Central Bank Unveils a Robust Roadmap for Sri Lanka for 2012 after Recording the 2nd Consecutive Year of over 8pct Growth

04th January 2012, www.ft.lk, By Uditha Jayasinghe

A highly confident Central Bank yesterday unveiled a robust roadmap for Sri Lanka for this year and beyond though with a rider that realisation was subject to absence of any major unforeseen supply side shocks.

Governor Nivard Cabraal proudly told the ceremony attended by business leaders and media that the country in 2011 is estimated to have achieved its highest GDP growth of 8.3% thereby recording the second consecutive year of over 8% growth.

“2011 was a challenging year but amidst tense global developments, the Sri Lanka’s economy was able to deliver the promised results,” Cabraal said in his roadmap presentation that covered key macroeconomic developments in 2011; developments in the financial system in 2011; Macroeconomic outlook and proposed monetary policy strategy for 2012 and beyond; proposed strategies for financial system stability for 2012 and beyond and policies to strengthen the economy in 2012 and beyond.

The 8.3% GDP growth was marginally below targeted 8.5% figure whilst among other achievements included 4.9% year on year inflation as opposed to 4 to 6% target and debt to GDP ratio contained at 78% as against target of 79% and 82% in 2010. “We had controlled debt to GDP ratio at a time when other countries couldn’t,” he added.

Among things which Central Bank couldn’t control was broad money growth 19.8% as of October high in comparison to the target of 14.5%.

Whilst this was on account of sharp rise in private sector borrowing in tandem with post-war rebound and low interest rate regime, Cabraal however pointed to single digit inflation as a cushion and a key achievement. He also said Government expenditure was reduced by an estimated Rs. 15.5 billion due to the decline in interest rates.

Gross Official Reserves amounted to $ 6.0 billion by end 2011 compared to $ 6.6 billion by end 2010 and a high $ 8.2 billion in August.

“We built up such high reserves so that they could be used when the need arose. When we entered into the International Monetary Fund (IMF) agreement the target was to have enough reserves for 3.5 months of imports,” the Governor added.

He said that engagement with international monetary institutions will continue even though the IMF programme is due to end in the first quarter and that all key economic sectors contributed to high growth and the same resilience will help the country to achieve its third year of over 8% growth. However due to external shocks the 2012 forecast of 8% growth is a downward revision from 9% previously projected.
“We have also posted the lowest unemployment rate of 4.3% and made a significant reduction on poverty,” he added.

A key highlight of his roadmap was estimating a whopping $ 25 billion in foreign inflows in 2012 inclusive of $ 12.5 billion via exports (up from $ 10.5 billion in 2011); $ 2 billion in FDI (up from $ 1 billion in 2011) and $ 6.5 billion via remittances as opposed to $ 5.2 billion last year and $ 1.2 billion from tourism up from $ 850 million in 2011. Included in the forecast was $ 500 million (Rs. 57.5 billion) net inflow to Colombo stock market notwithstanding the Rs. 19 billion outflow in 2011. With regard to the latter he said that it was offset by Rs. 25 billion increase in foreign inflows to Government securities in 2011.

Cabraal also touched on success of fiscal management noting that Budget deficit in 2011 is estimated at below 7% of GDP down from 8% in 2010. Forecast for 2012 is a 6.2% fiscal deficit.

According to the Governor during 2006-2011 the Central Bank was able to appropriate Rs. 64 billion to the Government from surpluses generated by the Bank mainly from its international operations. In real terms based on 2006 prices this amounted to over Rs. 46 billion.

Based on success achieved in the recent past, Cabraal said “Central Bank now has greater confidence in its ability to face new challenges and adopt new frameworks of monetary policy since it uses the new strengths.”

He said the Bank can with greater confident target inflation in a broader sense hence from 2012 onwards it would start doing so parallel to its existing framework. “We will also give recognition to the major structural changes that have taken place in the economy and display a policy shift,” he added.

He also said Sri Lanka’s macro economic conditions and policies would be fashioned to support high growth in 2012. “We will be keen to accommodate the higher growth of economic activity although priority would be to check inflationary pressures in the economy,” he added.

“Today, Sri Lanka is on the threshold of a new era, where its economy is undergoing fundamental structural changes that are expected to provide a new platform that will pave the way for a robust future direction in the economy,” Cabraal said adding a cohesive and integrated monetary policy framework will be fashion whilst taking into new emerging policy environment.

According to the Central Bank 2012 growth will be driven by agriculture sector (expected to expand at 7.3%, compared to 2.0% in 2011); Industry sector (expected to expand at 9.0%, compared to 10.1% in 2011); and services sector (expected to expand at 7.7%, compared to 8.6% in 2011).

Cabraal also assured that the Central Bank will assist the Government and the private sector with the interventions necessary to move towards higher growth targets.

 “The wide range of goals as we have set for ourselves are not easy to achieve. And if we are to succeed, we will need total focus and diligent implementation of our policies and plans. We will also need to motivate and energise our fellow countrymen to realise the ambitious goals that have been endorsed by our people through their mandate for the “Mahinda Chintana – Vision for the Future,” Central Bank chief emphasised.

Road Map : Monetary and Financial Sector Policies for 2012 and beyond

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