Cabraal says platform set for stronger economic growth

Saturday, 3 January 2015 03:45 -     - {{hitsCtrl.values.hits}}

  • Central Bank unveils Roadmap for 2015 and beyond
  • Economy in 2014 estimated to have grown by 7.8%, target for 2015 is 8%
  • Says Lanka’s growth in 2014 exceeded that of many emerging market economies including South Asian peers
By Marisa Wikramanayake The Governor of the Central Bank yesterday emphasised that the stable economic platform created during the past five years will enable Sri Lanka to reach a $ 163.4 billion economy by 2020 from $ 75 billion in 2014. “The past five years have established an unprecedented stable and sound economic and financial platform,” Cabraal said, launching the Road Map 2015 and beyond at the BMICH yesterday. “Based on strong fundamentals, the next six years could look forward to an even stronger economic performance,” he added at the event, where the Central Bank’s monetary and financial policy strategy for the next year, as well as its macro targets for up to 2020, was shared. It was the ninth consecutive annual roadmap unveiled by the Central Bank to make medium-term policies more predictable and transparent for the benefit of stakeholders. The Road Map 2015 includes targets set for 2015 that will help achieve the fiscal and development goals set for 2020. These include a GDP target of $ 86.1 billion in 2015 with a growth estimate of 8% up from 7.8% in 2014. The goal by 2020 is to have a $ 163.4 billion economy. The target for 2015’s per capita income is set at $ 4,122 to help reach $ 7,500 by 2020. Cabraal said the favourable structural change of the economy that began in 2009 was continuing and the change and results were not due to any accident but meticulous planning. “The consistent, bold and innovative policies as well as the efforts, commitment and support of all stakeholders helped maintain macroeconomic stability and high broad based and inclusive economic growth,” he said. “As the Central Bank we are proud and happy that we have been at the forefront of this remarkable transformation of the economy,” Cabraal added. Among significant achievements in 2014 listed by CB Chief were 7.8% economic growth, annual average inflation of 3.3%, unemployment at 4%, healthy external position with $ 8.2 billion reserves, greater stability in the exchange rate in spite of massive global market volatility, continued fiscal consolidation with the budget deficit at 5.2% and public debt at 75% of GDP, a high level of public investment of around 6% of GDP, continued stability in the financial system and rapid expansion in equity market with a 23% rise in the All Share Price Index. Cabraal said Lanka’s growth in 2014 face exceeded that of many emerging market economies including South Asian peers. The inflation target for 2015 will be 2-4. Monetary policy framework will be further strengthened to help support the stable growth rate of 8% over the medium-term while monetary policy decision-making will be improved by following a new framework which includes input from the Monetary Policy Committee (MPC) and the Monetary Policy Consultative Committee (MPCC). It will also be guided by the projected path for monetary aggregates with the Central Bank using a new reporting format for Monetary Statistics in 2015. Government debt is projected to decrease to 71% from 75% in 2015 to keep it on track for decreasing to 60% of the GDP by 2020, while the budget deficit will drop to 4.6% of GDP in 2015 and to 3% by 2020. Medium-term public debt management strategies will consolidate the public debt portfolio and refine interest rate structures and the average time to maturity will be lengthened while exchange control policies will be further relaxed. The debt securities market’s structure and safety will be improved as will the country’s sovereign rating.  Inflation is projected at 3% for 2015 and then steady at 4% till 2020 while commemorative coins will be issued to mark special events and a currency processing centre will be established by 2017. Women in business The strategy for 2015 also focuses on women in business with plans to encourage female schoolleavers to enter the ICT industry, 50% of Saubagya loans set aside for female entrepreneurs and assistance for women in business to move from microfinance to small- and medium-sized enterprises. It is expected that this focus will help drive growth and development, kicking the real GDP growth rate from the Central Bank’s figures of 7.8% in 2014 to 8% in 2015 where the Central Bank hopes it will stay stable till 2020 to prevent the country’s economy from growing too fast. The current account is expected to benefit from increases in trades and services with merchandise exports netting $ 22.1 billion, tourism earnings totalling $ 6 billion, transportation earnings totalling $ 4.7 billion, remittances growing at a moderate rate to reach $ 11 billion due to more skilled migration, ICT earnings totalling $ 2 billion and other services netting $ 0.9 billion by 2020 and allowing the current account to record a surplus by 2018. In the meantime, exports are expected to reduce the trade deficit while diversifying across sectors with an increase in products from the agricultural sector, aided by certain policies set up to help achieve the goods exports target such as establishing free ports, bonded areas and export zones and helping promote particular products. The Central Bank also expects banks to be the main source of investment and funding with direct foreign investment from other Asian countries increasing to $ 2.4 billion in 2015 and $ 4.6 billion in 2020, encouraging foreign reserves to cover short-term debt and liabilities by 100% by 2018. This will lead to the Central Bank focusing on reserve diversification and encouraging the fiscal consolidation process. In regional development, there will be an increase in disbursements by 66% compared to 2014 to provide microfinance options, SME help and create awareness building and training. Cabraal also outlined potential challenges from policy differences between major financial institutions to competitive depreciation of the currencies of other economies and advocated the creation of spaces and cushions within the economy to provide a buffer effect for events that may impact Sri Lanka’s economy. “If we build these cushions in, then we can withstand anything,” he said. “If our deficit is below 3% then if a crisis hits we can go up to 5% and prevent the economy suffering, if our inflation is low, we can then allow it to increase to absorb the impact of a crisis without damaging the economy.” Productivity due to the low unemployment rate and an ageing population present a domestic labour market challenge to be addressed. Other challenges include managing the balance between stability and growth and the overall demands of a population with increasing per capita incomes while avoiding the middle income trap which was the cornerstone of the Central Bank’s Roadmap for 2014. Cabraal stated that the ongoing development under the Five Hub concept and in tourism and other emerging sectors in the country would help drive growth in the future and help Sri Lanka bypass the middle income trap because diversification would enable more domestic and foreign investment. He pointed out that the Maritime Hub would make Sri Lanka a global logistics centre, as would the Aviation Hub and that significant progress had already been made with the Energy Hub plan with the Uma Oya Hydro Power Plant project already in the pipeline to provide 120 MW of energy in 2015. He also stated that Sri Lanka is becoming a global education centre with a target of 10 international universities set to be established and Colombo set to become the centre of the Commercial Hub by 2020 with Sri Lanka established as a global financial and business centre. By 2020, the financial sector will be aligned with the real economy with at least five banks having assets in excess of 1 trillion rupees, access to banking for all and banks specialised in regional development set up by 2016. In 2015, banks will be required to adopt the Basel III framework to enhance the quantity and quality of their capital and to strengthen their liquidity risk management.  The minimum capital requirement will increase on 1 January 2016 to Rs. 10 billion for local LCBs and Rs. 5 billion for LSBs and foreign LCBs. The EPF will be more diversified, the process will be made more efficient and paperless with remote online and mobile access to the system provided and e-accounts set up for all those involved. The Central Bank also plans to follow a new communication policy to make information more transparent and increase financial literacy including the publication of inflation projections, completing the second phase of the Economic History Museum, and providing training for journalists and other economic agents to help improve macro-economic stability.