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
3
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 today’s 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
4
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
5
These results were achieved, even while global economic conditions continued to remain weak‌
Source: IMF, WEO Database - Oct 2013
6
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 • Japan’s 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
7
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 • India’s 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
8
9
However, amidst the challenging global environment, Sri Lanka’s 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 Lanka’s 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 Lanka’s 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 Lanka’s 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
CEB’s lower reliance on petroleum and CPC’s 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 Bank’s 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 Bank’s 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
1
20.7
2
Southern
13.2
2
16.1
4
Sabaragamuwa
11.3
6
13.5
8
North Western
10.7
7
12.9
9
Central
11.5
5
14.4
7
Uva
11.6
4
14.5
6
North Central
12.6
3
16.1
4
Eastern
10.2
8
16.7
3
Northern
9.9
9
21.5
1
*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
2
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
8
0.7
1, 137 67 10
Summary of Gross Investment Income Investment Income
90.9 5.4 0.8
3
0.3
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 EPF’s 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
EPF’s 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 Government’s 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 Bank’s 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 country’s 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 • Moody’s 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 Moody’s were proven wrong as the country’s 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 & Poor’s 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+ Moody’s 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 Lanka’s recent reforms in: – Dealing with construction permits – Paying taxes – Getting electricity – Trading across borders •
Sri Lanka’s 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: – People’s 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 Women’s 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 People’s Bank of China and other banks operating in China
80
Many international observers commented positively on Sri Lanka’s 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 5–14 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 Lanka’s 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 Lanka’s 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 government’s 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 Lanka’s 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 country’s 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 Government’s 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 Bank’s 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 Bank’s 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 Lanka’s medium term macroeconomic strategy will need to focus on avoiding this “Trap” as well
123
Meanwhile, Sri Lanka will also graduate to the IMF’s 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 Lanka’s 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 Bank’s 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 Bank’s 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 Bank’s 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 - Women’s 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