
78.5% compared to 81.9%in 2010 (Lowest in 30 years) Decline in Govt. debt /GDP ratio
6
4
By that time however, the global economy which failed to take off in 2011, had slowed down further in 2012…
-6
-4
-2
0
2
4
6
8
1020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Per
ce
nt
Real GDP Growth
World
Advanced economies
Euro area
Emerging market and developing economies
Source : IMF, WEO Database, Oct 2012
7
The Sri Lankan economy too, faced heightened global and domestic challenges in 2012…
• Globally… – The European Sovereign debt crisis, Fiscal cliff in the US, etc.
– Global geo-political uncertainties, Iran sanctions, etc.
– Persistently high petroleum prices
• Locally… – Excessive credit demand and high imports
– Drought conditions that severely affected Agriculture and hydro power generation
– Heavy rains in the last quarter that disrupted food supplies
8
5
To deal with these challenges, several tough policy decisions were implemented at the beginning of 2012…
• Monetary policy – Increased policy interest rates – Placed ceiling of 18% on bank
credit expansion; Additional 5% for foreign funds
• Exchange rate policy – Allowed greater flexibility – Curbed speculative behaviour in
the Forex market
• Fiscal policy – Imposed higher tariffs and excise
duties on selected imports
• Administered pricing policy – Allowed greater pass-through of
Energy and Transport prices
The Repurchase rate and the Reverse Repurchase rate of the Central Bank raised by 50 bps each
A ceiling on rupee credit growth imposed on Licensed Banks. This was expected to directly impact the intermediate target of the Monetary Policy Framework
The Repurchase rate raised by 25 bps and the Reverse Repurchase rate raised by 75 bps
9
-5
0
5
10
15
20
25
30
35
Dec
-78
Dec
-80
Dec
-82
Dec
-84
Dec
-86
Dec
-88
Dec
-90
Dec
-92
Dec
-94
Dec
-96
Dec
-98
Dec
-00
Dec
-02
Dec
-04
Dec
-06
Dec
-08
Dec
-10
Dec
-12
Per
cen
t
Inflation continued to remain in single digits...
-5
0
5
10
15
20
25
30
35
Dec
-78
Dec
-80
Dec
-82
Dec
-84
Dec
-86
Dec
-88
Dec
-90
Dec
-92
Dec
-94
Dec
-96
Dec
-98
Dec
-00
Dec
-02
Dec
-04
Dec
-06
Dec
-08
Dec
-10
Dec
-12
Per
cen
t
Inflation continued to remain in single digits...
The Sri Lankan economy showed resilience and adjusted reasonably well to those measures…
-6
-4
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Per
cen
t
GDP growth was reasonably strong…
World
Advanced economies
Euro area
Emerging market and developing economies
Sri Lanka
-2
0
2
4
6
8
10
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(E)
Per
cen
t
GDP growth was reasonably strong…
10
6
And, as expected, import expenditure declined… • Cumulative expenditure on imports declined
by 4.5% during the first 11 months, reflecting declines in:
– Consumer goods imports by 17.2%
– Intermediate goods imports by 3.7%
• Non-oil imports declined by 8.4%
• Nevertheless, Investment goods imports increased by 4.8%
0
5,000
10,000
15,000
20,000
25,000
2007 2008 2009 2010 2011 2011(Jan-Nov)
2012(Jan-Nov)
US$ mn Import Performance (2007 - 2012)
-50-40-30-20-10
0102030405060708090
Jan
-08
Mar
-08
May
-08
Jul-
08
Sep
-08
No
v-0
8
Jan
-09
Mar
-09
May
-09
Jul-
09
Sep
-09
No
v-0
9
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-1
0
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1Ja
n-1
2
Mar
-12
May
-12
Jul-
12
Sep
-12
No
v-1
2
(%) Contribution to y-o-y change in Imports
Consumer goodsIntermediate goodsInvestment goodsOther
66.5 61.3
41.4
77.9
34.7
22.1
27.9
13.4 -3.4
-6.4 -15.0
-25.1 -4.7
-25.4
-10.0
-8.4
47.9 72.1
38.0
68.4
30.9
20.6
7.8
3.0
-6.5
-1.3
-23.1
-15.4
-6.8
-30.4
-11.5
-17.2
-40 -20 0 20 40 60 80
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
% Growth in Imports
Y-o-Y Growth in Imports
Y-o-Y Growth in Imports net of Petroleum
Imports as a % of GDP: 31.5%
11
At the same time however, export earnings too, declined as a result of weak global demand… • Earnings from exports declined due to;
– Lower prices of key export items stemming from lower international commodity prices
– Subdued global demand in major exports markets
• Earnings from exports declined by 6.6% in the first 11 months in 2012
– Industrial exports by 7.5% – Agricultural exports by 8.7%
• However, exports of mineral products increased by 68.1%
0
2,000
4,000
6,000
8,000
10,000
12,000
2007 2008 2009 2010 2011 2011(Jan-Nov)
2012(Jan-Nov)
US$ mn Export Performance (2007 - 2012)
500
520
540
560
580
600
620
640
660
680
700
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3
US$ mn
Agricultural Exports (2011 - 2012 Q3)
0
500
1,000
1,500
2,000
2,500
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3
US$ mn Industrial Exports (2011 - 2012 Q3) Exports as a % of GDP: 16.5%
12
7
More importantly, the trade balance contracted…
Trade deficit is expected to contract to 15.1% of GDP in 2012, from 16.4% in 2011
-1200
-1000
-800
-600
-400
-200
0
Jan
Feb
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec
US$
mn
Trade Balance
2011
2012
• The cumulative deficit in the trade account declined by 2.1% to US$ 8,583 mn during the first eleven months of 2012 from the corresponding period of 2011.
• Deceleration in the growth in the trade balance was driven by declining expenditure on consumer and non-oil intermediate goods imports.
13
As a result of the contraction of the trade deficit and the increase in other earnings, the current account deficit reduced substantially in 2012…
Other inflows to the Current Account
• Tourism on an accelerator
• Workers’ remittances continued to bring in substantial foreign exchange
• Trade in services improved with BPO and KPO sectors gathering momentum
Accordingly, the current account deficit is expected to reduce to US$ 3.3 bn or 5.5% of GDP in 2012, down from 7.8% in 2011.
-12
-10
-8
-6
-4
-2
0
-12
-10
-8
-6
-4
-2
0
2007 2008 2009 2010 2011 2012 P
Per
cen
t
US$
bn
Trade Balance and the Current Account Balance
Trade Balance
Current Account Balance
Current Account Balance as a % of GDP (Right Axis)
14
8
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2007 2008 2009 2010 2011 2012 P
US$
bn
BOP Overall Balance
…Leading to the Balance of Payments recording a surplus in 2012…
• The BOP improved from a deficit of US$ 1,061 mn in 2011, to a surplus of over US$ 100 mn in 2012
• The BOP is expected to
strengthen further in 2013 and beyond, with the gradual recovery of trading, services and investment partners across the globe
15
5
7
9
11
13
15
Jan
-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun
-11
Jul-
11
Aug
-11
Sep
-11
Oct
-11
No
v-11
Dec
-11
Jan
-12
Feb
-12
Mar
-12
Apr
-12
May
-12
Jun
-12
Jul-
12
Aug
-12
Sep
-12
Oct
-12
No
v-12
Dec
-12
Per
cen
t
Movement of Selected Market Interest Rates
Repo
Rev Repo
Monthly AWPR
AWDR
AWFDR
During the year, higher policy rates, credit ceiling & lower levels of liquidity led to higher market interest rates, curtailed rapid increase in credit & checked import demand…
5
7
9
11
13
15
Feb
-11
Ap
r-11
Jun
-11
Au
g-11
Oct
-11
Dec
-11
Feb
-12
Ap
r-12
Jun
-12
Au
g-12
Oct
-12
Dec
-12
Per
cen
t
Movement of Selected Market Interest Rates
Repo Rev Repo Monthly AWPR AWDR AWFDR
6
8
10
12
14
6-Fe
b-1
1
23-M
ar-1
1
7-M
ay-1
1
21-J
un
-11
5-A
ug-
11
19-S
ep-1
1
3-N
ov-1
1
18-D
ec-1
1
1-Fe
b-1
2
17-M
ar-1
2
1-M
ay-1
2
15-J
un
-12
30-J
ul-
12
13-S
ep-1
2
28-O
ct-1
2
12-D
ec-1
2
Per
cen
t
Treasury Bill Rates and Policy Interest Rates
RepoReverse Repo91- Day Treasury bill364- Day Treasury bill
8.5
33.7
60.2
24.1
-10
0
10
20
30
40
(20)
-
20
40
60
80
Jan
-09
Mar
-09
May
-09
Jul-
09Se
p-0
9N
ov-
09
Jan
-10
Mar
-10
May
-10
Jul-
10Se
p-1
0N
ov-
10
Jan
-11
Mar
-11
May
-11
Jul-
11Se
p-1
1N
ov-
11
Jan
-12
Mar
-12
May
-12
Jul-
12Se
p-1
2N
ov-
12
Per
cen
t
Rs.
bn
Credit granted by Commercial Banks to the Private Sector
Monthly change in credit (Absolute terms) Growth of credit (y-o-y)
• Growth in private sector credit, which increased rapidly since the latter part of 2010 and continued until Q1 2012, declined thereafter
16
9
However, in spite of significant price revisions, credit to public corporations increased in 2012… • Credit to public corporations
increased by around Rs.63 bn.
• Bulk of the increase was due to credit extended to CEB and CPC, as a result of:
– CEB’s reliance on thermal power generation due to erratic weather patterns and continued drought.
– CEB’s increased cost of generation and the re-imposition of the FAC did not offer sufficient relief to cover costs.
– CPC selling fuel at a loss to the transportation sector, and supplying fuel to CEB for electricity generation at well below cost.
145
198
261
-
50
100
150
200
250
300
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-1
0
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar
-12
May
-12
Jul-
12
Sep
-12
No
v-1
2
Rs.
bn
Credit Obtained by Government Corporations
-
1,500
3,000
4,500
6,000
7,500
9,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
20
12
(Pr
oj)
Hydro Thermal
Electricity Generation (GWh)
17
-
50
100
150
200
250
300
350
400
Dec
-09
Feb
-10
Ap
r-10
Jun
-10
Au
g-10
Oct
-10
Dec
-10
Feb
-11
Ap
r-11
Jun
-11
Au
g-11
Oct
-11
Dec
-11
Feb
-12
Ap
r-12
Jun
-12
Au
g-12
Oct
-12
Dec
-12
Rs.
bn
CBSL Treasury bill holdings and Provisional advances to the Government
Provisional Advances
Treasury Bill holdings
Net Credit to Government (NCG) also increased during 2012…
The increase in NCG by Monetary Authorities was around Rs. 3 bn during 2012.
The increase in NCG by LCBs is estimated to have been around Rs.142 bn during 2012.
531 550
571
713
400
450
500
550
600
650
700
750
Dec
-09
Feb
-10
Ap
r-1
0
Jun
-10
Au
g-10
Oct
-10
Dec
-10
Feb
-11
Ap
r-1
1
Jun
-11
Au
g-11
Oct
-11
Dec
-11
Feb
-12
Ap
r-1
2
Jun
-12
Au
g-12
Oct
-12
Dec
-12
(est
)
Rs.
bn
NCG by Licensed Commercial Banks (LCBs)
18
10
The banking sector utilised funds raised from abroad to facilitate domestic economic activity, resulting in a decline in Net Foreign Assets (NFA)…
• NFA of the banking system declined significantly by around Rs.122 bn during the first eleven months of 2012, following the decline in NFA of commercial banks.
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-1
0
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar
-12
May
-12
Jul-
12
Sep
-12
No
v-1
2
Rs.
bn
.
NFA of Monetary Authorities NFA of Commercial Banks
NFA of the Banking System
Net Foreign Assets (NFA)
This decline was a reflection of the shift in commercial banks’ foreign assets to domestic assets.
19
Monetary expansion was subdued and reached the targeted levels by end 2012…
• Broad money growth, year-on-year (y-o-y), was expected to decline to 16.2% by end December 2012, from a peak of 22.9% in April.
• Reserve money growth was in line with the projected path for 2012
Y-o-Y Growth of M2b (%)
Month 2011 2012
January 16.7 20.1
February 17.7 21.9
March 17.5 22.8
April 18.4 22.9
May 19.4 20.9
June 20.7 20.5
July 20.7 19.8
August 20.6 20.2
September 20.7 18.9
October 19.8 18.2
November 20.6 18.1
December 19.1 16.2 (proj)
10
12
14
16
18
20
22
24
Dec
-11
Jan
-12
Feb
-12
Mar
-12
Ap
r-12
May
-12
Jun
-12
Jul-
12
Au
g-12
Sep
-12
Oct
-12
No
v-1
2
Dec
-12
Per
ce
nt
Growth of Broad Money (M2b)
-30
-10
10
30
50
Jan
-10
Mar
-10
May
-10
Jul-
10
Sep
-10
No
v-10
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-11
Jan
-12
Mar
-12
May
-12
Jul-
12
Sep
-12
No
v-12
Per
cen
t
Contribution to Year-on-year growth of M2b
Net Foreign Assets Credit to the Private SectorCredit to Public Corporations Claim on Government (net)Other Items (net) Broad Money (M2b) growth
20
11
9.2
7.6
0123456789
10
Dec
-10
Jan
-11
Feb
-11
Mar
-11
Ap
r-11
May
-11
Jun
-11
Jul-
11A
ug-
11Se
p-1
1O
ct-1
1N
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11
Dec
-11
Jan
-12
Feb
-12
Mar
-12
Ap
r-12
May
-12
Jun
-12
Jul-
12A
ug-
12Se
p-1
2O
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12
Dec
-12
Per
ce
nt
Movement of Headline and Core Inflation
Headline (Y-o-Y) Headline (Annual Avg.)
Core (xFFET+ RC) (Y-o-Y)
As a result, it was possible to maintain inflation at single digit levels during the year (and cumulatively for 47 months), although supply side pressures were severe…
Headline Inflation • Annual average: 7.6% in Dec. 2012 • Year-on-year: 9.2% in Dec. 2012
Core Inflation • Annual average: 5.8% in Dec. 2012 • Year-on-year: 7.6% in Dec. 2012
Inflation moved upwards during the year mainly due to:
• Supply disruptions on account of drought conditions • Upward adjustments of several administratively determined prices • Upward duty revisions of several imported items • Pass-through of the depreciation of the rupee • High credit expansion in the past • Low base that prevailed in 2011
21
Towards the end of the year, with the tight monetary policy attaining the expected stabilisation objectives, some relaxation measures were possible and were effected…
• Repurchase rate and the Reverse Repurchase rate were reduced by 25 basis points in December 2012
• Announcement was made that the credit ceiling will be allowed to expire at the end of 2012
These measures are expected to stimulate the economy to return to a higher growth path this year while maintaining inflation around the targeted levels.
22
12
The multi-pronged policy package in early 2012, helped the economy get back on track swiftly, and to record the shortest tightening cycle since 2001…
• Since 2001, Sri Lanka has completed two tightening and two relaxing cycles in terms of policy interest rates
• The proactive measure of placing a ceiling on rupee credit expansion, considerably shortened the transmission lag.
0
5
10
15
20
25
Jan
-01
Jul-
01
Jan
-02
Jul-
02
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Per
cen
t
Key Policy Interest Rates
Repo rate Reverse Repo rate
Dec
-12
23
During the year, foreign reserve accumulation has been prudent… not too excessive nor too low… • Reserves, which were used for intervention during the first half to face external
challenges and to effect an orderly adjustment, were shored up by the end of the year…
• Reserves improved to US$ 6.8 bn by end 2012 from US$ 6.0 bn by end 2011. This is equivalent to 4.4 months of imports.
The healthy reserve position was supported by the inflow of funds
from foreign sources, which have been continuously encouraged in
order to bridge the savings-investment gap…
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
8
9
Jan
-09
Feb
-09
Mar
-09
Ap
r-09
May
-09
Jun
-09
Jul-
09A
ug-
09Se
p-0
9O
ct-0
9N
ov-
09
Dec
-09
Jan
-10
Feb
-10
Mar
-10
Ap
r-10
May
-10
Jun
-10
Jul-
10A
ug-
10Se
p-1
0O
ct-1
0N
ov-
10
Dec
-10
Jan
-11
Feb
-11
Mar
-11
Ap
r-11
May
-11
Jun
-11
Jul-
11A
ug-
11Se
p-1
1O
ct-1
1N
ov-
11
Dec
-11
Jan
-12
Feb
-12
Mar
-12
Ap
r-12
May
-12
Jun
-12
Jul-
12A
ug-
12Se
p-1
2O
ct-1
2N
ov-
12
Dec
-12
Mo
nth
s
US$
bn
Gross Official Reserves and Months of Imports
Gross Official Reserves (Left Axis) Months of Imports (Right Axis)
4.4 mths
US$ 6.8 bn
24
13
In particular, workers’ remittances increased significantly...
• Workers’ remittances are estimated to be around US$ 6 bn in 2012, up by 16.8% from US$ 5.1 bn in 2011
– As a percentage of GDP: 10%
– As a percentage of external current receipts: 30%
Main reasons for the increase:
• Incentives to encourage Sri Lankan migrants to open NRFC accounts
• Expansion in global branches of Sri Lankan commercial banks and ATM network mainly in the Middle East, Australia, France, Canada and Singapore
• Setting up of new exchange centers in Canada, Malaysia, Japan, Cyprus and Singapore
• Introduction of new web based products supported by the latest technology such as “People’s eRemittance”
• Departures for foreign employment during the first half of 2012 stood at 139,092, which is an increase of 9.9%
• Increase of migrant workers of the professional category by 33%
2,161 2,502
2,918 3,330
4,116
5,145
6,007
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2006 2007 2008 2009 2010 2011 2012 Est.
US$ mn Workers' Remittances
10.1% of GDP 8.7% of
GDP
8.3% of GDP
7.9% of GDP
7.2% of GDP 7.7% of
GDP 7.6% of GDP
25
The high level of inflows on account of emerging services, also buttressed the current account…
– Presently, there are over 400 IT and IT enabled entities with international recognition operating in Sri Lanka
– The Sri Lankan ICT/ BPO industry is among the top 5 export revenue earners for Sri Lanka, employing a workforce of 35,000, with exports amounting to over US$ 600 mn
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2006 2007 2008 2009 2010 2011 2012 Est.
US$ bn Inflows to the Services Account
Foreign exchange inflows on account of emerging services such as export of software and Information Technology Enabled Services (ITES), helped to support the current account substantially…
Sri Lanka’s ICT/BPO industry is set to achieve the target of reaching US$ 1 bn in exports by 2015 with an estimated workforce of over 80,000
26
14
In addition, other inflows to the capital and financial account were timely and significant…
• Net portfolio investments inflow (2012): US$ 305 mn. (In 2011, an outflow of US$ 171.5 mn was recorded)
• Project loans to the Government (excluding sovereign bond proceeds): US$ 1.6 bn (Jan–Oct)
• Net inflows from sale of Government securities: Treasury Bills + Treasury Bonds (2012): US$ 843 mn
• Receipt of Government Grants: US$ 124 mn (Jan–Oct)
• Foreign Borrowings by the Commercial Banks: US$ 973 mn (Jan-Nov)
• Sovereign Bond receipts: US$ 1 bn
• Corporate Sector inflows: US$ 307 mn (Jan–Sep)
27
-50
-40
-30
-20
-10
0
10
20
30
1975
Dec
1976
Dec
1977
Dec
1978
Dec
1979
Dec
1980
Dec
1981
Dec
1982
Dec
1983
Dec
1984
Dec
1985
Dec
1986
Dec
1987
Dec
1988
Dec
1989
Dec
1990
Dec
1991
Dec
1992
Dec
1993
Dec
1994
Dec
1995
Dec
1996
Dec
1997
Dec
1998
Dec
1999
Dec
2000
Dec
2001
Dec
2002
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
Dec
2008
Dec
2009
Dec
2010
Dec
2011
Dec
2012
Dec
Rupee depreciation against the US$ 1975-2012
0
20
40
60
80
100
120
140
1975
Dec
1976
Dec
1977
Dec
1978
Dec
1979
Dec
1980
Dec
1981
Dec
1982
Dec
1983
Dec
1984
Dec
1985
Dec
1986
Dec
1987
Dec
1988
Dec
1989
Dec
1990
Dec
1991
Dec
1992
Dec
1993
Dec
1994
Dec
1995
Dec
1996
Dec
1997
Dec
1998
Dec
1999
Dec
2000
Dec
2001
Dec
2002
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
Dec
2008
Dec
2009
Dec
2010
Dec
2011
Dec
2012
Dec
End-Month LKR/US$ Exchange Rate 1975-2012
A robust and flexible exchange rate policy had been implemented, which has given consideration to all key aspects of the economy… • Overall, the rupee depreciated against the
US dollar by 10.4% in 2012, reflecting the increased demand for forex in the market, due mainly to oil imports
• However, since June 2012, the rupee appreciated by 5.3%, and is expected to stabilise over the medium-term
105115125135145155165175185195205215
2-Ja
n-1
2
23-J
an-1
2
14-F
eb-1
2
6-M
ar-1
2
27-M
ar-1
2
19-A
pr-
12
11-M
ay-1
2
31-M
ay-1
2
21-J
un
-12
12-J
ul-
12
2-A
ug-
12
22-A
ug-
12
12-S
ep-1
2
2-O
ct-1
2
22-O
ct-1
2
12-N
ov-1
2
4-D
ec-1
2
24-D
ec-1
2
Rs.
LKR Movements against US$, GBP, and Euro
LKR/USD LKR/GBP LKR/EURO
28
15
Poverty alleviation and inclusive growth have been given high priority while socio-economic factors have been improving constantly and consistently…
28.8%
22.7%
15.2%
8.9%
0%
10%
20%
30%
40%
1995/96 2002 2006/07 2009/10
Poverty Headcount Ratio (% of Population)
Province 2000 2005 2011
Western 49.6 50.8 44.4
Central 9.4 8.5 9.8
Southern 9.4 8.9 11.1
Northern 2.2 3.0 3.7
Eastern 4.5 4.7 5.7
North Western 10.4 8.9 10.0
North Central 3.9 4.3 4.6
Uva 3.9 4.5 4.5
Sabaragamuwa 6.7 6.4 6.2
The dominance of the Western Province is diminishing and the contribution by other provinces to GDP is on the rise…
Provincial Share of GDP
29
Prosperity as tracked by the Sri Lanka Prosperity Index (SLPI) has increased over the years...
Indicator 2009 2010 2011 Growth 2010/11
Sri Lanka Prosperity Index 56.5 58.2 60.6 4.1
Economy & Business Climate 66.0 67.4 70.1 4.0
Well Being of the People 52.5 54.4 56.4 3.6
Socio–Economic Infrastructure 50.9 52.8 55.4 4.9
0 20 40 60 80
Uva
Eastern
North Central
Northern
S'gamuwa
North Western
Central
Southern
Sri Lanka
Western
Province-wise Performance of SLPI: 2009 - 2011
2009
2010
2011
• Improvements have taken place in all sub-indices. But the highest improvement has been in the Socio-Economic Infrastructure sub-index
• Prosperity has improved in every province during this period
1. Per capita GDP
2. Employment Rate
3. Informal Sector Wages
4. Percentage of Poor Households
5. All Island/Provincial CPI
6. Number of Industrial Enterprises per 1,000 Population (Density)
7. Number of Bank Branches per 100,000 Population (Density)
8. Government Hospital Beds per 1,000 Population
9. Government Medical Officers per 100,000 Population
10. Low Weight Births per 1,000 Live Births
11. Schools per sq km
12. Pupil Teacher Ratio
13. Dropouts from Secondary Education (Secondary School Attainment)
14. G.C.E O/L Pass Rate and Number of University Admissions per 100,000 Population
15. Percentage of Schools with English Medium Classes
16. Number of Vehicles per 1,000 Population
17. Number of Supermarkets per 1 Million Population
18. Average number of Film-goers per Month as a Percentage of Population
19. Number of Persons Treated for Respiratory Diseases per 1,000 Population
20. Per Capita Mosquito Coil Usage 21. Per Capita Electricity Usage 22. Number of Telephone Connections per
1,000 Population 23. Road Density 24. Number of Reported crimes per 1,000
Population 25. Percentage of Schools with Safe
Drinking Water Facilities 26. Percentage of Schools with Computer
Facilities
Variables of the Sri Lanka Prosperity Index
30
16
At the same time, unemployment reached its historically lowest rate… • Unemployment rate declined to 3.9% in
first half of 2012 due to: – Continued employment generation due to
expansion of economic activities
– Increased employment in the Industry sector, particularly construction
– Unemployment declining among more educated categories (GCE A/L and above)
– Total number of departures for foreign employment increased by 7.7% in the first half of 2012, over the same period of 2011
6.0 5.4
5.8
4.9 4.2 3.9
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 FH
Unemployment Rate %
0
5
10
15
20
25
Au
stra
liaC
anad
aC
hin
aC
zech
Rep
ub
licFr
ance
Ger
man
yG
reec
eIn
do
nes
iaIr
elan
dIt
aly
Jap
anK
ore
aM
alay
sia
New
Zea
land
Pak
ista
nP
ort
uga
lR
uss
iaSi
nga
po
reSp
ain
Sri L
anka
Swed
enSw
itze
rlan
dU
nit
ed K
ingd
om
Un
ited
Sta
tes
Unemployment Rates % – 2012 (Est)
These developments were in contrast to the experiences of
other economies
31
0
20
40
60
80
100
120
140
160
180
200
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Ind
ex P
oin
ts
Labour Productivity of Selected Economies (2002=100)
USA Australia
Germany Japan
Singapore Taiwan
UK Sri Lanka
Labour productivity also improved, but continued improvements are necessary…
• Overall labour productivity, measured by GDP per worker, has been improving
– Industry and Service sectors recorded growth in productivity
– However, labour productivity in the Agriculture sector remains low
-
100
200
300
400
500
600
2005 2006 2007 2008 2009 2010 2011
In R
s.'0
00
pe
r p
ers
on
Movement of Labour Productivity
Agriculture Industry Services Total labour productivity
Source: U.S. Department of Labor, Bureau of Labor Statistics, CBSL Estimates
With declining unemployment and rising relative wages, improving labour productivity to spur economic growth has become increasingly important.
32
17
A serious commitment has been made by the Government towards sustainable fiscal consolidation…
• The overall fiscal deficit is estimated to be 6.2% of GDP in 2012, down from 6.9% of GDP in 2011, mainly due to expenditure rationalisation policies
-9.9
-8.0
-6.9 -6.2
-12
-10
-8
-6
-4
-2
0
2009 2010 20112012Est
% o
f G
DP
Budget Deficit
• Recurrent expenditure declined, while public investment was maintained at a level to sustain the targeted growth momentum
18.2 16.7
15.4 14.7
6.8 6.4 6.2 5.8
0
4
8
12
16
20
2009 2010 2011 2012Rev Est
% o
f G
DP
Government Expenditure
Recurrent Public Investment
33
As a direct result of the public investment, massive infrastructure projects have transformed the country…
– Road development projects • The Southern Expressway Project - 126 km (Phase 1- Completed, Phase 2 – completion 2013)
• The Colombo - Katunayake Expressway - 26 km (Completion 2013)
• The Colombo Outer Circular Highway Project – 29 km (Phase 1- Completion 2013)
• Colombo – North/East Highway Project (Feasibility study in progress)
• Kandy – Badulla Alternate Highway Project – 34 km (Feasibility study done)
– Power projects
• 900 MW Norochcholai Coal Power Plant (Phase 1 (300 MW) – Commissioned, Phase 2 - completion 2014)
• 120 MW Uma Oya Hydro Power Project (Completion 2015)
• 500 MW Sampur Coal Power Project (Completion 2017)
• 20 MW Moragahakanda and Kaluganga Reservoir Project (In Progress)
– Port development projects
• The South Colombo Harbour Project (Phase 1 Completion 2013)
• The Hambantota Port Development Project (Phase 1 - Completed, Phase 2 – completion 2015)
• The Oluwil Port Development Project (Completion 2013)
• The Kankasanthurei Port development Projects (In progress)
– Airport development projects
• Second International Airport at Mattala (Completion 2013)
• BIA Expansion Project (In progress)
• Domestic Airport Development – Ampara, Koggala, China-Bay, Jaffna and Ratmalana
– Ongoing rural infrastructure development projects
• Gama Neguma, Maga Neguma, Small Irrigation projects and Kirigammana projects
– Lighting Sri Lanka (Target - 100% electrification by 2013)
– Several mega hotel projects, condominiums, shopping malls, development of Northern and Eastern provinces, and water supply projects
34
18
Aviation Hub Second international airport
at Mattala
Modernisation of the Bandaranaike International Airport (BIA) and building of second runway at the BIA
Development and upgrading of domestic airports
Position Colombo as a regional logistics and services hub and as a hub for budget airlines
Energy Hub Develop renewable
energy sources
New oil refinery at Hambantota
Oil exploration and production –
3 sea basins (offshore) have been identified
(Mannar, Cauvery, Southern Waters)
Develop oil trade-related ancilliary services
including gas
Maritime Hub
Colombo Port – Container
mega hub
Hambantota Port – Free port-
service, industrial and multi-purpose
Galle Port – Cruise shipping centre
Trincomalee – Port-related industries
Oluvil Port – Commercial and
fisheries
Kankasanthurei & Point Pedro –
Regional ports
Knowledge Hub Target IT literacy and internet access for all
Creation of knowledge-based jobs
Commence degree programmes directly targeting foreign
students
Accredited foreign universities to set up university colleges
in Sri Lanka
Commercial Hub Establish Sri Lanka as the
foremost centre in the region in the
provision of commercial services,
International banking and international investments
With growth of ports and tourism, Sri Lanka’s commercial
sector will develop naturally
South Asian Economic
Hub
Tourism Hub Arrivals – to increase to 2.5mn
by 2016
Earnings from Tourism
– to increase to US$ 2.8bn by 2016
The 5-hub concept introduced in Mahinda Chintana, has been gaining ground while tourism has emerged as a key thrust industry…
35
Tourist arrivals and earnings have been on target for 2012 & beyond… • Tourist arrivals increased by over 17% to 1,003,000
• During 2012, earnings from tourism is expected to have increased by 24% to US$ 1,029 mn.
• Targets for Tourism Sector by 2016, now seem more realistic: - Tourist arrivals: 2.5 mn - Foreign Direct Investment in Tourist related projects:
US$ 3 bn - Tourism related employment: 500,000 persons - Foreign exchange earnings: US$ 3.5 bn
“Best place to visit in 2013” – Lonely Planet
Among six best of the world 2012 destinations
– National Geographic Traveler Magazine
Ranked 3rd hottest new holiday destination to travel in
2012 – Condé Nast Traveller Magazine
Best destination to visit in 2013 – British Airways
• Many accolades have been received from reputed media:
-
200
400
600
800
1,000
1,200
2009 2010 2011 2012 (Est)
Toursit Arrivals ('000)
0
20
40
60
80
100
120
140
Jan
Feb
Mar
Ap
r
May Jun
Jul
Au
g
Sep
Oct
No
v
Dec
US$
mn
Earnings from Tourism
2009 2010 2011 2012
36
19
At the same time, Sri Lanka’s HDI Ranking has now reached the best level in South Asia, and is above the world average…
0.50
0.55
0.60
0.65
0.70
1980 1990 2000 2005 2006 2007 2008 2009 2010 2011
HD
I Val
ue
Sri Lanka compared to Average World HDI
Sri Lanka World
• Sri Lanka is ranked 97 out of 187 countries
• Sri Lanka is the highest ranked in South Asia
0
0.2
0.4
0.6
0.8
1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011
HD
I Val
ue
National Trends in HDI
Afghanistan Bangladesh
India Nepal
Pakistan Sri Lanka
• Sri Lanka’s ranking in the Global Prosperity Index also increased with the ranking moving up to the 58th from the 63rd position
37
“Doing Business” indicators and other international ratings have also recorded noteworthy improvements… • Doing Business Index rose to 81st (for
2013) from 89th (for 2012)
• Sri Lanka is the highest ranking country in South Asia and is the only country in the region to improve its ranking for 2013
• For the first time in 7 years, a South Asian country – Sri Lanka, ranks among those improving the most
The 10 economies improving the most across 3 or more areas measured by Doing Business in 2011/12
2009 2010 2011 2012
Index of Economic Freedom (Rank)
111 120 107 97
Corruption Perception Index (Rank)
97 91 86 79
Global Competitiveness Index (Rank)
79 62 52 68
Sri Lanka’s position in World Indicators
38
20
Sovereign credit rating was maintained in a year where many countries’ ratings were downgraded…
BB- stable B+
stable
B1 positive B+
negative
B+ positive
BB- stable
2009 2010 2011 2012 2012 2012
Fitch Ratings
B negative
B+ stable
B+ positive
2009 2010 2011
Standard & Poor’s
B1 stable
B1 positive
2010 2011
Moody’s
Sovereign Downgrades during 2012
Fitch Ratings South Africa BBB+ Stable to BBB+ Negative
Spain A to BBB Cyprus BBB to BB- Slovenia AA- to A Negative
Belgium AA+ to AA Egypt BB- to B+ Greece CCC to C Japan AAA to AA+
Standard & Poor’s South Africa A to A- Italy A to BBB+ France AAA to AA+ Negative
Spain AA- to BB- Cyprus BBB to B Portugal BBB- to BB Negative
Slovenia AA- to A Egypt B+ to B Argentina B to B-
Moody’s South Africa A3 to Baa1 France Aaa to Aa1 Spain A3 to Baa3 Cyprus Ba1 to B3 Greece Ca to C Pakistan B3 to Caa1
39
The successful completion of the IMF - SBA was a significant milestone in the country’s economic history…
• By July 2012, the IMF completed eight reviews and released the entirety of the facility totalling US$ 2.55 bn, under the SBA
Approval
First Tranche
US$ 321 mn
First Review
Second Tranche
US$ 331 mn
Second & Third Review
Third & Fourth Tranche
US$ 408 mn
Fourth Review
Fifth Tranche
US$ 213 mn
Fifth Review
Sixth Tranche
US$ 217 mn
Sixth Review
Seventh Tranche
US$ 219 mn
24
July
2009
6
November
2009
28
June
2010
24
September
2010
3
February
2011
4
April
2011
2
April
2012
Seventh Review
Eighth Tranche
US$ 426 mn
Eighth Review
Ninth Tranche
US$ 414 mn
20
July
2012
• Discussions will take place this year regarding the way forward in the country’s future engagements with the IMF
40
21
8.25 7.4
6.25 6.25 5.875
0
3
6
9
0
250
500
750
1000
2007 2009 2010 2011 2012
Amount (USD mn) Rate
Progressive Reduction in Cost
135
260 310
315 425 1.6
6.8 6.5 7.5
10.5
0
4
8
12
0
200
400
600
2007 2009 2010 2011 2012
(USD bn) # Investors (LHS) Orderbook (RHS)
The growing confidence of overseas investors was evident from the performance of the fifth sovereign bond, which set a new benchmark…
Increased Investor Base
0
2
4
6
8
10
Oct
-09
Dec
-09
Feb
-10
Ap
r-10
Jun
-10
Au
g-10
Oct
-10
Dec
-10
Feb
-11
Ap
r-11
Jun
-11
Au
g-11
Oct
-11
Dec
-11
Feb
-12
Ap
r-12
Jun
-12
Au
g-12
Oct
-12
Dec
-12
Pe
rcen
t
Strong Secondary Market
SL 7.40% due 2015 SL 6.25% due 2020
SL 6.25% due 2021 SL 5.875% due 20220
5
10
15
20
29
-Dec
-11
29-J
an-1
2
29-F
eb-1
2
31-M
ar-1
2
30-A
pr-
12
31-M
ay-1
2
30-J
un
-12
31-J
ul-
12
31-A
ug-
12
30-S
ep-1
2
31-O
ct-1
2
30-N
ov-1
2
31
-Dec
-12
Per
cen
t
10-Year Sovereign Bond Yields Portugal Italy Ireland
Spain US Brazil
Philippines Sri Lanka
41
Although somewhat slow, gradual adjustments took place in the two key SOEs, CPC and CEB… Ceylon Petroleum Corporation (CPC) • Domestic Petroleum prices were revised substantially in February 2012 and again in December 2012.
These measures have served to reduce the losses of CPC, but still, significant losses are incurred. • Discussions are being held to extend suppliers’ credit beyond 30 days, thereby avoiding/delaying the
necessity to obtain foreign exchange loans from banks at market rates • Arrangements are being made to acquire crude oil and bulk petroleum through bilateral
arrangements with oil producing countries. As a result, spot tenders and price hikes would be avoided.
• Plans are being made to expand the existing refinery. • Measures are being taken to improve the product mix yield in the refinery, i.e., conversion of crude
oil to yield greater output of high-end products such as diesel and petrol.
Ceylon Electricity Board (CEB) • The Fuel Adjustment Charge (FAC) was introduced to recover fuel usage cost due to drought
conditions. However, electricity is still being provided at subsidised prices and significant losses are incurred.
• Action is continuously being taken to change the power generation mix in favour of less costly sources, such as hydro, wind and coal. Work on such power plants is already in progress.
Urgent steps need to be taken to ensure that these two institutions reach at least break-even level by end 2013, in order to ensure their viability and to eliminate any imbalances being created in the banking sector
42
22
Improvements in other SOEs have been aimed at minimising losses and transforming loss making ventures into profit making institutions…
Sri Lanka Transport Board • Procured 291 new buses and repaired 1,024
buses • 13 luxury and 11 semi-luxury buses were
deployed during 2012 Lanka Phosphate Limited
• Increased dividend payments to the Treasury in 2011/12.
• New machinery worth Rs.56mn installed • Manufacturing capacity to be doubled
SriLankan Airlines • Added more destinations and increased
frequencies to existing destinations • Increased the airline’s fleet to benefit from
tourism boom
National Water Supply and Drainage Board • Water tariffs were revised upwards to
better reflect costs Sri Lanka Railways
• Reduced recurrent expenditure using better management techniques.
• Deployed 30 new power sets • Northern railway line was completed
up to Omanthai • Improvements to the southern railway
line to enable high speed train services • Southern railway line extension up to
Beliatta is in progress
It is vital that these improvements are effected at a faster pace, in order to reduce/eliminate their dependence on Treasury funds, at least by the end of 2014
43
• The debt to GDP ratio is estimated to be 81% in 2012, marginally higher than 78.5% of GDP in 2011.
102.3 102.3
90.6 87.9
85
81.4
86.2
81.9 78.5
81
72
76
80
84
88
92
96
100
104
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(est)
Per
cen
t
Outstanding Government Debt (as a % of GDP) – Sri Lanka
86.0 80.6
165.4
106.5 120.1
229.6
107.8 107.6
69.1 78.5 81.8 102.9
0
50
100
150
200
250
Fran
ce
Ger
man
y
Gre
ece
Irel
and
Ital
y
Jap
an
Po
rtu
gal
Sin
gap
ore
Spai
n
Sri L
anka UK
USA
Selected Countries’ Debt to GDP ratios - 2011
90.0 83.0
170.7
117.7 126.3
236.6
119.1 106.2
90.7 81 88.7 107.2
0
50
100
150
200
250
Fran
ce
Ger
man
y
Gre
ece
Irel
and
Ital
y
Jap
an
Po
rtu
gal
Sin
gap
ore
Spai
n
Sri L
anka UK
USA
Selected Countries’ Debt to GDP ratio estimates for 2012
The Public Debt has been managed prudently, and the Debt to GDP ratio has been improving gradually…
This is mainly due to the one-off increase of about Rs.278 bn in the public debt on account of the depreciation of the rupee
44
23
The risk indicators of Sri Lankan public debt have also improved, at a time where global risk has been rising…
Indicator
UN-ESCAP Definition Levels Sri Lanka
2012 Less Indebted
Moderately Indebted
Highly Indebted
Disbursed External Debt Outstanding/Gross
National Income <30% >30% and <50% >50% 37.0%
Disbursed External Debt Outstanding/Exports of
Goods and Non Factor Services <165% >165% and <275% >275% 112.6%
Total External Debt Service Payments/Exports of
Goods and Non-Factor Services <18% >18% and <30% >30% 10.7%
External Interest Payments/Exports of Goods
and Non-Factor Services <12% >12% and <20% >20% 3.7%
Net Present Value of External Debt/Gross
National Income <48% >48% and <80% >80% 40.0% *
Net Present Value of External Debt/Exports of
Goods and Non- Factor Services <132% >132% and <220% >220% 130.0% *
* Data for 2011 Source: Manual on Effective Debt Management, UN-ESCAP, 2006.
45
However, the cost of domestic debt portfolio increased for most part of the year, but started moderating towards the latter part of the year…
• Due to the tight monetary policy
conducted by the Central Bank and
increased investor preference for
short term securities, the overall
average interest rate of Treasury bills
and Treasury bonds increased during
the first four months of 2012.
• However this trend reversed during
the latter part of the year
0%
5%
10%
15%
20%
25%
0 1 2 3 4 5 6 7 8 9 10
Maturity Period (Years)
Primary Market Yield Curve
End Dec 08
End Dec 09
End Dec 10
End Dec 11
End Dec 12
46
24
2.17 2.25
2.10
2.35
3.32
0
1
2
3
4
5
6
7
2008 2009 2010 2011 2012
Years Average Time to Maturity
T-bills T-bonds R-Loans Overall
During the year, the interest cost as a percentage of GDP decreased marginally, while the average time to maturity of domestic currency debt improved…
4.90% 5.13% 5.10%
4.82%
6.42% 6.29%
5.45% 5.43%
0%
2%
4%
6%
8%
0
100
200
300
400
500
2005 2006 2007 2008 2009 2010 2011 2012
Rs.
bn
Interest Cost as a % of GDP
Interest Cost (Rs bn) As a % of GDP
Total interest cost as a percentage of GDP
reduced marginally to 5.43% despite the
depreciation of the Exchange Rate and the
Interest Rate fluctuations throughout the year.
47
Despite challenges and shocks to the economy, Sri Lanka’s financial system maintained stability, even while expanding…
• Stability and strength of the banking sector was maintained • Performance of financial institutions improved • Regulations were strengthened and streamlined • Efficiency of the Payment and Settlements system increased • Safety net mechanisms and consumer protection were further
strengthen and developed
Item 2008 2011 2012
(Provisional)
Bank Branches 1,782 2,130 2,193
Other Banking Outlets 3,646 4,054 4,103
ATMs 1,676 2,237 2,331
Expansion of Banking Outlets
48
25
The Banking sector was responsive to the needs of the economy, and thereby helped achieve a more rapid and sustainable economic growth…
• The Banking sector has become increasingly competitive and strong during the recent years
2.7 3.0 3.6 4.3 4.6 4.9 5.0
7.7
11.7
17.8 19.8
24.4 22.5
21.2
0
5
10
15
20
25
30
0
1
2
3
4
5
6
200
8
200
9
201
0
201
1
Mar
'12
Sep
'12
No
v'12
Gro
wth
, %
Am
ou
nt,
Rs
tn
Assets Growth
Assets Assets Growth
1.6 1.6 2.0 2.6 2.8 3.0 3.1
6.6
(2.3)
23.7
31.7
36.3
29.2
23.3
-5
0
5
10
15
20
25
30
35
40
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
200
8
200
9
201
0
201
1
Mar
'12
Sep
'12
No
v'12
Gro
wth
, %
Am
ou
nt,
Rs
tn
Loans Growth
Loans Loans Growth
1.9 2.2 2.6 3.1 3.2 3.5 3.5
7.9
18.8
15.9
18.8
21.6
19.3 18.2
0
5
10
15
20
25
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
200
8
200
9
201
0
201
1
Mar
'12
Sep
'12
No
v'12
Gro
wth
, %
Am
ou
nt,
Rs
tn
Deposits Growth
Deposits Deposits Growth
49
12.6 12.8
10.4 10.5
12.3 11.9 11.4
13.4 13.3 14.1 14.5
16.1 16.2 16.0 15.0
0
2
4
6
8
10
12
14
16
18
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sep
-12
Pe
r ce
nt
Capital Adequacy Ratio
4.4 4.6 4.6 4.2 4.1 4.1 4.1
1.1 1.0
1.8 1.7 1.8 1.7 1.7
13.4 11.8
22.0 19.7
21.1 20.0 19.6
0
5
10
15
20
25
0
1
2
3
4
5
2008 2009 2010 2011 Mar'12 Sep'12 Nov'12
Rat
io, %
Rat
io, %
Profitability maintained
Interest Margin Return on Assets Return on Equity
70.0
60.9 63.9
70.2 70.2 71.2 71.2
31.3
39.2 36.6
32.4 31.6 30.9 31.3
20
30
40
50
60
70
80
2008 2009 2010 2011 Mar'12 Sep'12 Nov'12
Rat
io, %
Liquidity improved
Credit to Deposits & Borrowings SLAR -DBU
Banking sector stability indicators improved, further consolidating the progress…
• Capital Adequacy Ratio (CAR) of banks was maintained at well over the minimum level of 10%
• The Basel II Capital Adequacy Standards continued to be implemented and monitored.
• Consultation paper on implementation of ICAAP and SRP under Pillar 2 of Basel II issued.
50
26
During the year, several banks successfully accessed international debt capital following the advice of the Central Bank to tap the international markets…
• Banks adopted an internationalised approach and used/ leveraged their balance sheets more efficiently to meet the resource gap
• Several banks secured a total US$ 973 mn, of which 70% were long term borrowings
US$ 1,100 mn - Approved
US$ 973 mn – Received
(88%)
Long Term Tenors – 70% Five to Ten Years
51
Continuous supervision and quick guidance helped to ensure a stable, streamlined financial system…
• Speedy approval granted to open bank outlets islandwide
• Reviewed current classification of banking outlets to streamline and rationalise approval procedure
Safety net mechanism and consumer protection was strengthened… • The Mandatory Deposit
Insurance Scheme continued to grow and reached around Rs.8.9 bn by end 2012
• Obligations of customers and banks were published in the form of a Customer Charter
• Continuous monitoring took place to ensure adherence to Customer Charter
52
27
• Newspaper advertisements regularly listed institutions licensed to accept deposits
• Extensive TV and Radio ad campaigns targeted Northern and Eastern provinces especially, in combating prohibited schemes
• A framework was put in place to take action against prohibited schemes, in a systematic manner
The massive campaign against Prohibited schemes continued during the year…
53
A number of financial risk assessment techniques were developed to assist in the system stability analyses… Test/Indicator What it does… Test is based on…
Sensitivity Stress Testing Gauges resilience to shocks relating to
credit risk, market risk, liquidity risk and
exchange risk (Quarterly)
Information of individual banks and banking
industry, relevant to each risk category
Macro Stress Testing Assesses resilience of the financial system
to extreme but plausible macroeconomic
shocks (Quarterly)
Selected macro-economic variables and its
impact on the asset quality of the banking
sector
Banking Soundness Index
(BSI)
Assesses the soundness (financial stability)
of the banking sector (Quarterly)
Selected financial soundness indicators (capital,
asset quality, profitability, liquidity, sensitivity
to market risk)
Financial Market Stability
Indicator (FMSI)
Assesses the stability of the financial
markets over a period of time for any
buildup of risks (Monthly)
Analysis of 10 variables associated with money
and bond market, forex market and equity
market
Macro-economic Stability
Indicator (MESI)
Assesses macro-economic stability
(Quarterly)
Analysis of key indicators of the real, external,
fiscal and monetary sectors of the domestic
economy and global developments
Financial System Stability
Indicator (FSSI)
Quantifies overall financial system stability
in Sri Lanka through a composite indicator
(Quarterly)
Analysis of 3 major indices, BSI, FMSI and MESI
54
28
Non-banking sector assets & deposits improved…
• Deposits were the major source of funding, representing 41% of the total liabilities
• Capital Funds increased by 24% to Rs. 84 bn • Loans and advances accounted for 80% of
assets, of which, finance leasing and hire purchases accounted for around 72%
• Asset quality of the sector improved, with NPA ratio reducing from 5.5% in 2011 to 5.0% in 2012
• Branch network increased by 129 to 833 during the first nine months of 2012
22.7
1.9
21.8
29.6
24.0
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
-
100
200
300
400
500
600
30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
(%) Rs.bn Total Assets - Amount & Growth
Amount (Rs.bn) Growth Rate (%)
18.0
(2.8)
25.3
48.3
26.6
(10.0)
-
10.0
20.0
30.0
40.0
50.0
60.0
- 50
100 150 200 250 300 350 400 450 500
30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
(%) Rs.bn Loans and Advances - Amount & Growth
Amount (Rs.bn) Growth Rate (%)
5.9
9.2 9.7
5.5 5.0
2.9
4.8 4.8
1.9 1.6
-
2.0
4.0
6.0
8.0
10.0
12.0
-
5
10
15
20
25
30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
(%) Rs.bn Non Performing Advances - Amount & Ratios
Gross NPA (Rs.bn) Gross NPA Ratio (%)Net NPA Ratio (%)
55
• Upper limit interest rates for LFCs revised
• Minimum requirements for information systems security
• Panel of External Auditors selected and guidelines
New Directions Issued to Finance Institutions
• Internal Rating system developed
• Early Warning Systems developed
Supervisory Action Taken
• Regularised unauthorised institutions and initiated action against others
• 27 Public awareness programs, 14 Audio programmes, 33,000 Brochures and 1,550 Posters
• Established procedure manual for investigation of unauthorised firms
Combating Unauthorised Finance Institutions
• Finalising legislation to consolidate the microfinance sector
Initiating Regulatory Mechanism for Microfinance Sector
• 7 Distressed finance companies affected by liquidity crisis were being restructured
Revival of Distressed Companies
• Gradual increase of minimum core capital to be maintained by SLCs from Rs.100 mn by Dec. 2012 to Rs.300 mn by Jan. 2016
• Core capital as yardstick for gearing ratio • Fitness and Propriety of Directors • Changes to borrowing definitions
…while proactive and timely supervisory policy measures produced the desired outcomes…
56
29
The Payments & Settlements System benefitted by several innovations in 2012…
• Issued licences to 3 new service providers to engage in debit card business
• Issued a licence to a mobile telecommunication network operator to operate an e-money scheme
• Facilitated the establishment of the Common Card and Payment Switch (CCAPS) by LankaClear (Pvt) Ltd., to provide a national level platform for clearing and settlement of electronic payments
• Commenced self assessment of the LankaSettle System against the new core principles of the Committee on Payment and Settlement Systems (CPSS)
• Conducted public awareness programmes to increase awareness on payment and settlement systems
Performance of the Payments System – 2012
System availability 99.8%
Average No. of RTGS Transactions per day (High value payments)
1,140
Average No. of Retail Payments per day
387,050
57
• To enhance the efficiency of member service:
– EPF Act No 15 of 1958 was amended to compel employers to send member contributions and payment details electronically.
– Commercial banks were appointed as collecting agents of member contributions
– EPF Website was connected with Lanka Gate E-governance service to provide wider access for members
– New members were registered under a unique identification number to enable linking with their previous account numbers.
The Employees’ Provident Fund grew by 13% to Rs.1.15 trillion in 2012… • Rs.301 bn was invested in government securities during 2012 to benefit from high interest
rates in the government securities market.
• The share portfolio yielded Rs.2,774 mn as realised income (dividends and capital gains) during the year
• Long term share portfolio was maintained in order to benefit from the expected future upturn in the equity markets
• Interest paid on member balances for 2011: 11.5% pa.
Type 2011 2012
Value (Rs.bn)
Share %
Value (Rs.bn)
Share %
Govt. Securities 898 88.0 1,036 89.9
Equities 78 7.7 68 5.9
Corporate Debentures & Other
9 0.9 9 0.8
Reverse Repo 3 0.3 2 0.2
Fixed Assets & Net Current Assets
32 3.1 37 3.2
Total 1,020 100 1,152 100
58
30
CBSL
0
1
2
3
4
5
6
7
Returns made in 2011 (%)
Foreign Reserves management returns showed remarkable results in 2010, 2011 and 2012 amidst challenges…
0
100
200
300
400
500
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
US$
mn
Absolute Returns 1988 - 2012
Year Absolute Return
(US$ mn)
CBSL Return %
Benchmark return % (2 Yr Govt Treasuries
Average Rate)
2010 341 6.2% 0.7% 2011 430 6.6% 0.4% 2012 220 4.0% 0.3%
• Returns earned between 2010 - 2012 amounted to almost US$ 1.0 bn. • Returns during the past 3 years have been the highest ever in history
Source: Respective Central Bank Annual Reports
• CBSL out-performed most of the leading central banks in reserve management during 2011
59
Currency management improved further in 2012… • Measures taken to inculcate good habits of handling
currency notes and coins through public awareness programmes
• Implemented the Clean Note Policy, in association with licensed banks and general public
• Developed close relationship with law enforcement authorities to educate the general public on security features of currency notes
• Issued instructions to licensed banks and finance companies to have counterfeit detectable counting/sorting machines
• Effected continuous improvements in human capital, with regular and special training programmes, seminars, workshops and discussions conducted, locally and internationally
• Issued two commemorative coins to mark 100 years of Scouting in Sri Lanka and the 60th anniversary of Sri Lanka-Japan diplomatic relations
60
31
Profit transfers increased several fold in the past few years, greatly assisting the revenue streams of the Government…
• From 1976-2005 period of 30 years, the profit transfers amounted to about Rs.60 billion. • From 1950-1975 period, the total profit transfers amounted to about Rs.30 million.
• During the period 2006-2012, the Central Bank has been able to appropriate a sum of Rs.112 billion to the Government from the surpluses the Bank generated, mainly from its international operations
0 0 0 0 0 1.5 1.6 1.5 1.8 1.7 1.6 2
0.5 0.5 0.1 1 1 1.4 1.7 1.5 2.7 3 3.2 4
11
7.5
3.5 5.6
0
4
8
0
25
15
27
33
0
5
10
15
20
25
30
35
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
P
Rs.
bn
Profit Transfers by the Central Bank to the Government
61
SMS Alerts: Our new initiative, since October 15th…
….
Web Communication
Average visitors in 2012
– 212,929 per day
The Central Bank has been in constant touch with its stakeholders in 2012…
62
32
When taken on an overall basis, current macro fundamentals have reached reasonably benign levels, and have been moving in the right direction…
Unit 2000 2006 2011
2012 (Est/Proj)
Real GDP Growth % 6.0 7.7 8.3 6.5
GDP at 2002 Prices Rs. bn 1,598 2,091 2,864 3,049
GDP US$ mn 16,596 28,267 59,175 59,253
Per Capita GDP in US$ US$ 899 1,421 2,836 2,922
Unemployment % 7.6 6.5 4.2 4.0
Inflation (Average) % 6.2 10.0 6.7 7.6
Trade Balance % of GDP -10.8 -11.9 -16.4 -15.1
Tourist Arrivals ‘000 400 560 856 1,003
Remittances US$ mn 1,160 2,161 5,145 6,007
FDI Inflows US$ mn 175 604 1,066 1,000
International Reserves US$ mn 2,131 4,005 7,989 7,800
International Reserves Months of Imports 3.5 4.7 4.7 5.0
Exchange Rate Rs./US$ 80.06 107.71 113.90 127.16
Budget Deficit % of GDP 9.5 7.0 6.9 6.2
Public Debt % of GDP 96.9 87.9 78.5 81
Broad Money Growth (M2b) % 12.9 17.8 19.1 16.2
Private Sector Credit Growth % 11.8 24.0 34.5 18.6
Stock Market Capitalisation Rs. bn 88.8 834.8 2,213.9 2,167.6 63
In that scenario, per capita incomes have been improving consistently, as envisaged…
$981
$2,057
$2,400
$2,836
$2,922
2003
2009
2010
2011
2012
64
33
The stage is now set for sustained progress
towards a US$ 100 billion economy
and a US$ 4,000+ per capita income…
65
Towards such an outcome, the Medium Term Macroeconomic Framework will need to be carefully fashioned, while providing for the expected acceleration of economic activity…
Indicator Unit 2012 (Est)
Projections
2013 2014 2015
Real Sector
Real GDP Growth % 6.5 7.5 8.0 8.3
GDP Deflator % 8.5 7.0 6.0 5.0
Total Investment % of GDP 30.3 31.0 32.0 32.5
External Sector
Trade Balance % of GDP -15.1 -14.4 -13.3 -12.7
Current Account Balance % of GDP -5.5 -4.7 -3.3 -2.0
Overall Balance US$ mn 100 510 795 1,925
Fiscal Sector
Current Account Balance % of GDP -0.8 -0.1 0.8 1.4
Overall Budget Deficit % of GDP -6.2 -5.8 -5.2 -4.7
Government Debt % of GDP 81 78 75 71
Monetary Sector
Broad Money Growth (M2b) % 16.2 15.0 15.0 14.0
The projections for 2013 are based on the following assumptions…
• Global economy expected to grow by around 3.3%
• Commodity prices expected to remain reasonably stable
• Advanced economies expected to maintain accommodative policies
• Domestic weather conditions expected to be favourable
66
34
0
2
4
6
8
10
12
Dec
-08
Mar
-09
Jun
-09
Sep
-09
Dec
-09
Mar
-10
Jun
-10
Sep
-10
Dec
-10
Mar
-11
Jun
-11
Sep
-11
Dec
-11
Mar
-12
Jun
-12
Sep
-12
Dec
-12
Per
cen
t
Year-on-Year Headline and Core Inflation
Headline Inflation (y-o-y) Core Inflation (y-o-y)
Ensuring that inflation stays on course to be at mid-single digits over the next 5 years will be a priority…
• The Central Bank will continue to focus on keeping demand driven inflationary pressures in check, and maintain inflation, particularly core inflation, at the desired mid single digit levels…
The achievement of maintaining single digit inflation for 47 months in spite of severe supply side shocks would help contain adverse inflation expectations and inflation-related wage spirals.
67
The Central Bank will also focus on two key factors in order to maintain macro-economic stability… • With inflation stabilising, sustainable economic growth will be a key
outcome, especially under the current global economic conditions
• Employment, which is at a historic high, will be considered a continuous priority, while due attention will be paid, to deal with any incidence of wage driven inflation
0
5
10
15
20
25
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Per
cen
t
Unemployment Rate - World
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Portugal
Spain
United Kingdom
United States
0
5
10
15
20
25
1990
2000
2004
2005
2006
2007
2008
2009
2010
2011
1H 2
012
Per
cen
t
Unemployment Rate
7.5 8.0
8.3 8.5
0
2
4
6
8
10
2013 2014 2015 2016
Per
cen
t
Expected Real GDP Growth 2013-2016
68
35
In the determination of the Exchange Rate (ER), market based flexibility will be maintained…
• The ER will be allowed to reflect market conditions.
• The Central Bank intervention in directly supplying and absorbing foreign exchange, will be limited to reducing excessive fluctuations and maintaining external reserves at desired levels.
• NOP limits of LCBs will be increased with effect from 2nd January 2013 to give LCBs more flexibility in managing their foreign exchange transactions.
• Limits on forward market transactions will be relaxed with effect from 2nd January 2013.
• Selected Derivative products will be allowed to be developed within broad guidelines that will be issued during 2013.
69
The Central Bank’s monetary policy will be conducted within the current framework of monetary targeting…
• This framework has provided greater transparency and flexibility in the conduct of monetary policy, particularly in difficult times.
The imposition of monetary targets, such as the credit ceiling acted as a tool to supplement the traditional transmission mechanism, and served to control the intermediate target of broad money directly.
In the global economy too, with key policy rates reaching almost zero, central banks are increasingly using monetary and liquidity aggregates to communicate monetary policy signals. Recent comments by Governor-elect, Bank of England regarding nominal income targeting, confirms the usefulness of unconventional strategies.
70
36
The policy rate corridor will continue to guide short term interest rates…
• Considering short term interest rates as a target variable could support the economy to move towards explicit inflation targeting in future
• Stability of the benchmark yield curve will be promoted, which would help the effectiveness of monetary policy transmission
• Greater focus will be on real interest rates in order to promote domestic savings while encouraging productive activity
Operationally, the following changes will be considered during the year…
• Lengthening the current one week reserve maintenance period to two weeks, thereby allowing greater flexibility for banks in managing their day-to-day liquidity
• Conducting regular term auctions to address structural liquidity
• Enhancing operational capabilities in order to be able to fine-tune operations to manage day-to-day liquidity in a more effective manner
71
The Central Bank’s Communication policy will act as a key instrument in monetary policy…
• An advance release calendar for Monetary Policy announcements will be issued
• Press conferences and interviews will be held regularly
• Training courses for journalists will continue
• Awareness programmes will continue
• Web presence will be enhanced through the official website, social media and mobile networking
Market expectations have become an important component of monetary policy transmission
The Central Bank’s future communications will also reflect the economy’s structural shift towards a wider range of foreign exchange earning activities
72
37
At the same time, the Central Bank will facilitate other key activities that have a direct impact on the ER, since a flexible, but stable ER will be considered a key stabilisation factor… • FDI, portfolio investments and bond market investments will be supported
• Raising debt capital by banks from foreign sources will be encouraged
• Foreign borrowings by the private sector will be made more convenient
• Private and Workers’ remittances will be continuously encouraged
• Import substitution measures, particularly in food, will be supported
• Fuel and electricity generation that involve large amounts of imported inputs, will be supported to become more efficient and less reliant on such inputs
• Large scale foreign exchange earning activities will be encouraged:
e.g. tourism, knowledge based activities, global commercial activities, education, health, port and aviation related activities, etc.
• Prudent sovereign debt management will be pursued, to provide a continuously improving international benchmark that will assist private sector funding activities as well
• Productivity level enhancements will be actively promoted
73
The trade & services gap will also be managed proactively, so as to not lead to excessive pressure on the BOP and the Exchange Rate…
• Increased inflows from tourism, service exports and workers’ remittances will be keenly supported to mitigate the impact of the trade deficit
Realisation of expected capital flows will result in a favourable outcome in the BOP.
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(E)
2013
(P)
2014
(P)
2015
(P)
Per
cen
t
External Current Account Balance (% of GDP)
Bangladesh
India
Maldives
Nepal
Pakistan
Sri Lanka
74
38
In addition, greater emphasis will be placed on developing alternative non-inflationary sources of financing… • The corporate bond market and the equity market will be encouraged to play a
greater role in supporting the financing needs of the economy, thereby reducing reliance on short-term bank credit.
• Direct financing from external sources will be encouraged
0
10
20
30
40
50
60
70
80
2012 2013 2014 2015 2016(Target)
US$
bn
Expectations for the Stock Market
Stock Market Capitalisation
0
2
4
6
8
10
12
2012 2013 2014 2015 2016(Target)
US$
bn
Expectations for the Corporate Debt Securities Market
Size of Corporate Debt Securities Market
75
Steps will be taken to bridge the high savings-investment gap through medium to long-term measures, for the economy to realise its true potential…
• Long-term domestic savings will be encouraged through positive real interest rates and promotion of pension funds and life insurance
• Capital market development will be promoted to support investments, local and foreign
• Foreign investment will be encouraged by maintaining a conducive policy environment and creating an enabling environment
-30
-20
-10
0
10
20
30
40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
As
a %
of
GD
P
Domestic Savings-Investment Gap
Investment Domestic Savings Savings-Investment Gap
76
39
Further strengthening financial institutions and deepening financial markets will be key strategies for 2013 and beyond… • Approval from the Controller of Exchange has been dispensed with, for
- Corporate entities to borrow up to US$ 10 mn per annum over the next 3 years
- LCBs to borrow from overseas up to US$ 50 mn each year over the next 3 years
- All residents who provide services to non-residents to be able to maintain Foreign Exchange Earners’ Accounts in currencies of their choice in LCBs
- Resident Sri Lankans as well as expatriates to be able to transfer foreign savings up to US$ 5 mn into Sri Lanka
• Banks will be encouraged to access stable wholesale funding sources without relying only on short-term small scale customer deposits.
• National Development Bank and DFCC Bank will be allowed to raise US$ 250 mn each, with up to 10-year tenor to fund SMEs, plantations, construction and manufacturing industries.
• Banks will be expected to consider raising a significant part of their Tier I and Tier II capital, from foreign sources, by building strong Balance Sheets.
77
Several existing Exchange Control policies will be relaxed in 2013 and beyond… • Time restrictions on forward foreign exchange transactions will be removed with
effect from 2nd January 2013
• A new investment account for non-residents amalgamating several types of investment accounts currently maintained at LCBs will be introduced with effect from 2nd January 2013
• A new Inward Remittances Distribution Account, which can be used as a clearing account to disburse earnings of Sri Lankans providing services abroad, will be introduced with effect from 2nd January 2013
• Foreign borrowings by companies for investment and business purposes to be allowed under the “External Commercial Borrowing Scheme”
• The current limit on overseas investments by residents will be increased
• Criteria for permitting selected non-banking entities to engage in foreign currency deposit business will be introduced
• Inward remittances through mobile phones will be facilitated
• A mechanism to change foreign currency through ATMs of LCBs will be introduced
• Fund transfers involving shipping companies, port operations and harbour services will be facilitated
78
40
The Government’s announced commitment to continued fiscal consolidation would greatly facilitate the effective conduct of monetary policy…
This commitment is particularly welcome when many other countries are grappling with fiscal deterioration.
7.0%
9.9%8.0%
6.9% 6.2% 5.8% 5.2%
0
3
5
8
10
2006-08
Average
2009 2010 2011 2012E 2013P 2014P
(%) Fiscal deficit (as a % of GDP)
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Per
cen
t
General Government Fiscal Balance to GDP Ratio in Selected Economies
2006
2012
79
81 78 75 71 68 65
0
20
40
60
80
100
2012 2013 2014 2015 2016 2017
Since debt dynamics play a vital role in the maintenance of both price and financial system stability, developments in public debt will be monitored carefully…
Projection of Outstanding Public Debt (as a % of GDP)
• Transparency in public debt management will be enhanced
• Advanced risk management systems for public debt management will be introduced
• The continuous enhancement of sovereign credit rating will be pursued
Indicator 2011 2012
(Est)
Revised Annual Target
2013 2014 2015
Debt/GDP ratio (%) 78.5 81 78 75 71
Average Time to Maturity of Domestic Debt (years) 2.4 3.2 3.5 3.7 4.0
Ratio of Short-term Domestic Debt to Total Domestic Debt (%) 25 24 23 22 21
Share of Foreign Currency Debt to Total Debt (%) 44 47 42 40 38 80
41
Many improvements to the G-SEC market are planned/contemplated for 2013 and beyond… Efficiency of the primary auction system will be further improved • Half-yearly Treasury bond Calendar will be issued to the market • Competition at primary auctions will be increased through greater participation of
institutional investors • Complete underwriting of issuances will be ensured by putting in place, an appropriate
mechanism, including liquidity support for primary dealers
Secondary market will be broadened and deepened while improving transparency • An e-trading platform will be established and reporting of all G-SEC transactions will be
made mandatory • A guaranteed central clearing arrangement on net-settlement basis (rupee leg and
security leg) will be established to eliminate counterparty credit risk while enhancing the efficiency of intraday liquidity of participants
• The trading platform to require mandatory two-way quotes • Covered short selling will be introduced • Information asymmetry will be eliminated, thereby narrowing spreads • Appropriate products for a derivative market which will help participants to enhance
their return while hedging their risk exposures in the cash market, will be introduced once the cash market is developed
81
• The continued decline in unemployment in Sri Lanka in recent years, compels re-thinking of the future employment strategies. In this context, labour force concentration will need to be given careful attention
– Although the share of Agriculture in the GDP has declined over time, the share of employees in the sector has not reduced proportionately
– Despite inherent limitations for expansion, special attention will need to be paid to developing productivity in the Agriculture sector, as it is a vital sector of the economy
In the long-run, productivity growth will be a vital instrument of improving competitiveness and living standards...
Concerted efforts by relevant authorities will need to be continued in order to improve agricultural output and reduce price volatility: – Effective information dissemination, – Introduction of a crop calendar, – Facilitation and enhancement of storage facilities, – Strengthening of domestic forward and futures
markets for agricultural produce
30
27
43
12
31 57
Share of Key Sectors in GDP and Labour Force
Agriculture Industry Services
Share of Labour Force
Share of GDP
82
42
Closer integration of the key sectors will also improve productivity…
• One of the key issues with Sri Lanka’s external trade has been the export of primary products where domestic value addition is low
• Given Sri Lanka’s widespread agricultural base, forward linking into Agro based Industries would be a natural next step for workers in Agriculture
A stronger domestic production base would lead to a more sustainable economic growth
Improvements in productivity in the Long-Term will also provide an important positive “supply side shock” • Very often, negative shocks to the
economy from various sources are discussed
• However, improved productivity in all three sectors of the economy would help bring down inflation and sustain price stability in the long run
• Sri Lanka would then be able to remain a competitive supplier in the global economy
83
Productivity improvements will need to be supported by evolving physical and socio-economic infrastructure…
• Continue improving:
- Road and rail networks for connectivity
- Ports and Airports to facilitate transportation
- Energy, telecommunication, etc. to facilitate economic activity
- Education and health services to suit the country’s requirements
- Use of technology
• Introduce socio-economic practices that are vital in a society that is gradually improving:
- Have child-care facilities at work places, especially to increase female labour force participation
- Introduce flexible work hours/ strategies
- Absorb differently-abled citizens into the workforce
The Central Bank is proud to welcome nine new differently-abled graduates to its workforce from 1st January 2013
84
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Since oil imports account for over 25% of current imports, moving towards sustainable and renewable energy is an important factor in the future progress of the economy…
There is renewed focus on increasing the Renewable Energy share of Sri Lanka’s energy mix
• Regular additions of mini hydro power plants to the national grid • Completion of a 100MW wind park in Mannar by end 2014 • Studies are ongoing to construct a 10MW solar PV park in the North
Budget proposals to promote renewable energy sources need
to be made use of: • Tax exemption for profits and income from cultivation of renewable energy crops • Concessionary income tax rate for mini hydro power/alternative energy projects • VAT exemption for import/supply of raw material for manufacture of energy
saving bulbs • Tax exemption for solar panel modules, accessories or solar home systems • Allowing higher depreciation on energy efficient plant machinery or equipment
85
Managing currently available resources in the energy sector will be a critical factor in the way forward…
• Monitoring of Energy Labelling Programmes that encourage high efficiency levels of electrical appliances
• Introduction of Energy Audits and Energy Efficiency measures in commercial organisations
• Initiation of Public Campaigns: e.g. “Switch off at least one Bulb during Peak Hours”, awareness programmes at schools, roadside campaigns, etc.
The government has undertaken an active campaign to create awareness about energy conservation and these initiatives need
to be continued…
The reservoir water levels have to be
prudently used to:
• Ensure a favourable generation mix through 2013
• Curb any losses that could be incurred due to changing weather patterns 0
20
40
60
80
100
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Per
cen
t
Reservoir Water Level
2010
2011
2012
86
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Monetary policy implementation will also take into close account, global developments…
• In addition to domestic developments, the monetary policy regime will be closely aligned with the global business cycle.
• Growth and inflation developments as well as policy decisions of major economies, trading partners and competitor economies will be taken into consideration when fashioning domestic policies.
• International commodity prices, particularly energy prices will be carefully considered.
87
In summary, monetary policy decisions will be based on a multi-dimensional approach, which will take into account the following… • Policy priorities to be pursued
– Maintaining inflation at mid-single digit levels – Ensuring continuous economic growth – Maintaining low unemployment – Maintaining Exchange Rate flexibility and stability
• Direct Monetary Policy Instruments to be used – Monetary targeting measures with policy rate corridor guiding short term interest rates, with the
Statutory Reserve Ratio and Open Market Operations being used to manage liquidity – Managing inflation expectations through continuous policy dialogues and robust communication
policy
• Key stabilisation measures to be influenced – Encouraging appropriate wage inflation curtailment measures – Facilitating activities that impact the ER – Influencing key components of the External Account – Facilitating non-inflationary sources of financing – Encouraging continued fiscal consolidation and pursuing prudent management of public debt – Promoting continuous productivity improvement – Providing guidance for sustainable energy practices
• External factors to be considered – Growth, inflation, exchange rates, etc., and policy decisions of advanced economies, competitor
economies and trading-partner economies – International commodity prices, particularly, energy
88
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Considering these expectations and concerns, key Monetary Aggregates are expected to be maintained as follows in 2013:
Dec-11
Dec-12
(Est) Dec-13 (Proj)
Broad Money y-o-y % change 19.1 16.2 15.0
Reserve Money y-o-y % change 21.5 10.2* 14.5
Credit to the Private Sector
y-o-y % change 34.5 18.5 18.5
Policy Parameters as at end 2012 Repurchase rate: 7.50% Reverse Repurchase rate: 9.50% Statutory Reserve Ratio: 8.00%
Further relaxation of monetary policy may be warranted if:
• Inflation and inflation expectations ease
• Economic growth remains below potential
• Aggregate demand is low
• Monetary and credit expansion take place at lower rates than projected
Tightening of monetary policy may be considered if:
• Demand driven inflation and adverse inflation expectations build up
• Signs of economic overheating occur
• Aggregate demand expands at a high rate
• Excessive monetary and credit expansion take place
* Actual
89
Over the next few years, improvements in per capita income and reduction of regional disparities will bring about further major structural changes in the economy… • With the economy expected to reach a level of over US$ 4,000 per
capita before 2016, policies for the second wave of growth must be carefully planned in order to avoid the “middle-income trap…”
The key reason for these economies not “taking off” was a lack of diversification in economic activity
0
2000
4000
6000
8000
10000
t-1
0
t-9
t-8
t-7
t-6
t-5
t-4
t-3
t-2
t-1 t
t+1
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t+3
t+4
t+5
t+6
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t+1
0
US$
pe
r ca
pit
a
Barbados BrazilChile Costa RicaDominica GabonGreece Iran, Islamic Rep.Lebanon MalaysiaMexico St. LuciaSt. Vincent & Grenad. Trinidad & TobagoUruguay Venezuela, RB
While many economies
experienced their per capita
incomes “taking off” after
reaching per capita US$
4,000 level, some economies
took more than 10 years for
the next doubling of per
capita GDP…
90
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That is why it is vital that the “5+1 Hubs” concept is implemented effectively in order to successfully guide Sri Lanka through this barrier…
South Asian
Economic Hub
Aviation Hub
Knowledge Hub
Commercial Hub
Energy Hub
Maritime Hub
Tourism Hub
The maturing of these economic activities will provide the diversification that is needed to move the Sri Lankan economy to the second wave of growth…
91
With these diversified activities taking place, the structure of country’s earnings is likely to change materially… • In the external sector, these changes
will result in earnings from exports of services gaining prominence – Earnings from tourism
– IT/BPO Services
– Aviation services
– Maritime services
– Potential earnings from the Knowledge economy
External Account Targets & Projections for 2016 Per Annum Value Merchandise Exports: US$ 15.2 bn of which Tea: US$ 1.9 bn Rubber: US$ 0.2 bn Textiles & Garments: US$ 5.6 bn Rubber products: US$ 1.2 bn Gems, Diamonds & Jewellery: US$ 1.0 bn Services Exports: US$ 9.8 bn of which Earnings from tourism: US$ 3.5 bn IT/BPO services: US$ 1.0 bn Workers’ remittances: US$ 10.0 bn Foreign Direct Investment: US$ 5.0 bn Net Portfolio inflows: US$ 1.0 bn Long term loan inflows:
Government: US$ 1.8 bn Private sector: US$ 0.5 bn
21
22
22
23
23
24
24
25
25
0
5
10
15
20
25
30
20
11
20
12
(E
)
20
13
(P
roj)
20
14
(P
roj)
20
15
(P
roj)
20
16
(P
roj)
% o
f G
DP
US$
bn
Projected Receipts from the Export of Goods and Services
Service Receipts (US$ bn)
Merchandise Exports (US$ bn)
Total Receipts from the Export of Goods and Services (% of GDP)
92
47
The structural changes taking place when moving towards a US$100 billion economy, is likely to be reflected in the new Sectoral Composition of GDP by 2016, & the several mile posts to be reached…
45
.0
30
.7
12.7
10
19
.1
28
.7
29
.7
32 3
5.9
40
.6
57
.6
58
0
10
20
30
40
50
60
70
1950 1977 2009 2016 (Proj)
Per
cen
t
Sectoral Share of GDP - Actual and Projected
Agriculture Industry Services
National Mileposts Poverty: Less than 2% Unemployment: Less than 3% Acute Malnutrition amongst children
under 5 years: Less than 5% Electricity coverage: 100% Public investment: 6% of GDP National Savings/investment gap: 0.5% of GDP
Market based Targets Value
Stock Market Capitalisation: US$ 70 bn Corporate bond market: US$ 10 bn Bank assets: Rs. 10 tn
93
• Review and amend the regulatory framework to facilitate the business models of banks and NBFIs
• Encourage the adoption of policies for diversification of business and income, through fee-based services
• Encourage consolidation in the banking and the NBFI sectors
• Strengthen the regulatory regime, while encouraging diversification of sources of funding and business operations mainly through foreign sources
• Enhance the quality and frequency of Bank and NBFI examinations
• Identify and regulate the risk profiles of banks and NBFIs in order to ensure stability of the financial sector and enhance public confidence
In the meantime, to reach a US$ 100 billion economy by 2016, Banks and NBFIs will have to play a critical role. In that regard, the Central Bank will…
94
48
In particular, the Capital Levels in the Banking System will be strengthened continuously… • The capital levels of banks will need to
grow to facilitate rising credit demand and to cushion any potential risk
• With the growth in Banking sector, smaller players may not be able to compete with large banks and therefore mergers and acquisitions will be encouraged for banks to be internationally competitive
• Banks will also be encouraged to leverage balance sheets by obtaining foreign finance
Effective Date
Licensed Commercial
Banks (Rs.bn)
Licensed Specialised
Banks (Rs.bn)
31.12.2011 3.0 2.0
31.12.2013 4.0 2.5
31.12.2015 5.0 3.0
Year Licensed
Commercial Banks (Rs.bn)
Licensed Specialised
Banks (Rs.bn)
2010 3.0 2.0
2012 4.0 2.5
2014 5.0 3.0
New Banks
Existing Banks
The capital and liquidity standards will be developed under Basel III
95
Banks will be expected to re-align their business models and processes to be in sync with the evolving needs of the economy. The 21-Point “To-do-List” for banks will help them to focus…
1. Keep abreast of macro-economic factors, both national and international
2. Ensure that all regulatory directions of the Central Bank are followed diligently
3. Keep a close eye on the Bank’s capital adequacy, present and future
4. Pay close attention to corporate governance. In particular, Board practices, top management services, and regulatory responses
5. Train staff continuously, so that they are prepared for the new developments in banking in the evolving economy
6. Upgrade Information Systems for the new levels of business
7. Improve Risk Management Systems and pay close attention to local and international trends, rather than individual “one-off” events
96
49
The 21-Point “To-do-List” continued…
8. Develop a corporate planning culture and practice it diligently
9. Be conscious of “conglomerate” risk, if the Bank is a part of a group, or has associates
10. Keep a close tab on the Bank’s international links and business partners with regular “know your customer” updates
11. Attempt to improve the Bank’s rating, with at least one upgrade each year
12. Consider new opportunities, and try to introduce new services on a staggered basis
13. Plan for management “succession” as a routine exercise, not as an exceptional effort
14. Constantly search for productivity improvements, and tighten the interest spreads to improve profitability
15. Encourage funding lines for the “5 Hubs + Tourism” initiatives of the country
97
The 21-Point “To-do-List” continued…
16. Maintain SME focus and use the Budget 2013 initiatives for SMEs effectively
17. Support foreign remittance business, both from the sender and receiver angles
18. Support lagging provinces’ growth, particularly Northern, Eastern and Uva Provinces
19. Source foreign capital for Tier 1 and Tier 2 of the Bank, by using the balance sheet strengths effectively
20. Promote foreign capital inflows among the Bank’s clients, and help to bridge the savings gap that is existing in the country
21. Support local entrepreneurship and create new business leaders for the future
98
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• The Banking Act will be amended taking into account the new developments in domestic and international financial markets…
– Supervision of bank dominated financial groups will be strengthened
– Provisions to facilitate mergers and acquisition of banks will be introduced
– Bank resolution measures will be strengthened
• Banks & NBFIs will be required to further strengthen:
− The quantity and quality of capital to improve their loss absorbency
capabilities
− The systems and processes to migrate to advanced approaches on the Basel II
capital framework
− The management of banking risks in an integrated manner, and
− The governance, fitness and propriety of directors and senior management to
establish operational accountability
Strengthening the regulatory regime will continue, unabated…
99
Finance Companies and Leasing Companies will continue to receive close attention… • Risk focused regulatory and supervisory system will be strengthened, with a new
action-based examination procedure with the introduction of integrated risk management system in NBFIs
• The number, extent and frequency of on-site examinations will be increased
• Online early warning system to identify the possible risks of NBFIs will be used
• The rating of LFCs will be assessed on quarterly basis
• A framework of macro prudential supervision to assess group risk of NBFIs will be implemented
• Information among other regulators will be shared to minimise contagion effect of negative development within a group
• Issue of new licenses for NBFIs will be stopped for the next two years, with greater focus being given to the rehabilitation processes of weak companies in the NBFI sector
• New prudential directions and guidelines will be formulated
• The adequacy and effectiveness of the corporate governance direction will be reviewed
• SLCs will be encouraged to convert to LFCs
• Investigation processes on unauthorised finance businesses will be expedited
• Regulatory and supervisory mechanism for microfinance institutions will be introduced
100
51
Steps will be taken to ensure that Sri Lanka’s currency notes reflect an emerging, prosperous society…
In particular, the Clean Note Policy will be robustly implemented with soiled notes being replaced in an efficient and effective manner
In addition, several processes will be implemented:
• An advanced automated cash processing system will be implemented to increase efficiency, reduce operational risks and improve working environment
• A more environment- friendly disposal system for unfit currency notes will be established
• A new series of Rs. 10 coins to depict each District, will be issued in 2013
• A major “Idle coin gathering programme” will be launched to collect and re-issue such coins for circulation
Doing so will make cash transactions pleasant, and improve the image of the country
101
An extensive regional development strategy that will focus on convenient financing of SMEs will be implemented in 2013…
● Giving support for business start-ups with
knowledge transfers
● Granting Quick loans for small businesses
● Supporting growth of SMEs
● Establishing sound financial footing for SMEs
● Supporting revitalisation of local and regional economies
● Granting Quick loans for agriculture and fisheries to
support farmers
● Creating collaboration between agriculture and food
industry
● Providing management and technical support services such
as training
● Providing medium
term funds for SMEs
● Supporting
innovations and
business turnarounds
To support economic growth and development, the strategy will focus on:
• Business start-up advice
• Convenient funding
• Appropriate safety nets
• Management innovation
• Links with large businesses
• Meeting regional priorities
• Export market access
• Business revitalisation
102
52
Regional development activities will concentrate on the SME sector & providing affordable finance, while focusing on lagged regions/needy sectors…
Loans to be Granted in 2013
• In 2013, nearly Rs. 17 bn worth of loans will be distributed through concessionary financing schemes implemented through the Central Bank
Sector Amount (Rs. mn)
Beneficiaries (No.)
New enterprises 7,000 53,700
Agriculture Diversification
9,900 117,300
• Awareness building and training programmes for SMEs will be carried out in 2013
Programme Expected No.
of Programmes
Expected No. of
Beneficiaries
Financial Literacy for School Leavers and Loan Beneficiaries
552 21,670
Entrepreneurship Development
32 1,280
Training of Trainers and Bankers
38 640
Post and Pre-Harvest Technology Seminars
12 600
Total 634 24,190
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The International Reserve Management Strategy will focus on maintaining safety of funds and maximising return in a risky global financial environment…
Towards such an objective, the Central Bank will:
• Gradually and scientifically move to a broader array of asset classes through further diversification of its Reserve portfolio
• Continually build-up expertise in different trading areas of forex, commodities, securities, futures and options and other risk-mitigating derivative products
• Judiciously maintain an appropriate currency mix of reserves with due regard to currencies of large debt obligations and expected future developments of reserve currencies
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The country’s Payments and Settlements platform will be maintained at a level to be ahead of time…
• Improvements in the national payment system will be facilitated and the participation of banks and non-bank service providers in developing payment and settlement systems, will be promoted
• The supervisory framework and continuing supervision of Licensed Service Providers of Payment Cards will be strengthened
• The regulatory documents to harmonise the new developments in payment systems with the regulatory framework will be revised
• The business continuity policy to ensure operational reliability of the systematically important LankaSettle system, will be continued
Expectations for the Payments System in a US$ 100 bn
Economy
Average No. of RTGS Transactions per day (High value payments)
1,500
Average No. of Retail Payments per day
500,000
RTGS/SSSS System Availability
99.9%
• The risk factors to the system will be identified and policy measures to mitigate such risks will be adopted to ensure payment and settlement system stability
• The LankaSettle system will be assessed against the new core principles of CPSS in order to identify and address any deficiencies
105
The EPF will implement innovative fund management strategies to maximise returns in the projected low interest rate regime, while enhancing the efficiency of member services…
• With fiscal consolidation and the expected further decline in inflation, market interest rates are expected to decline in future, thereby providing a challenging environment for the EPF to generate high returns in the medium to long term
• Accordingly, the EPF will systematically continue its investment portfolio diversification policy, to provide better returns to its members.
• Such diversification strategy will cover:
a) Equity investments that would provide for long term growth and income,
b) Private equity investments that would yield higher long term returns, and
c) Investments in debt securities such as corporate debentures, trust certificates and commercial paper that will provide higher annual incomes
Through such investments, the EPF will strive to provide a return that is approximately 2% higher than inflation, on a consistent basis
106
54
In order to further increase the efficiency of the EPF, it will…
• Make it compulsory for employers who have more than 50 employees to send e-returns, which will enable the update of member accounts instantly
- Nearly 80% of 2.3 million members will be covered by this scheme
- It will also help to improve the Doing Business ranking of Sri Lanka
• Undertake image scanning of all master records of members to further enhance services
• Establish an e-record room by replacing the existing master files by 2014 with electronic records
107
This human resource pool manages/regulates: - The Central Bank Balance Sheet that exceeds a
value of Rs. 1,300 bn - Monetary policy to ensure economic and price
stability - Financial system stability by regulating and
supervising a financial sector with over Rs. 6,000 bn assets
- The public debt of over Rs. 6,100 bn - The Official International Reserves amounting to
over US$ 6,800 mn - The EPF funds amounting to over Rs. 1,100 bn - The currency in circulation amounting to over
Rs. 300 bn - The payment platform that facilitates transactions
totalling over Rs. 65,000 bn - Properties and assets valued at Rs. 23 bn
The Central Bank’s in-house skills will be continuously improved to be in line with the best in the world… • To support policy analysis, the Central Bank will strengthen its
staff capabilities further and strengthen their analytical
capabilities
PhD +Professional
3
PhD
6
Masters
129
Masters +Professional
40
First Degree
325
Classification of Professional Qualifications
Qualification Total CA, CIMA, ACCA, CMA 133
Law 27
IBSL 20
BCS 11
CFA 2
AAT 3
First Degree +Professional
104
Professional
49
108
55
On a continuous basis, the Central Bank has diligently delivered on its “Growth with Stability” tagline…
Key Socio-Economic Indicators
• The Central Bank has been in the forefront of the economic renaissance of Sri Lanka during the past
several years…
• In recent times the economic, social and physical landscape of the country has undergone a rapid transformation
Unit 1980 1990 2000 2010 2012 (Prov/Est)
GDP US$ mn 4,025 8,033 16,596 49,565 59,253
GDP Per Capita US$ 273 494 899 2,400 2,922
GDP Growth % 5.8 6.2 6.0 8.0 6.5
Unemployment Rate % 17.9 15.9 7.6 4.9 3.9
GDP Deflator % 18.1 20.0 6.7 7.3 8.5
Exports US$ mn 1,065 1,984 5,522 8,626 9,751
Imports US$ mn 2,051 2,686 7,320 13,451 18,679
Workers’ Remittances US$ mn 152 401 1,160 4,116 6,007
Current Account Balance % of GDP -16.4 -4.7 -6.4 -2.2 -5.5
Tourist Arrivals ‘000 317 298 400 654 1,003
Foreign Direct Investment US$ mn 42.9 41.6 175 516 1,000
Overall Balance US$ mn -191.9 118.7 -521.9 921.0 100.0
Gross official Reserves US$ mn 245.5 435.0 905.5 6,610.2 6,845.0
Gross official Reserves Months of Imports 1.4 1.9 1.5 5.9 4.4
Total External Debt % of GDP 41.4 72.0 54.5 43.3 43.7
End Year Exchange Rate Rs/US$ 18.00 40.24 80.06 110.95 127.16
Budget Deficit % of GDP 19.2 7.8 9.5 8.0 6.2
Government Debt % of GDP 77.2 96.6 96.9 81.9 81
Interest Rate (91-day T-Bill) % per annum 13.00 17.41 17.77 7.24 10.0
109
If Sri Lanka is successful over the next three years, the country would surely be the next “Break-out Nation” and the “Wonder of Asia”…
2012 was an extraordinary year…
– External and domestic challenges prompted the Central Bank to adopt strong measures to stabilise the economy.
– These measures resulted in swift responses allowing the Bank to relax the policy stance before the end of the year.
• Today, the Central Bank is in a position to move along a more stable and sustainable path to achieve its mission of maintaining economic and price stability and financial system stability to support sustainable and inclusive growth
110
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12
20
11
20
08
20
09
20
10
Over the past 6 years, we have embarked on a planned and systematic journey…
Growth with Stability
20
07
111
To Deliver Prosperity to
Now, we are well positioned to…
112