Business Times

CB has key role in economic development - Basil

By Natasha Gunaratne

The Central Bank (CB) has a large responsibility and role to play in developing Sri Lanka’s economy after decades of war and internal unrest. According to the newly appointed Minister of Economic Development Basil Rajapaksa who spoke at a presentation on the economy and the financial system at the CB this week, all stakeholders must work together to achieve economic growth.

In the presentation, the CB said infrastructure development is essential to accelerating economy growth and enhancing the pace of socio-economic development. Significant changes have to be made to state institutions such as the Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC), Sri Lanka Railways, Sri Lanka Transportation Board (SLTP) and the National Water Supply & Drainage Board (NWSDB) in order to increase operational efficiency. The government is also encouraging public private partnerships (PPP’s) as state funded infrastructure development will only increase the budget deficit and debt.

The CB said the government is also planning on addressing problems surrounding administrative procedures, procurement delays and land acquisition. The government will also establish a strong development planning and monitoring process.

History shows that the public debt stock has doubled every five years due to a persistently high budget deficit and sharp depreciation of the Sri Lanka rupee against major foreign currencies. The total outstanding debt in 2009 increased to Rs.4,161 billion from Rs.1,219 billion in 2000. In 2009, the Rupee/Japanese Yen rate was Rs.1.23, up from Rs.0.03 in 1977. Similarly, the Rupee/US Dollar rate was Rs.114.94 in 2009, having increased from Rs.8.87 in 1977. The Rupee/Pound rate was Rs.179.9 last year, an increase from Rs.15.49 in 1977.

The CB explained that the out of the total outstanding debt of Rs.4,161 billion in 2009, Rs.1,760 billion was from foreign debt, 72% of which is concessional loans. If the Sri Lanka rupee depreciates by 5% against major currencies, the foreign currency ebt will be Rs.9 billion.

The CB also said Sri Lanka’s GDP growth is projected at 6.5% for 2010, increasing to 7.5% GDP growth in 2011 and 2012. In comparison, India’s GDP growth for 2010, 2011 and 2012 is forecasted at 8.8%, 8.4% and 8.1% respectively while the GDP growth in the United States is estimated to be 3.1%, 2.6% and 2.4% over 2010, 2011 and 2012 respectively. Furthermore, GDP growth for 2010, 2011 and 2012 in Europe is projected to be 1%, 1.5% and 1.7%.

The CB noted that export earnings in February 2010 grew by 20% to $629 million, partly due to higher earnings from the agriculture sector. Growth in export earnings is expected to exceed 17.5% in 2010. Expenditure on imports also increased by 61% in February 2010 with further increases expected by end 2010. The tourism sector is also picking up according to the CB. The number of tourist arrivals in 2010 is expected to pass the record level of arrivals of 566,202 in 2004.

The CB further noted that the public has highlighted several issues such as high interest rates on lending, the inability to pay loans and low income on deposits. Other issues include low lending to the private sector and low levels of financial literacy.

The CB said it will work to persuade banks to lower interest rates, introduce measures to expand credit in line with doubling of per capita GDP and expand the banking network outside of the Western province. The CB will also work towards increasing lending to the agricultural sector and develop a deposit insurance scheme to act as a buffer and safety net.

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