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“These developments and trends have now established a new economic platform in Sri Lanka,” Cabraal said.
He said to benefit by these new trends, a new mindset and a new set of initiatives are now necessary in going forward. “A medium term macroeconomic framework is envisaged to take the economy beyond $ 4,000 per capita levels and the 5+1 hub strategy has been designed to meet these challenging medium terms targets, while avoiding the middle income trap,” he said.
However a key highlight of Cabraal’s presentation was a very objective listing of some important issues which Sri Lanka should address if the country were to sustain rapid growth.
They were enhancing the productivity and profitability of the strategically important agriculture sector; introducing improved insurance and credit guarantee schemes for the agriculture sector; promoting high value added manufacturing via innovation and research and development; further diversifying export products and markets; addressing the pressure on public utilities and infrastructure facilities as a result of increasing commercial activity; promoting the country’s brand identity as a stand-alone strategy as well as a viable outsourcing destination; positioning the tourism industry to meet the new and ambitious targets; ensuring the continued strength and dynamism of the financial sector; promoting new savings and pension products; continuing the efforts to reduce the cost of doing business and strengthening the contingency buffers to meet future global challenges.
“Developing and implementing policies to address these issues will improve overall productivity and resilience of the economy, and ensure sustained macro-economic stability,” emphasised Central Bank Chief Cabraal.
He began his presentation outlining the powers, purposes and responsibilities of the Central Bank as per the Monetary Law Act.
He said the Central Bank has to deliver economic and price stability and financial system stability with a view to encouraging and promoting the development of the productive resources of Sri Lanka. The bank has to administer, supervise and regulate the monetary, financial and payments system of Sri Lanka.
He said the Central Bank performs other key functions as well and listed the following: Manages the public debt: Rs. 6,806 billion; supervises and regulates the banks, finance companies, leasing companies and primary dealers: Rs. 6,873 billion; manages the Employees’ Provident Fund: Rs. 1,300 billion; manages the foreign reserves of the country: $ 7.5 billion (Rs. 980 billion); issues and manages currency: Rs. 340 billion; facilitates transactions amounting to Rs. 62,773 billion; facilitates regional development; carries out financial intelligence and manages and regulates foreign exchange.
Cabraal also recalled the words of John Exter, the first Governor of the Central Bank on the day of its establishment, and said they were still relevant. Exter had said: “It would be a mistake to expect startling results immediately from the establishment of the Central Bank. There is no financial wizardry by which the bank can suddenly pull out of a hat a higher standard of living for everybody. The bank’s contribution must necessarily be a long-run contribution. The Bank does not itself produce goods and services, but it should, by creating the right monetary conditions enable the country [to do so].”
The CB Chief said by maintaining single digit inflation over the past five years, the Central Bank had been able to give a new meaning to price stability. He said current inflation was below 4.5%, and inflation was expected to remain in mid-single digits for the rest of the year. Furthermore average inflation has been in double digits in the post liberalisation period whereas average inflation has been at single digit of 6% for the last 62 months.
“The ability to maintain inflation at single digits for over five years has been supported by both demand and supply side improvements,” Cabraal said.
On the demand side, prudent monetary management and continued fiscal consolidation have helped whilst on the supply side factors such as higher domestic food supply, improved infrastructure, greater connectivity and relatively stable exchange rate have been helpful.
“These have ensured favourable inflation expectations leading to subdued wage pressures and continued low inflation,” he added.
Cabraal said a new meaning to economic stability has also been given by recording an average annual economic growth of 7.5% in the post-conflict period. He emphasised that that the average growth 7.5% for past four years compared favourably as against average annual real GDP growth rate of 3.7% between 1951 and 1977 and 4.8% between 1978 and 2005. However between 2006 and 2013 the growth was 6.7%.
In that growth model, Cabraal said the relative importance of the Industry Sector has been increasing, while the Services sector has remained strong with GDP (US$) which was 24 billion in 2005 growing to 67 billion in 2013.
He also said the Per Capita GDP has risen significantly over the past few years with Per Capita GDP (US$) at $ 1,241 in 2005 and growing to $ 3,280 by 2013. Average Annual Increase in Per Capita GDP between 1978 and 2005 was 5.8% whereas it was 13.1% between 2006 and 2013.
The unemployment rate, which is a key factor in determining economic stability, has moderated and stabilised below 5% over the past four years with the rate by end 2013 being 4.4%.
Increased merchandise exports and imports over the past eight years reflect the country’s growing economic activity and increased openness with exports in 2013 amounting to $ 10.39 billion and imports valuing $ 18 billion. In 2005 exports were only $ 6.34 billion and imports were $ 8.86 billion.
The importance of services exports has also been rising while workers’ remittances have increased significantly with 2013 figure being $ 4.68 billion as opposed to $ 1.54 billion in 2005. Worker Remittances in 2013 grew to $ 6.4 billion from $ 1.96 billion in 2005.
The external current account has been improving while allowing greater trade openness with current account deficit being 3.9% of GDP.
Foreign Direct Investments have increased to over $ 1 billion annually Cabraal said, from negligible levels in the past. In 2013 the FDI inflows were $ 1.42 billion. Average FDI inflows between 1978 and 2005 were $ 101.1 million and it was $ 901.6 million between 2006 and 2013.
The CB Chief also said Balance of Payments was now in positive territory on a consistent basis with 2013 figure being $ 985.4 million.
Gross Official Reserves have reached unprecedented levels and months of imports have also recorded comfortable levels with 2013 figure been $ 7.5 billion or equivalent of 5 months of imports.
In recent times, the exchange rate has been relatively stable, thereby supporting economic and price stability. Average depreciation from 1976 to 2005 was 9.9% whereas from 2006 to 2013 it was 3.3%.
Banking sector
Focusing on the banking sector, the Governor said over the past few years, financial sector indicators have moved to benign territory, thereby portraying improved financial system stability.
In 2005 total assets of the banking sector were Rs. 3.15 trillion and by 2013 it has grown to Rs. 10.3 trillion. He also said the banking sector has made major strides since 2006. See table.
The CB Chief attributed key prudential policies adopted during 2006-2013 for the reinforcement of the resilience in the banking sector. Some of the policies were: Improved governance framework of banks; improved risk management framework and capital adequacy standards; enhanced consumer protection; improved financial literacy and training; encouraged healthy competition and improved efficiency; established a financial safety net in the form of a mandatory deposit insurance scheme; and improved disclosure requirements with a view of greater transparency.
“As a result, capital adequacy and liquidity ratios have also reached reasonably healthy levels,” Cabraal said.
However, he noted that Non Performing Loans (NPLs) have increased recently as gold backed advances were impacted by the decline in gold prices in the international market. Furthermore, the narrowing of interest spreads of banks also affected the profitability of the banking sector. “However, the banking sector is adequately capitalised to withstand any potential shocks,” Cabraal added.
Banking density has almost doubled since 2005 with number of bank outlets being 6,487 by 2013, ATMs being 2,538 and overall banking density being 16.8. In 2005 the numbers were 3,683, 901 and 7.6.
He also said significant developments have been effected in the NBFI sector during the past five years. Some of them were: Strengthened risk focused regulatory and supervisory system, and action based examination procedure with the introduction of integrated risk management systems; increased number of on-site examinations to at least once a year; used the online early warning system to identify the possible risks and inform NBFI in advance to take remedial action; computed the rating of lfcs on a quarterly basis to assess the associated risk; implemented a framework of macroprudential supervision to assess group risks; reviewed and followed up rehabilitation processes of weak companies; reviewed existing prudential directions and formulated new prudential directions and guidelines; reviewed adequacy and effectiveness of corporate governance; ceased the issue of new licences to NBFIs from 2013 onwards; took necessary steps to further strengthen the NBFI sector through a process of consolidation; and expedited the investigation process on unauthorised finance businesses.
“These prudential measures taken have helped to address the possible risks, and have led to reasonably satisfactory results in the NBFI sector,” Governor Cabraal said.
In the meantime, many improvements have taken place in the Payment and Settlement Systems.
Key developments include cheque imaging and truncating system was introduced in 2006 eliminating manual processing. As a result, the number of days for cheque clearing was reduced to one day. Regulatory framework relating to electronic retail payment systems was strengthened in 2009 in order to promote a level playing field for retail payments while mitigating risks.
Governor also said over the past few years, Sri Lanka has been steadily moving towards high level electronic payment systems. Key highlights were: Service providers of payment cards and mobile payment systems are now licensed; Sri Lanka Interbank Payment System (SLIPS) upgraded from off-line to on-line to provide same day settlement; Electronic money systems to reduce the usage of cash implemented (eZ cash and mCash); Stored value card system for transport sector implemented; Security of payment card infrastructure strengthened and Common ATM Switch (CAS) implemented.
Management of public debt
Cabraal also said public debt has been managed prudently. He said debt to GDP has improved to 78.3% in 2013 from 90.6% in 2005. Improved public debt management is reflected in numerous indicators. A key indicator was the average time to maturity increasing to 4.8 years by 2013 from 2.5 years in 2005.
Another was the steady expansion of the yield curve for Government Securities and composition of Government domestic debt being in favour of T- Bonds.
Additionally, the domestic Government securities market broadened while increasing the competition by opening it for foreigners in November 2006. Other highlights were benchmark T-bond series introduced and the yield curve developed in 2007; yield curve extended up to 10 years in 2009 and 30 years in 2013; first international sovereign bond issued in 2007. Since then, ISBs were issued in 2009, 2010, 2012 and 2014 while the borrowing costs have been progressively reduced; steps being taken to improve to “investment grade” by 2016; issuance of Sri Lanka Development Bonds streamlined; half-yearly Treasury bond calendar introduced; initiated strong standby funding arrangements; enhanced transparency of the debt management function since 2006 with an annual publication.
In the meantime, many Exchange Control Regulations have been relaxed in keeping with the strengthening of the External Account. Among them were: Introduced scheme for resident companies to borrow from non-residents under the External Commercial Borrowing Scheme (ECBS); introduced Foreign Exchange Earners’ Account (FEEA) by unifying several existing foreign currency accounts and permitted to extend accommodations in foreign currency from DBU to FEEA holders; introduced scheme for setting up places of business outside Sri Lanka and investments in overseas by residents through convenient ‘Outward Investment Account’ (OIA); introduced scheme for residents who provide goods and services to non residents to accept foreign currency, by abolishing the requirement of acceptance permits; introduced Securities Investment Account (SIA) amalgamating several types of accounts for investments in Sri Lanka by non-residents; and introduced scheme for non residents to invest in Rupee denominated debentures issued by Sri Lankan companies.
Management of EPF
Focusing on the Employees’ Provident Fund (EPF), the Governor said the EPF Investment Portfolio was managed prudently and expanded, resulting in the returns remaining attractive, even in the low interest rate environment.
Annual growth of the investment portfolio has been 15% between 2006 and 2013 whilst the asset base as at end 2013 was Rs. 1.3 trillion.
The EPF also gradually improved its service levels in order to provide a satisfactory service to its 2.4 m active members. Major milestones were: Re-registration project launched to assign unique identification numbers to all existing members in 2007, web-based member information service introduced by 2008, e-return system and a direct debit payment scheme for EPF payments introduced in 2009; real time registration process for all the new members to assign unique identification numbers implemented in 2010; the asset base of the Fund surpasses Rs. 1 trillion by 2011, e-returns and direct debit payments made mandatory for all the employers who have more than 50 employees by 2012 and image scanning project with the aim of near paperless environment, initiated in 2013. EPF’s active member base is 2.4 million and unique identification numbers assigned to 1.2 million members so far.
Cabraal also said regional development contributed to the achievement of inclusive and balanced growth, and its outreach increased by 37% from 2005 to 2013. Efforts focused on access to finance and awareness building and funding made available, affordable financing through PFIs.
He also said the Financial Intelligence Unit (FIU) has supported the financial integrity of the country. The FIU helps to prevent Money Laundering by enforcing the Prevention of Money Laundering Act No. 5 of 2005 and it implements the Convention on the Suppression of Terrorist Financing Act
The FIU also functions as a Member of the Egmont Group of Financial Intelligence Units since 2009 for the purpose of international cooperation and exchange of information. The FIU implements the provision of the United Nations Security Council Resolutions (UNSCRs) 1267 and 1373 in Sri Lanka with the Ministry of External Affairs and the Ministry of Defence and Urban Development.
Cabraal said the FIU is in the process of amending Financial Transactions Reporting Act No.6 of 2006 (FTRA) to be in line with international standards set by the Financial Action Task Force (FATF) since February 2012. In recognition of the FIU achievements during the past five years, the Asia Pacific Group on Money Laundering (APG) has chosen Sri Lanka to Co-chair the APG for two years commencing July 2016.
Recent developments in currency management were also shared by Central Bank Chief during his presentation at the 2013 Annual Report launch. He said currency in circulation by 2013 was Rs. 340 billion up from Rs. 132 billion in 2005.
Other recent developments included: Introduction of Rs. 2,000 note in 2006; installation of a new currency disintegrator machine to fast track destruction of notes unfit for circulation in 2007; Currency Museum opened in Anuradhapura in 2008; commemorative note on ushering of peace to Sri Lanka in 2009; Currency Museum opened in Matara in 2010; 11th currency note series introduced after 20 years, with standardised sizes of notes as well as a Rs. 5,000 note for the first time in 2011; introduction of Clean Note Policy in 2012 and in 2013 installation of advanced currency note processing system with briquetting system; cash counting machines with counterfeit detection facility made mandatory for financial institutions; introduction of Rs. 2 and Rs. 10 coins in stainless steel and New Economic History Museum opened in Central Point Building.
New mindset, new initiatives to meet new challenges
“These developments and trends have now established a new economic platform in Sri Lanka. To benefit by these new trends, a new mindset and a new set of initiatives are now necessary in going forward,” Governor Cabraal said.
He said the medium term macroeconomic framework is envisaged to take the economy beyond $ 4,000 per capita with projected GDP per capita in 2016 being $ 4,825, Debt to GDP ratio for 2016 being 65% and BOP surplus for 2016 being $ 3 billion.
He also said the 5+1 hub strategy has been designed to meet these challenging medium terms targets, while avoiding the Middle Income Trap. He went on to list some of the key initiatives under each of the five hubs – energy, maritime, aviation, knowledge, commercial and tourism.
However, in order to successfully realise these goals, many challenges remain in the country’s path towards prosperity.
“Therefore, appropriate policies need to be implemented in order to address these challenges,” said the Governor, adding some of these key challenges were briefly discussed in the Annual Report 2013.
He explained that enhancing the productivity and profitability of the strategically important Agriculture sector was one the key challenges. In this regard he said issues in agriculture remain. The Agriculture sector absorbs 29% of the labour force while contributing 11% of GDP and low productivity raises cost of production and reduces competitiveness.
The Governor emphasised that policies are required to modernise the sector through new technologies; link the sector to global value chains; enhance uniformity in land use in selected areas according to inherent strengths; encourage better farm management practices; develop domestic input industries and develop product based agricultural export industries.
Another challenge was due to the lack of insurance and credit guarantee schemes, access to bank credit is limited therefore agriculture needs improved insurance and credit guarantee schemes. In this regard policies are required to promote traditional and non-traditional insurance schemes; develop financial risk transfer products such as weather index based insurance products; develop credit guarantee funds and encourage farmers to make informed decisions with regard to the choice of crop.
Promoting high value added manufacturing via innovation and Research & Development (R&D) was another challenges listed by the CB Chief. He said with rising incomes, competitiveness of labour intensive industries will reduce in the future. This requires policies to promote knowledge based technology incentive industries; diversify the industrial base into high value added products; train and re-train the labour force in required skills; promote education in engineering and technology related subjects; promote practical hands-on-training opportunities and set up industrial clusters to boost technology based industries.
The need to further diversifying export products and markets was another key challenge. The reason being exports structure was still based on light manufacturing and commodities. The Governor said policies are required to continue to promote diversification through the five hubs strategy; provide incentives to local companies to develop global brands; improve utilisation of bilateral and multilateral trade arrangements; conduct awareness programs to educate exporters and seek geographical diversification towards new and emerging markets.
Addressing the pressure on public utilities and infrastructure facilities as a result of increasing commercial activity was another challenge. He said developing the country as an internationally competitive commercial hub requires major improvements to public utilities and continuous improvement of infrastructure was important. Towards this end, policies are required to develop capacity of the major public utilities and infrastructure facilities to meet rising demand; improve the distribution and transmission networks of public utilities and reduce leakages and improve metering systems of public utilities are important. Promoting the country’s brand identity as a stand-alone strategy as well as a viable outsourcing destination was also listed as a challenge. Cabraal explained that Sri Lanka has to be re-branded in line with its new status as a peaceful and emerging economy. Furthermore effective Brand identity is essential for the development of the IT/BPO/KPO services.
Policies suggested by Central Bank in this regard include implement a coordinated strategy of involving both the government agencies and the private sector to re-brand the country; ensure the availability of skilled manpower; create awareness about job opportunities in related sectors; continue collaboration between universities and the private sector to establish required degree programs and conduct roadshows to position the country as an emerging outsourcing destination.
The importance of positioning the tourism industry to meet the new and ambitious targets was also emphasised. Cabraal said a clear, market driven strategy is required to facilitate the target of 2.5 million arrivals by 2016. In this regard he said policies are required to strengthen training by establishing new training schools; encourage staff to obtain higher certification and multi-skills; continue collaboration between the government and the private sector and continue to conduct promotional campaigns in untapped potential markets.
Ensuring the continued strength and dynamism of the financial sector was also listed as another challenge. Cabraal said transaction and information costs need to be reduced, and the entire financial sector has to be boosted on a continuous basis. He said policies are needed to promote further financial deepening; continue consolidation efforts to generate economies of scale; further diversify financial services to attract a larger pool of savings, both locally and from overseas; promote global competitiveness and promote non-inflationary sources of financing such as private equity.
He also emphasised the need for promoting new savings and pension products. CB Chief noted that low interest rate environment is likely to continue in the light of low inflation. Another challenge was the ageing population. Therefore a reasonable standard of living for the aged needs to be ensured, he pointed out. Towards addressing these, the Central Bank has suggested that the need to promote alternative saving and pension products such as annuities, superannuation schemes and pension plans and promote health and life insurance.
The Central Bank is also advocating continuity in the efforts to reduce the cost of doing business. A key reason for this being Increasing domestic and foreign private long term investments require further improvements to the doing business environment. Policies recommended by Central Bank include engage international agencies with regard to improving doing business ranking; educate potential investors in relation to the doing business environment; improve efficiency of the public sector institutions in service provision; and continue labour market and legal reforms. Strengthening the contingency buffers to meet future global challenges was also another challenge according to Cabraal since global economic conditions continue to be challenging. The bank is advocating policies to strengthen fiscal, monetary and external sector buffers to mitigate global risks; maximise benefits of increasing world trade; and reduce vulnerabilities arising from adverse capital flows.
“Developing and implementing policies to address these issues will improve overall productivity and resilience of the economy, and ensure sustained macro-economic stability,” Central Bank Chief Cabraal said, concluding his presentation at the launch of 2013 Annual Report.
Pix by Upul Abayasekara
