cbsl road map 2013
TRANSCRIPT
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1
2013 is the seventh consecutive year that the
Central Bank is presenting its policy direction &
work plan for the upcoming period
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2
His Excellency the President, Mahinda Rajapaksa as the Minister of Finance
for the excellent leadership and guidance given
The Deputy Minister of Finance and Planning, Hon. Dr. Sarath Amunugama
and the Former Deputy Minister of Finance and Planning, Hon. Geethanjana
Gunawardene for their constant guidance and support
The members of the Monetary Board, Dr. P.B. Jayasundera, Secretary to the
Treasury, Mrs. Mano Ramanathan, Mr. Nimal Welgama and Mr. Neil
Umagiliya for all their assistance, guidance and wise counsel
Deputy Governors, Dr. Nandalal Weerasinghe, Mr. Ananda Silva and
Mrs. Chandra Premaratne, Assistant Governors, Heads of Departments andall staff of the Central Bank who have worked with dedication, commitment
and professionalism to fulfill the mandate of the Central Bank
The Consultative Committees on Monetary Policy, the Financial SystemStability and all other committees for the policy advice
Last years satisfactory results were due to thecontributions of many, to whom sincere thanks are due
3
Prior to presenting
the policy direction and strategies
for 2013 and beyond,
a review of the post-conflict period of
2010, 2011 and 2012*
would be useful
* Figures for 2012 are provisional
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3
A major growth momentum has been witnessed in thefirst two years, 2010 & 2011, while a gentle
deceleration in growth took place in 2012 Peace dividend has been
clearly visible
Remarkable performanceshave been witnessed in all keysectors of the economy
Business confidence has beenenhanced during the 3-yearperiod
Benign macro-economicfundamentals have beenestablished across all vitalsectors
6.2
7.0
6.3
4.3
1.6
2.1
4.2
6.1
7.1
8.5
8.0
8.6
8.08.1
8.58.3
7.9
6.4
4.8
6.8
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2008-Q1
2008-Q2
2008-Q3
2008-Q4
2009-Q1
2009-Q2
2009-Q3
2009-Q4
2010-Q1
2010-Q2
2010-Q3
2010-Q4
2011-Q1
2011-Q2
2011-Q3
2011-Q4
2012-Q1
2012-Q2
2012-Q3
2012-Q4(Est)
% Quarterly Economic Growth
5
By end 2011, the Sri Lankan economy had recordedremarkable progress amidst global challenges
8.3% on top of 8.0% in 2010 (First time ever)High Economic Growth
29.9% of GDPIncreased level of Investment
Declined to 6.7% (Annual Average) in December 2011(Longest ever continuous period at single digits)Low Inflation
Historic low at 4.2%Decline in Unemployment
Exports grew by 22.4% and Imports by 50.7%
Exports & Imports as a % of GDP: 17.8% & 34.3%, respectivelyBuoyant External TradeArrivals increased by 30.8% to 855,975
Earnings increased by over 44% to US$ 830 mnTourism on an accelerator
Grew by 25% to US$ 5.1 bnRemittances continued to increase
US$ 1,066 mnHighest FDI recorded
US$ 6 bn at end year (3.5 months of imports)Foreign Reserves at
comfortable levels
6.9% of GDPDecline in Budget Deficit
Along with improved business confidence, leading to high creditgrowth of 34.5%
Stable interest rates
A deficit of US$ 1,061 mn, mainly due to unprecedented import
demandBalance of payments
78.5% compared to 81.9%in 2010 (Lowest in 30 years)Decline in Govt. debt /GDP ratio
6
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4
By that time however, the global economy which failedto take off in 2011, had slowed down further in 2012
-6
-4
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Percent
Real GDP Growth
World
Advanced economies
Euro area
Emerging market and developing economies
Source : IMF, WEO Database, Oct 2012
7
The Sri Lankan economy too, faced heightened globaland domestic challenges in 2012
Globally The European Sovereign debt crisis, Fiscal cliff in the US, etc.
Global geo-political uncertainties, Iran sanctions, etc.
Persistently high petroleum prices
Locally Excessive credit demand and high imports
Drought conditions that severely affected Agriculture and
hydro power generation
Heavy rains in the last quarter that disrupted food supplies
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5
To deal with these challenges, several tough policydecisions were implemented at the beginning of 2012
Monetary policy Increased policy interest rates
Placed ceiling of 18% on bankcredit expansion; Additional 5%for foreign funds
Exchange rate policy Allowed greater flexibility
Curbed speculative behaviour inthe Forex market
Fiscal policy Imposed higher tariffs and excise
duties on selected imports Administered pricing policy
Allowed greater pass-through ofEnergy and Transport prices
The Repurchase
rate and the
Reverse
Repurchase rate
of the Central
Bank raised by
50 bps each
A ceiling on
rupee credit
growth imposed
on Licensed
Banks.
This was
expected to
directly impact
theintermediate
target of the
Monetary Policy
Framework
The Repurchase
rate raised by
25 bps and the
Reverse
Repurchase rate
raised by 75 bps
9
-5
0
5
10
15
20
25
30
35
Dec-78
Dec-80
Dec-82
Dec-84
Dec-86
Dec-88
Dec-90
Dec-92
Dec-94
Dec-96
Dec-98
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Percent
Inflation continued to remain in single digits...
The Sri Lankan economy showed resilience andadjusted reasonably well to those measures
-20
2
4
6
8
10
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012(E)
Percent
GDP growth was reasonably strong
10
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6
And, as expected, import expenditure declined Cumulative expenditure on imports declined
by 4.5% during the first 11 months, reflectingdeclines in:
Consumer goods imports by 17.2%
Intermediate goods imports by 3.7%
Non-oil imports declined by 8.4%
Nevertheless, Investment goods importsincreased by 4.8%
0
5,000
10,000
15,000
20,000
25,000
2007 2008 2009 2010 2011 2011
(Jan-Nov)
2012
(Jan-Nov)
US$ mnImport Performance (2007 - 2012)
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
8090
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
(%)Contribution to y-o-y change in Imports
Consumer goods
Intermediate goods
Investment goods
Other
66.5
61.3
41.4
77.9
34.7
22.1
27.913.4
-3.4
-6.4-15.0
-25.1
-4.7
-25.4
-10.0
-8.4
47.9
72.1
38.0
68.4
30.9
20.6
7.83.0
-6.5
-1.3
-23.1
-15.4
-6.8
-30.4
-11.5
-17.2
-40 -20 0 20 40 60 80
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
% Growth in Imports
Y-o-Y Growth in Imports
Y-o-Y Growth in Imports net of Petroleum
Imports as a % of GDP: 31.5%
11
At the same time however, export earnings too, declinedas a result of weak global demand Earnings from exports declined due to;
Lower prices of key export items stemming fromlower international commodity prices
Subdued global demand in major exports markets
Earnings from exports declined by 6.6% in the first11 months in 2012
Industrial exports by 7.5% Agricultural exports by 8.7%
However, exports of mineral products increased by68.1%
0
2,000
4,000
6,000
8,000
10,000
12,000
2007 2008 2009 2010 2011 2011
(Jan-Nov)
2012
(Jan-Nov)
US$ mnExport Performance (2007 - 2012)
500
520540
560
580
600
620
640
660
680
700
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3
US$ mn
Agricultural Exports (2011 - 2012 Q3)
0
500
1,000
1,500
2,000
2,500
2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3
US$ mnIndustrial Exports (2011 - 2012 Q3)
Exports as a % of GDP: 16.5%
12
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7
More importantly, the trade balance contracted
Trade deficit is expected to
contract to 15.1% of GDP in 2012,
from 16.4% in 2011
-1200
-1000
-800
-600
-400
-200
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
US$mn
Trade Balance
2011
2012
The cumulative deficit inthe trade account declined
by 2.1% to US$ 8,583 mn
during the first eleven
months of 2012 from the
corresponding period of
2011.
Deceleration in the growth
in the trade balance was
driven by decliningexpenditure on consumer
and non-oil intermediate
goods imports.
13
As a result of the contraction of the trade deficit and theincrease in other earnings, the current account deficitreduced substantially in 2012
Other inflows to the Current Account
Tourism on an accelerator
Workers remittances continued to
bring in substantial foreignexchange
Trade in services improved with
BPO and KPO sectors gathering
momentum
Accordingly, the current account deficit is expected to reduce to
US$ 3.3 bn or 5.5% of GDP in 2012, down from 7.8% in 2011.
-12
-10
-8
-6
-4
-2
0
-12
-10
-8
-6
-4
-2
0
2007 2008 2009 2010 2011 2012 P
Percent
US$bn
Trade Balance and the Current Account Balance
Trade Balance
Current Account Balance
Current Account Balance as a % of GDP (Right Axis)
14
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8
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2007 2008 2009 2010 2011 2012 P
US$bn
BOP Overall Balance
Leading to the Balance of Payments recording asurplus in 2012
The BOP improved from adeficit of US$ 1,061 mn in 2011,to a surplus of over US$ 100 mnin 2012
The BOP is expected tostrengthen further in 2013 andbeyond, with the gradualrecovery of trading, servicesand investment partners acrossthe globe
15
5
7
9
11
13
15
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Pe
rcent
Movement of Selected Market Interest Rates
Repo
Rev Repo
Monthly AWPR
AWDR
AWFDR
During the year, higher policy rates, credit ceiling &lower levels of liquidity led to higher market interestrates, curtailed rapid increase in credit & checkedimport demand
6
8
10
12
14
6-Feb-11
23-Mar-11
7-May-11
21-Jun-11
5-Aug-11
19-Sep-11
3-Nov-11
18-Dec-11
1-Feb-12
17-Mar-12
1-May-12
15-Jun-12
30-Jul-12
13-Sep-12
28-Oct-12
12-Dec-12
Percent
Treasury Bill Rates and Policy Interest Rates
Repo
Reverse Repo
91- Day Treasury bill
364- Day Treasury bill
8.5
33.7
60.2
24.1
-10
0
10
20
30
40
(20)
-
20
40
60
80
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Percent
Rs.bn
Credit granted by Commercial Banks to
the Private Sector
Monthly change in credit (Absolute terms) Growth of credit (y-o-y)
Growth in private sector
credit, which increased
rapidly since the latter part of
2010 and continued until Q1
2012, declined thereafter
16
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9
However, in spite of significant price revisions, credit topublic corporations increased in 2012
Credit to public corporationsincreased by around Rs.63 bn.
Bulk of the increase was due to creditextended to CEB and CPC, as a resultof:
CEBs reliance on thermal powergeneration due to erratic weatherpatterns and continued drought.
CEBs increased cost of generationand the re-imposition of the FAC didnot offer sufficient relief to covercosts.
CPC selling fuel at a loss to thetransportation sector, and supplyingfuel to CEB for electricity generationat well below cost.
145
198
261
-
50
100
150
200
250
300
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Rs.bn
Credit Obtained by Government Corporations
-
1,500
3,000
4,500
6,000
7,500
9,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012(Proj)
Hydro Thermal
Electricity Generation (GWh)
17
-
50
100
150
200
250
300
350
400
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Rs.bn
CBSL Treasury bill holdings and
Provisional advances to the Government
Provisional Advances
Treasury Bill holdings
Net Credit to Government (NCG) also increased during2012
The increase in NCG by Monetary Authorities was around Rs. 3 bn during
2012.
The increase in NCG by LCBs is estimated to have been around Rs.142 bn
during 2012.
531550
571
713
400
450
500
550
600
650
700
750
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12(est)
Rs.bn
NCG by Licensed Commercial Banks (LCBs)
18
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10
The banking sector utilised funds raised from abroad tofacilitate domestic economic activity, resulting in a decline
in Net Foreign Assets (NFA) NFA of the banking system
declined significantly by
around Rs.122 bn during
the first eleven months of
2012, following the decline
in NFA of commercial
banks.-500
-400
-300
-200
-100
0
100
200
300
400
500
600
J
an-10
M
ar-10
M
ay-10
Jul-10
Sep-10
N
ov-10
J
an-11
M
ar-11
M
ay-11
Jul-11
Sep-11
N
ov-11
J
an-12
M
ar-12
M
ay-12
Jul-12
Sep-12
N
ov-12
Rs.bn.
NFA of Mo neta ry Aut hor iti es NFA of Commerci al Ba nks
NFA of the Banking System
Net Foreign Assets (NFA)
This decline was a reflectionof the shift in commercial
banks foreign assets to
domestic assets.
19
Monetary expansion was subdued and reached thetargeted levels by end 2012
Broad money growth, year-on-year
(y-o-y), was expected to decline to
16.2% by end December 2012,
from a peak of 22.9% in April.
Reserve money growth was in line
with the projected path for 2012Y-o-Y Growth of M2b (%)
Month 2011 2012
January 16.7 20.1
February 17.7 21.9
March 17.5 22.8
April 18.4 22.9
May 19.4 20.9
June 20.7 20.5
July 20.7 19.8
August 20.6 20.2
September 20.7 18.9
October 19.8 18.2
November 20.6 18.1
December 19.1 16.2 (proj)
10
12
14
16
18
20
22
24
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Percent
Growth of Broad Money (M2b)
-30
-10
10
30
50
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Percent
Contribution to Year-on-year growth of M2b
Net Foreign Assets Credit to the Private Sector
Credit to Public Corporations Cla im on Government (net)
Other Items (net) Broad Money (M2b) growth
20
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11
9.2
7.6
0123456789
10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Percent
Movement of Headline and Core Inflation
Headline (Y-o-Y) Headline (Annual Avg.)
Core (xFFET+ RC) (Y-o-Y)
As a result, it was possible to maintain inflation at singledigit levels during the year (and cumulatively for 47months), although supply side pressures were severe
Headline Inflation Annual average: 7.6% in Dec. 2012
Year-on-year: 9.2% in Dec. 2012
Core Inflation Annual average: 5.8% in Dec. 2012
Year-on-year: 7.6% in Dec. 2012
Inflation moved upwards during the year mainly due to:
Supply disruptions on account of drought conditions
Upward adjustments of several administratively determined prices
Upward duty revisions of several imported items
Pass-through of the depreciation of the rupee
High credit expansion in the past
Low base that prevailed in 2011
21
Towards the end of the year, with the tight monetarypolicy attaining the expected stabilisation objectives,some relaxation measures were possible and wereeffected
Repurchase rate and the Reverse Repurchase rate
were reduced by 25 basis points in December 2012
Announcement was made that the credit ceiling will
be allowed to expire at the end of 2012
These measures are expected to stimulate theeconomy to return to a higher growth path thisyear while maintaining inflation around thetargeted levels.
22
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12
The multi-pronged policy package in early 2012,helped the economy get back on track swiftly, and to
record the shortest tightening cycle since 2001
Since 2001, Sri Lanka has
completed two tightening
and two relaxing cycles in
terms of policy interest
rates
The proactive measure of
placing a ceiling on rupee
credit expansion,considerably shortened
the transmission lag.0
5
10
15
20
25
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Percent
Key Policy Interest Rates
Repo rate Reverse Repo rate
Dec-12
23
During the year, foreign reserve accumulation has beenprudent not too excessive nor too low
Reserves, which were used for intervention during the first half to face external
challenges and to effect an orderly adjustment, were shored up by the end of the year
Reserves improved to US$ 6.8 bn by end 2012 from US$ 6.0 bn by end 2011. This is
equivalent to 4.4 months of imports.
The healthy reserve position was supported by the inflow of funds
from foreign sources, which have been continuously encouraged in
order to bridge the savings-investment gap
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
8
9
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Months
US$bn
Gross Official Reserves and Months of Imports
Gross Official Reserves ( Left Axis) Months of Imports (Right Axis)
4.4
mths
US$
6.8
bn
24
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13
In particular, workers remittances increasedsignificantly...
Workers remittances are estimated to be
around US$ 6 bn in 2012, up by 16.8% fromUS$ 5.1 bn in 2011
As a percentage of GDP: 10%
As a percentage of external current receipts: 30%
Main reasons for the increase:
Incentives to encourage Sri Lankan migrants to
open NRFC accounts
Expansion in global branches of Sri Lankan
commercial banks and ATM network mainly in
the Middle East, Australia, France, Canada and
Singapore
Setting up of new exchange centers in Canada,
Malaysia, Japan, Cyprus and Singapore
Introduction of new web based products
supported by the latest technology such as
Peoples eRemittance
Departures for foreign employment during the
first half of 2012 stood at 139,092, which is anincrease of 9.9%
Increase of migrant workers of the professional
category by 33%
2,1612,502
2,9183,330
4,116
5,145
6,007
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2006 2007 2008 2009 2010 2011 2012 Est.
US$ mnWorkers' Remittances
10.1%
of GDP8.7% of
GDP
8.3% of
GDP7.9% of
GDP7.2% of
GDP7.7% of
GDP7.6% of
GDP
25
The high level of inflows on account of emerging services,also buttressed the current account
Presently, there are over 400 IT and
IT enabled entities with
international recognition operatingin Sri Lanka
The Sri Lankan ICT/ BPO industry is
among the top 5 export revenue
earners for Sri Lanka, employing a
workforce of 35,000, with exports
amounting to over US$ 600 mn 0.00.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2006 2007 2008 2009 2010 2011 2012 Est.
US$ bnInflows to the Services Account
Foreign exchange inflows on account of emerging services such as export of software
and Information Technology Enabled Services (ITES), helped to support the current
account substantially
Sri Lankas ICT/BPO industry is set to
achieve the target of reaching US$ 1 bn
in exports by 2015 with an estimated
workforce of over 80,000
26
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14
In addition, other inflows to the capital and financialaccount were timely and significant
Net portfolio investments inflow (2012): US$ 305 mn.
(In 2011, an outflow of US$ 171.5 mn was recorded)
Project loans to the Government (excluding sovereign bond
proceeds): US$ 1.6 bn (JanOct)
Net inflows from sale of Government securities: Treasury
Bills + Treasury Bonds (2012): US$ 843 mn
Receipt of Government Grants: US$ 124 mn (JanOct)
Foreign Borrowings by the Commercial Banks: US$ 973 mn
(Jan-Nov)
Sovereign Bond receipts: US$ 1 bn
Corporate Sector inflows: US$ 307 mn (JanSep)
27
-50
-40
-30
-20
-10
0
10
20
30
1975Dec
1976Dec
1977Dec
1978Dec
1979Dec
1980Dec
1981Dec
1982Dec
1983Dec
1984Dec
1985Dec
1986Dec
1987Dec
1988Dec
1989Dec
1990Dec
1991Dec
1992Dec
1993Dec
1994Dec
1995Dec
1996Dec
1997Dec
1998Dec
1999Dec
2000Dec
2001Dec
2002Dec
2003Dec
2004Dec
2005Dec
2006Dec
2007Dec
2008Dec
2009Dec
2010Dec
2011Dec
2012Dec
Rupee depreciation against the US$ 1975-2012
0
20
40
60
80
100
120
140
1975Dec
1976Dec
1977Dec
1978Dec
1979Dec
1980Dec
1981Dec
1982Dec
1983Dec
1984Dec
1985Dec
1986Dec
1987Dec
1988Dec
1989Dec
1990Dec
1991Dec
1992Dec
1993Dec
1994Dec
1995Dec
1996Dec
1997Dec
1998Dec
1999Dec
2000Dec
2001Dec
2002Dec
2003Dec
2004Dec
2005Dec
2006Dec
2007Dec
2008Dec
2009Dec
2010Dec
2011Dec
2012Dec
End-Month LKR/US$ Exchange Rate 1975-2012
A robust and flexible exchange rate policy had beenimplemented, which has given consideration to all keyaspects of the economy Overall, the rupee depreciated against the
US dollar by 10.4% in 2012, reflecting the
increased demand for forex in the market,
due mainly to oil imports
However, since June 2012, the rupee
appreciated by 5.3%, and is expected tostabilise over the medium-term
105115125135145155165175185195205215
2-Jan-12
23-Jan-12
14-Feb-12
6-Mar-12
27-Mar-12
19-Apr-12
11-May-12
31-May-12
21-Jun-12
12-Jul-12
2-Aug-12
22-Aug-12
12-Sep-12
2-Oct-12
22-Oct-12
12-Nov-12
4-Dec-12
24-Dec-12
Rs.
LKR Movements against US$, GBP, and Euro
LKR/USD LKR/GBP LKR/EURO
28
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Poverty alleviation and inclusive growth have been givenhigh priority while socio-economic factors have been
improving constantly and consistently
28.8%
22.7%
15.2%
8.9%
0%
10%
20%
30%
40%
1995/96 2002 2006/07 2009/10
Poverty Headcount Ratio (% of Population)
Province 2000 2005 2011
Western 49.6 50.8 44.4
Central 9.4 8.5 9.8
Southern 9.4 8.9 11.1
Northern 2.2 3.0 3.7
Eastern 4.5 4.7 5.7
North Western 10.4 8.9 10.0
North Central 3.9 4.3 4.6
Uva 3.9 4.5 4.5
Sabaragamuwa 6.7 6.4 6.2
The dominance of the Western Provinceis diminishing and the contribution byother provinces to GDP is on the rise
Provincial Share of GDP
29
Prosperity as tracked by the Sri Lanka Prosperity Index(SLPI) has increased over the years...
Indicator 2009 2010 2011 Growth2010/11
Sri Lanka Prosperity Index 56.5 58.2 60.6 4.1Economy & Business Climate 66.0 67.4 70.1 4.0Well Being of the People 52.5 54.4 56.4 3.6SocioEconomic Infrastructure 50.9 52.8 55.4 4.9
0 20 40 60 80
Uva
Eastern
North Central
Northern
S'gamuwa
North Western
Central
Southern
Sri Lanka
Western
Province-wise Performance of SLPI: 2009 - 2011
2009
2010
2011
Improvements have taken place in
all sub-indices. But the highest
improvement has been in the
Socio-Economic Infrastructure
sub-index
Prosperity has improved in every
province during this period
1. Per capita GDP
2. Employment Rate
3. Informal Sector Wages
4. Percentage of Poor Households
5. All Island/Provincial CPI
6. Number of Industrial Enterprises per 1,000
Population (Density)
7. Number of Bank Branches per 100,000
Population (Density)
8. Government Hospital Beds per 1,000
Population
9. Government Medical Officers per 100,000
Population
10. Low Weight Births per 1,000 Live Births
11. Schools per sq km
12. Pupil Teacher Ratio
13. Dropouts from Secondary Education
(Secondary School Attainment)
14. G.C.E O/L Pass Rate and Number of University
Admissions per 100,000 Population
15. Percentage of Schools with EnglishMedium Classes
16. Number of Vehicles per 1,000Population
17. Number of Supermarkets per 1 MillionPopulation
18. Average number of Film-goers perMonth as a Percentage of Population
19. Number of Persons Treated forRespiratory Diseases per 1,000Population
20. Per Capita Mosquito Coil Usage
21. Per Capita Electricity Usage
22. Number of Telephone Connections per1,000 Population
23. Road Density
24. Number of Reported crimes per 1,000Population
25. Percentage of Schools with SafeDrinking Water Facilities
26. Percentage of Schools with ComputerFacilities
Variables of the Sri Lanka Prosperity Index
30
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16
At the same time, unemployment reached itshistorically lowest rate Unemployment rate declined to 3.9% in
first half of 2012 due to:
Continued employment generation due toexpansion of economic activities
Increased employment in the Industrysector, particularly construction
Unemployment declining among moreeducated categories (GCE A/L and above)
Total number of departures for foreignemployment increased by 7.7% in the firsthalf of 2012, over the same period of 2011
6.05.4
5.8
4.9
4.2 3.9
0
1
2
3
45
6
7
2007 2008 2009 2010 2011 2012 FH
Unemployment Rate %
0
5
10
15
20
25
Australia
Canad
a
Chin
a
CzechRepublic
Franc
e
German
y
Greec
e
Indonesia
Irelan
d
Italy
Japa
n
Kore
a
Malaysia
NewZealan
d
Pakista
n
Portugal
Russia
Singapore
Spain
SriLank
a
Swede
n
Switzerlan
d
UnitedKingdom
UnitedStates
Unemployment Rates % 2012 (Est)
These developments were incontrast to the experiences of
other economies
31
0
20
40
60
80
100
120
140
160
180
200
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
IndexPoints
Labour Productivity of Selected Economies (2002=100)
USA Australia
Germany Japan
Singapore Taiwan
UK Sri Lanka
Labour productivity also improved, but continuedimprovements are necessary
Overall labour productivity,
measured by GDP per worker, has
been improving
Industry and Service sectors
recorded growth in
productivity However, labour productivity
in the Agriculture sector
remains low
-
100
200
300
400
500
600
2005 2006 2007 2008 2009 2010 2011
InRs.'000perperson
Movement of Labour Productivity
Ag riculture Industry Servi ces Total labour productivity
Source: U.S. Department of Labor, Bureau of Labor Statistics, CBSL Estimates
With declining unemployment and
rising relative wages, improving
labour productivity to spur
economic growth has become
increasingly important.
32
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17
A serious commitment has been made by theGovernment towards sustainable fiscal consolidation
The overall fiscal deficit is estimated to be 6.2% of GDP in 2012, down from
6.9% of GDP in 2011, mainly due to expenditure rationalisation policies
-9.9
-8.0
-6.9-6.2
-12
-10
-8
-6
-4
-2
0
2009 2010 2011
2012
Est
%ofGD
P
Budget Deficit
Recurrent expenditure declined, while public investment was maintained
at a level to sustain the targeted growth momentum
18.216.7
15.414.7
6.8 6.4 6.2 5.8
0
4
8
12
16
20
2009 2010 2011 2012
Rev Est
%ofGDP
Government Expenditure
Recurrent Public Investment
33
As a direct result of the public investment, massiveinfrastructure projects have transformed the country
Road development projects The Southern Expressway Project - 126 km (Phase 1- Completed, Phase 2 completion 2013)
The Colombo - Katunayake Expressway - 26 km (Completion 2013)
The Colombo Outer Circular Highway Project 29 km (Phase 1- Completion 2013)
Colombo North/East Highway Project (Feasibility study in progress)
Kandy Badulla Alternate Highway Project 34 km (Feasibility study done)
Power projects
900 MW Norochcholai Coal Power Plant (Phase 1 (300 MW) Commissioned, Phase 2 - completion2014)
120 MW Uma Oya Hydro Power Project (Completion 2015)
500 MW Sampur Coal Power Project (Completion 2017)
20 MW Moragahakanda and Kaluganga Reservoir Project(In Progress)
Port development projects
The South Colombo Harbour Project (Phase 1 Completion 2013)
The Hambantota Port Development Project (Phase 1 - Completed, Phase 2 completion 2015)
The Oluwil Port Development Project (Completion 2013)
The Kankasanthurei Port development Projects (In progress)
Airport development projects
Second International Airport at Mattala (Completion 2013)
BIA Expansion Project (In progress)
Domestic Airport Development Ampara, Koggala, China-Bay, Jaffna and Ratmalana
Ongoing rural infrastructure development projects
Gama Neguma, Maga Neguma, Small Irrigation projects and Kirigammana projects
Lighting Sri Lanka (Target - 100% electrification by 2013) Several mega hotel projects, condominiums, shopping malls, development of Northern and
Eastern provinces, and water supply projects34
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18
Aviation Hub Second international airport
at Mattala
Modernisation of the Bandaranaike International
Airport (BIA) and building of second runway at the
BIA
Development and upgrading of domestic airports
Position Colombo as a regional logistics and services
hub and as a hub for budget airlines
Energy Hub Develop renewable
energy sources
New oil refinery at Hambantota
Oil exploration and production
3 sea basins (offshore) have been identified
(Mannar, Cauvery, Southern Waters)
Develop oil trade-related ancilliary services
including gas
Maritime Hub
Colombo Port Container
mega hub
Hambantota Port Free port-
service, industrial and multi-purpose
Galle Port Cruise shipping centre
Trincomalee Port-related industries
Oluvil Port Commercial and
fisheries
Kankasanthurei & Point Pedro
Regional ports
Knowledge Hub Target IT literacy and internet access for all
Creation of knowledge-based jobs
Commence degree programmes directly targeting foreign
students
Accredited foreign universities to set up university colleges
in Sri Lanka
Commercial Hub
Establish Sri Lanka as the
foremost centre in the region in the
provision of commercial services,
International banking and international investments
With growth of ports and tourism, Sri Lankas commercial
sector will develop naturally
South Asian
Economic
Hub
Tourism Hub Arrivals to increase to 2.5mn
by 2016
Earnings from Tourism
to increase to US$ 2.8bn by 2016
The 5-hub concept introduced in Mahinda Chintana,has been gaining ground while tourism has emerged
as a key thrust industry
35
Tourist arrivals and earnings have been on targetfor 2012 & beyond Tourist arrivals increased by over 17% to 1,003,000
During 2012, earnings from tourism is expected to have
increased by 24% to US$ 1,029 mn.
Targets for Tourism Sector by 2016, now seem more
realistic:
- Tourist arrivals: 2.5 mn
- Foreign Direct Investment in Tourist related projects:
US$ 3 bn
- Tourism related employment: 500,000 persons
- Foreign exchange earnings: US$ 3.5 bn
Best place to visit in 2013 Lonely Planet
Among six best of the world 2012 destinations
National Geographic Traveler Magazine
Ranked 3rd hottest new holiday destination to travel in
2012Cond Nast Traveller Magazine
Best destination to visit in 2013 British Airways
Many accolades have been received from reputed media:
-
200
400
600
800
1,000
1,200
2009 2010 2011 2012 (Est)
Toursit Arrivals ('000)
0
20
40
60
80
100
120
140
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
US$mn
Earnings from Tourism
2009 2010 2011 2012
36
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19
At the same time, Sri Lankas HDI Ranking has nowreached the best level in South Asia, and is above the
world average
0.50
0.55
0.60
0.65
0.70
1980 1990 2000 2005 2006 2007 2008 2009 2010 2011
HDIValue
Sri Lanka compared to Average World HDI
Sri Lanka World
Sri Lanka is ranked 97 out of
187 countries
Sri Lanka is the highest ranked
in South Asia
0
0.2
0.4
0.6
0.8
1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011
HDIValue
National Trends in HDI
Afghanistan Bangladesh
India Nepal
Pakistan Sri Lanka
Sri Lankas ranking in the
Global Prosperity Index
also increased with the
ranking moving up to the
58th from the 63rdposition
37
Doing Business indicators and other internationalratings have also recorded noteworthy improvements
Doing Business Index rose to 81st (for2013) from 89th (for 2012)
Sri Lanka is the highest rankingcountry in South Asia and is the onlycountry in the region to improve itsranking for 2013
For the first time in 7 years, a SouthAsian country Sri Lanka, ranksamong those improving the most
The 10 economies improving the most across 3 or more
areas measured by Doing Business in 2011/12
2009 2010 2011 2012
Index of Economic
Freedom (Rank)
111 120 107 97
Corruption Perception
Index (Rank)
97 91 86 79
Global Competitiveness
Index (Rank)
79 62 52 68
Sri Lankas position in World Indicators
38
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20
Sovereign credit rating was maintained in a year wheremany countries ratings were downgraded
BB-stable B+
stable
B1positiveB+
negative
B+positive
BB-stable
2009 2010 2011 2012 2012 2012
Fitch Ratings
Bnegative
B+stable
B+positive
2009 2010 2011
Standard & Poors
B1stable
B1positive
2010 2011
Moodys
Sovereign Downgrades during 2012
Fitch RatingsSouth Africa BBB+ Stable to BBB+ Negative
Spain A to BBB
Cyprus BBB to BB-
Slovenia AA- to A Negative
Belgium AA+ to AA
Egypt BB- to B+
Greece CCC to C
Japan AAA to AA+
Standard & PoorsSouth Africa A to A-
Italy A to BBB+
France AAA to AA+ Negative
Spain AA- to BB-
Cyprus BBB to B
Portugal BBB- to BB Negative
Slovenia AA- to A
Egypt B+ to B
Argentina B to B-
MoodysSouth Africa A3 to Baa1
France Aaa to Aa1
Spain A3 to Baa3
Cyprus Ba1 to B3
Greece Ca to C
Pakistan B3 to Caa1
39
The successful completion of the IMF - SBA was asignificant milestone in the countrys economic history
By July 2012, the IMF completed eight reviews and released
the entirety of the facility totalling US$ 2.55 bn, under the SBA
Approval
First
Tranche
US$ 321 mn
First Review
Second
Tranche
US$ 331 mn
Second & Third
Review
Third & Fourth
Tranche
US$ 408 mn
Fourth Review
Fifth
Tranche
US$ 213 mn
Fifth Review
Sixth
Tranche
US$ 217 mn
Sixth Review
Seventh
Tranche
US$ 219 mn
24
July2009
6
November2009
28
June2010
24
September2010
3
February2011
4
April2011
2
April2012
Seventh
Review
Eighth
Tranche
US$ 426 mn
Eighth
Review
Ninth
Tranche
US$ 414 mn
20
July2012
Discussions will take place this year regarding the way
forward in the countrys future engagements with the IMF
40
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21
8.257.4
6.256.25 5.875
0
3
6
9
0
250
500
750
1000
2007 2009 2010 2011 2012
Amount (USD mn) Rate
Progressive Reduction in Cost
135
260310
3154251.6
6.8 6.57.5
10.5
0
4
8
12
0
200
400
600
2007 2009 2010 2011 2012
(USD bn)# Investors (L HS) Orderbook (RHS)
The growing confidence of overseas investors wasevident from the performance of the fifth sovereignbond, which set a new benchmark
Increased Investor Base
0
2
4
6
8
10
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Perce
nt
Strong Secondary Market
SL 7.40% due 2015 SL 6.25% due 2020
SL 6.25% due 2021 SL 5.875% due 20220
5
10
15
20
29-Dec-11
29-Jan-12
29-Feb-12
31-Mar-12
30-Apr-12
31-May-12
30-Jun-12
31-Jul-12
31-Aug-12
30-Sep-12
31-Oct-12
30-Nov-12
31-Dec-12
Per
cent
10-Year Sovereign Bond YieldsPortugal Italy Ireland
Spain US Brazil
Philippines Sri Lanka
41
Although somewhat slow, gradual adjustments tookplace in the two key SOEs, CPC and CEBCeylon Petroleum Corporation (CPC) Domestic Petroleum prices were revised substantially in February 2012 and again in December 2012.
These measures have served to reduce the losses of CPC, but still, significant losses are incurred.
Discussions are being held to extend suppliers credit beyond 30 days, thereby avoiding/delaying the
necessity to obtain foreign exchange loans from banks at market rates
Arrangements are being made to acquire crude oil and bulk petroleum through bilateral
arrangements with oil producing countries. As a result, spot tenders and price hikes would be
avoided. Plans are being made to expand the existing refinery.
Measures are being taken to improve the product mix yield in the refinery, i.e., conversion of crude
oil to yield greater output of high-end products such as diesel and petrol.
Ceylon Electricity Board (CEB) The Fuel Adjustment Charge (FAC) was introduced to recover fuel usage cost due to drought
conditions. However, electricity is still being provided at subsidised prices and significant losses
are incurred.
Action is continuously being taken to change the power generation mix in favour of less costly
sources, such as hydro, wind and coal. Work on such power plants is already in progress.
Urgent steps need to be taken to ensure that these two institutions reach at least break-even level by
end 2013, in order to ensure their viability and to eliminate any imbalances being created in the
banking sector
42
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Improvements in other SOEs have been aimed atminimising losses and transforming loss making ventures
into profit making institutionsSri Lanka Transport Board
Procured 291 new buses and repaired 1,024
buses
13 luxury and 11 semi-luxury buses were
deployed during 2012
Lanka Phosphate Limited
Increased dividend payments to the
Treasury in 2011/12.
New machinery worth Rs.56mn installed
Manufacturing capacity to be doubled
SriLankan Airlines
Added more destinations and increased
frequencies to existing destinations
Increased the airlines fleet to benefit from
tourism boom
National Water Supply and Drainage Board
Water tariffs were revised upwards to
better reflect costs
Sri Lanka Railways
Reduced recurrent expenditure using
better management techniques.
Deployed 30 new power sets
Northern railway line was completed
up to Omanthai
Improvements to the southern railway
line to enable high speed train services
Southern railway line extension up to
Beliatta is in progress
It is vital that these improvements are effected at a faster pace, in order to
reduce/eliminate their dependence on Treasury funds, at least by the end of 2014
43
The debt to GDP ratio isestimated to be 81% in 2012,marginally higher than 78.5% ofGDP in 2011.
102.3 102.3
90.687.9
85
81.4
86.2
81.9
78.581
72
76
80
84
88
92
96
100
104
2003 2004 2 005 20 06 20 07 200 8 2009 2010 2011 2 012
(est)
Percent
Outstanding Government Debt
(as a % of GDP) Sri Lanka
86.0 80.6
165.4
106.5120.1
229.6
107.8107.6
69.1 78.581.8
102.9
0
50
100
150
200
250
France
Germany
Greece
Ireland
Italy
Japan
Portugal
Singapore
Spain
SriLanka
UK
USA
Selected Countries Debt to GDP ratios - 2011
90.0 83.0
170.7
117.7 126.3
236.6
119.1106.2
90.7 81 88.7107.2
0
50
100
150
200
250
France
Germany
Greece
Ireland
Italy
Japan
Portugal
Singapore
Spain
SriLanka
UK
USA
Selected Countries Debt to GDP ratio estimates for 2012
The Public Debt has been managed prudently, and theDebt to GDP ratio has been improving gradually
This is mainly due to the one-off increase
of about Rs.278 bn in the public debt onaccount of the depreciation of the rupee
44
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The risk indicators of Sri Lankan public debt have alsoimproved, at a time where global risk has been rising
Indicator
UN-ESCAP Definition LevelsSri Lanka
2012LessIndebted
ModeratelyIndebted
HighlyIndebted
Disbursed External Debt Outstanding/Gross
National Income30% and 50% 37.0%
Disbursed External Debt Outstanding/Exports of
Goods and Non Factor Services165% and 275% 112.6%
Total External Debt Service Payments/Exports of
Goods and Non-Factor Services18% and 30% 10.7%
External Interest Payments/Exports of Goods
and Non-Factor Services12% and 20% 3.7%
Net Present Value of External Debt /GrossNational Income
48% and 80% 40.0% *
Net Present Value of External Debt /Exports of
Goods and Non- Factor Services132% and 220% 130.0% *
* Data for 2011 Source: Manual on Effective Debt Management, UN-ESCAP, 2006.
45
However, the cost of domestic debt portfolioincreased for most part of the year, but startedmoderating towards the latter part of the year
Due to the tight monetary policy
conducted by the Central Bank and
increased investor preference for
short term securities, the overallaverage interest rate of Treasury bills
and Treasury bonds increased during
the first four months of 2012.
However this trend reversed during
the latter part of the year
0%
5%
10%
15%
20%
25%
0 1 2 3 4 5 6 7 8 9 10
Maturity Period (Years)
Primary Market Yield Curve
End Dec 08
End Dec 09
End Dec 10
End Dec 11
End Dec 12
46
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24
2.172.25
2.10
2.35
3.32
0
1
2
3
4
5
6
7
2008 2009 2010 2011 2012
Years
Average Time to Maturity
T-bills T-bonds R-Loans Overall
During the year, the interest cost as a percentage ofGDP decreased marginally, while the average time to
maturity of domestic currency debt improved
4.90%5.13% 5.10%
4.82%
6.42%6.29%
5.45%5.43%
0%
2%
4%
6%
8%
0
100
200
300
400
500
2005 2006 2007 2008 2009 2010 2011 2012
Rs.bn
Interest Cost as a % of GDP
Interest Cost (Rs bn) As a % of GDP
Total interest cost as a percentage of GDP
reduced marginally to 5.43% despite the
depreciation of the Exchange Rate and the
Interest Rate fluctuations throughout the year.
47
Despite challenges and shocks to the economy,Sri Lankas financial system maintained stability,even while expanding
Stability and strength of the banking sector was maintained
Performance of financial institutions improved
Regulations were strengthened and streamlined
Efficiency of the Payment and Settlements system increased Safety net mechanisms and consumer protection were further
strengthen and developed
Item 2008 20112012
(Provisional)
Bank Branches 1,782 2,130 2,193
Other Banking
Outlets 3,646 4,054 4,103
ATMs 1,676 2,237 2,331
Expansion of Banking Outlets
48
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25
The Banking sector was responsive to the needs of theeconomy, and thereby helped achieve a more rapid and
sustainable economic growth The Banking sector has become increasingly competitive and
strong during the recent years
2.7 3.0 3.6 4.3 4.6 4.9 5.0
7.7
11.7
17.819.8
24.422.5
21.2
0
5
10
15
20
25
30
0
1
2
3
4
5
6
2008
2009
2010
2011
Mar'12
Sep'12
Nov'12
Growth,
%
Amount,Rstn
Assets Growth
Assets Assets Growth
1.6 1.6 2.0 2.6 2.8 3.0 3.1
6.6
(2.3)
23.7
31.7
36.3
29.2
23.3
-5
0
5
10
15
20
25
30
35
40
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2008
2009
2010
2011
Mar'12
Sep'12
Nov'12
Growth,
%
Amount,Rstn
Loans Growth
Loans Loans Growth
1.9 2.2 2.6 3.1 3.2 3.5 3.5
7.9
18.8
15.9
18.8
21.6
19.318.2
0
5
10
15
20
25
0.0
0.51.0
1.5
2.0
2.5
3.0
3.5
4.0
2008
2009
2010
2011
Mar'12
Sep'12
Nov'12
Growth,
%
Amount,Rstn
Deposits Growth
Deposits Deposits Growth
49
12.6 12.8
10.4 10.5
12.3 11.9 11.4
13.4 13.314.1 14.5
16.1 16.2 16.015.0
0
2
4
6
8
10
12
14
16
18
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sep-12
Percent
Capital Adequacy Ratio
4.4 4.6 4.64.2 4.1 4.1 4.1
1.1 1.0
1.8 1.7 1.8 1.7 1.7
13.411.8
22.019.7
21.120.0 19.6
0
5
10
15
20
25
0
1
2
3
4
5
2008 2009 2010 2011 Mar'12 Sep'12 Nov'12
Ratio,
%
Ratio,
%
Profitability maintained
Interest Margin Return on Assets Return on Equity
70.0
60.963.9
70.2 70.2 71.2 71.2
31.3
39.236.6
32.4 31.6 30.9 31.3
20
30
40
50
60
70
80
2008 2009 2010 2011 Mar'12 Sep'12 Nov'12
Ratio,
%
Liquidity improved
Cr edit t o Deposits & Borrowi ngs SLAR -DBU
Banking sector stability indicators improved, furtherconsolidating the progress
Capital Adequacy Ratio (CAR) of banks was
maintained at well over the minimum level
of 10%
The Basel II Capital Adequacy Standards
continued to be implemented and
monitored.
Consultation paper on implementation of
ICAAP and SRP under Pillar 2 of Basel II
issued.
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26
During the year, several banks successfully accessedinternational debt capital following the advice of the
Central Bank to tap the international markets Banks adopted an internationalised approach and used/
leveraged their balance sheets more efficiently to meet the
resource gap
Several banks secured a total US$ 973 mn, of which 70% were
long term borrowings
US$ 1,100 mn
- Approved
US$ 973 mn
Received
(88%)
Long Term Tenors 70%
Five to Ten Years
51
Continuous supervision and quick guidance helpedto ensure a stable, streamlined financial system
Speedy approval
granted to open
bank outlets
islandwide
Reviewed current
classification of
banking outlets to
streamline and
rationalise
approval
procedure
Safety net mechanism and
consumer protection was
strengthened
The Mandatory Deposit
Insurance Scheme continued
to grow and reached around
Rs.8.9 bn by end 2012
Obligations of customers and
banks were published in the
form of a Customer Charter
Continuous monitoring took
place to ensure adherence to
Customer Charter
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27
Newspaper advertisements
regularly listed institutions
licensed to accept deposits
Extensive TV and Radio ad
campaigns targeted Northern and
Eastern provinces especially, in
combating prohibited schemes
A framework was put in place to
take action against prohibitedschemes, in a systematic manner
The massive campaign against Prohibited schemescontinued during the year
53
A number of financial risk assessment techniques weredeveloped to assist in the system stability analyses
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 macroeconomic
shocks (Quarterly)
Selected macro-economic variables and its
impact on the asset quality of the banking
sectorBanking Soundness Index
(BSI)
Assesses the soundness (financial stability)
of the banking sector (Quarterly)
Selected financial soundness indicators (capital,
asset quality, profitability, liquidity, 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)
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
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28
Non-banking sector assets & deposits improved
Deposits were the major source of funding,
representing 41% of the total liabilities
Capital Funds increased by 24% to Rs. 84 bn
Loans and advances accounted for 80% of
assets, of which, finance leasing and hirepurchases accounted for around 72%
Asset quality of the sector improved, with NPA
ratio reducing from 5.5% in 2011 to 5.0% in 2012
Branch network increased by 129 to 833 during
the first nine months of 2012
22.7
1.9
21.8
29.6
24.0
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
-
100
200
300
400
500
600
30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
(%)Rs.bnTotal Assets - Amount & Growth
Amount (Rs.bn) Growth Rate (%)
18.0
(2.8)
25.3
48.3
26.6
(10.0)
-
10.0
20.0
30.0
40.0
50.0
60.0
-
50
100
150
200
250
300
350
400
450500
30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
(%)Rs.bn
Loans and Advances - Amount & Growth
Amoun t (Rs. bn) Growth Rate (% )
5.9
9.29.7
5.5
5.0
2.9
4.8 4.8
1.9 1.6
-
2.0
4.0
6.0
8.0
10.0
12.0
-
5
10
15
20
25
30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
(%)Rs.bnNon Performing Advances - Amount & Ratios
Gross NPA (Rs.bn) Gross NPA Ratio (%)Net NPA Ratio (%)
55
Upper limit interest rates for LFCs revised
Minimum requirements for in formation systemssecurity
Panel of External Auditors selected andguidelines
New Directions Issued to Finance Institutions
Internal Rating system developed
Early Warning Systems developed
Supervisory Action Taken
Regularised unauthorised institutions and initiated action against others
27 Public awareness programs, 14 Audio programmes, 33,000 Brochures and 1,550Posters
Established procedure manual for investigation of unauthorised firms
Combating Unauthorised Finance Institutions
Finalising legislation to consolidate the microfinance sector
Initiating Regulatory Mechanism for Microfinance Sector
7 Distressed finance companies affected by liquidity crisis were being restructured
Revival of Distressed Companies
Gradual increase of minimum core capital to be maintained by
SLCs from Rs.100 mn by Dec. 2012 to Rs.300 mn by Jan. 2016
Core capital as yardstick for gearing ratio
Fitness and Propriety of Directors
Changes to borrowing definitions
while proactive and timely supervisory policymeasures produced the desired outcomes
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29
The Payments & Settlements System benefitted byseveral innovations in 2012
Issued licences to 3 new service providers toengage in debit card business
Issued a licence to a mobile telecommunicationnetwork operator to operate an e-moneyscheme
Facilitated the establishment of the CommonCard and Payment Switch (CCAPS) by LankaClear(Pvt) Ltd., to provide a national level platform forclearing and settlement of electronic payments
Commenced self assessment of the LankaSettleSystem against the new core principles of the
Committee on Payment and Settlement Systems(CPSS)
Conducted public awareness programmes toincrease awareness on payment and settlementsystems
Performance of the Payments
System 2012
System
availability 99.8%
Average No. of
RTGS Transactions
per day (High
value payments)
1,140
Average No. of
Retail Payments
per day
387,050
57
To enhance the efficiency of member service:
EPF Act No 15 of 1958 was amended to compel
employers to send member contributions and
payment details electronically.
Commercial banks were appointed as collecting
agents of member contributions
EPF Website was connected with Lanka Gate
E-governance service to provide wider access for
members
New members were registered under a unique
identification number to enable linking with their
previous account numbers.
The Employees Provident Fund grew by 13% toRs.1.15 trillion in 2012 Rs.301 bn was invested in government securities during 2012 to benefit from high interest
rates in the government securities market.
The share portfolio yielded Rs.2,774 mn as realised income (dividends and capital gains)
during the year
Long term share portfolio was maintained in order to benefit from the expected future upturn
in the equity markets
Interest paid on member balances for 2011: 11.5% pa.
Type2011 2012
Value
(Rs.bn)
Share
%
Value
(Rs.bn)
Share
%
Govt. Securities 898 88.0 1,036 89.9
Equities 78 7.7 68 5.9
Corporate
Debentures & Other9 0.9 9 0.8
Reverse Repo 3 0.3 2 0.2
Fixed Assets & Net
Current Assets32 3.1 37 3.2
Total 1,020 100 1,152 100
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30
CBSL
0
1
2
3
4
5
6
7
Returns made in 2011 (%)
Foreign Reserves management returns showedremarkable results in 2010, 2011 and 2012 amidstchallenges
0
100
200
300
400
500
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
US$mn
Absolute Returns 1988 - 2012
Year AbsoluteReturn
(US$ mn)
CBSL Return%
Benchmark return %(2 Yr Govt Treasuries
Average Rate)
2010 341 6.2% 0.7%
2011 430 6.6% 0.4%
2012 220 4.0% 0.3%
Returns earned between 2010 - 2012 amounted to almost US$ 1.0 bn. Returns during the past 3 years have been the highest ever in history
Source: Respective Central Bank Annual Reports
CBSL out-performed most of the leading central
banks in reserve management during 2011
59
Currency management improved further in 2012 Measures taken to inculcate good habits of handling
currency notes and coins through public awareness
programmes
Implemented the Clean Note Policy, in association with
licensed banks and general public
Developed close relationship with law enforcement
authorities to educate the general public on security
features of currency notes
Issued instructions to licensed banks and finance
companies to have counterfeit detectable
counting/sorting machines
Effected continuous improvements in human capital,
with regular and special training programmes, seminars,
workshops and discussions conducted, locally and
internationally
Issued two commemorative coins to mark 100 years of
Scouting in Sri Lanka and the 60th anniversary of Sri
Lanka-Japan diplomatic relations
60
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31
Profit transfers increased several fold in the pastfew years, greatly assisting the revenue streams of the
Government
From 1976-2005 period of 30 years, the profit transfers amounted to about Rs.60 billion.
From 1950-1975 period, the total profit transfers amounted to about Rs.30 million.
During the period 2006-2012, the Central Bank has been able to appropriate a sum of
Rs.112 billion to the Government from the surpluses the Bank generated, mainly
from its international operations
0 0 0 0 01.5 1.6 1.5 1.8 1.7 1.6 2 0.5 0.5 0.1 1 1
1.4 1.7 1.52.7 3 3.2
4
11
7.5
3.55.6
0
4
8
0
25
15
27
33
0
5
10
15
20
25
30
35
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012P
Rs.bn
Profit Transfers by the Central Bank to the Government
61
SMS Alerts: Our new initiative, since October 15th
.
Web Communication
Average visitors in 2012
212,929 per day
The Central Bank has been in constant touch with itsstakeholders in 2012
62
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32
When taken on an overall basis, current macrofundamentals have reached reasonably benign levels,and have been moving in the right direction
Unit 2000 2006 2011 2012(Est/Proj)
Real GDP Growth % 6.0 7.7 8.3 6.5
GDP at 2002 Prices Rs. bn 1,598 2,091 2,864 3,049
GDP US$ mn 16,596 28,267 59,175 59,253
Per Capita GDP in US$ US$ 899 1,421 2,836 2,922
Unemployment % 7.6 6.5 4.2 4.0
Inflation (Average) % 6.2 10.0 6.7 7.6
Trade Balance % of GDP -10.8 -11.9 -16.4 -15.1
Tourist Arrivals 000 400 560 856 1,003
Remittances US$ mn 1,160 2,161 5,145 6,007
FDI Inflows US$ mn 175 604 1,066 1,000
International Reserves US$ mn 2,131 4,005 7,989 7,800
International Reserves Months of Imports 3.5 4.7 4.7 5.0
Exchange Rate Rs./US$ 80.06 107.71 113.90 127.16
Budget Deficit % of GDP 9.5 7.0 6.9 6.2
Public Debt % of GDP 96.9 87.9 78.5 81
Broad Money Growth (M2b) % 12.9 17.8 19.1 16.2
Private Sector Credit Growth % 11.8 24.0 34.5 18.6
Stock Market Capitalisation Rs. bn 88.8 834.8 2,213.9 2,167.6 63
In that scenario, per capita incomes have beenimproving consistently, as envisaged
$981
$2,057
$2,400
$2,836
$2,922
2003
2009
2010
2011
2012
64
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33
The stage is now set for
sustained progress
towards a
US$ 100 billion economy
and a
US$ 4,000+ per capita income
65
Towards such an outcome, the Medium TermMacroeconomic Framework will need to be carefullyfashioned, while providing for the expected accelerationof economic activity
Indicator Unit 2012(Est)
Projections
2013 2014 2015
Real Sector
Real GDP Growth % 6.5 7.5 8.0 8.3
GDP Deflator % 8.5 7.0 6.0 5.0
Total Investment % of GDP 30.3 31.0 32.0 32.5
External Sector
Trade Balance % of GDP -15.1 -14.4 -13.3 -12.7
Current Account Balance % of GDP -5.5 -4.7 -3.3 -2.0
Overall Balance US$ mn 100 510 795 1,925
Fiscal Sector
Current Account Balance % of GDP -0.8 -0.1 0.8 1.4
Overall Budget Deficit % of GDP -6.2 -5.8 -5.2 -4.7
Government Debt % of GDP 81 78 75 71
Monetary Sector
Broad Money Growth (M2b) % 16.2 15.0 15.0 14.0
The projections for 2013 are
based on the following
assumptions
Global economy
expected to grow by
around 3.3%
Commodity prices
expected to remain
reasonably stable
Advanced economies
expected to maintain
accommodative policies
Domestic weather
conditions expected to
be favourable
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0
2
4
6
8
10
12
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Percent
Year-on-Year Headline and Core Inflation
Headl in e In flat io n (y -o -y ) Core In flat io n (y -o -y )
Ensuring that inflation stays on course to be at mid-single digits over the next 5 years will be a priority
The Central Bank will continue to focus on keeping demand
driven inflationary pressures in check, and maintain inflation,
particularly core inflation, at the desired mid single digit
levels
The achievement ofmaintaining single digitinflation for 47 months inspite of severe supply sideshocks would helpcontain adverse inflationexpectations andinflation-related wagespirals.
67
The Central Bank will also focus on two key factors inorder to maintain macro-economic stability With inflation stabilising, sustainable economic growth will be a key
outcome, especially under the current global economic conditions
Employment, which is at a historic high, will be considered a continuous
priority, while due attention will be paid, to deal with any incidence of wage
driven inflation
0
5
10
15
20
25
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Percent
Unemployment Rate - World
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Portugal
Spain
United Kingdom
United States
0
5
10
15
20
25
1990
2000
2004
2005
2006
2007
2008
2009
2010
2011
1H2012
Percent
Unemployment Rate
7.58.0
8.3 8.5
0
2
4
6
8
10
2013 2014 2015 2016
Percent
Expected Real GDP Growth
2013-2016
68
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35
In the determination of the Exchange Rate (ER),market based flexibility will be maintained
The ER will be allowed to reflect market conditions.
The Central Bank intervention in directly supplyingand absorbing foreign exchange, will be limited toreducing excessive fluctuations and maintainingexternal reserves at desired levels.
NOP limits of LCBs will be increased with effect from
2nd January 2013 to give LCBs more flexibility in managing
their foreign exchange transactions.
Limits on forward market transactions will be relaxed witheffect from 2nd January 2013.
Selected Derivative products will be allowed to be developed
within broad guidelines that will be issued during 2013.
69
The Central Banks monetary policy will be conductedwithin the current framework of monetary targeting
This framework has provided greater transparency
and flexibility in the conduct of monetary policy,
particularly in difficult times.
The imposition of monetary targets, such as the credit ceilingacted as a tool to supplement the traditional transmission
mechanism, and served to control the intermediate target of
broad money directly.
In the global economy too, with key policy rates reaching almost zero, central
banks are increasingly using monetary and liquidity aggregates to
communicate monetary policy signals. Recent comments by Governor-elect,
Bank of England regarding nominal income targeting, confirms the usefulness
of unconventional strategies.
70
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36
The policy rate corridor will continue to guide shortterm interest rates
Considering short term interest
rates as a target variable could
support the economy to move
towards explicit inflation targeting
in future
Stability of the benchmark yield
curve will be promoted, which
would help the effectiveness of
monetary policy transmission
Greater focus will be on real
interest rates in order to promotedomestic savings while
encouraging productive activity
Operationally, the following
changes will be considered
during the year
Lengthening the current one week
reserve maintenance period to two
weeks, thereby allowing greater
flexibility for banks in managing
their day-to-day liquidity
Conducting regular term auctions to
address structural liquidity Enhancing operational capabilities in
order to be able to fine-tune
operations to manage day-to-day
liquidity in a more effective manner
71
The Central Banks Communication policy will act as a
key instrument in monetary policy
An advance release calendar for Monetary Policyannouncements will be issued
Press conferences and interviews will be held regularly Training courses for journalists will continue
Awareness programmes will continue
Web presence will be enhanced through the official website,social media and mobile networking
Market expectations have become an important
component of monetary policy transmission
The Central Banks future communications will also reflect
the economys structural shift towards a wider range of
foreign exchange earning activities
72
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37
At the same time, the Central Bank will facilitate otherkey activities that have a direct impact on the ER, sincea flexible, but stable ER will be considered a key
stabilisation factor FDI, portfolio investments and bond market investments will be supported
Raising debt capital by banks from foreign sources will be encouraged
Foreign borrowings by the private sector will be made more convenient
Private and Workers remittances will be continuously encouraged
Import substitution measures, particularly in food, will be supported
Fuel and electricity generation that involve large amounts of imported inputs,will be supported to become more efficient and less reliant on such inputs
Large scale foreign exchange earning activities will be encouraged:
e.g. tourism, knowledge based activities, global commercial activities,
education, health, port and aviation related activities, etc. Prudent sovereign debt management will be pursued, to provide a
continuously improving international benchmark that will assist private sectorfunding activities as well
Productivity level enhancements will be actively promoted
73
The trade & services gap will also be managedproactively, so as to not lead to excessive pressureon the BOP and the Exchange Rate
Increased inflows fromtourism, service exportsand workers
remittances will bekeenly supported tomitigate the impact ofthe trade deficit
Realisation of expected
capital flows will result in
a favourable outcome in
the BOP.-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012(E)
2013(P)
2014(P)
2015(P)
Percent
External Current Account Balance (% of GDP)
Bangladesh
India
Maldives
Nepal
Pakistan
Sri Lanka
74
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38
In addition, greater emphasis will be placed ondeveloping alternative non-inflationary sources of
financing The corporate bond market and the equity market will be encouraged to play a
greater role in supporting the financing needs of the economy, thereby reducing
reliance on short-term bank credit.
Direct financing from external sources will be encouraged
0
1020
30
40
50
60
70
80
2012 2013 2014 2015 2016
(Target)
US$bn
Expectations for the Stock Market
Stock Market Capitalisation
0
2
4
6
8
10
12
2012 2013 2014 2015 2016
(Target)
US$bn
Expectations for the Corporate Debt Securities
Market
Size of Corporate Debt Securities Market
75
Steps will be taken to bridge the high savings-investment gap through medium to long-termmeasures, for the economy to realise its true potential
Long-term domestic savings
will be encouraged through
positive real interest rates
and promotion of pensionfunds and life insurance
Capital market development
will be promoted to support
investments, local and
foreign
Foreign investment will be
encouraged by maintaining a
conducive policy
environment and creating an
enabling environment
-30
-20
-10
0
10
20
30
40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Asa%ofGDP
Domestic Savings-Investment Gap
Investment Domest ic Savings Savings-Investment Gap
76
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39
Further strengthening financial institutions anddeepening financial markets will be key strategies for
2013 and beyond Approval from the Controller of Exchange has been dispensed with, for
- Corporate entities to borrow up to US$ 10 mn per annum over the next 3 years
- LCBs to borrow from overseas up to US$ 50 mn each year over the next 3 years
- All residents who provide services to non-residents to be able to maintain Foreign
Exchange Earners Accounts in currencies of their choice in LCBs
- Resident Sri Lankans as well as expatriates to be able to transfer foreign savings up
to US$ 5 mn into Sri Lanka
Banks will be encouraged to access stable wholesale funding sources without
relying only on short-term small scale customer deposits.
National Development Bank and DFCC Bank will be allowed to raise
US$ 250 mn each, with up to 10-year tenor to fund SMEs, plantations,construction and manufacturing industries.
Banks will be expected to consider raising a significant part of their Tier I and
Tier II capital, from foreign sources, by building strong Balance Sheets.
77
Several existing Exchange Control policies will berelaxed in 2013 and beyond Time restrictions on forward foreign exchange transactions will be removed with
effect from 2nd January 2013
A new investment account for non-residents amalgamating several types ofinvestment accounts currently maintained at LCBs will be introduced with effectfrom 2nd January 2013
A new Inward Remittances Distribution Account, which can be used as a clearing
account to disburse earnings of Sri Lankans providing services abroad, will beintroduced with effect from 2nd January 2013
Foreign borrowings by companies for investment and business purposes to beallowed under the External Commercial Borrowing Scheme
The current limit on overseas investments by residents will be increased
Criteria for permitting selected non-banking entities to engage in foreign currencydeposit business will be introduced
Inward remittances through mobile phones will be facilitated
A mechanism to change foreign currency through ATMs of LCBs will be introduced
Fund transfers involving shipping companies, port operations and harbourservices will be facilitated
78
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40
The Governments announced commitment tocontinued fiscal consolidation would greatly
facilitate the effective conduct of monetary policyThis commitment isparticularly welcome whenmany other countries aregrappling with fiscaldeterioration.
7.0%
9.9%8.0%
6.9% 6.2% 5.8% 5.2%
0
3
5
8
10
2006-08
Average
2009 2010 2011 2012E 2013P 2014P
(%) Fiscal deficit (as a % of GDP)
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Percent
General Government Fiscal Balance to GDP Ratio in
Selected Economies
2006
2012
79
8178 75
71 6865
0
20
40
60
80
100
2012 2013 2014 2015 2016 2017
Since debt dynamics play a vital role in the maintenanceof both price and financial system stability, developmentsin public debt will be monitored carefully
Projection of Outstanding Public Debt
(as a % of GDP) Transparency in public debt
management will be enhanced
Advanced risk management
systems for public debtmanagement will be introduced
The continuous enhancement of
sovereign credit rating will be
pursued
Indicator 20112012
(Est)
Revised Annual Target
2013 2014 2015
Debt/GDP ratio (%) 78.5 81 78 75 71
Average Time to Maturity of Domestic Debt (years) 2.4 3.2 3.5 3.7 4.0
Ratio of Short-term Domestic Debt to Total Domestic Debt (%)25 24 23 22 21
Share of Foreign Currency Debt to Total Debt (%) 44 47 42 40 3880
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41
Many improvements to the G-SEC market areplanned/contemplated for 2013 and beyond
Efficiency of the primary auction system will be further improved Half-yearly Treasury bond Calendar will be issued to the market
Competition at primary auctions will be increased through greater participation ofinstitutional investors
Complete underwriting of issuances will be ensured by putting in place, an appropriatemechanism, including liquidity support for primary dealers
Secondary market will be broadened and deepened while improving transparency An e-trading platform will be established and reporting of all G-SEC transactions will be
made mandatory
A guaranteed central clearing arrangement on net-settlement basis (rupee leg andsecurity leg) will be established to eliminate counterparty credit risk while enhancingthe efficiency of intraday liquidity of participants
The trading platform to require mandatory two-way quotes
Covered short selling will be introduced Information asymmetry will be eliminated, thereby narrowing spreads
Appropriate products for a derivative market which will help participants to enhancetheir return while hedging their risk exposures in the cash market, will be introducedonce the cash market is developed
81
The continued decline in unemployment in Sri Lanka in recent years,
compels re-thinking of the future employment strategies. In this context,
labour force concentration will need to be given careful attention
Although the share of Agriculture in the GDP has declined over time, the share
of employees in the sector has not reduced proportionately Despite inherent limitations for expansion, special attention will need to be
paid to developing productivity in the Agriculture sector, as it is a vital sector of
the economy
In the long-run, productivity growth will be a vitalinstrument of improving competitiveness and livingstandards...
Concerted efforts by relevant authorities will need
to be continued in order to improve agricultural
output and reduce price volatility:
Effective information dissemination,
Introduction of a crop calendar,
Facilitation and enhancement of storage facilities,
Strengthening of domestic forward and futures
markets for agricultural produce
30
27
43
12
3157
Share of Key Sectors in GDP and
Labour Force
Agriculture Industry Services
Share of
Labour Force
Share of GDP
82
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42
Closer integration of the key sectors will also improveproductivity
One of the key issues with SriLankas external trade has been
the export of primary products
where domestic value addition is
low
Given Sri Lankas widespread
agricultural base, forward linking
into Agro based Industries would
be a natural next step for workers
in Agriculture
A stronger domestic production
base would lead to a more
sustainable economic growth
Improvements in productivity in the
Long-Term will also provide an
important positive supply side
shock
V