CB Chief targets high and low

The Central Bank of Sri Lanka, launching its third annual road map for 2011 themed ‘Repositioning Sri Lanka for the New Era,’ announced that managing inflation below 5% and targeting 8.5% economic growth will be the main challenges that lie ahead in 2011.

“The year 2011 poses a formidable challenge to the Central Bank to ensure that the economy of our country is ready to serve the needs of the people and take the country towards those ambitious goals while maintaining economic, price and financial system stability,” Governor of the Central Bank Ajith Nivard Cabraal said.

He noted that the main challenge was to maintain stability and adopt a culture of high productivity.

The Governor, presenting the Road Map for 2011, said that during the year, the country’s investments were expected to reach 30% of GDP in the medium term and domestic savings were expected to increase to 22%.

He also said that more foreign resources were likely to be available via inward remittances, foreign direct investments and foreign financing inflows to both the Government and the private sectors.

Presenting the policy on the gradual structural adjustments that are expected to take place in the sector, the bank announced that some of the critical issues being addressed were labour productivity and land availability issues.

This also includes Government fiscal consolidation, changing lifestyles and spending patterns with enhanced incomes and greater regional and global integration with ICT empowerment.

Cabraal also pointed out that during 2011 the country’s exports and imports were expected to maintain upward momentum, where earnings from services – particularly sectors such as tourism, ports, ICT and external and internal trade – were expected to record a significant increase.

Remittances are expected to increase further from the current level of 8% of GDP in the coming year, higher FDI inflows to reach around 2% of GDP due to the more conducive environment, balance of payment surplus to be around 1.5% of GDP and international reserves to be at a comfortable level of around five to six months of imports. The exchange rate is to remain largely stable with a tendency to appreciate.

Commenting on the level of foreign inflows expected during the year, the CBSL Chief said it was

projected to reach US$1.7 billion during 2011 given the improved investment climate, relaxation of exchange controls with focused fiscal incentives and facilitation of the country’s long term inflows.

The FDI and inflows to the private sector are expected to reach US$ 1.5 billion and portfolio investments expected to increase during the year.

On the fiscal front, the CBSL in its policies for 2011 said that the overall budget deficit was expected to decline further, to 6.8% of GDP and to 5% of GDP in the medium term. Government revenue is also expected to increase to 15.6% of GDP and expenditure and net lending is expected to decrease to 22.4% of GDP.

The bank also said that during the year the Government’s recurrent expenditure was projected to decrease to 16.1% of GDP, with public investments expected to be maintained at 6.5%.

Commenting on the main focus in 2011, Cabraal said that developing efficiency and productivity would be achieved by focussing on the financial sector, Small and Medium Enterprises (SMEs), telecommunications, tourism, value added exports and research development.

The bank also pointed out that the recent tax reforms should generate ‘feel good’ factors and revenue improvements in the areas of simplified tax system, lowered tax rates, a broadened tax base and improved tax administration.

The Central Bank noted that it would strive to keep the GDP deflator at 6% and Balance of Payments (BOP) surplus in 2011 to US$ 350 million, keeping net credit to the Government at about Rs. 42 billion.  During the year credit to the private sector is expected to expand by 16% and broad money and reserve money growth to be around 14.5%.

Highlighting the key performances of the economy, the Central Bank Governor said 2010 was an important year where the country’s economy was concerned due to the fact that it marked a full year since the conclusion of the war.

“Unlike other countries that went through a post-war economic recovery, Sri Lanka performed well. The main reason was that even during the war the Government was involved in investing in the development of infrastructure projects and soon after the war these projects started to beam positively for better performance,” he said.

In his presentation on the economic performance in 2010, the Governor pointed out that last year alone some countries continued to experience the collapse of banks and other financial institutions due to the global economic downturn. But in the case of Sri Lanka, none of the financial institutions fell and this was mainly due to the tight vigilance and constant supervision carried out by the Central Bank.

Cabraal also said that during 2010 the country’s economy showed strong growth momentum, where peace dividends were clearly observed, leading all sectors to perform well due to improved business confidence.

Presenting performances of key sectors, the Central Bank said that the agriculture sector was expected to grow by 6.3% and the industry sector was expected to show a growth of 8.7% where the main share was gained due to the expansion in hydropower generation, which represented 40% to 50% growth.

The Central Bank also predicted that the tourism sector was expected to show a growth of 7.9% with hotels and restaurants showcasing 36% growth. During the year tourist arrivals increased by 46% and transport and communication contributed 11.9% growth.

According to CBSL, in 2010 the unemployment level in the third quarter showed 5.2% and an improvement in overall labour productivity was seen.

During the year the external outlook also improved substantially, with the country graduating to Middle Income Emerging Market status.

Foreign capital inflows continued to be sufficient, with the third international sovereign bond oversubscribed by more than six times.

The BOP also experienced a surplus by US$ 900 million and gross official reserves also reached US$ $ 6.6 billion to meet six months of imports.

During the year the rupee appreciated gradually as the bank absorbed foreign currency to avoid excessive rupee appreciation.

The export sector improved by 13.3%, mainly due to the gradual recovery of demand and the improved investment environment, while the removal of the marine war risk premium on reinsurance and growth in industrial exports also contributed.

In the import sector, the bank projected that it would settle at 34.9% for 2010. The rebound tourism sector also performed strongly, recording an increase of 47% in tourist arrivals from January to November; earnings in the sector increased by 61.4%, to US$ 501 million.

During the year remittances increased by 24%, which is considered the highest-ever increase post- tsunami, where inflows recorded 23%. Worker remittances were expected to reach the US$ 4.1 billion mark at end 2010.

Central Bank's Balance Sheet tops trillion rupees

Central Bank Governor Nivard Cabraal yesterday took pride in announcing that his institution’s Balance Sheet has reached the trillion rupee value mark.

This he highlighted in support of emphasising how 2010 has been a “significant year” for the bank.

During the course of his presentation of the CB’s Roadmap for 2011 and beyond, Governor Cabraal also said public debt that the Central Bank manages has exceeded Rs. 4 trillion and the EPF’s base has reached Rs. 900 billion. Furthermore foreign reserves, which the CB manages, is now over Rs. 700 billion.