A rosy update

CB gives appraisal on economy, admits 2012 start under pressure but insists new policies have smoothed road ahead

 

By Uditha Jayasinghe

Regardless of emerging pressures, the Central Bank is confident that Sri Lanka will be able to weather economic storms in 2012, a top official said yesterday, insisting that proactive policy measures would bear fruit in the second quarter of the year.

A visibly-relaxed Central Bank Governor Ajith Nivard Cabraal gestures to the media while Deputy Governor B. Silva looks on – Pic by Upul Abayasekera

Central Bank Governor Ajith Nivard Cabraal acknowledged that 2012 started slow with a higher trade deficit driven by an 86% increase in motor vehicle imports as well as increased gold, oil and investment goods, but that the right policy measures were now in place to keep the economy on track.

“At the start of 2012 the higher current account deficit was 7.8% of GDP while the Balance of Payment deficit was US$ 1 billion. The exchange rate was under pressure and credit expansion was at 35%. However, these issues are being ironed out now,” he said.

Despite the new taxes to reduce trade deficit and policies to bolster reserves, Cabraal admitted that all three aspects of the economy would show a downturn with agriculture growing by 6.9%, industry 8.4% and services 6.7%. By contrast in 2011 industry grew by 10.1% and services by 8.6%.

Inflation is also expected to hit a high of 7% as an annual average despite Sri Lanka keeping numbers at single digit levels for a record 39 months. Exports are projected to end at US$ 11.7 billion, which is slightly below the earlier target of US$ 12 billion. Imports, which were at US$20.3 billion, is estimated to end the year at US$ 20.9 billion on new taxes that hopes to reduce vehicle imports by as much as US$ 1 billion.

On the positive side Central Bank sees remittances hitting an all-time high of US$ 6.5 billion, earnings from tourism US$ 1.2 billion and Foreign Direct Investment (FDI) nearly doubling to US$ 2 billion.

Government inflows are expected to moderate from US$ 2.2 billion to US$ 2.1 billion while Tier II capital of banks is to hit US$ 1 billion – quite a jump considering it was only US$ 0.1 billion last year.

Debt as a percentage of GDP is to remain at 78% while public investment as a percentage of GDP will increase from 6% to 6.6%.

“Fifteen projects worth US$ 1 billion have been identified by the government as bringing in US$ 2 billion. In addition US$ 500 million from the Colombo South Harbour as well as three mixed development projects from a Malaysian investor, Colombo-Kandy Expressway, Sampur Coal Power Plant and petrol refinery in Trincomalee will add to this,” he assured.

Stock market flows are projected to be US$ 500 million while inflows up to 2 May have been US$ 172 million, which is the same amount as net outflows in 2011, Cabraal pointed out. Inflows from Commercial Banks including Tier II capital is US$ 880 million this year and expected to surpass the annual target to US$ 1 billion to hit US$ 1.4 billion by December.

“Aside from this we expect US$ 500 million from major corporate capital from international markets, US$ 500 million from long term currency swaps and US$ 500 million from treasury bills and bonds as well as US$ 1 billion from sovereign bond.” However, the Government does have US$ 1.4 billion in loan repayments this year.

Nonetheless, insisting that this showed a positive outlook for Sri Lanka, Cabraal echoed Treasury Secretary Dr. P.B. Jayasundera’s prediction that the rupee should appreciate against the dollar.