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Road Map: Monetary and financial sector policies for 2017 and beyond


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Monetary Policy Strategy and Policies for 2017 and Beyond

A coherent and clear macroeconomic framework, is important to achieve our objectives.

Among the key elements of the overall macroeconomic framework, price stability is an important pillar. Price stability is interpreted to mean low, stable and predictable levels of inflation, which is conducive for fostering sustainable long-term economic growth and employment in a country. Price stability is instrumental in keeping nominal interest rates low, thereby enabling an economy to exploit its growth potential, while both consumers and producers can make economic decisions with confidence and certainty. Therefore, modern central banks predominantly focus on achieving price stability as a pre-condition for sustainable growth.

In this context, I would like to indicate that the Central Bank and the Government are working towards establishing a well-designed macroeconomic policy framework in the country, built upon three key areas.

The Government is in the process of taking decisive measures to address the long felt deficiencies in its budgetary operations through a new fiscal framework, aimed at strengthening fiscal sustainability in the medium-term. This framework is embedded in the IMF-EFF arrangement.

These efforts will complement the expected improvements of the Central Bank with regard to two key policy frameworks in relation to monetary policy.

a. The conduct of monetary policy will be strengthened through the move towards a flexible inflation targeting (FIT) framework.

b. A properly designed and widely accepted framework for exchange rate management will also be introduced to establish a market- based exchange rate system in the country.

The broad-based reform actions under the EFF arrangement with the IMF will complement these efforts.

The Central Bank, since the 1980s, has been pursuing monetary targeting (MT) as its monetary policy framework to achieve price stability. Under this framework, monetary aggregates were used as a key nominal anchor in the conduct of monetary policy and the final objective of price stability was expected to be achieved by influencing money aggregates. Reserve money was considered the operating target and broad money was used as the intermediate target of monetary policy under this framework.

Nevertheless, monetary targeting has become a less meaningful framework for monetary policy conduct, given issues such as the instability in the money demand function amidst financial innovations and the weakening relationship between money and inflation.

Hence, countries, which were dependent on monetary targeting frameworks, have been moving away towards new frameworks, such as inflation targeting.

In line with this global tendency, the Central Bank of Sri Lanka has also been improving its monetary policy framework over the years.

In particular, the Central Bank has officially announced that the monetary targeting framework would be gradually replaced by migrating towards a flexible inflation targeting framework.

Under this enhanced monetary policy framework, the Central Bank would focus on stabilising inflation in mid-single digits over the medium-term, while supporting growth objectives and flexibility in exchange rate management.

Generally, an inflation targeting framework is characterised by an announced numerical inflation target, a medium-term inflation forecast, which facilitates forward looking monetary policy decision making and a higher degree of transparency and accountability.

Inflation targeting is known to be operationally complex. It requires greater awareness of the whole monetary transmission mechanism (MTM) and is based on a working link from policy interest rates to interbank interest rates and to long-term interest rates. Under our enhanced monetary policy framework, we expect to predominantly employ market-based instruments, particularly policy interest rates and open market operations (OMO) to guide the average weighted call money rate (AWCMR), which is considered as the operating target, along the desired path. This would ensure effective transmission of monetary policy.

Within this enhanced framework, the Central Bank does not set any monetary targets explicitly. However, broad money (M2b) will remain as the key indicative intermediate variable, which reflects the broad liquidity conditions in the economy, to guide the conduct of monetary policy of the Central Bank.

 

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To implement the new framework, macroeconomic projections, including inflation projections, are currently being strengthened using short-term as well as medium-term structural forecasting tools and techniques. In this endeavour, continued efforts are being made to upgrade the technical capabilities of the Central Bank staff.

With a view to strengthening its policy formulation and modelling capacity, the Central Bank of Sri Lanka has been obtaining technical assistance from the IMF in the area of macroeconomic forecasting, modelling and policy analysis. As such, a joint effort has been made by the Central Bank and the IMF in developing a structural model-based Forecasting and Policy Analysis System (FPAS) to strengthen the monetary policy decision making process and to support Sri Lanka’s transition to a flexible inflation targeting regime. The FPAS is a medium-term, pre-emptive policy analysis system, which brings together information and judgment in a coherent and logical manner.

untitled-5Under the FPAS, the Central Bank has already finalised the development of the baseline version of a semi-structural Quarterly Projection Model (QPM) for forecasting and analysing monetary policy.

Meanwhile, the Central Bank is in the process of implementing several organisational changes necessary for the effective implementation of the model. To this end, a separate Modelling and Forecasting Division has been setup in the Economic Research Department and relevant processes are being developed while equipping the staff with adequate training.

More importantly, we intend to introduce several changes in the monetary policy formulation process as well. Accordingly, we will reduce the number of Monetary Policy Committee (MPC) meetings to 8 meetings per year from the current level of 12 meetings per year. Consequently, around 5-6 weeks will be devoted for analysing the latest developments in the economy and developing model-based macroeconomic forecasts, thereby facilitating the provision of in-depth and more forward looking insights to the monetary policy formulation process.

The above improvements envisaged in the monetary policy decision making process are expected to be implemented before the end of 2017. This will entail revising the Monetary Law Act to accommodate some of the new changes to be introduced in this process in the medium-term.

Moreover, we also intend to reintroduce the Monetary Policy Consultative Committee (MPCC) in 2017, comprising eminent academics, professionals as well as representatives from the private sector. We expect to benefit from the views and inputs of the MPCC in better calibrating the monetary policy decision making process.

In addition, we also intend to establish two other important consultative committees in relation to financial system stability and private sector views on Central Bank policies and regulations. We are of the view that the inputs of such committees would also be helpful in devising appropriate monetary policy decisions.

We will continue to monitor developments in the monetary sector closely and adopt timely and effective monetary policy measures, supported by other macroprudential measures in order to ensure stable monetary conditions and price stability, thus facilitating envisaged economic growth.

At the same time, we will continue to actively engage in liquidity management operations in the money market to guide the short-term interest rates within the desired path.

In order to ensure the effective implementation of monetary policy, we expect to introduce certain measures with regard to OMOs, such as introducing fixed rate and variable rate auctions, and fine tuning auctions after examining their need and feasibility in line with other country experiences and market needs. We will evaluate alternative instruments to strengthen OMOs.

Reflecting these measures, inflation is expected to remain at mid-single digit levels in the medium-term. As such, it is expected that the low inflation environment that prevailed for several years would be sustained in a range of 4-6% in the medium-term, which is also consistent with the inflation target bands stipulated under the EFF arrangement with the IMF.

We would also continue to strengthen the technical capability, particularly with regard to the compilation methodologies of macroeconomic statistics in line with international standards. This will promote sound economic analyses for the purpose of formulating effective policies, while improving the transparency of monetary policy and policy communication.

At the same time, in the process of making more informed policy decisions, we look forward to enhancing statistical inputs by introducing new indices on property prices as well as modifying wage indices, while improving the coverage of existing surveys to better track developments in the private sector.

The Central Bank will continue to communicate policy decisions among market participants and the general public through multiple means providing greater clarity and understanding about policy. Moreover, launching of the revamped corporate website of the Central Bank is expected to provide high quality content with dynamic and interactive features.

At the same time, continuing the practice that has been followed in the past, we intend to make monetary policy announcements according to an advance announcement calendar. The calendar for 2017 is set out below.

Monetary Policy 

Announcements in 2017

  •  7 February, Tuesday
  •  24 March, Friday
  •  9 May, Tuesday
  •  27 June, Tuesday
  •  3 August, Thursday
  •  26 September, Tuesday
  •  7 November, Tuesday
  •  28 December, Thursday

Volatile global market conditions and Sri Lanka’s vulnerability as a twin deficit country underscore the vital importance of having a flexible exchange rate policy to adjust to external pressures. Recent experience has clearly demonstrated that it is unsustainable to maintain an overvalued exchange rate at the expense of external reserves. A smooth market based exchange rate would prevent highly disruptive adjustments after a period of stable rates artificially maintained by continuous intervention by the Central Bank, as experienced in the 2011-12 period when the currency depreciated by around 14% after expending $ 4.0 billion of scarce external reserves in a futile attempt to defend the external value of the rupee through market intervention. There was a similar experience in 2015 when the currency depreciated by 6.5% after spending $ 2.1 billion of our reserves. Wasting large amounts of the country’s external reserves, much of it borrowed, in a vain effort to defend the currency, which has to be ultimately depreciated anyway, is clearly unsustainable. It is time to stop this pattern and commence building up of external reserves through sustainable foreign exchange inflows.

The impact of global developments, such as Brexit, recent Presidential elections in the United States (US) as well as interest rate hikes by the US Federal Reserve, the forthcoming elections in France and Germany in Europe, the projected slowdown in the Chinese economy, as well as economic conditions in Sri Lanka’s major trading partners, including India, Japan, Russia and the Middle East, will also have a significant influence on the domestic economy.

Trends in oil prices and international capital flows, following the normalisation of interest rates in the US are likely to be particularly important.

We also expect that changes to Government tax structure and supply shortages stemming from weather-related developments as well as shocks that could arise due to possible reversal of global commodity prices could cause temporary variations in price levels. In particular, if current drought conditions prevail, there could be adverse implications on price levels, while impacting on economic activities, notably agriculture and power generation.

As in the past, it is expected that the Government would take timely measures to counter the adverse supply side effects on prices, thus mitigating adverse inflation expectations of the general public.

Accordingly, it is anticipated that inflation expectations would broadly remain anchored in the medium-term with appropriate demand management policies, supported by timely supply side measures.

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Financial Sector Policies for 2017 and Beyond

The financial system remains important for efficient allocation of resources and hence in facilitating strong economic performance of the country. In particular, a broader, deeper and a liquid financial system is vital as economies grow more sophisticated.

A stable financial system creates a trusted, enabling environment favourable to savers and investors; helps the transmission of monetary policy; encourages efficient financial intermediation, which eventually promotes investment and growth; and encourages effective and efficient operation of markets while improving the allocation of resources in the economy.

Financial system stability is founded on the confidence of the public in the financial system and depends on the soundness and resilience of principal components of the financial system to collectively withstand risks emanating from various internal and external developments.

The Central Bank has sought to preserve the soundness, efficiency and stability of the financial system primarily through the regulation and supervision of all major categories of financial institutions, ensuring sound and safe payment and settlement systems as well as establishing risk management systems and instilling good corporate governance standards and practices in the financial sector while promoting financial inclusion.

In the medium-term, our overall aim is to ensure the stability in the financial sector through identifying emerging vulnerabilities in this sector; adopting early corrective actions; and implementing a series of measures to further strengthen financial institutions, markets, infrastructure and safety nets.

Our medium-term plan is to have a financial system, which offers the full range of financial products and services to all economic sectors, including agriculture, infrastructure, manufacturing, particularly small and medium enterprises (SMEs), and trade to achieve broader economic objectives of our country. We need to have a well-planned and an ambitious agenda for financial sector development and reforms ranging across financial sector policies with a vision of innovative, robust and competitive financial systems.

As a priority, we expect to strengthen the regulatory framework pertaining to all financial institutions, including licensed banks, licensed finance companies (LFCs), specialised leasing companies (SLCs) and primary dealers. It will further ensure the stability of the financial sector by promoting the safety and soundness of those institutions to face unforeseen challenges in the growing business environment.

In this regard, the Central Bank wishes to implement the following policies in 2017 and beyond.

Since the last amendment to the existing Banking Act in 2006, the banking sector landscape has undergone a significant change, both nationally and internationally. Considering the need for upgrading of statutes in line with these developments, we expect to initiate amendments to the existing Banking Act. Accordingly, steps will be initiated to streamline and strengthen the regulatory and supervisory framework through the proposed Banking Act amendments. We will consider provisions for reinforcing the Central Banks’s enforcement powers for violations of the Act and the Directions issued under it. In this regard, we wish to seek views from the banking sector as well. In line with these reforms, we intend to review all key regulations in the medium-term. In this regard, we will review key Banking Act Directions, such as share ownership, foreign borrowings, and corporate governance, and these will be amended where necessary. In order to maintain financial stability in the country and in line with regulatory reforms, we have identified the need for further strengthening of the supervisory function of the Central Bank. Accordingly, we expect to enhance the bank examination methodology to focus on the efficiency, effectiveness and sustainability of individual banks and the banking sector, based on the Bank Sustainability Risk Index (BSRI). Accordingly, amendments will be introduced to the existing risk-based supervision framework based on a mix of quantitative and qualitative indicators to enhance focus on sustainability and operational efficiency of banks. We will conduct the pilot run of the Risk Index on large banks during the first quarter of 2017 and subsequently, the index will be extended to the other segments of the banking sector.

In 2018, the Risk Index will be incorporated to all examination reports and we intend to assign a supervisory rating, based on this index. By 2019, a comprehensive pre-risk assessment will be conducted for all banks and a risk-based examination plan will be formulated.

In addition, we intend to strengthen capital positions in line with minimum requirements and Basel III capital standards. Implementing Basel III capital and liquidity standards were identified as key policy measures in the Road Map for 2014 with a view to further strengthening the resilience of licensed banks. We have already issued Directions on the Basel III Liquidity Coverage Ratio in April 2015.

We have just issued the Direction on Basel III Minimum Capital Requirements for implementation on a staggered basis, commencing 01 July 2017, and to be fully implemented by 01 January 2019 in line with the international timeline.

With a view to creating a more resilient banking sector, we expect banks to maintain a stable funding profile. Accordingly, we plan to introduce the Net Stable Funding Ratio (NSFR) and the Leverage Ratio for banks. NSFR will be applicable by 01 January 2018 and the necessary Banking Act Directions on NSFR will be issued in line with the international timeline. By implementing the Leverage Ratio, it is intended to restrict the build-up of excessive leverage in the banking sector. Accordingly, in 2017, we will begin to monitor the level of compliance under the leverage ratio.

It is also our intention to finalise the Crisis Preparedness Plan, and Recovery and Resolution Framework as a precondition for effective supervision. Accordingly, guidelines will be issued on recovery and resolution frameworks of banks and the crisis management frameworks will be strengthened and streamlined in order to minimise the adverse impact, both on the troubled banks and, on the banking and financial sectors as a whole.

In line with the developments in the banking sector and the guidelines from the Basel Committee on Banking Supervision, we will be taking steps to review the existing criteria and mechanism for the selection of the panel of qualified auditors in order to strengthen the current assessment process and enhancement of audit quality.

In recent years, the Central Bank has introduced a broad range of prudential regulations to strengthen risk management, corporate governance, capital adequacy and internal controls of the non-bank financial institutions. Going forward, the stability of the financial sector will also be strengthened by enhancing the existing regulatory framework of non-bank financial institutions.

The capital levels of licensed finance companies (LFCs) and specialised leasing companies (SLCs) are expected to be strengthened further. Accordingly, existing LFCs and SLCs will be required to maintain a higher minimum core capital than the prevailing requirement of Rs. 400 million and Rs. 300 million, respectively. These will be increased to Rs. 2 billion and Rs. 1 billion, respectively on a staggered basis to facilitate the smooth transition. This will serve as a structural capital buffer for further consolidation of this sector. It is expected to improve the existing framework on capital adequacy, which will be more risk sensitive, focusing on credit risk based on borrowers’ risk profiles as well as operational and market risk in the trading book.

Further, in order to strengthen the governance framework of the non-bank financial sector, we will introduce appropriate policy changes to the existing Corporate Governance Direction.

 

The risk management framework of non-bank financial institutions will also be strengthened. We will amend the existing Directions on classification and provisioning for non-performing loans and advances in line with the new Accounting Standards in order to harmonise the differences between regulatory provisioning and accounting impairment. In order to mitigate undue exposures and reduce high concentration risks on investments, guidance will be given for valuation of immovable properties of LFC/SLC sector. Further, minimum liquidity requirement for the sector is expected to be more stringent to create additional liquidity buffers.

Measures will also be taken to enhance disclosures and transparency through the introduction of a new regulatory framework for the preparation, presentation and publication of the Annual Audited Accounts/Quarterly Financial Statements and periodical returns.

Our objective is to reduce the overall risk of the financial sector by maintaining fewer companies but a stronger sector to avoid any contagion effect. As such, with the proposed changes to the existing regulatory framework, we encourage companies to pursue organic consolidation in order to strengthen the non-bank financial sector.

In addition, more attention will be given to distressed finance companies, by resolving the difficulties largely through mergers and recapitalisation in 2017. We intend to establish an Enforcement Unit to prosecute the Board of Directors and senior management of failed finance companies who are involved in fraudulent activities and malpractices.

With a view to strengthening the existing enforcement framework on prohibited schemes, the Central Bank intends to establish a unit comprising officers with specialised skills in the areas of law, forensic and investigation skills and accounting, to liaise and assist law enforcement authorities on related investigations. This Unit will also deal with matters relating to unauthorised deposit taking institutions. In addition, the Central Bank will continue to enhance awareness of the general public on the dangers of engaging in unauthorised investment schemes, and institutions authorised by the Central Bank to accept deposits from the general public through an effective public awareness campaign involving mass media.

Primary dealers play a vital role in trading of Government securities and market making. Further, there is high potential to deepen the debt securities market in the country. Hence, we need to have a clearly stated policy framework for Primary Dealers. This will further enhance the safety of investments in the Government securities market. Accordingly, we have already revisited the existing regulatory framework of primary dealers and based on those findings, we will introduce an appropriate regulatory framework for primary dealers in line with the latest developments in the market by benchmarking the global standards. We also expect to establish and implement a restructuring mechanism for distressed primary dealers.

The Macroprudential Surveillance Department (MSD) of the Central Bank is being strengthened to keep a close tab on the developments in the financial system as a whole. In this regard, we expect to strengthen the institutional framework for macroprudential surveillance, which includes: (1) collecting macroeconomic and financial data by customising the existing FInNet Data Reporting System of the Central Bank; (2) expanding the statistical analysis to identify system-wide vulnerabilities and threats to the financial stability from the build-up of risks and interconnectedness of financial institutions; and (3) improving the early warning framework with a focus on stress tests and financial system stability indicators, to identify and assess systemic risks and vulnerabilities in order to ensure formulation and implementation of proactive macroprudential policies to maintain financial stability.

The Central Bank has continued to take measures to strengthen the payment and settlement infrastructure of the country and to develop an efficient and stable payment and settlement system, capable of catering to the growing payment needs.

Continuing to discharge this important function, we expect to improve the national payment system to promote electronic payments to establish a less-cash dependent society. In this regard, a payment platform is being developed to effect Government payments, particularly the payments to Sri Lanka Customs, through the Common Electronic Fund Transfer Switch (CEFTS) in real time. A National Card Scheme (NCS) is being introduced as a cost effective alternative to currently available international card schemes and a Common Point-Of-Sale Switch (CPS) is being developed to facilitate clearing and switching of payment cards issued under the National Card Scheme. A Common Mobile Switch (CMobs) will be implemented to ensure interoperability between mobile wallets. Further, we will monitor the progress of licensed banks and other financial institutions joining the CEFTS, CPS and CMobs and adopt policies with a view of increasing the efficiency of electronic retail payment systems and minimising risks associated with such payment systems.

Going forward, we will strengthen the supervisory framework and carryout on-site and off-site supervision of licensed service providers of payment cards and mobile payment systems to ensure compliance with regulations and guidelines. We also intend to introduce Internet Banking Guidelines and Security Standards for mobile applications to strengthen security of electronic payments.

In year 2016, the Central Bank adopted the Cabinet approved National Policy on Anti-money Laundering and Countering the Financing of Terrorism. Currently, all the stakeholders are in the process of developing their internal frameworks to support the national policy on Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT).

Sri Lanka needs to strengthen the AMF/CFT regime by effectively implementing Financial Action Task Force (FATF) recommendations in order to upgrade the country rating. If Sri Lanka fails to achieve the expected level of compliance, the country may be considered as a high risk country, resulting in adverse implications on the financial sector.

In order to overcome such challenges and hence to ensure compliance, the Central Bank will focus on a number of strategic actions in the medium-term.

I would also like to note that the Microfinance Act came into effect on 15 July 2016. In line with this, the Department of Supervision of Microfinance Institutions (DSMI) was established at the Central Bank of Sri Lanka to carry out the responsibilities, as stipulated in the Microfinance Act No. 06 of 2016 and implement policies approved by the Monetary Board to ensure good governance, transparency and stability of Microfinance Institutions (MFIs).

The Central Bank is ready to receive duly completed applications from eligible companies, which would be submitted to the Monetary Board. Continuous surveillance and on-site examinations of Licensed Microfinance Companies (LMFCs) will be conducted by the Central Bank. We expect to maintain a constant dialogue with the LMFCs and increase awareness on regulations.

While we are proposing policies and plans for the financial sector, as the apex financial institution in the economy, we also need to ensure the stability, continuity and safety of our own house. In particular, it is important to foster a risk culture within the Central Bank as central banks are considered as the trustee of public assets.

In line with this endeavour, the Central Bank of Sri Lanka intends to continue to apply the “Three Lines of Defense” risk management model, where the operational managers form the first line of defense, and the Risk Management and Internal Audit Departments constitute the second and third lines of defense, respectively.

Moreover, in view of the need to build a governance and risk management framework that balances return objectives with prudent risk management and controls, Strategic Asset Allocation (SAA) for the international reserves, managed by Central Bank, has been developed and a new Investment Policy Statement has been drafted in line with it. The Investment Guidelines have been reviewed to reflect the revised investment criteria.

Going forward, we expect to ensure a proper Enterprise Risk Management (ERM) Framework for the Central Bank, which involves setting up a new Risk Governance Structure and developing systems and procedures to monitor financial and non-financial risks of the Bank by engaging in risk mapping of all departments in order to develop a risk profile for the Central Bank of Sri Lanka.

 



Policies to strengthen the broader economy

Currency Management: We want to make sure that the Sri Lankan Rupee notes and coins are available to the public in required denominations upon demand without any shortage. We plan to develop a new mechanism for islandwide coin distribution and arrange programmes with banks to collect the coin tills issued to the public.

In 2017, the Central Bank plans to issue a new coin series to reduce the cost of minting. In addition, measures are also being taken to improve the quality standards of currency notes issued by the Central Bank.

As in the past, the currency management policy of the Central Bank will be focused on maintaining quality standards. Accordingly, the Central Bank plans on strict enforcement of law as per the Monetary Law Act on willful mutilation, alteration and defacement of currency notes in order to improve the quality of currency notes in circulation to reflect the image of the emerging Sri Lankan economy.

Management of the Employees’ Provident Fund: Employees’ Provident Fund (EPF) is the largest superannuation fund of the country having total assets of Rs. 1.8 trillion. During the last year, we have introduced several initiatives to enhance the overall risk management framework and greater oversight over the organisational performance of the Fund. In addition, the completion of Phase I of the Image Scanning Project and the automation of certain functions will improve the operational efficiency of the Fund. Going forward, we intend to strengthen the EPF operations by expanding member services to the regional level through EPF units established in the Central Bank Regional Offices. Initiatives have also been taken to re-register all members with the new biometric National Identity Card in consultation with the Ministry of National Policies and Economic Affairs.

In line with the Government policy agenda, we are in the process of reviewing investment policies by incorporating international best practices, focusing on proper assets diversification and risk management with the assistance of the Asian Development Bank (ADB) and the World Bank.

Going forward, the EPF will also focus on the following;

  • Improving web based ICT technologies to link employers, employees and other stakeholders
  • Enhancing the quality of existing database
  • Improving the efficiency of the refund payment system
  • Improving awareness among stakeholders on EPF operations to improve the level of service delivery
  • Establishing e-accounts for both employers and employees
  • Introducing a web based data collection and contribution payment system facility to employers for real-time validation of member accounts
  • Identification of new markets and asset classes for investments and maintaining appropriate asset allocations to generate the highest level of risk adjusted return
  •  Enhancing the institutional capacity to ensure effective and efficient fund management
  • Improving the framework for managing financial risks

Public Debt Manage-ment: As you know, the Central Bank manages public debt on behalf of the Government. In delivering this responsibility, we want to make sure that our debt management operations are conducted in a professional way with the highest level of integrity.

In this context, the Monetary Board has come up with a list of actions to develop the debt market and debt management operations. Some of these have already been implemented.

In July 2016, we resumed Pre-bid Meetings with all the primary dealers to provide them the relevant information in relation to the forthcoming auction. We hope that the availability of such market information would enhance transparency.

We are working towards publishing an Annual Auction Calendar with more information with the collaboration of the Ministry of Finance, which will be reviewed quarterly. This will enhance the transparency and predictability of the primary auction process in the Government securities market. Such initiatives will provide the same information to all market participants thereby ensuring the availability of information on potential transactions well in advance.

Further, with the intention of enhancing the transparency of our operations, since June 2016, a decision is in place not to accept more than the aggregated offered amount at an auction although the Central Bank may accept less than the amount offered.

The Bloomberg Trading Platform has also been introduced for Government securities trading. Greater price discovery and transparency in the system, as well as increased confidence, have resulted in a significant increase in the volume of trading on the platform, in the secondary market.

Further, the Bloomberg e-Trading Platform will be extended for repurchase transactions, and two-way quotes will be made mandatory. This will enhance price guidance to the market and would result in increased liquidity due to price discovery and transparency.

The Primary Auction Rules for Government securities will also be published in order to improve transparency and the standardisation of the procedures.

Meanwhile, the current auction process is being reviewed, and the draft outcome of this review has been shared with the World Bank and the IMF. The Central Bank expects to get the draft auction system validated by these international organisations before going live with it. We hope to do this in the first quarter of 2017. We have also invited a consultant from the US Treasury to look into a number of areas, including the auction process, cashflow management and debt management strategies, as well as establishing a good database for Government securities.

The possibility of active debt management initiatives, such as buy-backs, switching and swap arrangements, which are also a part of liability management initiatives, will be explored to improve the debt management process, with changes in relevant legislation.

The Central Bank will establish an Electronic Trading Platform and a Central Counter Party (CCP) arrangement for Government securities along with required legal reforms to deepen and broaden the secondary market for Government securities. Similarly, a mechanism to disseminate secondary market information on debt instruments will also be established through the proposed e-trading platform and the clearing house. Hence, we will have a new set of operational processes for Government securities in the secondary market as well, in the near term.

The Treasury is already in the process of studying the possibility of implementing liability management for US dollar as well as Rupee denominated borrowings. The Central Bank will work closely with the Treasury in this process.

We should access the international capital market when market conditions are favourable to Sri Lanka to build a buffer to avoid unwarranted domestic market pressure due to limited resource availability. This would broaden and diversify the foreign investor base as well. We have already seen growing confidence in the currency among some large international investors, which means that in the near future, we should be able to issue international bonds in rupees, which would minimise our exposure to exchange rate movements. In this endeavour, we are working to cooperate with the Euroclear System to facilitate us to trade our bonds in their system in the future. Such an initiative will increase the efficiency and effectiveness of settlement for investors and increase the pool of savings available for investment in domestic securities.

There will be a new Public Debt Act. A team of professionals is consolidating all the statutes relating to debt management and a separate Debt Management Unit is being set up at the Ministry of Finance.

This, in our view, is a positive development, because for years now, the Central Bank has had to cope with the conflict of interest of trying to conduct an independent monetary policy while at the same time, raising funds for the Government as cheaply as possible. This conflict of interest poses challenges to the monetary policy conduct of the Central Bank. Therefore, taking away the debt management function would enable the Central Bank to have a greater room to manoeuvre to conduct an independent monetary policy.

Foreign Exchange Management: With a view to further relaxing foreign exchange transactions, the Central Bank has implemented several new policy measures in the recent past with the support of the Government. We want to emphasise that all our policy measures are in line with the current policy stance to promote the competitive advantages of Sri Lanka in global business activities resulting in the enhancement of investor confidence, strengthening of foreign reserves and stabilising the foreign exchange market.

The Government has identified that it is timely to have a new Foreign Exchange Act. As proposed in the Budget 2017, the new Foreign Exchange bill will be presented to the Parliament during 2017.

In addition, the Central bank is in the process of further relaxing foreign exchange transactions.

Regional Development: The Central Bank, as the agent of the Government of Sri Lanka, implements a number of concessionary development credit schemes through Participating Financial Institutions (PFIs), with a view to uplift living standards to enhance financial literacy as well as financial inclusion, and to ensure balanced regional growth and equitable development.

nA New Loan Scheme for the Micro, Small and Medium Scale Enterprises (MSMEs): A new loan scheme for the MSME sector development and employment generation has been designed jointly by the Central Bank and the Ministry of National Policies and Economic Affairs. It constitutes a Government-led support mechanism to address financial, technical, marketing and entrepreneurship needs, especially of youth and young graduates, women and differently abled people. The unique feature of this Scheme is the inclusion of a special grant element for start-up enterprises to meet the initial expenses. The maximum amount of the grant will be Rs. 50,000 and the maximum loan amount of Rs. 250,000 will be given at an interest of 5.5% per annum. The Scheme intends to allocate Rs. 4.0 billion to the needy sectors of the economy and is expected to commence in January 2017.

nNational Strategy for Financial Inclusion: Based on the findings of the Financial Inclusiveness Survey (FIS), a comprehensive draft of National Strategy for Financial Inclusion will be developed considering the contemporary national financial inclusion strategies of peer countries. The views of domestic stakeholders, obtained through continuous dialogue, will be considered in drafting the proposed national strategy.

nPromoting Commercial Scale Organic Agriculture and Dairy Entrepreneurship: Addressing the increased concerns of the public and the Government on organic agriculture, mainly due to the multiple benefits that accrue from it, the Central Bank expects to promote commercial scale organic agriculture and dairy entrepreneurs through the establishment of formal agribusiness societies and multi-stakeholder enterprises.

nA Loan Scheme for Promoting Rooftop Solar Power Generation: A new loan scheme, funded by ADB, will be implemented with the collaboration of the Ministry of National Policy and Economic Affairs, Ministry of Power and Renewable Energy, Sustainable Energy Authority and other stakeholders, with the intention of promoting rooftop solar power generation in the country.

nPromoting Green Financing: In addition, the Central Bank will promote Green Financing through enhancing awareness to encourage enterprises to protect the environment, conserve resources and to achieve carbon neutrality. Banks will also be encouraged to provide financial facilities to green enterprises with the intention of protecting the environment.

In line with the international appetite to promote green financing, the Central Bank has also joined the Sustainable Banking Network (SBN) of the International Finance Corporation (IFC), which is a knowledge and capacity building platform for financial regulators and banking associations of emerging markets on sustainable finance. As a member of the SBN, we would focus on sustainable banking practices to help banks to effectively manage environmental and social risks in the projects they finance and support businesses that are greener, climate friendly and socially inclusive. As an important step towards sustainable finance, with the support of IFC, we intend to conduct a workshop for the senior staff of banking institutions in Sri Lanka during the first quarter of 2017.


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