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2

2014 is the eighth consecutive year


that the Central Bank announces
its plans and policy direction
for the forthcoming period
to all stakeholders.
Since the first Road Map in 2007,
the Central Bank has been at the
forefront of a
remarkable transformation of
the Sri Lankan economy

This transformation did not come easy, and was


achieved amidst skepticism & brickbats of some,
and accolades from others

The Central Bank is thankful to many, for the


continued support
The President and Minister of Finance, His Excellency Mahinda Rajapaksa for continuing to
provide us admirable leadership and direction
Senior Minister of International Monetary Cooperation and Deputy Minister of Finance and
Planning, Hon. Dr. Sarath Amunugama for his unceasing guidance and assistance
Secretary to the Treasury, Dr. P. B. Jayasundera, for his outstanding commitment towards the
maintenance of sound macro fundamentals in the economy
Members of the Monetary Board, Mrs. Mano Ramanathan, Mr. Nimal Welgama and
Mr. Neil Umagiliya for their unstinted support and prudent advice
Deputy Governors, Dr. Nandalal Weerasinghe, Mr. Ananda Silva and Mrs. Chandra
Premaratne (who retired from the Bank in 2013)
Assistant Governors, Heads of Departments, particularly the Director of Economic Research,
Mrs. Swarna Gunaratne and the staff of the Economic Research Department for todays
effort, as well as all staff of the Central Bank who have worked with utmost commitment,
enthusiasm and proficiency to fulfill the key objectives of the Central Bank
The Consultative Committees on Monetary Policy, Financial System Stability and all other
committees for the prudent and timely policy counsel

The year 2013* was a year of many notable


achievements, having successfully responded to
the economic stabilisation package that was
implemented in 2012
Economic growth rebounded (7.2% expected in 2013)
Level of investment maintained at over 30% of GDP
Headline inflation declined to 4.7%
(59 months in single digits)
Core inflation at its lowest levels
(2.1% in December 2013)
Real Sector
Developments
Unemployment remained at low
and
levels (4.5% in H1-2013)

Inflation
Budget Deficit declined to 5.8%
of GDP in 2013 from 6.4% in
2012
Debt to GDP Ratio declined to
78.0% in 2013 from 79.1% in
2012

Exports expected to grow by 6.9% with monthly export


earnings exceeding US$ 1bn since October 2013
Trade Deficit estimated to contract by 8.7%
Tourist arrivals at record levels
Remittances estimated to reach US$ 6.7 bn
FDI surpassed US$ 1 bn for the third
consecutive year
BOP recorded a surplus of US$ 700 mn
External
Foreign Reserves at healthy levels:
Sector
US$ 7.1 bn (4.5 months of imports)
The rupee remained stable amidst
global market volatility

2013
Fiscal
Sector

Policy rates reduced by 100 bps


Market interest rates declined
Monetary
by 61-452 bps
and
Private sector credit picked up
Financial
Credit to public corporations
Sector
moderated sharply
Stability of the Banking sector preserved
throughout the year supported by strong
capitalisation and liquidity conditions

*Figures for 2013 in this presentation are provisional

These results were achieved, even while global


economic conditions continued to remain weak

Source: IMF, WEO Database - Oct 2013

Mixed signals were observed in advanced


economies, and weaker prospects were noted in
emerging economies

US economy was growing at a moderate


pace and the Fed announced gradual
tapering of QE
Some recovery in economic activity was
visible in the Euro area while risk of a
contraction declined
Japans growth picked up in H1 2013,
but slowed in Q3
EMEs and developing country growth
rates were down about 3% since 2010,
with significant slowdowns in Brazil,
Source: IMF, WEO Database - Oct 2013
China, India and Russia
However, EMEs continued to account for the bulk of global growth
Net capital flows to EMEs have been negative in recent months, both in terms
of bonds and equity

The effect of global uncertainties was experienced


closer home in South Asia as well
South Asia faced greater
economic turbulence while
regional inflation remained
highest amongst developing
economies
Indias growth forecasts were
downgraded by IMF and WB,
as a result of:
High headline inflation
Heavy capital outflows

Sharp depreciation of the Indian


rupee

Source: IMF, WEO Database - Oct 2013

However, amidst the challenging global environment,


Sri Lankas economy remained resilient & on track
GDP growth to be around 7.2% in 2013
The economy returned to the high growth trajectory, with the vigilant and prudent
policies of the Central Bank and the Government

Notable growth of over 7% was observed in all key sectors of the economy in Q32013; a first since Q1-2006

Average growth from 2006-2013 (8 years) was 6.7%, and from 2010-2013 (4 years) was
7.5%, showing evidence of a sustainable growth model

The Agriculture sector strengthened with high


growth in paddy & fisheries sectors
Agriculture sector is expected to
grow by 4.1% in 2013
The sector expanded by 7.0% in Q32013
- Paddy production recorded a
growth of 56.5% in Q3 due to the
increased harvest in the Yala season
- Fish production increased by 9.9%
in Q3
- However, tea, rubber and coconut
production declined due to adverse
weather conditions

10

The Industry sector recorded the highest sectoral


growth for the fifth consecutive year
Industry sector is expected to grow by 9.2% in 2013
All sub-sectors of the Industry sector
performed well in Q3-2013

Sector
Industry

Q3 Growth 2013
Y-o-Y %
8.1

Mining and Quarrying

12.5

Manufacturing

6.0

Factory Industry

6.8

Electricity, Gas and Water

11.2

Construction

10.0
* Q4 2013 is an estimate

Favorable macroeconomic conditions, increased economic activities, expansion of


infrastructure development and gradual recovery of major trading partner economies
supported the growth momentum of the Industry sector

11

12

The Services sector gathered momentum in 2013


The Services sector is expected to grow by 6.7% in 2013
The sector expanded by 7.9% in
Q3-2013
Noteworthy improvements in all
sub-sectors in the Services sector in
Q3-2013
Wholesale and Retail Trade (7.6%)
Hotels and Restaurants (13.6%)
Transport and Communication
(11.8%)
Banking, Insurance and Real
estate, etc. (6.7%)

Growth was broad based & inclusive, with higher


contributions from lagging provinces
The dominance of the Western Province is diminishing and the
contribution by other provinces to GDP is on the rise

Note: The size of the bubble represents the GDP of the Province

13

Unemployment & poverty continued to remain


low
Employment generation continued to increase with expanding economic
activities
Increased employment was seen in
all key sectors of the economy and all
employment categories
Due to the higher labour force
participation of females, labour force
participation rate (LFPR) increased
significantly to 54.2%
However, unemployment rate rose to
4.5% in the H1-2013 mainly due to
the entry of new job seekers to the
labour market

14

15

Labour productivity also continued to rise


Overall productivity has
improved over the past
few years
This improvement is
seen in all key sectors of
the economy
High productivity would
help to achieve high and
balanced economic
growth and to contain
inflationary pressures

Source: APO productivity Database 2013

Prosperity, as measured by the Global Prosperity


Index, as well as the HDI improved

16

Sri Lanka was ranked 60th in the world in the Global Prosperity Index:
Highest ranked in South Asia

Sri Lanka was ranked 92nd in the


world in the Human Development
Index:
Sri Lanka is the highest ranked country
in South Asia
Sri Lanka has advanced to the high
human development category from the
medium human development category
Source: UNDP

In the External sector, earnings from merchandise


exports recovered strongly from the slowdown
seen in 2012
Earnings from exports increased
steadily from June 2013
Gradual recovery in main export
destinations
Favourable prices and high
agricultural volume exports

Earnings from exports grew by


5.6% to US$ 9,400 mn during the
period Jan-Nov 2013
Industrial exports grew by 4.1%
Agricultural exports grew by 10.6%

Export earnings are estimated to


record around US$ 10,452 mn
(an increase of 6.9%) in 2013

17

Key strategic interventions resulted in expenditure


on imports declining during the year

Expenditure on imports declined


Policy measures adopted in 2012 to
rationalise imports had the desired
effect
Lower international commodity prices
Favourable weather conditions

Cumulative expenditure on
imports declined by 2.5% to
US$ 17,231 mn during the first 11
months of 2013
Consumer goods increased by 4.5%
Intermediate goods declined by 2.8%
Investment goods declined by 5.9%

Import expenditure is estimated


to record around US$ 19,046 mn
(a decline of 0.7%) in 2013

18

Reflecting these developments, the trade balance


contracted to targeted levels

19

The cumulative deficit in the


trade account declined by
10.7% to US$ 7,831 mn during
the first 11 months of 2013
from the corresponding period
of 2012

The trade deficit is expected to


contract to US$ 8,594 mn
(12.8% of GDP) in 2013

Projection for Dec. 2013

20

Tourist arrivals and earnings continued to increase


2013 (Est)

Tourist arrivals increased by 15% to 1,016,228


Earnings from tourism increased by 24% to US$ 1,120 mn
Tourist arrivals from non traditional markets such as China and
Russia increased significantly
Western Europe continued to remain the foremost source of
tourists

Earnings from tourism

2012

During the period Jan-Nov 2013,

1.4 US$ bn
1,170,000 arrivals

1.0 US$ bn
1,005,605 arrivals

Computer and Information services inflows


bolstered the trade in services
Computer and Information
Services are emerging as a
sector with high growth
potential

2013 (Est)

471 US$ mn

2012

Presently, over 300 IT, BPO and


KPO companies employ more
than 60,000 Sri Lankans

436 US$ mn

(Excluding KPO Services)

21

22

2013 (Est)

418 US$ mn

2012

Earnings from transportation services also increased


significantly in 2013

254 US$ mn

Workers remittances maintained its high growth


momentum...

23

Main reasons for the increase:


Increased labour migration under
professional and skilled
categories
Improved awareness on the
benefits of remitting money
through formal channels

Increase of migrant workers of the skilled and


professional category by 28%

2013 (Est)

Departures for foreign employment during the first


nine months of 2013 stood at 221,760, which is an
increase of 5.6%

6.7 US$ bn

2012

Introduction of new web based


money transferring systems to
facilitate remitting money swiftly
to Sri Lanka

6.0 US$ bn

As a result of these developments, the Current


Account Deficit reduced to the projected levels

The current account deficit is expected to reduce to US$ 2.6 bn or


3.9% of GDP in 2013, down from 6.6% in 2012

24

In addition, substantial foreign inflows to the


capital and financial account were observed

FDI inflows: (Jan-Sep 2013): US$ 870 mn (during Jan-Sep 2012, FDI inflows
were US$ 615 mn)

Net portfolio investment inflows: (Jan-Dec 2013): US$ 270 mn

Primary Market: US$ 91 mn & Secondary Market: US$ 179 mn

Project loans to the Government: US$ 1.5 bn (Jan-Oct 2013)

Net inflows from sale of Government securities:


Treasury Bills and Treasury Bonds (Jan-Dec 2013): US$ 493 mn

Receipt of Government Grants: US$ 24 mn (Jan-Oct 2013)

Foreign Borrowings by Banks: US$ 1,548 mn (Jan-Oct 2013)

Corporate Sector inflows: US$ 650 mn (Jan-Sep 2013)

25

These positive external sector developments


resulted in further improvements in the BOP in
2013
The BOP improved
from a surplus of
US$ 151 mn in 2012,
to a surplus of over
US$ 700 mn in 2013

26

In that background, the Sri Lankan Rupee was able to face 27


the global market turmoil effectively, with minimal Central
The Rupee appreciated until the first week of June 2013
Bank intervention
Thereafter, over the next 3 months, with the expectation of a
possible exit of foreign investors from Government securities
market with the likely tapering of the US bond buying
programme, the rupee depreciated by 5.0%

Since early September, the Rupee has gained value against the
US dollar by about 1.6%

In the latest AREAER, the IMF has


reclassified Sri Lankas exchange rate
regime as floating w.e.f. 9th February 2012

Overall, by end 2013, the Rupee depreciated by 2.7% against


the US dollar, 4.7% against the Sterling Pound, and 6.8%
against the Euro. The Rupee appreciated by 10.2% against the
Indian Rupee, 13.3% against the Australian dollar and 18.8%
against the Japanese yen

Throughout the year, gross official reserves were


maintained at healthy levels
Substantial inflows of foreign exchange from different sources (private corporates,
banks) helped swell Sri Lankas reserves to around US$ 7.1 bn by end 2013
The level of reserves was
equivalent to 4.5 months of
imports compared to the
internationally accepted norm
of 3 months
Based on the new risk
weighted reserve adequacy
metrics proposed by IMF
(where risk factors are
assigned specific weights), Sri
Lankas reserves were well
above the 100% benchmark

The healthy reserve position was supported by the inflow of funds from foreign
sources, which have been continuously encouraged in order to bridge the savingsinvestment gap

28

The International reserves were also managed


efficiently amidst global market volatility...

29

The Central Bank has been able to earn positive returns through
effective International reserve management, in spite of severe
uncertainties in global financial markets
Year

Absolute
Return
(US$ mn)

CBSL Return
(%)

2 Year US Govt
Treasuries Average
Return (%)

2010

341.0

6.2

0.7

2011

430.0

6.6

0.4

2012

222.7

4.0

0.3

2013

197.0

3.3

0.3

Inflation continued on a moderate path with supply


improvements and prudent monetary management
30

Inflation declined during the year due to:

The lagged effect of the effective monetary policy stance


Fiscal discipline due to contraction of fiscal deficit
Absence of significant supply-side shocks domestically
Moderation of global commodity prices

Headline Inflation (End 2013)

Core Inflation (End 2013)

Year-on-year: 4.7%

Year-on-year: 2.1%

Annual average: 6.9%

Annual average: 4.4%

Maintaining single digit inflation for nearly 5


consecutive years has given a new meaning to
price stability

31

Monetary policy decisions taken in a forward


looking framework have proved effective

32

Market interest rates have responded appropriately


to monetary policy easing
Market interest rates on deposits
gradually adjusted downwards during
the year
Prime lending rates were quick to adjust
downwards in response to monetary
policy easing
However, commercial banks longer
term lending rates, which remained
downward rigid in the first half of the
year, started adjusting downwards in the
second half
Increased levels of liquidity and
improved foreign investor appetite
reflected positively on the yield rates on
government securities

33

With the lag effect of monetary policy in 2012,


credit to the private sector decelerated, but turned
around in the second half of the year

34

Monthly increase in Private Sector Credit (Rs. bn)

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total

2012
Rs. bn
44.6
55.3
55.3
18.7
36.1
19.0
35.7
14.5
9.8
29.5
24.1
9.9
352.6

2013
Rs. bn
9.7
18.0
9.5
7.6
18.3
11.4
28.5
3.2
4.9
27.2
22.2

Credit Growth
in 2013
15.5%
13.3%
10.9%
10.2%
9.3%
8.9%
8.4%
7.9%
7.6%
7.4%
7.3%

160.6

Year-on-year growth of credit extended to the private sector


slowed to 7.3% in November 2013, from 17.6% at end 2012

Compared to the net increase in private sector credit of Rs. 111 bn


in the first 9 months of the year, the increase in October and
November was Rs. 49.5 bn

Reasons for lower private sector credit growth


were several

35

Meanwhile, credit to public corporations


moderated due to repayments by key SOEs
Credit to public corporations
increased by around Rs. 15.5 bn
during Jan-Nov 2013, compared
to Rs. 94 bn in 2012
During Sep-Nov 2013, however,
public corporations made
repayments of about
Rs. 56.3 bn to the banking
system, mainly reflecting
improved financial
performances of CEB and CPC

36

Cost reflective tariff revisions helped CEB to recover,


and generate a modest profit
CEB revised the tariffs w.e.f. 20 April 2013,
which resulted in the overall average tariff
increasing by around 20% to mitigate the
substantial losses incurred by the
institution
Average Hydro:Thermal ratio (59:41)
during the first ten months of 2013 was
significantly higher than the corresponding
period of last year (22:78)
As a result, CEB has recorded an operating
profit of Rs. 20.3 bn during the first ten
months of 2013, in comparison to a loss of
Rs. 52.8 bn during the corresponding
period of the previous year

The addition of 600 MW by stage 2 and stage 3 of Norochcholai Coal Power Plant
to the system by April 2014 will help sustain the performance of CEB while
reducing the dependence on a single source of fuel

37

CEBs lower reliance on petroleum and CPCs own


price revision helped contain the losses of CPC
CPC incurred losses mainly due to below-cost sales of petroleum
products for power generation, high subsidy for kerosene, and
overproduced low-end products such as furnace oil and naphtha
However, measures were taken to contain the losses of the CPC via;

Increase in Domestic Petroleum prices in February 2013


Revision of the price of furnace oil by Rs. 25/- per liter w.e.f. 1 April 2013
to curb losses on the sale of furnace oil supplied to CEB for thermal power
generation

These measures reduced the losses of CPC to Rs. 6.8 bn during the
first ten months of 2013, compared to the loss of Rs. 87.0 bn
recorded during the corresponding period of 2012

38

39

Improvements in other SOEs were also welcome


Sri Lanka Ports Authority

Sri Lanka Railways

Transshipment handling improved significantly

Passenger transportation increased significantly

Colombo South Port, which possesses facilities on par


with leading international ports, was declared open
on August 2013

2 Diesel multiple units, 3 new locomotives and 15


rehabilitated passenger carriages were added to the
fleet
Northern railway line from Omanthai to Kilinochchi
was completed in mid-September
Development of railway stations to provide
additional convenience to passengers
Gradual increase of luxury passenger services to
facilitate both tourists and local passengers

Oluvil Port, which provides convenient and cost


effective access to and from the southeastern region,
was opened in September 2013
New Ports of Colombo and Hambantota were
declared as free ports

Sri Lanka Transport Board

SriLankan Airlines

Gami Sariya and Sisu Sariya services were continued

Air passengers and volume of cargo increased,


reflecting the increase in demand associated with
tourism and business activities

Compilation of standards applicable to inter-provincial


bus services, by the National Transport Commission

Implementation of plans to purchase thirteen aircrafts


to support rapid development in tourism and aviation
sectors

In the meantime, Net Credit to the Government


(NCG) was higher than anticipated, although the
Central Banks NCG declined sharply

40

NCG from the banking system increased by Rs. 280.3 bn during Jan-Nov 2013
However, NCG from the Central Bank declined by Rs. 151.1 bn during the period

With these developments, overall monetary


expansion was somewhat higher than projected in
2013
Year-on-year growth of broad money
(M2b) decelerated from the high levels
observed in 2012
Average growth of broad money (M2b)
decreased to 16.5% during Jan-Nov
2013 compared to 20.2% in 2012

Reserve money growth was in line


with the projected path during the
year while it remained marginally
above the projected levels in the
second quarter of 2013

Y-o-Y Growth of M2b (Per cent)


Month
January
February
March
April
May
June
July
August
September
October
November
December

2011
16.7
17.7
17.5
18.4
19.4
20.7
20.7
20.6
20.7
19.8
20.6
19.1

2012
20.1
21.9
22.8
22.9
20.9
20.5
19.8
20.2
18.9
18.2
18.1
17.6

2013
18.3
17.0
15.6
15.2
16.3
15.8
16.4
15.3
16.3
18.3
16.7
16.0 (proj)

41

The Central Banks active communication with its


stakeholders helped manage market expectations
effectively
369

1,855
30
26
52
12
252

42

The Central Bank established a first-of-a-kind


Economic History Museum at the newly
refurbished Central Point Building

43

In fulfillment of its Financial System Stability


objective, the Central Bank continued to ensure a
robust and resilient banking sector

Focusing on risk based supervision


Calibrating the business models and
processes of banks
Assisting and harmonising with the
emerging needs in the growing
economy

Strengthened
supervisory
and regulatory
framework

44

Despite many challenges faced during 2013, the


banking sector expanded in terms of both business
volumes and outreach
Banking Services

2012

2013 (Sept)

Branches

3,359

3,426

Other Outlets

3,031

3,031

ATMs

2,415

2,496

Banking Density* by Province


2009

2013

Density

Rank

Density

Rank

Western

18.3

20.7

Southern

13.2

16.1

Sabaragamuwa

11.3

13.5

North Western

10.7

12.9

Central

11.5

14.4

Uva

11.6

14.5

North Central

12.6

16.1

Eastern

10.2

16.7

Northern

9.9

21.5

*Bank Branches per 100,000 population

Within 4 years, the Banking Density


ranking of the Northern Province, rose
from the lowest to the highest!

45

The funding structure of the Sri Lankan Banking


Sector started undergoing a positive change
The funding structure of the Sri Lankan Banking Sector commenced a
change process, with the recent orientation for funding towards local
debt and equity markets and foreign borrowing

46

The banking sector, on the strength of their


Balance Sheets, raised US$ 1,548.3 mn in 2013
(US$ 973 mn in 2012) through foreign borrowings

47

In the meantime, the banking sector indicators


reflected continued resilience

48

Several key policies were adopted in 2013


Further strengthened the Internal Capital Adequacy
Assessment Processes (ICAAP) and Risk
Management Frameworks of banks

Issued Directions on the implementation of the Supervisory


Review Process for banks, in accordance with the Pillar 2 of the
Basel II Capital Accord.

Streamlined the Regulations on the exposure of the


banking sector to the stock market

Issued Directions to regulate the exposure of the banking


sector to the stock market.

Facilitated adoption of new Sri Lanka Accounting


Standards (LKASs) and Sri Lanka Financial Reporting
Standards (SLFRSs)

Issued Guidelines to banks on statutory reporting and


adoption of the new Accounting Standards.

Enhanced the disclosure requirements with a view


of greater transparency

Prescribed formats for the preparation and publication of


interim and annual financial statements.

Established stronger communications channels for


Home-host relationships and with other regulators

Work is in progress to enter into Memoranda of


Understanding (MOU) with several foreign regulatory
authorities.

Reduced the interest rates on loans and advances in


line with the low interest rate regime prevailing in
the country, and the low interest rates prevailing in
other peer emerging economies

Maximum levels were prescribed:


Interest rates: 24%
Penal interest rates: 2% above the applicable rate

Exemptions were granted for foreign borrowings of:


Liberalised foreign borrowings of Licensed Banks

LCBs up to US$ 50 mn each during 2013 to 2015


National Savings Bank, National Development Bank PLC and DFCC

49

During the year, a number of financial risk assessment


techniques were also used to assist in micro & macroprudential policy setting.
Test/Indicator

What it does

Test is based on.

Sensitivity Stress
Testing

Gauges resilience to shocks relating to credit risk,


market risk, liquidity risk and exchange risk
(Quarterly)

Information of individual banks and banking


industry, relevant to each risk category

Macro Stress
Testing

Assesses resilience of the financial system to extreme


but plausible macro-economic shocks (Quarterly)

Selected macro-economic variables and its


impact on the asset quality of the banking sector

Banking
Soundness Index
(BSI)

Assesses the soundness (financial stability) of the


banking sector (Quarterly)

Selected financial soundness indicators (capital,


asset quality, profitability, liquidity, management
soundness, efficiency, sensitivity to market risk)

Financial Market
Stability
Indicator (FMSI)

Assesses the stability of the financial markets over a


period of time for any buildup of risks (Monthly/
Quarterly)

Analysis of 10 variables associated with money


and bond market, forex market and equity
market

Macro-economic
Stability
Indicator (MESI)

Assesses macro-economic stability (Quarterly)

Analysis of key indicators of the real, external,


fiscal and monetary sectors of the domestic
economy and global developments

Financial System
Stability
Indicator (FSSI)

Quantifies overall financial system stability in Sri


Lanka through a composite indicator (Quarterly)

Analysis of 3 major indices, BSI, FMSI and MESI

Network
Analysis

Analyse the interconnectedness of the banking sector


and identify the impact of failure of a systemically
important bank on the entire banking system

Inter-bank exposures quantified through


Network Analysis

50

Overall, the non-bank sector assets & funding


improved

During the past 5 years, the NBFI sector recorded


a CAGR of 23%
Deposits were the major source of funding,
representing 47% of the total liabilities
Capital Funds increased by 14% to Rs. 95 bn
Accommodations accounted for 78% of assets,
while accommodations growth has moderated to
19%
Asset quality of the sector deteriorated, with NPA
ratio increasing from 5.0% in 2012 to 6.1% in
2013, mainly due to the decline in gold prices
affecting pawning portfolios

51

Several new policy measures were implemented


to strengthen the NBFI sector
The scope of the Structural Changes Direction was broadened to
be in line with present financial sector developments
Regulations were issued regarding the writing off of
accommodations on related parties
Regulatory framework on debt instruments was issued covering:
Debt Instruments Direction
Interest Rates Direction
Liquidity Direction

Guideline on adoption of Sri Lanka Accounting Standards (LKAS)


32, 39 and Sri Lanka Financial Reporting Standards (SLFRS) 7, was
issued
Amendments to the Corporate Governance Direction were issued

52

The monitoring and campaigning against


prohibited schemes continued
Published many press notices
and used other media to
inform the public to deposit
money in banks and non-bank
financial institutions that are
supervised by the Central bank
Carried out many Awareness
Programmes to regularly
highlight the negative
implications of participating,
promoting, and engaging in
prohibited schemes
throughout the country

53

Regional development improved & inclusive growth


was experienced due to Central Bank efforts

In 2013, RDD operated 14


loan schemes and several
awareness programmes

2013
All sectors

No. of
Beneficiaries
96,685

8,232

SME

25,314

5,284

Micro Finance

42,572

2,534

2,028

211

166,599

16,261

Total

No. of Programmes conducted by RDD in 2013

Entrepreneurship development

63
37

Loan Amount
Rs. mn

Agriculture

Housing

Financial literacy

54

No. of Mass Media Programmes conducted by


RDD in 2013

Radio programmes

16

Newspaper advertisements / articles

100

TV programmes

Improving financial inclusion & capacity building were


actively pursued
Programmes
The Central Bank continued to
undertake special programmes
Programmes conducted by the
Central Bank Provincial Offices
covered
security features of currency notes
risk associated with investing in
unauthorised finance institutions and
prohibited schemes
benefits of investing in government
securities
seminars for school children and
teachers
exchange control regulations
training for bankers

No. of
Programmes

No. of
Participants

Financial Literacy

69

5,674

Workshops for MSMEs

13

1,067

Best Practices in AgriBusiness

37

1,692

Skills Development

78

3,285

CBSL Credit Schemes

64

3,853

Credit Camps

26

1,647

Other Awareness
Programmes

249

23,682

Total

536

40,900

Conducted by
Provincial Offices

A survey to measure financial inclusiveness was conducted


covering 18 districts

55

The FIU expanded its awareness campaigns


further
Four programmes for reporting sectors; Insurance
Companies and Stock Brokering Firms
A special training programme for High Court Judges on
Money Laundering and Terrorist Financing focusing more
on financial crimes
Eleven training programmes for the officials of Licensed
Banks
Nineteen awareness programmes for officials of financial
institutions, government institutions and Sri Lanka Police
in Colombo, Jaffna and Anuradhapura Districts

56

Several steps were also taken to improve


Financial Intelligence
Issued Know-Your-Customer and Customer Due Diligence Rules to
all authorised money changers
Amended the Convention on the Suppression of Terrorist Financing
Act, No. 25 of 2005
Took necessary action to ensure the level of compliance to the
recommendations and best practices of Financial Action Task Force
(FATF), the international policy setter on Anti Money Laundering
and Countering Financing of Terrorism
Bringing the total number of MOUs to 24, signed four MOUs with;

Japan Financial Intelligence Centre (JAFIC)


Lebanon Special Investigations Commission (SIC)
Costa Rica FIU
Denmark FIU

57

The Payment & Settlement Systems were


expanded & strengthened
Facilitated the establishment of the Common ATM switch in July 2013 to
utilise the ATM network in the country more efficiently and effectively to
reduce transaction costs in the financial system
Issued Payment Cards and Mobile Payment Systems Regulations No. 1 of
2013 replacing the Service Providers of Payment Cards Regulations No. 1 of
2009 to strengthen the regulatory framework

Introduced Line-encryption technology for POS terminals to ensure secured


environment for payment card operations
Issued licences to 3 new service providers to engage in debit card business
Issued a licence to a mobile telecommunication network operator to operate
an e-money scheme
Approved the proposal made by a licensed telecommunication network
operator to issue stored value cards with near field communication
technology for passenger transport sector

58

A Clean Note Policy was initiated and many steps


were taken to upgrade the quality of the currency
notes in circulation
Value and Number of Currency Notes and

59

Coins in Circulation (as at end 2013)


Value (Rs.)
Number of Pieces

Improved currency notes sorting


standards of Banks by issuing guidelines Notes
on sorting parameters
Coins
Educated the public regarding proper
currency handling practices through public
awareness campaigns
Collected unfit notes from bus stations, railway
stations, temples and from the public at
exhibitions, CBSL counters, etc.
Conducted unfit currency note exchange
programmes with hotels, public transport
sector, economic centres, money changers, etc.

332.4 bn

825.5 mn

7.4 bn

4,354.6 mn

At the same time, improvements to currency


management continued
Engaged new suppliers for minting and supplying of
coins for circulation (2013 2015)
Improved the currency processing system by
installing new automated currency processing
machines to increase efficiency in processing
Reduced coin issue cost substantially by conducting
island wide coin collection programmes and by
reissuing idle coins into circulation

Increased public awareness to preserve


the public confidence in currency and to
minimise the incidence of counterfeit
notes

Issued the third


commemorative
currency note in
Sri Lanka to mark
the CHOGM 2013

60

The steps taken by the SEC & CSE to improve stock


market activity were commendable
The ASPI and S&P SL 20 Index
increased by 4.8% and 5.8%,
respectively, during the year,
compared to end 2012
Market capitalisation increased to
Rs. 2.5 tn at end 2013 from Rs. 2.2 tn
at end 2012
There was 1 IPO through which
Rs. 494.4 mn raised and 09 rights
issues through which Rs. 25.5 bn was
mobilised in 2013
The net cumulative foreign inflows to
the stock market amounted to
US$ 264 mn

61

The corporate debt market also showed signs of


finally taking off
Funds raised through
debentures (IPOs) amounted to
Rs. 68.3 bn during the year,
compared to Rs. 12.5 bn in
2012
In addition to the financial
sector, several non-financial
institutions also raised funds
through debentures in 2013

Funds Raised Through Listed Debentures (2012-2013)


Rs. bn
2012
2013
Banks
12.5
35.4
LCBs
12.5
33.4
LSBs
2.0
LFCs
21.9
Non Financial Institutions
11.0
Total
12.5
68.3
Source: Colombo Stock Exchange

62

The total value of the EPF during the first 9 months of


2013 grew by 12.4%, mainly due to improved members
contributions and healthy investment income

63

Selected Key Information of the Fund


Item
Total number of member
accounts (mn)

Jan-Sep
2013*

Change
(%)

14.6**

14.7

0.68

2.3**

2.4

4.3

Total contributions
(Rs. mn)

52,025

57,596

10.7

Total refunds
(Rs. mn)

36,481

36,949

1.3

87,304

83,046

(4.9)

997.0

1,139.8

14.3

1,112.9

1,250.7

12.4

Contributing member
accounts (mn)

Number of refunds
Total liability to members
(Rs. bn)
Total value of the Fund
(Rs. bn)
* Annualised growth

Jan-Sep
2012

* Provisional
** As at 31.12.2012

64

The total income of the Fund grew by 11.9%


during the first 9 months of 2013
Type

Composition of Assets
2012
2013*
Value
Value
Share %
Share %
(Rs. bn)
(Rs.bn)

Govt. Securities
Equities
Corporate
Debentures and
Other
Reverse Repo
Fixed Assets
and Net Current
Assets

1,035
59

Total

1,144

90.5
5.1

0.7

1, 137
67
10

Summary of Gross Investment Income


Investment Income

90.9
5.4
0.8

0.3

0.2

39

3.4

34

2.7

2012 Jan Sep


(Rs.mn)

Gross Interest

66,785

76,930

Amortization
Gain/(Loss)

14,702

13,207

Interest and
Amortization

81,487

90,137

1,467

2,467

560

885

83,514

93,489

Dividends
Others

100.0

1,251

100.0

2013 Jan Sep*


(Rs.mn)

Total

11.9%

*(Provisional)

*As at 30/09/2013 (Provisional)

Net Profit of the Fund


2011

Change
(%)

2012

2013 (Est)

Profit
(Rs. mn)

As a % of
Net worth
of the Fund

Profit
(Rs. mn)

As a % of
Net worth
of the Fund

Profit
(Rs. mn)

As a % of
Net worth
of the Fund

107,202

10.53

111,829

9.77

128,847

9.85

The EPFs rates of returns were consistently higher


than inflation & rates of other competitors
EPF provided a positive real rate of return to members in the
past few years

EPFs rate of return to be credited to members for 2013 is likely to be between


10.8% and 11.3%

65

In the fiscal sector, the Governments curtailment


of the budget deficit was a major boost to the health
of the economy and monetary management

66

The overall fiscal deficit is estimated to be at 5.8% of GDP in 2013, down from
6.4% of GDP in 2012

Recurrent expenditure has been rationalised, &


although revenues reduced, public investment
has been maintained at around 6% of GDP

67

Total expenditure and net lending during 2013 is estimated to decline to 19.7%
of GDP from 20.5% of GDP during 2012
Average public investment from 2006 to 2013 (8 years): 6.2% of GDP

The Central Bank also made substantial profit


transfers to the Government, which assisted the
Government to maintain its Fiscal deficit targets
From 1977 to 2005, over a period of 29 Years, the Central Bank made profit
transfers amounting to Rs. 61.0 bn to the Government.
However, since 2006, over the past 8 years, the Central Bank has been able
to make profit transfers of Rs. 138.4 bn to the Government.

* Final appropriation to be done in March 2014

68

The prudent management of the public debt


helped to lengthen the average time to maturity
of the debt stock
Rs. 6.8 trillion worth Public
Debt is under the Central
Banks management
For the first time, ATM of the
domestic debt was lengthened
to around 5 years:
- Conversion of short term debt
into low cost long term debt
- Issue of 30-year T-bond for the
first time in history

69

Debt servicing costs also declined sharply


Interest cost, as a percentage
of GDP, improved to 4.2% at
the end of 2013 from 5.4% in
2012 driven by strategic debt
management initiatives:
-

Efficient use of foreign


investments

Resources through SLDBs

Stand by arrangements from


the Middle Eastern banks

The net saving to the GOSL


as interest cost is estimated
to be around Rs. 80 bn
during the next 30 years

70

The Debt to GDP ratio improved continuously

71

Debt to GDP ratio is estimated to improve to around 78% in 2013


compared to 79.1% in 2012
These improvements were recorded at a time when many other
countries experienced higher Debt to GDP ratios in 2013

Source: IMF, WEO Database - Oct 2013

72

Many improvements took place in the Government


Securities market
Efficiency of the primary auction system was improved
A Half-yearly Treasury bond calendar is now in place
Competition at primary auctions increased through increasing the
participation

Initiatives were taken to broaden and deepen the Secondary


market, while improving transparency
Commenced developing an E-trading platform
Commenced work on a guaranteed central clearing arrangement on netsettlement basis for G-securities, listed debt instruments and shares
Commenced preparing of necessary standard documentation for market
repo and short selling
Established access to the Middle East markets
Covered short selling introduced

In the meantime, the Government continued with the


mega-scale infrastructure development plan, which has
improved the countrys productive capacity significantly
Road development projects

Port development projects

The Southern Expressway Project - 126 km

The South Colombo Harbour Project

Phase 1 - Completed
Phase 2 - Completion by early 2014

Commissioned in August 2013

Northern Railway Project - 146 km


Railway line from Omanthai to Kilinochchi (63 km) was
completed in September 2013

The Colombo-Katunayake Expressway - 26 km


Completed in October 2013

The Colombo Outer Circular Highway Project - 29 km


Phase 1 - Completion by early 2014

Northern Expressway
Feasibility study in progress

Kandy-Badulla Alternate Highway Project-34 km


Feasibility study done

The Hambantota Port Development Project


Phase 1 - Completed
Phase 2 - Completion 2015

The Oluvil Port Development Project


Opened in September 2013

The Kankasanthurai Port Development Project


In Progress

Airport development projects


Second International Airport at Mattala
Opened in March 2013

BIA Expansion Project


To be completed by February 2017

Power projects
900 MW Norochcholai Coal Power Plant
Phase 1: (300 MW) Commissioned
Phase 2: Unit 1 (300 MW) Completion by early 2014
Unit 2 (300 MW) Completion by April 2014

120 MW Uma Oya Hydro Power Project


Completion 2015

500 MW Sampur Coal Power Project


Completion 2018

20 MW Moragahakanda and Kaluganga Reservoir Project


In Progress

Domestic Airport Development Ampara, Koggala, China-Bay,


Jaffna and Ratmalana
In Progress

Ongoing rural infrastructure development projects


Gama Neguma, Maga Neguma, Small Irrigation projects and
Kirigammana projects

Several mega hotel projects, condominiums, shopping


malls, development of Northern and Eastern provinces,
and water supply projects

73

74

The 5+1 hub strategy introduced in Mahinda


Chintana gathered momentum for inclusive and
sustainable growth in Sri Lanka

75

Overall, the sovereign credit ratings were


maintained, but it was believed that a country
rating upgrade was warranted
Sovereign Downgrades during
Fitch and S&P credit ratings
remained unchanged
Moodys revised the rating
outlook from Positive to
Stable in July 2013 citing
inadequate development in
the external sector and a
slowdown in fiscal
consolidation

However, by end 2013, the


assertions of Moodys were
proven wrong as the
countrys external sector
demonstrated clear
improvements in terms of
lower current account
deficit, increased BOP
surplus, and higher foreign
reserves, while the fiscal
deficit declined to 5.8%
from 6.4% of GDP last year
as targeted

2012/2013
Fitch Ratings
Spain A to BBB
Cyprus BBB to BBBelgium AA+ to AA
Greece CCC to C
Slovenia A Negative to BBB+ negative
Egypt B+ to B- negative
Japan AA+ to A+ stable
Standard & Poors
France AAA to AA+ Negative
Spain AA- to BBPortugal BBB- to BB Negative
Slovenia AA- to A
South Africa A- to BBB negative
Italy BBB+ to BB negative
Cyprus B to C stable
Egypt B to CCC+ stable
Argentina B- to B- negative
European Union AAA to AA+
Moodys
South Africa A3 to Baa1
France Aaa (Negative) to Aa1
Spain A3 to Baa3
Cyprus Ba1 to B3
Greece Ca to C
Pakistan B3 to Caa1
Italy Baa2 to Baa2 (Negative)
Egypt B3 to Caa1 (Negative)

76

Sri Lanka was ranked best in South Asia in the


Doing Business Index (DBI) 2014
Sri Lanka was ranked 85th in 2014,

The World Bank acknowledged Sri


Lankas recent reforms in:
Dealing with construction
permits
Paying taxes
Getting electricity
Trading across borders

Sri Lankas DB ranking improved


in absolute terms

77

Perceptions of business confidence as per LMDNielsen BCI showed signs of improvement

78

Sri Lanka successfully hosted the CHOGM 2013,


and many other events, which helped to showcase
Sri Lanka & build its new brand
Several events associated with CHOGM were
also organised:
Peoples Forum in Hikkaduwa
Youth Forum in Hambantota
Business Forum in Colombo

International conference on building resilience


Serendib International Cup (Rugby)
Arugam Bay Surf Classic
FIBA Asia Under 16 Womens Championships
Colombo Night Races
Carlton Super Sevens International Rugby
Tournament
Sri Lanka Challenge The tuk tuk adventure

79

The Central Bank continued its close coordination


with International Organisations

In February 2013, the Governor led a delegation of


senior bankers to the Sultanate of Oman and Abu Dhabi
to strengthen the investment relationship with the
region
In April and July 2013, the Governor led two delegations
to the US to engage with key politicians, investors,
opinion leaders and influential media
In September 2013, the Governor led a delegation of
banking sector top executives to engage with
representatives from the Peoples Bank of China and
other banks operating in China

80

Many international observers commented positively on


Sri Lankas developments
I commend the authorities for delivering strong growth, low inflation, fiscal consolidation,
and a strengthening of the external accounts as well as on the ambitious growth and
development objectives laid out in the Mahinda Chintana.

- Naoyuki Shinohara, Deputy Managing Director of IMF


Sri Lanka's willingness to host this Commonwealth shows its commitment to democratic
pluralism and freedom based on law and ought to reassure all its citizens that just as today is
better than yesterday, tomorrow will be better than today.

- Tony Abbott, Prime Minister of Australia


Sri Lanka has an excellent record on bringing children aged 514 years into school,
following seven decades of universal free primary and secondary education."

- Reza Hossaini, Sri Lanka Country Representative, UNICEF


The efforts by Sri Lanka to develop the health sector are highly commendable.

- Dr Firdosi Mehta, Sri Lanka Country Representative, WHO


President Mahinda Rajapaksa has shown maturity of wisdom in
taking the country towards the high goal of making Sri Lanka a
country of peace and a regional knowledge hub

- Prof. Peter A. Bruck, Chairman, World Summit Awards

81

In summary, substantial progress was achieved


in all macro-fundamentals
Unit
Real GDP Growth
(Avg. for 5 years ending)
GDP

%
US$ mn

2000

2005

2013 (Est/Proj)

5.0

4.0

6.7

16,596

24,406

67,374

Remarks
Substantially higher growth
trajectory
176% increase in 8 years!

Unemployment

7.6

7.2

4.5(1H)

Inflation (Annual Average)

6.2

11.0

6.9

Almost 5 years at single digit levels

% of GDP

6.4

2.7

3.9

Satisfactory progress being made

000

400

549

1,170

Current Account Deficit


Tourist Arrivals

Steady progress

Remarkable increase after the


conflict
Steady y-o-y growth, & 237%
increase in 8 years

Remittances

US$ mn

1,160

1,968

6,650

FDI Inflows

US$ mn

175

272

1,459

Steady growth

US$ mn
Months of Imports

911
1.5

2,735
3.7

7,128
4.5

Consistent improvement and


steady progress

Gross Official Reserves


Exchange Rate (End Period)

Rs./US$

80.06

102.12

130.75

Budget Deficit

% of GDP

9.5

7.0

5.8

Public Debt

% of GDP

96.9

90.6

78.0

Broad Money Growth (M2b)

12.9

19.1

16.0

Private Sector Credit Growth

11.8

21.5

8.0

Stock Market Capitalisation

Rs. bn

88.8

584.0

2,459.9

Stable levels maintained


Important progress towards fiscal
consolidation
Moving steadily towards greater
sustainability
Close to projected levels
Adequate and sustainable

Reflects peace dividend and


corporate sector vibrancy

82

83

and
Per Capita
income has been
on track
with the
ambitious
targets

84

Now, let us focus on


the Road Map 2014,
covering the
Monetary and External Sector Policies,
as well as Financial Sector Policies for
2014 and beyond

The conduct of monetary policy will be fashioned


towards realising a sound medium term
macroeconomic framework
Indicator

Unit

2013 (Est)

Projections
2014

2015

2016

Real Sector and Inflation


Real GDP Growth

7.2

7.8

8.2

8.5

Total Investment

% of GDP

31.0

32.0

32.5

33.0

GDP Deflator

7.0

6.0

5.5

5.0

Headline Inflation

4.7

5.0

4.5

4.0

Trade Balance

% of GDP

-12.8

-11.6

-10.2

-8.4

Current Account Balance

% of GDP

-3.9

-2.4

-1.0

0.1

US$ mn

700

1,500

1,750

3,700

Current Account Balance

% of GDP

-0.5

1.1

1.6

2.3

Overall Balance

% of GDP

-5.8

-5.2

-4.4

-3.8

Government Debt

% of GDP

78.0

74.3

70.6

65.0

Broad Money Growth (M

16.0

14.0

14.0

14.0

Private Sector Credit Growth (in M2b)

8.0

16.0

17.0

17.0

External Sector

Overall Balance
Fiscal Sector

Monetary Sector
2b)

The following potential risks could pose challenges to the above projections:
Uncertain weather conditions
Geopolitical tensions
Unwinding of accommodative monetary policies in advanced economies
Slower growth in global demand

85

86

A sustained real economic growth of over 8% is


targeted in the medium term

Diversification needed for sustained growth will


continue to be based on the 5+1 Hub concept

On that basis, the country will continue on a


focused path to promote hub-activity led growth

87

The Maritime hub will focus on unlocking value


of Sri Lankas ocean resources

Significant investments in the sector


have created a unique opportunity
for Sri Lanka to become a complete
logistics provider from a mere cargo
handler
Accordingly, the second wave of
maritime development is expected
to be centred on developing related
services such as
vessel trading
financial services
legal services, and

Proposals in the Budget to


develop the maritime sector
Increased duties on boat
imports to develop the local
boat building industry
Reduced taxes on profits of
shipping lines, freight
forwarders and logistics
industry services to
incentivise training of local
professionals in the industry

crew training

Private sector has responded to emerging opportunities in the


maritime sector

88

Speedy headway will be made towards realising


an Aviation hub
Potential as an Aviation hub enhanced by being centrally positioned in the
strongest and fastest growing route of regional travel flows
Development of Flying schools and Aerospace Engineering schools
Clean and Light Aviation related manufacturing
BIA and MRIA expansion will be completed in 2017 and will have the capacity to handle
over 20 million passengers

Investment opportunities in the proximity of MRIA as it is a free port


Ratmalana to be developed as a city airport and to accommodate international traffic of
private jets
Proposed expansion of SriLankan Airlines will lead to further growth in the aviation sector
Creating a reputed Aircraft Maintenance, Repair and Overhaul (MRO) facility for the
South Asian region
SriLankan Airlines commissioned its new A320 Hangar in 2013
New fleet equipped with fuel saving technology, which will increase efficiency and
improve profitability
Private sector investments will lead the next wave of investment in aviation

Sri Lanka ranks 4th in the Asia Pacific


Aviation
region as per the periodic safety audit
Achievements in 2013 of the International Civil Aviation
Organisation

89

Steady pipeline of investments will assure energy


security & strengthen the emerging Energy hub

90

Schedule of the Sampur Coal Power project of 500 MW


Before October 2014

Construction to commence

Before mid 2018

Construction of coal unloading


port to be completed

Before end 2018

Power Plant to be
commissioned

Other Key Electricity Generation Projects


Mid 2014

600 MW from Norochcholai Coal Power Plant to be


added to the national grid

Before end 2015

120 MW Uma Oya Hydro Power Plant to be added


to the national grid

The addition of new power plants will help increase total installed capacity of
the country by around 36% to 4,575 MW by end 2018
First commercial production of Sri Lankas gas fields is expected to commence
in 2016
Sri Lanka is building capacities to provide oil trade-related ancillary services
The existing capacity at Sapugaskanda Crude Oil Refinery will be increased

Infrastructure to transport oil from ships to Muthurajawela will be improved

2013 (Est)

With the improvements in


commercial activity,
infrastructure, and health and
education facilities, the number
of tourists on extended stay is
expected to increase
This trend is likely to continue
resulting in a substantial
increase in tourist earnings in
the period ahead
268 projects were in the
pipeline by end June 2013, of
these, final approval was
granted for 136 projects
The industry needs to add
around 22,500 rooms to the
current capacity by 2016 to
meet the projected tourist
arrivals

2016 (Proj)

2012

Sustainable tourism development will be the key


focus in creating the Tourism hub

1.0 US$ bn
1,005,605 arrivals

1.4 US$ bn
1,170,000 arrivals

3.1 US$ bn
2,500,000 arrivals

91

Development of skills for emerging sectors will


bolster the Knowledge hub
High levels of literacy rates, enrollment ratios and gender equality will
pave the way for a dynamic education sector

In addition to education that is provided free up to University


level, a strong drive to uplift the quality standards of domestic
educational institutions will be implemented
Programme to reduce resource disparities between rural and
urban schools through the transformation of 1,000 secondary
schools and 5,000 primary schools

Special focus on IT education with provision of Mahindodaya Technical


Laboratories in 1,000 secondary schools and the introduction of the
Technology stream at the GCE Advanced Level examinations
High allocations from Budget to carry out Medium term Development
Programme which encompasses the establishment of new faculties,
capacity expansion of existing faculties and advanced degrees

Private sector investment to play an important role in the


education sector
Transforming the existing universities into new world class universities
will turn the country into a net exporter of education services

92

The activities relating to all these hubs will


spearhead the transformation of the country
into a Commercial and Business hub
That will probably encourage the relocation
of many regional operating headquarters and
regional offices of international
establishments
The declaration of Hambantota and
Colombo South ports as free ports is also
expected to attract significant private
sector investments

93

Infrastructure & Public Utilities development,


together with skills enhancement will also
facilitate the Commercial Hub

Fast tracked expressway and road development projects


have reduced transportation costs and enhanced access to
markets through improvements in urban-rural linkages
Healthy pace of growth in the telecommunications sector
has resulted in high mobile penetration, rapidly growing
internet penetration and increased potential in mobile
related and e-commerce activities
Public utilities are being developed to cater to the
emerging world class city of Colombo
Productive and skilled labour force with large pools of
professionals as a result of governments commitment to
free education and health will create a
knowledge-driven economy

94

The Health sector will also evolve to produce


world class healthcare, while supporting a
healthier nation

Availability of healthcare services is widespread with 593 government


hospitals and 197 private hospitals
Reduced prevalence of communicable and infectious diseases is evidence of
the success of Sri Lankas health sector
The country has potential to emerge as a Medical hub in the future due to:
- Its strategic and convenient location, which can serve the Middle East, East Africa and
the Far East
- Growing number of internationally qualified medical specialists in the country
- The countrys focus on upliftment and modernisation of health sector through the
Budget 2014
o
Increased intake and expansion of subject areas available at the Postgraduate level
to encourage high calibre research and advanced medical studies
o
Increased availability of specialised medical services through the setting up of a
Centre of Medical Excellence
o
Increased number of medical specialists

Potential foreign exchange


earnings through health service
exports could be substantial

95

It is also encouraging that since of late, some signs


of diversification is seen in industrial activity,
reflecting the dawn of the Drive to Maturity*
Motor Vehicle Assembly
Assembling of a full range of vehicles, from compact cars
and vans to luxury SUVs and commercial vehicles
Boat Building
20 to 25 active boat yards around the country produces
various types of boats for local and international markets
Computer Assembling Plants
A PC assembly plant in Hambantota was officially declared
open in November 2013
Mobile Phone Manufacturing
Assembling smartphones for the first time in history under
a pilot project in November 2013

Established industries such as the apparel sector have


already commenced backward integration
Free port areas will help attract more sophisticated industries
to the country
* W.W.Rostow, Stages of Economic Growth

96

97

The direct & indirect effect of these activities on


growth, employment & earnings will be significant

Focused efforts to enhance Productivity


of labour as well as capital will be a
vital and integral part of the overall
macroeconomic policy framework
New employment opportunities would
result in labour migrating from the
agriculture/informal sectors to
emerging sectors, resulting in increased
labour productivity in all sectors
Increasing productivity of capital could
lower the Investment/GDP ratio
required to achieve high economic
growth
Source: APO productivity Database 2013

Achieving a US$ 100 bn economy would demand a significant


improvement in the productivity levels of the current workforce

In that background, merchandise exports are also


expected to increase, strengthening the trade
balance

98

Structural Measures taken to Promote Exports


Promote value addition of raw exports (eg: tea, rubber,
cinnamon)
Improving backward linkages
Declaring ports in Colombo and Hambantota as free
ports, thereby encouraging entrepot trade
Placing on zero duty or making duty free selected raw
materials and machinery used for production of goods
for export
Providing tax concessions for exporters and related R&D
Passing Finance Act No. 12 of 2012 towards
transforming Sri Lanka into a commercial hub
Negotiating bilateral agreements with potential trading
partners
Establishing Preferential Trade Arrangements (PTAs)

Projections for Merchandise Trade


US$ mn

Trade deficit as a % of GDP is


expected to improve to 12.8% in
2013 and to 11.6% in 2014

Exports
Imports
Trade Balance
% of GDP

2012
9,774
19,183
-9,409
-15.8

2013E
10,452
19,046
-8,594
-12.8

2014P
12,050
21,020
-8,970
-11.6

2015P
14,100
23,180
-9,080
-10.2

2016P
16,920
25,498
-8,578
-8.4

At the same time, as a result of many other real


sector developments, trade in Services is also
expected to accelerate sharply
Computer and Information Services

471 US$ mn

2016 (Proj)

2012

436 US$ mn

2013 (Est)

(Excluding KPO Services)

661 US$ mn

254 US$ mn
418 US$ mn

2016 (Proj)

2013 (Est) 2012

Transportation Services Freight and


Other Port Related Services

1,513 US$ mn

IT/BPO sector including KPOs


and the Transportation sector
are both estimated to surpass
US$ 1 bn each, by 2016

99

[10.1% of GDP]

6.6 US$ bn
[9.9% of GDP]

2016 (Proj)

6.0 US$ bn

2013 (Est)

2012

Workers remittances are also expected to


continue to cushion the external sector while
providing a useful source of employment

9.0 US$ bn
[8.9% of GDP]

Inflows from remittances are expected to exceed US$ 10 bn by


2017
Structural changes in the economy are expected to moderate
the growth of inflows from remittances in the future
The growth of the services related economy (BPO/KPO/Tourism/Port) would lead
a decreased demand for overseas employment
Creation of further new employment opportunities in the country
Reduction in lower skilled migration such as housemaids, although earnings and
remittances per worker would be higher due to skilled worker migration

100

As a consequence, the Current Account balance


is expected to improve faster than anticipated in
the past
Increased inflows from
workers remittances,
tourism and service exports
will mitigate the impact of
the trade deficit

Projections for the Current Account


US$ mn
% of GDP

2011

2012

2013E

2014P

2015P

2016P

-4,615

-3,915

-2,650

-1,872

-858

74

-7.8

-6.6

-3.9

-2.4

-1.0

0.1

101

External financing will continue to bridge the


savings-investment gap, although the gap will
contract gradually over the medium term

Domestic savings will be encouraged


through positive real returns at benign
levels even in the low interest rate
environment envisaged

Debt and Equity markets will continue to be


incentivised as outlined in the Budgets 2013
and 2014, while private sector will be
further encouraged to raise funds overseas

It is time for the corporate sector


also to enter international markets
to raise funds for domestic as well
as international expansion

102

The realisation of expected capital flows, along


with the improving current account, will result in
continuous favourable outcomes in the BOP
Accordingly, a BOP surplus of around US$ 3.7 bn is expected
by 2016

103

Reflecting these projections, the Sri Lankan Rupee


is expected to strengthen, & Foreign Reserves to
increase in the medium term

The Central Bank will continuously


assess the developments in the
domestic as well as international
foreign exchange markets to identify
risks to the stability of the rupee

Central Bank direct intervention will


be at minimal levels, and only in the
event there are signs of excessive
fluctuations will the Bank absorb or
supply foreign exchange, as and when
required

The maintenance of foreign reserves at


desirable levels will enable the Central
Bank to prudently manage market
dynamics and any impending risks

104

The management of official foreign reserves will


be based on multiple strategies
The objectives of international reserve management
will be three fold:
to maintain a comfortable level of reserves
to obtain an attractive return, and
to maintain a less volatile exchange rate

Strategies will include the following:


Further diversify into new markets and new instruments
Strengthen regional cooperation and minimise round
tripping of foreign resources
Asia creates the resources, invests in Western countries, and often
borrows same funds at a higher rate from Western investors!

105

In this context, the Central Bank will engage with other


Central Banks in Asia to gradually reduce the impact of
round tripping

106

Benefits of avoiding high


levels of round-tripping

Improve reserve and liquidity


levels
Attract higher returns
Mitigate risks through
diversification
Access wider range of markets
Strengthen relationships and
help capacity building

When Asia invests in the


West, it is termed
Investment by Asia.
When the West invests in
Asia, it is termed
Borrowings by Asia!

In the fiscal sector, the major reforms implemented in


the recent past are expected to enhance revenue
mobilisation
Revenue in 2013 is expected to be 13.6% of GDP, down from 13.9% of GDP in
2012. However, Government revenue reflected a turnaround of its declining
trend in the second half of 2013
In the medium term, revenue is expected to reach 15 to 16% of GDP with the
expected improvements in the tax base & tax administration, and greater tax
compliance

Further efforts to enhance tax


revenue were highlighted in the
Budget 2014:
Broadening the tax base
Minimising opportunities for
manipulations
Improving efficiency and
simplicity
Rationalising tax rates

107

The planned fiscal consolidation for the


medium term is very welcome

Total expenditure and net lending during 2013


is estimated to decline to 19.7% of GDP from
20.5% of GDP during 2012
Continuous efforts have been made to
rationalise recurrent expenditure: Salaries and
wages, interest payments, and transfers and
subsidies are in a declining trend, as a % of GDP
As % of GDP

2009

2010

2011

2012

2013E

2014P

Salaries and wages

5.6

5.4

4.9

4.6

4.5

4.1

Interest payments

6.4

6.3

5.5

5.4

5.1

4.4

3.9

3.5

3.3

3.1

2.9

2.9

Current transfers and


subsidies

The current account is expected to record a


surplus in 2014, after 26 years, reflecting the
rebound in revenue and the rationalisation of
recurrent expenditure

108

It is encouraging that the fiscal consolidation is to


be achieved while public investment levels are to
be maintained at satisfactory levels
Public investment is to be maintained at
over 6% of GDP in the medium term
The surplus in the revenue account will be
used to finance part of the public
investment programme, thereby reducing
the borrowing requirement
Emphasis is to be given to strategic mega
infrastructure development projects,
infrastructure in lagging regions, education
and health

Public investments are expected to complement the projected


improvement in the overall investment level to around 33% of GDP
in the medium term

109

In this scenario, the budget deficit is expected to


narrow substantially

In 2014, budget deficit is expected to decline further to 5.2% of GDP


from 5.8% in 2013

By 2016, the fiscal deficit will be reduced to below 4% of GDP

Resultant lower budgetary financing requirement will ease the need to rely on
bank borrowing, thereby allowing the Central Bank to maintain monetary
expansion at desired levels, reducing crowding out of private investment, and
reducing demand pressures on inflation

110

In the meantime, the planned improvements in


key SOEs will ease the Governments contingent
liabilities
Ceylon Electricity Board (CEB)
A long term generation expansion plan for
the period of 2013-2032 has been submitted
to the Public Utilities Commission focusing
on:
- Least cost generation using low cost
sources efficiently
- Providing reliable and quality electricity
while expanding capacity

Ceylon Petroleum Corporation (CPC)


Government guarantee provided to the CPC to enable the raising of long term capital
to restore its depleted pipeline network in budget 2014
Implementing a price revision policy with regular price revisions in line with
international prices would benefit both the CPC and energy users

111

Given these expectations in different sectors, the


Central Bank is confident that inflation could be
contained at around 5% or below, in the medium
term

In 2014, the tolerable range of inflation during the year


would be 4-6%
Thereafter, until 2016, 3-5% would be the tolerable range of
inflation

112

The conduct of monetary policy will continue to


be based on monetary targeting with greater
focus on managing inflation expectations...
Monetary Projections
Dec-12

Dec-13
(Est)

Dec-14
(Proj)

17.6

16.0

14.0

10.2

0.9*

14.0

8.0

16.0

Broad Money
y-o-y % change
Reserve Money
y-o-y % change

Credit to the Private Sector


y-o-y % change

17.6

* Actual. The sharp decline is due to the reduction in


SRR effective 1st July 2013.

Rules of Thumb for


Monetary Easing
Inflation and
inflation
expectations ease
Economic growth
remains below
potential
Aggregate demand
is low
Monetary and
credit expansion
take place at lower
rates than
projected

113

Rules of Thumb for


Monetary Tightening
Demand driven
inflation and
adverse inflation
expectations build
up
Signs of economic
overheating occur
Aggregate demand
expands at a high
rate
Excessive
monetary and
credit expansion
take place

In the meantime, the Government has already announced 114


the increase of the capital of the Central Bank to
Rs. 50 billion, to reflect its strength & stability
Capital funds of the Central
Bank have been substantially
increased since 2008
Considering the Central
Banks responsibilities and
recent trends in the
economy, the Budget 2014
proposed to increase the
capital of the Central Bank
further to Rs. 50 bn, by
capitalising its reserves
* Proposed

Under the Monetary Law Act, No.58 of 1949, the


Contributed Capital of the Central Bank is Rs. 15 mn.
Subsequent Monetary Board decisions in 2008 and 2012
have had reserves appropriated as capital, bringing it to
Rs. 35 bn as at end 2013.

The Strength of the Central Bank Balance Sheet will


enable the Central Bank to introduce an uncollateralised
Standing Deposit Facility in conducting OMO
With immediate effect, the current Policy Rate Corridor will be
renamed as the Standing Rate Corridor (SRC)
The current Standing Repurchase Facility will be renamed as the
Standing Deposit Facility (SDF), and provide the floor rate for
the placement of excess funds of the banking system
The current Standing Reverse Repurchase Facility will be
renamed as the Standing Lending Facility (SLF), and provide the
ceiling rate for the lending of funds to the banking system
OMO auctions will continue unchanged, with Repo or Reverse
Repo auctions, depending on liquidity conditions

With effect from 1st February 2014, the SDF will be uncollateralised,
in line with the practice followed by major central banks in the
world

115

Considering the current developments, the


Monetary Board also decided to compress the
Standing Rate Corridor with immediate effect

Accordingly, effective 2nd January 2014, the new key policy interest
rates of the Central Bank, the Standing Deposit Facility Rate (SDFR)
and the Standing Lending Facility Rate (SLFR) will be 6.50% and
8.00%, respectively

116

Well contained inflation & well managed inflation


expectations are likely to result in lower market
interest rates in the medium to long term

117

The compression of the Standing Rate


Corridor is expected to narrow the
interest spread of banks further
Lending rates are expected to decline
substantially, but with lower spreads
and low inflation, savers will still earn
a reasonable real interest rate

Spread between short term lending


and deposit rates are expected to
reduce to 2.5% by end 2015
A narrower spread is expected with
regard to long term rates

Source: World Development Indicators, 2012

With the improvement in the trade balance, the


margin deposit requirement against LCs for the
importation of vehicles will also be removed with
immediate effect
With currencies of several trading partner economies
depreciating sharply against the Sri Lankan rupee in mid2013, the Central Bank imposed a minimum cash margin
requirement of 100% against Letters of Credit opened with
commercial banks for the import of some categories of
motor vehicles

Since external trade conditions have since improved,


the Monetary Board has decided to remove this
condition with immediate effect

118

It is a matter of satisfaction that the past 4 years


have been among the only 5 years of
HIGH GROWTH + LOW INFLATION years in the post1977 period

119

Even in the future, policy trade-offs will be given due attention to


maintain a balanced approach to decision making

It is also another matter of satisfaction that the


decades old vicious cycle has now been replaced
with the present day virtuous cycle
Sri Lanka was trapped in a vicious
cycle for more than 5 decades

Sri Lanka is currently experiencing a


virtuous cycle

120

Overall, the multi-dimensional approach to


monetary policy decision making will continue

121

The Central Banks communication policy &


delivering on projections will continue to play a
key role in managing expectations
With advanced technology and improved information
flows, and considering the importance of market
expectations for the success of macroeconomic policies,
the Central Bank will continue to provide information to
all stakeholders in an effective manner

Regular press releases based on an advance release calendar


Press releases on important economic events
Regular statistical releases, & statutory and other publications
Special Presentations by senior management of the Central Bank
Continued dialogue with the domestic financial sector and international investors
Creating awareness among media personnel & financial sector employees
Continued use of Social media
The Governor will be on
with immediate effect

By consistently delivering on its projections, the Central Bank has


been able to enhance its credibility

122

Going forward, the Central Bank will also ensure


that its future macroeconomic policies will be
fashioned so that the country will avoid the
possible Middle Income Trap

* Estimate for 2013

By 2016, Sri Lanka will graduate to the Upper Middle Income category as per
international classification

As some countries have stagnated at this middle income level,


Sri Lankas medium term macroeconomic strategy will need to focus
on avoiding this Trap as well

123

Meanwhile, Sri Lanka will also graduate to the


IMFs SDDS data reporting category of countries
in 2014
By graduating to Special Data Dissemination Standard (SDDS)
from the current General Data Dissemination System (GDDS)
status, Sri Lanka will firmly commit to further improving data
coverage, periodicity and timeliness of data categories of all
sectors of the economy
SDDS has helped countries to:

Improve Sovereign ratings


Lower Sovereign borrowing costs
Lower corporate borrowing costs, and
Improve functioning of domestic financial markets

Graduating to SDDS will enable analysts to understand Sri


Lankas economic progress more closely

124

To sustain the positive outlook of the economy,


& to ensure Financial System Stability, the
banking sector will need a new vision in the
run-up to 2016, where

At least 5 Sri Lankan banks will have assets of Rs. 1 trillion or more, with such
banks also having a strong regional presence
There will be a reduced number of banks as a result of mergers and
consolidations
There will be a large Development Bank that will provide a substantial impetus
to development banking activities in the country
Banks will rely on new and effective IT applications
Banks will have substantially lower interest margins through increased
efficiency and prudent assets and liabilities management
Foreign banks in Sri Lanka will demonstrate a greater participation in economic
activities, and will be making significant contributions to the economy

125

Accordingly, over the next few years, the financial


sector will be encouraged to move towards this
new vision

126

The Central Banks policies will be forward looking and


designed to balance potential worldwide policies and adjust to
sudden volatilities
Adequate capital and other buffers will be put in place to
prepare the Sri Lankan financial sector to withstand business
cycles, without sacrificing investment potential during periods
of global economic downturn
Greater cohesion and overall sectoral integration would
provide a stronger thrust to propel the financial sector towards
a more sustainable growth model
The Central Banks role will be that of a pragmatic systemic risk
mitigator, and a guide that encourages innovation in order to ensure
the overall goal of financial system stability

The New Vision will require a strengthened financial 127


sector, which is strong enough to steer Sri Lanka towards
the goals set for 2016

In that scenario, the present skewed* banking structure


will need some structural changes to ensure that Banks &
NBFIs will be equipped to play the required role in the
envisaged US$ 100 bn economy

Consolidation in the banking and the NBFI sectors will have to be encouraged, using the
attractive tax concessions provided by the Government

The regulatory framework will have to be re-designed to monitor the emerging business
models of banks and NBFIs

The regulatory regime will have to be strengthened, while encouraging diversification of


sources of funding and business operations, including through foreign sources

The risk profiles of banks and NBFIs will have to be identified and regulated in order to
ensure overall stability of the financial sector and enhance public confidence

Number of
banks

Market
share

Over Rs. 100 bn

11

89.4%

Domestic banks with less than Rs. 100 bn

12

7.4%

Foreign banks with less than Rs. 50 bn

10

3.2%

Asset size of Present Banks

128

The State Banks will be expected to contribute


significantly towards building a strong and dynamic
banking sector

The two large state commercial banks, BOC and PB, will be
encouraged to grow and expand towards a stronger regional
presence, and to operate with higher levels of capital
The NSB will be encouraged to broad base their banking
activities to contribute to the economy on a larger scale
The Pradeshiya Sanwardhana Bank will be encouraged to serve
the niche market of microfinance, targeting inclusive growth in
the provinces
The other smaller state banks will be encouraged to merge and
play a more cohesive role, since at present these banks account
for just 1.1% of the market share!

129

The banks with assets less than Rs. 100 bn will be


expected to grow beyond Rs. 100 bn through
organic growth or consolidation/merger with other
banks/NBFIs, over a reasonable time horizon
The two Development banks, NDB and DFCC, will be
encouraged to merge in order to create a strong development
bank that could provide a broader impetus to development
banking activities
Foreign banks will be invited to demonstrate greater
participation and contribution to the economy
Commencing 2016, new foreign banks will have to be locally
incorporated

In keeping with such vision, banks will be expected to submit


broad plans by 30th June 2014 for possible mergers and/or
consolidation, and for the greater participation in the economy

130

In the meantime, banks capital will be


strengthened significantly
Key Policy Measure
Increase in minimum capital requirement:
Licensed Commercial Banks - minimum Rs. 10 bn
Licensed Specialised Banks - minimum Rs. 5 bn

Migrate to the advanced approach under the Basel II Capital


Adequacy Framework requirements by the implementation
of Standardised Approach for calculating capital charge for
operational risk under Pillar 1
Adopt Basel III Capital Standards
Increase in quality and quantity of capital of bank;
Introduction of a capital conservation buffer with the
intention of creating capital buffers in good times that
can be used to absorb shocks in periods of stress;
and
Introduction of a counter-cyclical buffer to reduce
pro-cyclicality to prevent excessive credit growth

131

Target Date

Existing Banks, from 1st January


2016
New Banks, from 1st January 2015

During 1st Quarter 2014

During 3rd Quarter 2014: Issue of


guidelines on parallel computation
of the Capital Adequacy Ratio
3rd and 4th Quarters 2014:
Supervisory observation period
In November 2014: Issue Direction
to maintain minimum capital
ratios effective from 1st January
2015

while the Risk Management Framework of


banks will also be improved further
Key Policy Measure
Issue guidelines on the Stress Testing Framework

Target Date

During 1st Quarter 2014

In 2014: Supervisory
Observation period
In November 2014: Issue
Direction to maintain
minimum LCR effective
from 1st January 2015

Implement the new Liquidity Risk Management Framework by the


introduction of the Basel III Liquidity Coverage Ratio (LCR)

Introduce a Regulatory Framework for Valuation of Immovable


Property of Licensed Banks

During 1st Quarter 2014

Introduce prudential requirements to regulate the exposure of the


banking system to asset markets and other potential economic
shocks and concentrations

During 2014

132

133

Further, several new Regulatory measures will be


implemented
Key Policy Measure

Target Date

Incorporate appropriate changes to existing regulatory framework in


line with new accounting standards
Introduction of the new off-site surveillance reporting system
Amendments to existing Directions and other regulations

From 2nd Quarter 2014

Establish minimum standards for core banking systems and other IT


based platforms used by banks

During 2nd Quarter 2014

Develop a comprehensive supervisory framework for consolidated


supervision of banking groups

During 2014

The new regulatory framework will continue to be


in line with international best practices
Adopt Standardised Approach for
calculating capital charge for operational
risk under Pillar 1 in compliance with Basel
II Capital Adequacy Requirement
Issue guidelines to strengthen
The Stress Testing Framework of the
Banking Sector
Minimum Requirements in Core Banking
System of Banks

Amend the Banking Act to take into


account the new developments in
domestic and international financial
markets
Supervision of bank dominated financial
groups to be strengthened
Provisions to facilitate mergers and
acquisition of banks to be introduced
Bank resolution measures to be
strengthened

134

Develop new Regulations on


Liquidity Risk Management
Framework for Valuation of Immovable
Property of Licensed Banks

Require banks to further strengthen


The quantity and quality of capital to
improve their loss absorbency
capabilities
The systems and processes to migrate to
advanced approaches on the Basel II
capital framework
The management of banking risks in an
integrated manner, and
The governance, fitness and propriety of
directors and senior management to
establish operational accountability

The resulting outcomes will lead to a new


equilibrium in the banking sector in Sri Lanka
Larger aggregate capital base
Increased potential to finance large scale transactions
Increased investments by foreign investors
Improved level of efficiency and corresponding profitability
Availability of a full range of financial services at affordable costs
More effective supervision

135

136

At the same time, in order to ensure Financial System


Stability while moving towards a US$ 100 bn economy, the
consolidation of the NBFI sector will be vital
The objective of merger/consolidation plan would be to fashion an
NBFI sector that comprises of smaller number of large NBFIs, which
are fully compliant with the Central Banks regulatory framework,
and which will serve to
Increase the quality and quantity of capital to improve the NBFIs loss
absorbency capabilities and enhance resilience to internal and external shocks
Attract low cost, long term funds in the form of deposits/debt instruments

Improve cost efficiencies in order to be competitive


Diversify the business models and be ready to deal with market volatilities

Manage risks in an integrated manner


Improve the governance, fitness and propriety of directors and senior
management to establish operational accountability

Accordingly, a NBFI sector consolidation plan will


be implemented with incentives proposed from
the 2014 budget

A corporate group will be allowed to operate only one NBFI after end June 2014
Accordingly, they will be required to acquire/merge if they operate more than one NBFI. A
group is to be defined as a holding company, which owns more than one NBFI, or where
common shareholders or directors own controlling stakes in more than one NBFI

Licensed Banks will be actively encouraged to acquire NBFIs


Large NBFIs will be encouraged to acquire or merge with smaller NBFIs
Smaller NBFIs will be encouraged to merge with one another to create large NBFIs
New investors or banks or large NBFIs will be encouraged to acquire negative net worth
NBFIs, or lowly capitalised NBFIs with the new equity investments being made directly
into the negative net worth NBFIs or selected lowly capitalised NBFIs in order to
supplement the capital of such NBFIs
When a new investor makes an equity investment of that nature, a matching long term
advance will be made through the Sri Lanka Deposit Insurance and Liquidity Support Scheme,
on concessionary terms

Consultancy fees for merger and consolidation processes will be paid by the Central
Bank to facilitate the process
The Central Bank will also establish a separate unit headed by an Assistant Governor to
assist in the merger/consolidation process

137

The NBFI Consolidation/Merger Plan will be


implemented according to a time-bound plan
Consolidation/Merger Strategy

138

Target Date for Completion

A group could operate only one NBFI

June 2014

Directors who own controlling shares in more than one NBFI to


arrange for the merger between the NBFIs

June 2014

NBFIs, which are currently


having negative net worth are
expected to be absorbed by
December 2014:
Others to be completed
by 2015

Investors or Banks or Large NBFIs to acquire negative net worth


NBFIs or selected lowly capitalised NBFIs

Increase of minimum core capital of a LFC to Rs. 1 bn

1st January 2016

Increase of minimum core capital of a LFC to Rs. 1.5 bn

1st January 2018

When the consolidation process is completed, the NBFI sector is expected to


comprise about 20 NBFIs, each with an asset base of around Rs. 20 bn

Simultaneously, the Central Bank will significantly


enhance the level of regulatory action in the NBFI
sector, and will

139

Introduce a system of lower leverage ratios to NBFIs which are only partially-compliant
with the Directions of the Central Bank
Publish the maximum deposit levels for each NBFI on a quarterly basis, beginning 2Q,
2014
Introduce a liquidity support fund for NBFIs which require short term liquidity support,
by 2H, 2014
Closely monitor the implementation of the proposed consolidation/merger plan
Strengthen the risk focused regulatory and supervisory system
Use an online early warning system to identify emerging risks in an NBFI
Impose penalties on, and/or disqualify from holding office, key management personnel
when there are continued non-compliances of Central Bank Directions
Review and follow up the rehabilitation process of weak companies in the NBFI sector,
and revive such companies in keeping with the proposed medium term consolidation
plan
Expedite the investigation processes on unauthorised finance businesses

In this newly emerging scenario, certain marketing


practices currently pursued by Banks & NBFIs will
have to be discontinued

140

Lottery schemes will be prohibited


New guidelines will be issued on non-interest incentive schemes
offered by banks to mobilise deposits
Accuracy of disclosures on interest rates, fees and charges, etc.
will be closely monitored
The implementation of the current Directions on Customer
Charter of banks will be enforced
More focused attention will be given to customers complaints
and consumer protection, so as to address grievances in an
efficient and timely manner

The emerging macro-economic fundamentals will


be ideal for the introduction of effective
superannuation products by Banks and NBFIs
The current and impending low interest regime is likely to be
challenging to savers who are dependent on interest income
Therefore, Banks, NBFIs and Insurance companies will be
encouraged to develop and introduce effective and
innovative long term superannuation products to provide
more opportunities to long term savers:
Annuities

Pension products, including Employer sponsored pension products


Insurance schemes with pension plans
Long term Super-savings accounts

Such products will also fulfill the emerging need for long term
savings instruments that are needed to fund long term projects

141

With regard to public debt management, a Medium Term 142


Debt management Strategy (MTDS) to achieve the targeted
composition of the debt will be pursued
Indicator

2013E

Annual Target
2014P

2015P

2016P

Debt/GDP ratio (%)

78.0

74.3

70.6

65.0

Average Time to Maturity of Domestic Debt (years)

4.8

5.5

6.0

6.5

Ratio of Short-term Domestic Debt to Total Domestic Debt (%)

25

24

23

22

Share of Foreign Currency Debt to Total Debt (%)

43

40

37

35

Further improvements in debt


sustainability to be effected
Advanced risk management systems to
be implemented to assess the
underlying risk on an ongoing basis
Average time to maturity (ATM) of
domestic debt portfolio to be further
improved

In addition, the on-going efforts to tighten the


amortization cost will continue
In 2014, the amortization
saving, compared with 2013
is expected to amount to
over Rs. 100 bn!

Over the medium term,


such reduction will continue
to provide space within the
borrowing programme via
lengthened ATM and
interest cost reduction

143

In the meantime, a deeper secondary market for


Government Securities will be developed

144

Secondary market for Government securities (G-sec) will be


broadened and deepened while improving transparency
The E-trading platform will be extended, with two-way quotes made
mandatory
A Central Counter Party (CCP) System will be established together
with SEC, CSE and LankaClear, and settlement of all G-sec
transactions will be made only through such CCP
Limited instruments for the derivative market will be introduced,
once the cash market is developed
Access to alternative international funding sources, which will
enhance and diversify funding options, will be supported

International financial agencies have already shown interest to issue


local currency bonds to finance long term projects, which will help
the development of the bond market further

The development of the entire debt market is


expected to be substantially supported through
the establishment of the CCP

145

It will act as the clearing agency for Government and corporate debt
instruments
It will act as the seller to buyers, and buyer to sellers, and therefore
the credit risk will be mitigated and counterparty confirmations will
not be necessary
It will ensure that all outright
transactions undertaken
through the proposed
E-trading platform and
OTC will be cleared
It will provide for the net
settlement of cash and
securities

The resulting measures will effectively establish a


longer term yield curve for secondary market
transactions
Issue of a half-yearly Treasury bond
calendar
Implementation of the Government
borrowing programme in a prudent
manner to ensure gradual reduction
in market yield rates
Promotion of competition among
foreign investors by establishing
strong access to the Middle-East
and Far East markets
Prudent management of foreign
participants in investments in
Government securities

146

The continuation of effective currency


management practices will be aimed at reducing
the cost of currency supply

The Clean Note Policy will continue, and currency notes that are unfit for
circulation will be withdrawn and destroyed through a robust process
Services of banks will be utilised to establish exchange counters to improve
currency exchange facilities
Continued education of the general public and other stakeholders will be
carried out to increase awareness of good habits of handling currency
notes and coins. The increased public awareness will preserve the public
confidence in currency and minimise the incidence of counterfeit notes
The coin collection programme will be continued in order to recirculate idle
coins. Banks will be instructed to collect the tills issued by them to their
customers within a period of 12 months, in order to bring coins back to
circulation

147

Improved technology will be applied to increase


the level of efficiency of currency management...
Cash operations of commercial banks will be
improved to ensure compliance with the Central
Bank guidelines
The efficiency in unfit notes shredding process will
be increased while maintaining a healthy
environment by procuring a new offline currency
shredder
Banks will be encouraged to exchange good
quality currency notes among themselves,
and thereby reduce the processing cost of
currency to both banks and the Central Bank
Steps will be taken to increase the quality
and lifespan of currency notes, by introducing
new Currency note packing solutions

148

A new series of coins representing the Districts of


Sri Lanka will be issued in 2014

149

The designs for the new series of Rs. 10 coins will depict one or
more of unique Archeological, Cultural, Economic,
Environmental, Religious or Social characteristics of each District
Example:
The Rs. 10 coin depicting the Colombo District will portray certain city sights
and the Colombo Port

To safeguard the integrity of financial transactions,


constant vigilance and risk assessment will be
maintained
The Financial Transactions Reporting Act, No. 6 of 2006 will be
amended to augment the existing regulatory mechanism
Coverage will be expanded to issue rules/guidelines to
designated Non-finance businesses, specifically NPOs, NGOs and
INGOs
A comprehensive National Risk Assessment on AML/CFT
vulnerabilities will be carried out
The co-operation in exchanging financial intelligence with
domestic and international agencies (FIUs), will be enhanced
through MOUs

150

Exchange Control policies will be further relaxed to


support the growing external environment
The development of corporate debt market will be
facilitated by widening the permitted instruments
available for investments by non-residents
Permission will be granted to companies that earn
foreign exchange, to lend in foreign currency to
companies in the same group
A borrowing scheme will be implemented for
companies in priority sectors that promote the five hubs
and tourism
The acquisition of leasehold rights of properties by nonresidents will be facilitated
Permission will be granted for banks to lend to FEEA
holders for any purpose
The investment limits for overseas investments will be
increased
Sri Lankan corporates will be permitted to list their
shares in stock exchanges abroad
Different accounts introduced for non-nationals who
seek residency in Sri Lanka under special schemes will
be amalgamated
The minimum balance requirements in SFIDA will be
removed

Policies will be introduced to facilitate


day to day foreign exchange
transactions of residents

Permit the issue of travel cards

Permit making payments in advance to


meet requirements to secure student
Visa

Permit companies in construction


industry to use available funds in FEEA
to make payments relating to new
overseas projects

Remove the requirement to obtain


permission to make amendments to LCs
relating to imports

The Monitoring Division of the


ECD will be reorganised in order
to build a strong database to
analyse foreign exchange
inflows and outflows

151

152

Regional development strategies will be given a


high level of support to
Promote Small and Medium Scale Enterprises (SMEs) to
reach new heights covering female entrepreneurs, young
entrepreneurs and innovative enterprises
Facilitate the diversification of the Agriculture sector
focusing on promoting export agriculture, scientific farming
techniques, mechanisation of farm activities, thereby
improving agricultural productivity
Facilitate the commercial scale dairy industry to modernise,
and improve productivity of all activities related to the dairy
supply chain, in order to achieve self sufficiency in milk
Facilitate the establishment of Business Support Units and
Business Revival Units in order to support SMEs

153
Regional development activities will concentrate on
providing affordable finance for the SME sector, while also
focusing on the lagging regions & needy sectors

In 2014, loans to the value of


Rs. 21.3 bn will be targeted to
be granted through
concessionary financing
schemes implemented by the
Central Bank
Sector

Amount
Rs Mn

Programme

Expected
No. of
Participants

120

11,000

Entrepreneurship
Development

620

27,300

50

2,500

20,600

Training of Trainers
and Bankers
Post and Pre
Harvest Technology

16

800

Business Start-up

12

1,200

Business Revival

12

1,200

830

44,000

Beneficiaries

9,800

117,000

SME

8,050

23,180

1,485

No of
Programmes

Financial
Literacy/School
Leavers/ Loan
Beneficiaries

Agriculture

Microfinance

Awareness building and training


programmes for SMEs will be
continued in 2014

Dairy

2,000

400

Total

21,335

161,180

Total

Women empowerment & financial inclusion will


be given high priority during 2014
Measures commenced in 2013

Women entrepreneurs in Jaffna


were linked to supermarkets to sell
their produce
Women entrepreneurs in the
Wanni region were linked to
wholesale buyers in Colombo to
sell their produce
New projects were introduced in
areas where the competency levels
of women are considerably high
Banks were permitted to utilise
investment fund account to lend to
women entrepreneurship ventures
with capital up to Rs. 10 mn

New measures in 2014 & beyond

Women will be encouraged to take


leadership roles in micro finance
activities
- Womens participation was close to 80%
in certain micro finance projects

Women entrepreneurs with talent and


potential will be identified in order to
graduate them from micro enterprises
to small and medium scale levels
Special workshops will be conducted
for women entrepreneurs to impart
new skills and technologies to them
Female school leavers will be
encouraged to undertake new ventures
50% of Saubagya loans will be targeted
for female entrepreneurs

154

Major improvements to the Payments &


Settlements platform will be carried out in order
to be prepared for the future

Improvements in the national payment system


including CCAPS will be facilitated and the participation
of banks and non-bank service providers in developing
payment and settlement systems, will be promoted
The supervisory framework will be strengthened and
supervision of Licensed Service Providers of Payment
Cards and Mobile Payment Systems will be continued
The business continuity policy to ensure operational
reliability of the systematically important LankaSettle
System, will be continued

155

Expectations for the Payments System


in a US$ 100 bn Economy
2013E

2016P

Average No. of
RTGS Transactions
per day (High
value payments)

1,300

2,500

Average No. of
non-cash Retail
Payments per day

395,000

750,000

RTGS/SSSS
System
Availability

99.92%

99.99%

The risk factors to the system will be identified and policy measures to mitigate such
risks will be adopted to ensure payment and settlement system stability
The LankaSettle System will be assessed continuously against the new core principles
of CPSS in order to identify and address any deficiencies

The EPF will continue to implement diversification


strategies to maximise returns in the projected
future low interest rate environment
With easing monetary conditions, fiscal consolidation and low
volatility of inflation, market interest rates are expected to remain
low, thereby providing a challenging environment for the EPF to
generate high returns in the medium to long term

Accordingly, the EPF will systematically continue to diversify its investment


portfolio in order to provide better returns to its members
Such diversification strategy will include:
Diversification into new instruments
Investments in foreign currency denominated instruments
Increase participation in secondary market activities

Fund management efficiency will be increased with in-depth analysis of


investments, in compliance with the internal rules and improved risk
management

156

EPF will also continue to improve its services to


enhance efficiency, thereby providing a better
service to its members & employer firms...

Registration of all employers who have more than 50


employees to receive the member contributions and
details through e-media
-

Nearly 80% of its 2.3 million members will be covered by this


scheme
Such initiative will also help to improve the Doing Business ranking
of Sri Lanka

Complete and maintain a member database with a Unique


Identification Number
Establish an Electronic Data Base Management System
and an e-record room by replacing the existing master
files by Q2 2014 with electronic records
Minimise operational risk in a high network dependent
environment

157

Contrary to the views of many detractors, the


Central Bank projections have been realised to a
great extent

*Annual Report/Daily FT Supplement, April 2013

158

159

Going forward, the Medium Term Framework


projections appear quite encouraging
Indicator

Unit

2013 (Est)

Projections

2014

2015

2016

Real Sector and Inflation

Real GDP Growth

7.2

7.8

8.2

8.5

Total Investment

% of GDP

31.0

32.0

32.5

33.0

GDP Deflator

7.0

6.0

5.5

5.0

Headline Inflation

4.7

5.0

4.5

4.0

Trade Balance

% of GDP

-12.8

-11.6

-10.2

-8.4

Current Account Balance

% of GDP

-3.9

-2.4

-1.0

0.1

US$ mn

700

1,500

1,750

3,700

Current Account Balance

% of GDP

-0.5

1.1

1.6

2.3

Overall Balance

% of GDP

-5.8

-5.2

-4.4

-3.8

Government Debt

% of GDP

78.0

74.3

70.6

65.0

Broad Money Growth (M

16.0

14.0

14.0

14.0

Private Sector Credit Growth (in M2b)

8.0

16.0

17.0

17.0

External Sector

Overall Balance
Fiscal Sector

Monetary Sector
2b)

The realisation of those projections will probably


be reflected in the changes that will soon be
visible in the Colombo City Skyline

160

Source: Colombo Central Business District Town Planning Study, December 2013

The new skyline will also mirror the growing


opportunities & the optimism in the economy

161

Source: Colombo Central Business District Town Planning Study, December 2013

162

163