ajith nivard cabraal governor-cbsl- aru - 5

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  • Unit 2000 2005 2013 2014 (Proj) Remarks Real GDP Growth (Avg. for 5 years ending)

    % 5.0 4.0 6.7 7.8 Substantially higher growth

    trajectory

    GDP US$ bn 16.6 24.4 67.2 77.0 176% increase in 8 years!

    Unemployment % 7.6 7.2 4.4 4.0 Steady progress

    Inflation (Annual Average) % 6.2 11.0 6.9 5.0 More than 5 years at single digit

    levels

    Current Account Deficit % of GDP 6.4 2.7 3.9 2.1 Satisfactory progress being made

    Remittances US$ bn 1.2 2.0 6.4 7.0 Steady y-o-y growth, & 237%

    increase in 8 years

    FDI Inflows US$ bn 0.2 0.3 1.4 1.9 Steady growth

    Gross Official Reserves

    US$ bn 1.0 2.7 7.5 8.3 Consistent improvement and

    steady progress Months of

    Imports 1.7 3.7 5.0 5.2

    Exchange Rate (Average) Rs./US$ 75.8 100.5 129.1 130.2* Stable levels maintained

    Budget Deficit % of GDP 9.5 7.0 5.9 5.2 Important progress towards fiscal

    consolidation

    Public Debt % of GDP 96.9 90.6 78.3 74.3 Moving steadily towards greater

    sustainability

    Broad Money Growth (M2b) % 12.9 19.1 16.7 14.0 Close to projected levels

    All Share Price Index (ASPI) No. 448 1,922 5,913 6,814* Reflects strong corporate sector

    performance

    Stock Market Capitalisation Rs. bn 88.8 584.0 2,459.9 2,857* Reflects peace dividend and

    corporate sector vibrancy

    Tourist Arrivals 000 400 549 1,275 1,593 Remarkable increase after the

    conflict

    The Sri Lankan economy has achieved substantial progress in almost all macro-fundamentals over the past 8 years

    2

    * As at end July 2014

  • 3

    The past 4 years were the only HIGH GROWTH + LOW INFLATION years in the post-1977 period

    Source: Road Map, 2014

    indicates year

  • Recent headlines indicate the new benign inflation expectations

    Recent headlines highlighted that inflation accelerated to 3.6% from 2.8% in July 2014

    It shows that perceptions have changed dramatically

    Average inflation over past 65

    months 5.9 %

    4

    In the past, any inflation figure that was less than 10% would have been hailed as a major achievement!

    -5

    0

    5

    10

    15

    20

    25

    30

    Jan

    -94

    Dec

    -94

    No

    v-9

    5

    Oct

    -96

    Sep

    -97

    Au

    g-9

    8

    Jul-

    99

    Jun

    -00

    May

    -01

    Ap

    r-0

    2

    Mar

    -03

    Feb

    -04

    Jan

    -05

    Dec

    -05

    No

    v-0

    6

    Oct

    -07

    Sep

    -08

    Au

    g-0

    9

    Jul-

    10

    Jun

    -11

    May

    -12

    Ap

    r-1

    3

    Mar

    -14

    %

    Movements of Headline Inflation (Y-o-Y)

    (1st August 2014)

    (4th August 2014)

  • Unlike in the past, international organisations such as the IMF have commended Sri Lankas economic management, requiring critics to dig up micro issues

    Executive Directors of the IMF Board approved the Article IV Staff Report for 2014, on a Lapse-of-time basis for the first time in its known history!

    Executive Directors agreed to approve the report without meeting as Sri Lankas macroeconomic fundamentals continued to remain strong

    5

  • The decades-old vicious cycle has now been replaced with the present day virtuous cycle

    Low inflation

    Real interest

    rates

    Enhanced savings

    Regular pipeline of investments

    Sustained growth

    Low debt levels

    Low fiscal deficits

    Sri Lanka is currently experiencing a virtuous cycle

    6

    High inflation

    High interest

    rates

    Low investor

    confidence

    Sluggish investment

    Low Growth

    High debt levels

    High fiscal

    deficit

    Sri Lanka was trapped in a vicious cycle for more than 5 decades

  • Sri Lankas per capita income would surpass US$ 4,000 by 2015 while the GDP would reach US$ 100 bn in 2016

    $981

    2003

    2011

    2013

    2015

    $2,836

    $3,280

    $4,240 (Projected)

    $4,825 (Projected)

    2016

    7

    GDP US$ 67.2 bn GDP US$ 59.2 bn

    GDP US$ 18.9 bn

    GDP

    $ 88.7 bn

    GDP

    $ 101.8 bn

  • On that solid platform,

    what will look like?

  • Sri Lanka: 2020 would have a GDP around US$ 150 bn, a US$ 7,000+ per capita income, and sound macroeconomic fundamentals

    Economic growth averaging around 8% from 2015 onwards

    Inflation at the lower end of mid-single digits

    Poverty at very low levels, with abject poverty having been eradicated

    Unemployment limited to standard unemployment levels

    A debt to GDP level around 50%

    Current account at surplus with foreign reserves growing faster

    A Sri Lankan rupee that has appreciated gently over the years, from 2015 to 2020

    9

  • Sri Lanka: 2020 business outlook would have improved significantly

    Doing Business ranking among the first 20 countries

    Sovereign being rated at investment grade with positive outlook

    Disparities among lagging districts reduced significantly with considerable contribution from all provinces to economic growth

    Economic growth spurred by modern infrastructure

    Sri Lankan ports and airports among the more popular and busy international ports and airports in the region

    Productivity levels improved to higher levels with better skilled labour force

    Advanced technology used in industry, supported by an intelligent work force

    Strong work ethic being practiced by a large segment of the work force

    10

  • Sri Lanka: 2020 real economy too, would have undergone a paradigm shift

    Economy would be more balanced, with foreign exchange earnings greater than expenditure

    The 5 Hubs ++ would have progressed quite well, and each hub as well as existing drivers of the economy would be operating at enhanced levels

    Tourism sector would be catering to about 4.5 million tourists

    Worker remittances would be mainly from a skilled and semi-skilled labour force, treated with greater care, dignity and respect

    Financial sector would be stable and would be having a presence in the region, providing services in Asia

    Sri Lankan business conglomerates would be enjoying serious business relationships with key Asian, European and US counterparts

    The Colombo and major city skylines would have undergone incredible changes

    11

  • Sri Lanka: 2020 sector composition would have undergone a gentle change

    A more modern and high yielding Agriculture sector of US$ 10 bn (6.7%)

    (2013: US$ 7.2 bn)

    A more innovative and advanced Industry sector of US$ 50 bn (33.3%)

    (2013: US$ 21.8 bn)

    A more broad-based and dynamic Services sector of US$ 90 bn (60.0%)

    (2013: US$ 38.1 bn)

    45

    .0

    30

    .7

    12

    .7

    10

    .8

    10

    .0

    6.7

    19

    .1

    28

    .7

    29

    .7

    31

    .1

    32

    .0

    33

    .3

    35

    .9 4

    0.6

    57

    .6

    58

    .1

    58

    .0

    60

    .0

    0

    10

    20

    30

    40

    50

    60

    70

    1950 1977 2009 2013 2016 (Proj) 2020 (Proj)

    Pe

    r ce

    nt

    Sectoral Share of GDP - Actual and Projected

    Agriculture Industry Services

    12

  • 2020 GDP

    2013 GDP

    Agriculture

    Agriculture

    Fishing

    Forestry

    Livestock

    Industry

    Mining and Quarrying

    Apparel

    Other Manufacturing

    Electricity, Gas and Water

    Oil and Gas Exploration

    Marine and Aquatic Resources

    Technology and Innovation

    Construction

    Services

    Wholesale and Retail Trade

    Hotels and Restaurants

    Transport

    Banking

    Communication and IT

    Insurance

    Real Estate

    Healthcare

    Entertainment

    Education Services

    Ownership of Dwellings

    Government Services

    Private Services

    Sri Lanka: 2020 macroeconomic framework would reflect several new drivers in the GDP computation tables

    13

  • Sri Lanka: 2020 would have delivered several new National Mileposts and Targets

    14

    National Mileposts Poverty: Less than 1% Unemployment: Less than 3% Acute Malnutrition amongst children under 5 years: Less than 3% Electricity coverage: 100% Literacy: 100% Computer Literacy: 90% Life Expectancy: Above 80 yrs. for both male and female New Highways: Additional 311 km Mono rails: To be initiated in 2015 Entire road network: All weather roads with 100% rural accessibility Public investment: 8% of GDP National Savings/investment gap: 0.5% of GDP

    Market based Targets Value

    Stock Market Capitalisation: US$ 150 billion Corporate bond market: US$ 30 billion Bank assets: Rs. 18 trillion

  • Sri Lanka: 2020 would have a greater bias towards export of services

    0

    5

    10

    15

    20

    25

    30

    35

    0

    5

    10

    15

    20

    25

    30

    35

    40

    2011 2012 2013 2014(Proj)

    2016(Proj)

    2020(Proj.)

    % o

    f G

    DP

    US$

    bn

    Projected Receipts from the Export of Goods and Services

    Service Receipts (US$ bn)

    Merchandise Exports (US$ bn)

    Total Receipts from the Export of Goods and Services (% of GDP)

    Tourism services

    IT/BPO services

    Aviation services

    Maritime services

    Knowledge economy services

    Item 2013 2016 2020

    Merchandise Exports 10.4 15.9 21.4

    of which

    Tea 1.5 2.2 2.5

    Rubber 0.1 0.2 0.3

    Textiles & Garments 4.5 5.6 8.0

    Rubber products 0.8 1.2 1.5

    Gems, Diamonds & Jewellery 0.4 1.0 1.5

    Services Exports 4.7 9.3 12.3

    of which

    Earnings from tourism 1.7 4.1 6.0

    Port and Airport related services 1.0 1.5 2.0

    IT/BPO services 0.6 1.0 2.0

    Oil and Gas - 0.5 3.0

    Workers remittances 6.4 8.3 10.5

    Foreign Direct Investment 1.4 2.8 4.3

    Long term loan inflows

    Government 1.6 2.2 2.7

    Private sector 0.7 1.0 1.2

    External Account Targets & Projections for 2016 and 2020

    (Per Annum Value, US$ bn)

    15

  • Sri Lanka: 2020 targets would obviously be challenging, and many stiff hurdles would need to be surmounted...

    16

    What needs to be done?

  • Sound macro-economic fundamentals and trends would need to be maintained, even if the global environment is tough

    Actual 2009 2014 2016 2020

    Real Sector

    GDP Growth % 3.5 7.8 8.3 8.0

    Per Capita GDP at Market Prices US$ 2,057 3,719 4,825 7,500

    Inflation (GDP Deflator) % 5.9 6.0 5.0 4.5

    Unemployment % 5.8 4.0 4.0 3.0

    Gross Investment % of GDP 24.4 31.0 33.1 36.5

    External Sector

    Trade Gap % of GDP -7.4 -9.5 -7.2 -4.5

    Exports of Goods and Services US$ bn 9.0 17.6 25.2 33.6

    Imports of Goods and Services US$ bn 11.7 23.2 29.5 37.3

    Current Account Balance % of GDP -0.5 -2.1 0.1 0.5

    Overall Balance US$ bn 2.7 1.7 2.9 3.0

    Fiscal Sector

    Budget Deficit % of GDP 9.9 5.2 3.8 3.0

    Government Debt % of GDP 86.2 74.3 65.0 50.0

    ProjectionsIndicator Unit

    17

  • 18

    Colombo Container mega hub

    Hambantota Free port, Service

    and Industrial port declared as a

    Free Port

    Galle Leisure Port

    Trincomalee Port-related

    industries and Port City

    Oluvil Commercial and

    fisheries

    Kankasanthurei and Point Pedro

    Regional ports

    Second international airport at Mattala

    Modernisation and the 2nd Runway at BIA

    Upgrading of domestic airports

    Colombo as a regional logistics and services hub

    IT literacy and internet access for all

    Creation of knowledge-based jobs

    Promotion of research and innovation

    Sri Lanka as an education destination Accredited foreign universities in Sri Lanka

    Develop renewable energy sources

    Oil exploration and production

    (Mannar, Cauvery, Southern waters)

    Develop oil trade related ancilliary services

    including gas

    Sri Lanka as a top centre in the region for

    commercial services

    Growth of ports and tourism will catalyse the

    development of Sri Lankas commercial sector

    Arrivals target of 4.5 mn by 2020

    Earnings from Tourism

    to increase to US$ 6.0 bn by 2020

    The Economic Diversification Programme would need to continue, based on the 5 Hubs ++ concept

  • Country-wide infrastructure development would need to provide the necessary impetus for investments

    Significant improvements to the macro economy are expected through infrastructure development

    Rapid advancement in physical infrastructure is expected to support the growth momentum in the medium term

    New growth sectors would need to be based around newly developed transport, port, aviation and commercial hubs

    19

  • World Bank Groups

    Doing Business Survey

    Doing Business Indicators improvements and investment grade sovereign rating upgrades would need to be focused upon

    The Index of

    Economic Freedom

    For 2020, Sri Lanka would strive to be among the first 20 countries in the Doing Business Ranking and would strive to have an investment grade sovereign rating with a positive outlook

    20

    89

    129 122 132 136

    83

    116 132 131 133

    85

    120 130 134

    108

    20

    Sri Lanka(B+/B1/BB-) Indonesia(BB+/Baa3/BBB-) Bangladesh(BB-/Ba3/-) India(BBB-/Baa3/BBB-) Philippines(BB/Ba3/BB)

    2012 2013 2014 2020

    107 116

    130 124 115

    97

    115 130

    123

    107

    81

    108

    132 119

    97

    30

    Sri Lanka(B+/B1/BB-) Indonesia(BB+/Baa3/BBB-) Bangladesh (BB-/Ba3/-) India(BBB-/Baa3/BBB-) Philippines(BB/Ba3/BB)

    2011 2012 2013 2020

    BB- BB BBB- BBB

    2014 2016 2018 2020

    Fitch

    B+ BB BBB- BBB

    2014 2016 2018 2020

    S&P

    B1 Ba2 Baa3 Baa2

    2014 2016 2018 2020

    Moodys

    Targets for Improvements in Sovereign Ratings

  • The financial sector would need to be developed and sustained in order to become deeper and more liquid

    The ongoing consolidation process would result in Sri Lankan financial institutions transforming towards being stable, large scale, globally competitive financial institutions

    Capital would need to be more competitive, and Sri Lanka would need to offer a safe environment with reasonable returns

    Public debt issuance would need to be streamlined with new issuances, also focused on developing the capital markets and supporting investment requirements of superannuation funds of the country

    21

    2016 Targets 2020 Targets

    At least 5 banks to have an asset base in excess of Rs. 1 tn At least 3 banks to have an asset base in excess of Rs. 2 tn

    Large state banks to have a regional and /or global presence At least five banks to have a regional or global presence

    Few specialized banks to finance regional development activities

    Well established off-shore banking operation centre under the commercial hub

    Smallest bank to have an asset base of over Rs. 100 bn Well established arbitration centre in Colombo for financial sector dispute resolutions

    Finance companies limited at 20 and the smallest company to have an asset base of Rs. 20 bn

    Strong NBFI sector backed by the banking system

    Local banks playing a key role in social security products

  • The labour force would need to be developed with a special focus on productivity, and the inculcating of a strong work ethic

    Overcome aging labour force challenge

    Focus on increasing labour productivity

    Ensure engagement of female labour force participation in the work force

    Minimise underemployment and labour market misalignment

    Introduce flexi-hours at the work place

    Consider restructuring the payment cycle, including the payroll system, in line with those followed by advanced economies, to increase and smoothen consumption levels of the work force

    22

  • The private sector would need to be continuously facilitated to become even more vibrant and enthusiastic

    A dynamic private sector that does not hesitate to engage in new ventures and investments is the way forward to 2020

    Transparent mechanisms with proper administration and due process

    Strong legal frameworks that provide swift recourse at times of remedial action

    Fundamentally sound public and private sector institutions, and strong regulatory authorities

    Vibrant payments and settlement systems with suitable infusion of new technologies

    23

  • A continued flow of capital investment along with a substantial improvement in productivity would be required over the next several years...

    A steady improvement in investment to GDP ratio reaching 36.5% by 2020 is required

    Investments need to be attracted from both local and foreign sources during the next few years

    Areas in which foreign funds could be introduced:

    FDI

    Capital inflows: portfolio and government securities

    Commercial borrowings

    Bilateral funding opportunities

    Investment treaties and investments with counterpart governments

    24

  • The Investment transmission channels would need to be maintained at optimum levels for the smooth flow of funds The channels for investment need to be robust in order to

    ensure smooth transmission and flow of funds into and out of Sri Lanka

    Financial intermediaries need to provide a reasonable low transaction cost regime among

    Payment gateways need to be secure and ensure the unhindered flow of funds

    Counterparty and legal risks need to be at minimum levels

    25

  • The capital flow system would need to be well managed

    Proper capital management would provide for sustained flow of funds

    Capital flows must be in both directions, so that Sri Lankan entrepreneurs too could reap the benefit from global investment opportunities

    A gradual and cautious capital account liberalisation process could facilitate the flow of capital, as well as ensuring sustained growth

    26

  • The notorious middle-income trap would need to be avoided

    Increased wage pressures may present a challenge to maintaining price stability

    Possibility of wider disparity among income classes, as may be reflected by a widening of the Gini coefficient would need to be addressed

    Declining labour productivity levels as faced by certain middle income countries would need to be responded to

    27

  • The issue of changing demographics would need to be addressed...

    Aging population and high retirement costs

    Increased expenditure on healthcare

    Ensuring adequate female labour force participation

    Loss of healthy and experienced persons to the workforce due to current retirement practices

    28

  • And, most importantly, continuous political stability and policy consistency would need to be ensured

    In the future too, implementation of progressive economic policies would require political support at times of challenges

    Investors would also need to be assured of policy consistency so that they are able to commit themselves to long-term, large-scale investments

    29

    The positive political environment since 2006 helped to effectively steer the economy out of global crises and turbulent times in the recent past

  • 30

    This

    To-Do List

    is a

    formidable one,

    but if all stakeholders,

    private and public,

    approach

    the challenges diligently,

    it could be

    comfortably delivered

  • Sri Lanka: 2020 is surely taking shape as reflected in Colombos new and emerging skyline

    Source: Report by Ernst & Young, 2013

    31

  • Sri Lanka: 2020

    While focusing on Sri Lanka: 2020, a longer term vision, whereby Sri Lanka moves to the High Income category by 2040, must also now enter the planning horizon

    Sri Lanka: 2040

    32

    Sri Lanka: Now US$ 3,280

    As proposed by the CCC Chairman at the 175th Anniversary Celebration, that vision must also now enter the board rooms of Chamber members

    Low

    Income

    Lower

    Middle

    Income

    Upper Middle

    Income High Income

    World Bank Categorisation:

    2012 GNI per capita, calculated based on World Bank Atlas method

    1,035 4,085 12,615

    Middle Income

    Congo, Dem. Rep.

    (230) India (1,580)

    Thailand (5,210)

    Malaysia (9,820)

    Bermuda (104,590)

    Philippines (2,500)

    Norway (98,860)

    Switzerland(80,970)

    South Africa (7,610)

    Chile (14,310)

    Rep. of Korea

    (22,670)