2

2014 is the eighth consecutive year that the Central Bank announces its plans and policy direction for the forthcoming period to all stakeholders. Since the first Road Map in 2007, the Central Bank has been at the forefront of a remarkable transformation of the Sri Lankan economy

This transformation did not come easy, and was achieved amidst skepticism & brickbats of some, and accolades from others

The Central Bank is thankful to many, for the continued support

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

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

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

2013
Fiscal Sector

Policy rates reduced by 100 bps Market interest rates declined Monetary by 61-452 bps and Private sector credit picked up Financial Credit to public corporations Sector moderated sharply Stability of the Banking sector preserved throughout the year supported by strong capitalisation and liquidity conditions

*Figures for 2013 in this presentation are provisional

These results were achieved, even while global economic conditions continued to remain weak

Source: IMF, WEO Database - Oct 2013

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

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

Sharp depreciation of the Indian rupee

Source: IMF, WEO Database - Oct 2013

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

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

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

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

10

The Industry sector recorded the highest sectoral growth for the fifth consecutive year
Industry sector is expected to grow by 9.2% in 2013
All sub-sectors of the Industry sector performed well in Q3-2013
Q3 Growth 2013 Y-o-Y %
8.1 12.5 6.0 6.8

11

Sector
Industry Mining and Quarrying Manufacturing
Factory Industry

Electricity, Gas and Water Construction

11.2 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

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

13

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

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
Highest ranked in South Asia

16

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

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

17

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

 Expenditure on imports declined

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

Key strategic interventions resulted in expenditure on imports declining during the year

18

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

Reflecting these developments, the trade balance contracted to targeted levels

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

19

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

During the period Jan-Nov 2013,
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

2013 (Est)

1.4 US$ bn
1,170,000 arrivals

2012

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 Presently, over 300 IT, BPO and KPO companies employ more than 60,000 Sri Lankans
2013 (Est)

21

471 US$ mn 436 US$ mn

2012

(Excluding KPO Services)

Earnings from transportation services also increased significantly in 2013

22

2013 (Est) 2012

418 US$ mn

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

Departures for foreign employment during the first nine months of 2013 stood at 221,760, which is an increase of 5.6% Increase of migrant workers of the skilled and professional category by 28%

Introduction of new web based money transferring systems to facilitate remitting money swiftly to Sri Lanka
2013 (Est) 2012

6.7 US$ bn 6.0 US$ bn

As a result of these developments, the Current Account Deficit reduced to the projected levels

24

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

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

25

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)

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% 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

In the latest AREAER, the IMF has reclassified Sri Lankas exchange rate regime as floating w.e.f. 9th February 2012

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

28

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

The International reserves were also managed efficiently amidst global market volatility...
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 (%)

29

2010 2011

341.0 430.0

6.2 6.6

0.7 0.4

2012
2013

222.7
197.0

4.0
3.3

0.3
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%
Annual average: 6.9%

Year-on-year: 2.1%
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
Monthly increase in Private Sector Credit (Rs. bn) 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 22.2 160.6 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

34

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%

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

37

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

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

38

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

39

Improvements in other SOEs were also welcome

Sri Lanka Ports Authority
Transshipment handling improved significantly Colombo South Port, which possesses facilities on par with leading international ports, was declared open on August 2013 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 Railways

Passenger transportation increased significantly 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

Sri Lanka Transport Board

Gami Sariya and Sisu Sariya services were continued

SriLankan Airlines
Air passengers and volume of cargo increased, reflecting the increase in demand associated with tourism and business activities Implementation of plans to purchase thirteen aircrafts to support rapid development in tourism and aviation sectors

Compilation of standards applicable to inter-provincial bus services, by the National Transport Commission

In the meantime, Net Credit to the Government (NCG) was higher than anticipated, although the Central Banks NCG declined sharply

40

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

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

41

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)

The Central Banks active communication with its stakeholders helped manage market expectations effectively
369

42

1,855 30 26 52 12
252

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

44

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

Despite many challenges faced during 2013, the banking sector expanded in terms of both business volumes and outreach
Banking Services Branches Other Outlets ATMs 2012 3,359 3,031 2,415 Banking Density* by Province 2009 2013 2013 (Sept) 3,426 3,031 2,496

45

Density
Western Southern Sabaragamuwa 18.3 13.2 11.3

Rank
1 2 6

Density
20.7 16.1 13.5

Rank
2 4 8

North Western
Central

10.7
11.5

7
5

12.9
14.4

9
7

Uva
North Central Eastern Northern

11.6
12.6 10.2 9.9

4
3 8 9

14.5
16.1 16.7 21.5

6
4 3 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!

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 Streamlined the Regulations on 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) Enhanced the disclosure requirements with a view of greater transparency

49

Issued Directions on the implementation of the Supervisory Review Process for banks, in accordance with the Pillar 2 of the Basel II Capital Accord.

Issued Directions to regulate the exposure of the banking sector to the stock market.
Issued Guidelines to banks on statutory reporting and adoption of the new Accounting Standards. Prescribed formats for the preparation and publication of interim and annual financial statements. Work is in progress to enter into Memoranda of Understanding (MOU) with several foreign regulatory authorities. Maximum levels were prescribed:
Interest rates: 24% Penal interest rates: 2% above the applicable rate

Established stronger communications channels for Home-host relationships and with other regulators
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 Liberalised foreign borrowings of Licensed Banks

Exemptions were granted for foreign borrowings of:

LCBs up to US$ 50 mn each during 2013 to 2015 National Savings Bank, National Development Bank PLC and DFCC

During the year, a number of financial risk assessment techniques were also used to assist in micro & macroprudential policy setting.
Test/Indicator
Sensitivity Stress Testing Macro Stress Testing Banking Soundness Index (BSI) Financial Market Stability Indicator (FMSI) Macro-economic Stability Indicator (MESI) Financial System Stability Indicator (FSSI) Network Analysis

50

What it does
Gauges resilience to shocks relating to credit risk, market risk, liquidity risk and exchange risk (Quarterly) Assesses resilience of the financial system to extreme but plausible macro-economic shocks (Quarterly) Assesses the soundness (financial stability) of the banking sector (Quarterly) Assesses the stability of the financial markets over a period of time for any buildup of risks (Monthly/ Quarterly) Assesses macro-economic stability (Quarterly)

Test is based on.

Information of individual banks and banking industry, relevant to each risk category Selected macro-economic variables and its impact on the asset quality of the banking sector Selected financial soundness indicators (capital, asset quality, profitability, liquidity, management soundness, efficiency, sensitivity to market risk) Analysis of 10 variables associated with money and bond market, forex market and equity market Analysis of key indicators of the real, external, fiscal and monetary sectors of the domestic economy and global developments Analysis of 3 major indices, BSI, FMSI and MESI

Quantifies overall financial system stability in Sri Lanka through a composite indicator (Quarterly) 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

Overall, the non-bank sector assets & funding improved

51

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

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

52

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

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 Agriculture No. of Beneficiaries 96,685 Loan Amount Rs. mn 8,232

54

SME
Micro Finance Housing Total

25,314
42,572 2,028 166,599

5,284
2,534 211 16,261

No. of Programmes conducted by RDD in 2013

Financial literacy Entrepreneurship development 63 37

No. of Mass Media Programmes conducted by RDD in 2013

Radio programmes
Newspaper advertisements / articles TV programmes

16
100 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
Conducted by Provincial Offices
Financial Literacy

55

No. of Programmes
69

No. of Participants
5,674

Workshops for MSMEs

Best Practices in AgriBusiness

13
37

1,067
1,692

Skills Development
CBSL Credit Schemes Credit Camps Other Awareness Programmes Total

78
64 26 249 536

3,285
3,853 1,647 23,682 40,900

A survey to measure financial inclusiveness was conducted covering 18 districts

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

58

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

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
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
7.4 bn

59

Coins in Circulation (as at end 2013) Value (Rs.) Number of Pieces 825.5 mn
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

60

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

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

62

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

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
Selected Key Information of the Fund Item Total number of member accounts (mn) Contributing member accounts (mn) Total contributions (Rs. mn) Total refunds (Rs. mn) Number of refunds Total liability to members (Rs. bn) Total value of the Fund (Rs. bn) * Annualised growth
* Provisional ** As at 31.12.2012

63

Jan-Sep 2012
14.6**

Jan-Sep 2013*
14.7

Change (%)
0.68

2.3**
52,025 36,481 87,304

2.4
57,596 36,949 83,046

4.3
10.7 1.3 (4.9)

997.0
1,112.9

1,139.8
1,250.7

14.3
12.4

The total income of the Fund grew by 11.9% during the first 9 months of 2013
Type Govt. Securities Equities Corporate Debentures and Other Reverse Repo Fixed Assets and Net Current Assets Composition of Assets 2012 2013* Value Value Share % Share % (Rs. bn) (Rs.bn) 1,035 59 8 3 39 90.5 5.1 0.7 0.3 3.4 1, 137 67 10 3 34 90.9 5.4 0.8 0.2 2.7 Summary of Gross Investment Income Investment Income 2012 Jan Sep (Rs.mn) 2013 Jan Sep* (Rs.mn)

64

Change (%)

Gross Interest
Amortization Gain/(Loss) Interest and Amortization Dividends Others

66,785
14,702

76,930
13,207

81,487
1,467 560 83,514

90,137
2,467 885 93,489 11.9%

Total

1,144

100.0

1,251

100.0

Total

*As at 30/09/2013 (Provisional)

*(Provisional)

Net Profit of the Fund

2011
Profit (Rs. mn) As a % of Net worth of the Fund Profit (Rs. mn)

2012
As a % of Net worth of the Fund

2013 (Est)
Profit (Rs. mn) As a % of Net worth of the Fund

107,202

10.53

111,829

9.77

128,847

9.85

The EPFs rates of returns were consistently higher than inflation & rates of other competitors
EPF provided a positive real rate of return to members in the past few years

65

EPFs rate of return to be credited to members for 2013 is likely to be between 10.8% and 11.3%

In the fiscal sector, the Governments curtailment of the budget deficit was a major boost to the health of the economy and monetary management
The overall fiscal deficit is estimated to be at 5.8% of GDP in 2013, down from 6.4% of GDP in 2012

66

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.

68

* Final appropriation to be done in March 2014

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

69

Debt servicing costs also declined sharply

Interest cost, as a percentage of GDP, improved to 4.2% at the end of 2013 from 5.4% in 2012 driven by strategic debt management initiatives:
Efficient use of foreign investments Resources through SLDBs

70

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

The Debt to GDP ratio improved continuously

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

71

Source: IMF, WEO Database - Oct 2013

72

Many improvements took place in the Government Securities market

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

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

In the meantime, the Government continued with the mega-scale infrastructure development plan, which has improved the countrys productive capacity significantly
Road development projects
The Southern Expressway Project - 126 km
Phase 1 - Completed Phase 2 - Completion by early 2014

73

Port development projects

The South Colombo Harbour Project
Commissioned in August 2013

The Hambantota Port Development Project

Phase 1 - Completed Phase 2 - Completion 2015

Northern Railway Project - 146 km

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

The Oluvil Port Development Project

Opened in September 2013

The Colombo-Katunayake Expressway - 26 km

Completed in October 2013

The Kankasanthurai Port Development Project

In Progress

The Colombo Outer Circular Highway Project - 29 km

Phase 1 - Completion by early 2014

Northern Expressway
Feasibility study in progress

Airport development projects

Second International Airport at Mattala
Opened in March 2013

Kandy-Badulla Alternate Highway Project-34 km

Feasibility study done

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

Domestic Airport Development Ampara, Koggala, China-Bay, Jaffna and Ratmalana

In Progress

120 MW Uma Oya Hydro Power Project

Completion 2015

Ongoing rural infrastructure development projects

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

500 MW Sampur Coal Power Project

Completion 2018

20 MW Moragahakanda and Kaluganga Reservoir Project

In Progress

Several mega hotel projects, condominiums, shopping malls, development of Northern and Eastern provinces, and water supply projects

74

The 5+1 hub strategy introduced in Mahinda Chintana gathered momentum for inclusive and sustainable growth in Sri Lanka

75

Overall, the sovereign credit ratings were maintained, but it was believed that a country rating upgrade was warranted Sovereign Downgrades during
Fitch and S&P credit ratings remained unchanged Moodys revised the rating outlook from Positive to Stable in July 2013 citing inadequate development in the external sector and a slowdown in fiscal consolidation 2012/2013
Fitch Ratings Spain A to BBB Cyprus BBB to BBBelgium AA+ to AA Greece CCC to C Slovenia A Negative to BBB+ negative Egypt B+ to B- negative Japan AA+ to A+ stable Standard & Poors France AAA to AA+ Negative Spain AA- to BBPortugal BBB- to BB Negative Slovenia AA- to A South Africa A- to BBB negative Italy BBB+ to BB negative Cyprus B to C stable Egypt B to CCC+ stable Argentina B- to B- negative European Union AAA to AA+ Moodys South Africa A3 to Baa1 France Aaa (Negative) to Aa1 Spain A3 to Baa3 Cyprus Ba1 to B3 Greece Ca to C Pakistan B3 to Caa1 Italy Baa2 to Baa2 (Negative) Egypt B3 to Caa1 (Negative)

76

However, by end 2013, the assertions of Moodys were proven wrong as the countrys external sector demonstrated clear improvements in terms of lower current account deficit, increased BOP surplus, and higher foreign reserves, while the fiscal deficit declined to 5.8% from 6.4% of GDP last year as targeted

Sri Lanka was ranked best in South Asia in the Doing Business Index (DBI) 2014
Sri Lanka was ranked 85th in 2014,

77

The World Bank acknowledged Sri Lankas recent reforms in: Dealing with construction permits Paying taxes Getting electricity Trading across borders
Sri Lankas DB ranking improved in absolute terms

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

78

Sri Lanka successfully hosted the CHOGM 2013, and many other events, which helped to showcase Sri Lanka & build its new brand
Several events associated with CHOGM were also organised:
Peoples Forum in Hikkaduwa Youth Forum in Hambantota Business Forum in Colombo

79

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

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

80

Many international observers commented positively on Sri Lankas developments

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

81

- Naoyuki Shinohara, Deputy Managing Director of IMF

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

- Tony Abbott, Prime Minister of Australia

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

- Reza Hossaini, Sri Lanka Country Representative, UNICEF

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

- Dr Firdosi Mehta, Sri Lanka Country Representative, WHO

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

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

In summary, substantial progress was achieved in all macro-fundamentals

Unit
Real GDP Growth (Avg. for 5 years ending) GDP Unemployment Inflation (Annual Average) Current Account Deficit Tourist Arrivals Remittances FDI Inflows Gross Official Reserves Exchange Rate (End Period) Budget Deficit Public Debt Broad Money Growth (M2b) Private Sector Credit Growth Stock Market Capitalisation % US$ mn % % % of GDP 000 US$ mn US$ mn US$ mn Months of Imports Rs./US$ % of GDP % of GDP % % Rs. bn

82

2000
5.0 16,596 7.6 6.2 6.4 400 1,160 175 911 1.5 80.06 9.5 96.9 12.9 11.8 88.8

2005
4.0 24,406 7.2 11.0 2.7 549 1,968 272 2,735 3.7 102.12 7.0 90.6 19.1 21.5 584.0

2013 (Est/Proj)
6.7 67,374 4.5(1H) 6.9 3.9 1,170 6,650 1,459 7,128 4.5 130.75 5.8 78.0 16.0 8.0 2,459.9

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

Steady progress
Almost 5 years at single digit levels Satisfactory progress being made Remarkable increase after the conflict Steady y-o-y growth, & 237% increase in 8 years

Steady growth
Consistent improvement and steady progress

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

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
Real Sector and Inflation Real GDP Growth Total Investment GDP Deflator Headline Inflation External Sector Trade Balance Current Account Balance Overall Balance Fiscal Sector % of GDP % of GDP US$ mn -12.8 -3.9 700 -11.6 -2.4 1,500 -10.2 -1.0 1,750 -8.4 0.1 3,700 % % of GDP % % 7.2 31.0 7.0 4.7 7.8 32.0 6.0 5.0 8.2 32.5 5.5 4.5 8.5 33.0 5.0 4.0

85

Unit

2013 (Est) 2014

Projections 2015 2016

Current Account Balance

Overall Balance

% of GDP
% of GDP

-0.5
-5.8

1.1
-5.2

1.6
-4.4

2.3
-3.8

Government Debt
Monetary Sector

% of GDP

78.0

74.3

70.6

65.0

Broad Money Growth (M

2b)

%
%

16.0
8.0

14.0
16.0

14.0
17.0

14.0
17.0

Private Sector Credit Growth (in M2b)

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

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

87

On that basis, the country will continue on a focused path to promote hub-activity led growth

The Maritime hub will focus on unlocking value of Sri Lankas ocean resources
Significant investments in the sector have created a unique opportunity for Sri Lanka to become a complete logistics provider from a mere cargo handler Accordingly, the second wave of maritime development is expected to be centred on developing related services such as
vessel trading financial services legal services, and crew training

88

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

Private sector has responded to emerging opportunities in the maritime sector

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

89

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

Steady pipeline of investments will assure energy security & strengthen the emerging Energy hub
Schedule of the Sampur Coal Power project of 500 MW Before October 2014 Construction to commence Construction of coal unloading port to be completed Power Plant to be commissioned

90

Before mid 2018

Before end 2018

Other Key Electricity Generation Projects

Mid 2014 Before end 2015
600 MW from Norochcholai Coal Power Plant to be added to the national grid
120 MW Uma Oya Hydro Power Plant to be added to the national grid

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

Infrastructure to transport oil from ships to Muthurajawela will be improved

Sustainable tourism development will be the key focus in creating the Tourism hub
2012

91

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

1.0 US$ bn
1,005,605 arrivals

2013 (Est)

1.4 US$ bn
1,170,000 arrivals

2016 (Proj)

3.1 US$ bn
2,500,000 arrivals

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

92

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

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

93

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

94

The Health sector will also evolve to produce world class healthcare, while supporting a healthier nation
Availability of healthcare services is widespread with 593 government hospitals and 197 private hospitals Reduced prevalence of communicable and infectious diseases is evidence of the success of Sri Lankas health sector The country has potential to emerge as a Medical hub in the future due to:
- Its strategic and convenient location, which can serve the Middle East, East Africa and the Far East - Growing number of internationally qualified medical specialists in the country - The countrys focus on upliftment and modernisation of health sector through the Budget 2014 o Increased intake and expansion of subject areas available at the Postgraduate level to encourage high calibre research and advanced medical studies o Increased availability of specialised medical services through the setting up of a Centre of Medical Excellence o Increased number of medical specialists

95

Potential foreign exchange earnings through health service exports could be substantial

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

96

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

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

97

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
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)

98

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
(Excluding KPO Services)

99

2016 (Proj)

436 US$ mn 471 US$ mn

2012

Transportation Services Freight and Other Port Related Services

2013 (Est)

661 US$ mn

2013 (Est) 2012

2016 (Proj)

254 US$ mn 418 US$ mn

1,513 US$ mn

IT/BPO sector including KPOs and the Transportation sector are both estimated to surpass US$ 1 bn each, by 2016

Workers remittances are also expected to continue to cushion the external sector while providing a useful source of employment
[10.1% of GDP]
2016 (Proj)

100

6.0 US$ bn

2013 (Est)

6.6 US$ bn
[9.9% of GDP]

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

2012

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

101

Projections for the Current Account

2011 US$ mn
% of GDP -4,615 -7.8

2012
-3,915 -6.6

2013E
-2,650 -3.9

2014P
-1,872 -2.4

2015P
-858 -1.0

2016P
74 0.1

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

102

It is time for the corporate sector also to enter international markets to raise funds for domestic as well as international expansion

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

104

The maintenance of foreign reserves at desirable levels will enable the Central Bank to prudently manage market dynamics and any impending risks

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

105

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!

In this context, the Central Bank will engage with other Central Banks in Asia to gradually reduce the impact of round tripping
Benefits of avoiding high levels of round-tripping

106

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

107

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

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

108

Salaries and wages Interest payments Current transfers and subsidies

5.6 6.4 3.9

5.4 6.3 3.5

4.9 5.5 3.3

4.6 5.4 3.1

4.5 5.1 2.9

4.1 4.4 2.9

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

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

109

Public investments are expected to complement the projected improvement in the overall investment level to around 33% of GDP in the medium term

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

110

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

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

111

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

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

112

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

The conduct of monetary policy will continue to be based on monetary targeting with greater focus on managing inflation expectations...
Monetary Projections
Dec-12 Broad Money y-o-y % change Reserve Money y-o-y % change 10.2 0.9* 14.0 17.6 16.0 14.0 Dec-13 (Est) Dec-14 (Proj)

113

Credit to the Private Sector y-o-y % change 17.6 8.0 16.0

* 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

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

In the meantime, the Government has already announced 114 the increase of the capital of the Central Bank to Rs. 50 billion, to reflect its strength & stability
Capital funds of the Central Bank have been substantially increased since 2008 Considering the Central Banks responsibilities and recent trends in the economy, the Budget 2014 proposed to increase the capital of the Central Bank further to Rs. 50 bn, by capitalising its reserves
* Proposed

Under the Monetary Law Act, No.58 of 1949, the Contributed Capital of the Central Bank is Rs. 15 mn. Subsequent Monetary Board decisions in 2008 and 2012 have had reserves appropriated as capital, bringing it to Rs. 35 bn as at end 2013.

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

115

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

Considering the current developments, the Monetary Board also decided to compress the Standing Rate Corridor with immediate effect

116

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

Well contained inflation & well managed inflation expectations are likely to result in lower market interest rates in the medium to long term
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

117

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

118

Since external trade conditions have since improved, the Monetary Board has decided to remove this condition with immediate effect

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

120

Sri Lanka is currently experiencing a virtuous cycle

Overall, the multi-dimensional approach to monetary policy decision making will continue

121

The Central Banks communication policy & delivering on projections will continue to play a key role in managing expectations
With advanced technology and improved information flows, and considering the importance of market expectations for the success of macroeconomic policies, the Central Bank will continue to provide information to all stakeholders in an effective manner
Regular press releases based on an advance release calendar Press releases on important economic events Regular statistical releases, & statutory and other publications Special Presentations by senior management of the Central Bank Continued dialogue with the domestic financial sector and international investors Creating awareness among media personnel & financial sector employees Continued use of Social media The Governor will be on with immediate effect

122

By consistently delivering on its projections, the Central Bank has been able to enhance its credibility

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

123

* Estimate for 2013

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

As some countries have stagnated at this middle income level, Sri Lankas medium term macroeconomic strategy will need to focus on avoiding this Trap as well

Meanwhile, Sri Lanka will also graduate to the IMFs SDDS data reporting category of countries in 2014
By graduating to Special Data Dissemination Standard (SDDS) from the current General Data Dissemination System (GDDS) status, Sri Lanka will firmly commit to further improving data coverage, periodicity and timeliness of data categories of all sectors of the economy SDDS has helped countries to:
Improve Sovereign ratings Lower Sovereign borrowing costs Lower corporate borrowing costs, and Improve functioning of domestic financial markets

124

Graduating to SDDS will enable analysts to understand Sri Lankas economic progress more closely

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
The Central Banks policies will be forward looking and designed to balance potential worldwide policies and adjust to sudden volatilities Adequate capital and other buffers will be put in place to prepare the Sri Lankan financial sector to withstand business cycles, without sacrificing investment potential during periods of global economic downturn Greater cohesion and overall sectoral integration would provide a stronger thrust to propel the financial sector towards a more sustainable growth model

126

The Central Banks role will be that of a pragmatic systemic risk mitigator, and a guide that encourages innovation in order to ensure the overall goal of financial system stability

The New Vision will require a strengthened financial 127 sector, which is strong enough to steer Sri Lanka towards the goals set for 2016

In that scenario, the present skewed* banking structure will need some structural changes to ensure that Banks & NBFIs will be equipped to play the required role in the envisaged US$ 100 bn economy
Consolidation in the banking and the NBFI sectors will have to be encouraged, using the attractive tax concessions provided by the Government The regulatory framework will have to be re-designed to monitor the emerging business models of banks and NBFIs The regulatory regime will have to be strengthened, while encouraging diversification of sources of funding and business operations, including through foreign sources The risk profiles of banks and NBFIs will have to be identified and regulated in order to ensure overall stability of the financial sector and enhance public confidence

128

Asset size of Present Banks Over Rs. 100 bn

Number of banks 11

Market share 89.4%

Domestic banks with less than Rs. 100 bn

Foreign banks with less than Rs. 50 bn

12
10

7.4%
3.2%

The State Banks will be expected to contribute significantly towards building a strong and dynamic banking sector

129

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!

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

130

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

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

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

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

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

132

Target Date
During 1st Quarter 2014

Implement the new Liquidity Risk Management Framework by the introduction of the Basel III Liquidity Coverage Ratio (LCR)

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

Introduce a Regulatory Framework for Valuation of Immovable Property of Licensed Banks Introduce prudential requirements to regulate the exposure of the banking system to asset markets and other potential economic shocks and concentrations

During 2014

133

Further, several new Regulatory measures will be implemented

Key Policy Measure
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 Establish minimum standards for core banking systems and other IT based platforms used by banks

Target Date

From 2nd Quarter 2014

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

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

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

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

135

136

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

Improve cost efficiencies in order to be competitive

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

Manage risks in an integrated manner

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

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

137

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

The NBFI Consolidation/Merger Plan will be implemented according to a time-bound plan

Consolidation/Merger Strategy A group could operate only one NBFI Directors who own controlling shares in more than one NBFI to arrange for the merger between the NBFIs Target Date for Completion June 2014 June 2014

138

Investors or Banks or Large NBFIs to acquire negative net worth NBFIs or selected lowly capitalised NBFIs

NBFIs, which are currently having negative net worth are expected to be absorbed by December 2014: Others to be completed by 2015 1st January 2016
1st January 2018

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

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

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

141

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

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
78.0 4.8 25 43

Annual Target 2014P

74.3 5.5 24 40

2015P
70.6 6.0 23 37

2016P
65.0 6.5 22 35

Debt/GDP ratio (%)

Average Time to Maturity of Domestic Debt (years)

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

Share of Foreign Currency Debt to Total Debt (%)

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!

143

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

In the meantime, a deeper secondary market for Government Securities will be developed
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

144

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

147

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

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

151

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

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 9,800 8,050 1,485 2,000 21,335 Beneficiaries 117,000 23,180 20,600 400 161,180

Awareness building and training programmes for SMEs will be continued in 2014
Programme
No of Programmes Expected No. of Participants

Financial Literacy/School Leavers/ Loan Beneficiaries Entrepreneurship Development Training of Trainers and Bankers Post and Pre Harvest Technology

120

11,000

Agriculture SME Microfinance Dairy

620
50 16

27,300
2,500 800

Total

Business Start-up
Business Revival

12
12

1,200
1,200

Total

830

44,000

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

154

New measures in 2014 & beyond

Women will be encouraged to take leadership roles in micro finance activities
- Womens participation was close to 80% in certain micro finance projects

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

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
Expectations for the Payments System in a US$ 100 bn Economy 2013E Average No. of RTGS Transactions per day (High value payments) Average No. of non-cash Retail Payments per day RTGS/SSSS System Availability 1,300 2016P 2,500

155

395,000

750,000

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

156

Fund management efficiency will be increased with in-depth analysis of investments, in compliance with the internal rules and improved risk management

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

157

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

Contrary to the views of many detractors, the Central Bank projections have been realised to a great extent

158

*Annual Report/Daily FT Supplement, April 2013

Going forward, the Medium Term Framework projections appear quite encouraging
Indicator
Real Sector and Inflation

159

Unit

2013 (Est)

Projections

2014
Real GDP Growth
Total Investment GDP Deflator Headline Inflation External Sector Trade Balance Current Account Balance Overall Balance Fiscal Sector Current Account Balance Overall Balance % of GDP % of GDP -0.5 -5.8 1.1 -5.2 % of GDP % of GDP US$ mn -12.8 -3.9 700 -11.6 -2.4 1,500

2015
8.2
32.5 5.5 4.5

2016
8.5
33.0 5.0 4.0

%
% of GDP % %

7.2
31.0 7.0 4.7

7.8
32.0 6.0 5.0

-10.2 -1.0 1,750

-8.4 0.1 3,700

1.6 -4.4

2.3 -3.8

Government Debt
Monetary Sector

% of GDP

78.0

74.3

70.6

65.0

Broad Money Growth (M

2b)

%
%

16.0
8.0

14.0
16.0

14.0
17.0

14.0
17.0

Private Sector Credit Growth (in M2b)

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