Business Times

Central Bank predicts 8-9% economic growth for Sri Lanka

By Bandula Sirimanna

Sri Lanka’s economic growth is expected to be 8-9% in the next few years with all sectors contributing to the growth while remittances from Sri Lankan migrant workers is expected to exceed $4.1 billion in 2010, up by 24% in the previous year, according to official figures released this week.

These statistics were released when Central Bank (CB) Governor Ajith Nivard Cabraal presented the bank’s annual “Road Map Monetary and Financial Sector Policies for 2011 and Beyond” to an audience comprising the media, businessmen and bankers at the CB auditorium. Sri Lanka has gained the middle income ‘emerging market’ country status with its Gross Domestic Product reaching to about $50 billion from just $ 24 billion in 2005, he said.

He added that inflows to the services account and workers’ remittances contained the current account deficit. Current account deficit of 3.8% of GDP was expected for 2010 and workers’ remittances had been increased by 24%, the highest ever growth, to $4.1 billion.

“Sri Lanka plans to build up foreign exchange reserves to over $10 billion by 2013," he said. Foreign exchange reserves hit a record 6.6 billion dollars in 2010 owing to inflows from lending agencies, foreign direct investments, remittances and increased export earnings, he added.

Export earnings are expected to grow at an annual rate of 13.3% and investments to reach above 30% of GDP in the medium term, he revealed. Long term inflows to the government are projected to be around $1.7 billion in 2011 and FDIs and inflows to the private sector expected to reach $1.5 billion, he said.
Despite the withdrawal of the GSP+ scheme since August 2010 and the sluggish recovery in external demand, exports to all major regions had been increased, including garments exports FDI is estimated to be around $500 million in 2010, a level lower than expected, reflecting declining capital flows globally.

The Central Bank will also implement an effective and robust supervisory mechanism with risk management given top priority. Under the Central Bank road map measures, guidelines are to be issued to banks on Integrated Risk Management to ensure availability of adequate capital within banks and other financial institutions to meet unforeseen risks. The measures will require all Registered Finance Companies to list on the CSE by June 2011.

The Central Bank plans to increase collaboration with foreign financial institutions in 2011. "Since there is an increasing presence of international banks in Sri Lanka and local bank branches outside Sri Lanka, Memorandum of Understanding (MOU) with home regulators of foreign banks and host regulators of local banks in the Asian region, will be developed by end 2012," Mr. Cabraal said.

The Central Bank will develop the corporate bond market further to create a deeper, increasingly integrated, and competitive financial market. It will further strengthen the macroeconomic factors within the Bank's control and commit to improve the economic and financial environment. Annual average inflation reached 5.9% in December 2010, up from a 25 year low of end-year annual average inflation of 3.4% in 2009. Year-on-year inflation in December 2010 was 6.9%.

He said the Colombo Consumer Price Index (CCPI) will be revised based on a more representative sample gathered in 2006/07 to reflect recent changes in consumption patterns.
"This will be a more realistic index to assess current inflationary pressures as well as inflationary outlook and there is a need to rebase the CCPI every five years as consumption patterns change rapidly," Mr. Cabraal said. The 12th Series of Sri Lankan Currency will be launched in February 2011. The new series will be printed with a theme of development and prosperity and feature enhanced security measures, he said.

Changes in inflation index not political -CB governor
Central Bank (CB) Governor Ajith Nivard Cabraal on Thursday rejected assertions by some (unnamed) economic analysts that changes envisaged in the Colombo Consumers Price Index was based on politics.

“It’s not true that these changes are based on politics according to some analysts. There’s nothing political (in a rational decision). For example if more people in 2011 are buying ice cream; more are buying shoes; and more are buying slippers, industry needs to have this information rather that what the (consumption) trends were 3-4 years ago,” he said, at a breakfast meeting organised by HSBC to discuss the CB’s roadmap for 2011.

He said the changes to the CCPI is aimed at reflecting recent changes in consumption patterns.
The Governor also assured Sri Lanka’s business community that there won’t be any major exchange rate fluctuations this year.

Responding to a question from HSBC Nick Nicolaou, Chief Executive Officer, HSBC Sri Lanka and Maldives on whether the CB has exchange rate targets for 2011, Mr Cabraal said; “ No we don’t have any targets.”

He then explained the exchange rate policy saying the CB will continue to follow a strategy where it decisions are based in market trends. “We will not allow it to be volatile but ensure that companies are able to make exchange rate decisions without any uncertainty in the market.” The US dollar, the most traded currency vis-a-vis the Sri Lanka rupee, is around Rs 110 per (1) dollar currently compared to Rs 113, a year ago in January 2010.

In a lighter vein, the Governor complimented his team at the Central Bank who ‘burnt the midnight oil’ to produce a comprehensive roadmap --- while everyone else (in Sri Lanka) was partying on New Year’s eve. “My thanks to them,” he said, adding also that the CB’s 1,400-strong employees worked hard last year.

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