State of the Economy

as reflected in the

Central Bank Annual Report

2010
Economic Research Department
Central Bank of Sri Lanka

27 April 2011

The Statutory Requirement

61st Annual Report of the Monetary Board submitted to the Hon.
Minister of Finance under Section 35 of the Monetary Law Act.
Part 1 Part 2 Part 3 Part 4 The state of the economy, its performance, policies and issues Accounts and operations of the Central Bank Major administrative measures Monetary Board in 2010 adopted by the

Major legislative enactments in 2010 relating to the functions and operations of the Central Bank and banking institutions in Sri Lanka Statistical Appendix

2010 : THE FIRST FULL YEAR AFTER THE END OF THE THREE-DECADE LONG CONFLICT
A favourable environment
Peace Improved investor confidence Favourable macroeconomic condition Gradual recovery of the global economy

Appropriate policies

Accommodative monetary policy Fiscal consolidation Strengthened financial sector stability

Outcome

High economic growth Improved resilience Increased stability Increased social welfare

HOWEVER, THERE WERE SOME CHALLENGES

Rising commodity prices, including crude oil in the international market Natural disasters Geo-political disturbances in a number of countries/ regions Sovereign debt crisis in Europe Delayed unwinding of fiscal stimuli provided during the crisis period

REAL SECTOR

ECONOMY RECOVERED STRONGLY IN 2010

Quarterly GDP Growth Rates

The economic recovery which commenced in mid 2009, continued in 2010

9 8

8.5 7.0 6.2 6.3 4.3 2.1 4.2 6.2 7.1

8.0

8.6

Per cent

7 6 5 4 3 2 1

1.6
2008-Q1 2008-Q2 2008-Q3 2008-Q4 2009-Q1

2009-Q2

2009-Q3

2009-Q4

2010-Q1

2010-Q2

2010-Q3
2399 2010 Prov.

Per capita GDP (US $)

3000
2500 2014 2000 1617 1500 1000 899 841 870 948 1030 1421 2057

1241

500
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source : Department of Census and Statistics

2010-Q4

THE GROWTH WAS BROAD BASED

All key sectors of the economy grew by 7% - 8% compared to the 3% - 4% growth in 2009.
GDP Sectoral Growth and Shares (%)

Sector Agriculture Industry Services GDP

Growth (%) 2009 2010 3.2 4.2 3.3 3.5 7.0 8.4 8.0 8.0

Share to the GDP (%) 2009 2010 12.0 28.6 59.3 100.0 11.9 28.7 59.3 100.0

Source : Department of Census and Statistics

7

INCREASED PERFORMANCE IN ALL KEY SECTORS IN 2010

Agriculture grew by 7.0%
Favourable weather conditions Increased paddy, tea, rubber, fish, milk, minor agricultural crops production Continued Govt. Support : fertiliser, minimum paddy purchase price, extension services, new planting and re-planting subsidy, high quality seeds Significant contribution from the Northern and the Eastern provinces

GDP and Sectoral Performance (Growth Rates)

9 8 7
Per cent

6 5 4 3 2 1 0
2005
Agriculture

Industry grew by 8.4%

Improved domestic and external demand Export market oriented : textiles & apparel, rubber based, leather, fabricated metal products Domestic market oriented : food and beverages, ceramic products, cement and building materials Improved infrastructure facilities, revival of economic activity, productivity improvement also helped

2006
Industry

2007

2008
Services

2009

2010

Gross Domestic Product

Services grew by 8.0%

All sub-sectors performed well
Wholesale and retail trade
Export and Import trade

Transport and Communication Tourism Banking and Insurance

8

SOME SELECTED INDICATORS

Telephone Density
Telephones per 100 persons 120 100 GWh. ('000) 80 60 40 20 0 7 6 TEUs in mn.

Power Generation
5 4 3 2 1

Volume of Container Handling and Transshipment

400 350 300 250 200 150 100

Motor Vehicle Registrations (in 000)

35 30 25 20 15 10

5 4
3 2 1 -

0
2005 2006 2007 2008 2009 2010 Hydro Thermal & Other 2006 2007 2008 2009 2010 Container Handling Transshipments

2006
Fixed Access

2007

2008

2009

2010

2006 2007 2008 2009 2010 Total Vehicle Registrations (LHA) Monthly Average (RHA)

Total (including Cellular phones)

Telephone density increased to 100.8 in 2010 from 86.6 in 2009

Electricity generation increased by 8.4% Hydro power generation increased by 45.2% 53% of total electricity generation was Hydro Electrification level increased to 90%

The Port of Colombo handled 4.1mn containers in 2010 Transshipment handling increased by 18% Cargo handling increased by 26.7%

Total vehicle registration recovered and increased by 76% Registration of buses increased by 237% Registration of cars increased by 300%

BOTH SAVINGS AND INVESTMENT INCREASED

Savings and Investment (% of GDP)
Item Investment
Private Government

2005 26.8 22.4 4.4 23.8 17.9 5.9 -3.0

30

2006 28.0 23.9 4.1 22.3 17.0 5.4 -5.7

2007 28.0 22.6 5.4 23.3 17.6 5.8 -4.7

2008 27.6 21.1 6.5 17.8 13.9 3.9 -9.8

2009 24.4 17.9 6.6 23.7 17.9 5.8 -0.7

2010 27.8 21.6 6.2 24.7 18.7 6.0 -3.1

National savings
Domestic savings Net factor income

Savings-Investment Gap

Savings and Investment as a % of GDP

25
Per cent

20 15

10
5 0 2005 2006 2007 Investment 2008 Savings 2009 2010

10

UNEMPLOYMENT RATE DECLINED

Unemployment rate declined to 4.9% in 2010 from 5.8% in 2009 Increased economic activities Reconstruction and resettlement programmes Increased self-employment opportunities Steady increase in foreign employment Need measures to increase labour productivity in agriculture through improved seeds, technology & innovation, mechanisation, extension services, etc. to address possible labour shortages.
Unemployment (1990-2010)
16
15.9

14
12.3

12
Per cent

11.3 10.5 9.2 8.9 7.6 7.9 8.8 8.4 8.3 7.7 6.5 6 5.4 5.8 4.9

10 8 6 4 2 0
1990 1995 1996 1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source : DCS

11

2010

POVERTY LEVEL HAS DECLINED RAPIDLY

Decline in poverty surpassed the target set under MDGs
per cent

Poverty Head Count Index (a)

35 30 25 20 15 10 7.6 28.8 22.7 15.2

Headcount index, halved from 15.2% (2006/07) to 7.6% (2009/10) Significant decline in poverty levels in estate and rural sectors

5
0 1995/1996
(a)

Poverty alleviation programmes continued

Samurdhi subsidy programme Nutrition allowance programme Samurdhi social security programme Kerosene subsidy stamp programme Income support schemes & Community development programmes

2002

2006/2007

2009/2010

Based on household income & expenditure survey 2006/2007

Source : Department of Census and Statistics

Poverty HCI Sector Sri Lanka Urban Rural 2006/07 15.2 6.7 15.7 2009 7.6 6.5 7.7

Estate

32.0

9.2

Source : Department of Census and Statistics

12

INFRASTRUCTURE DEVELOPMENT PROGRAMME WAS ON TRACK

Extensive Colombo City Development Plan Power projects
900 MW Norochcholai Coal Power Plant (Phase 1 - 300MW Completed, Phase 2 : 2013) 150 MW Upper Kothmale Hydro Power Plant (Completion by 2011) Uma Oya Hydro Power Project (Completion by 2015) Moragahakanda and Kaluganga Reservoir Project (Commenced)

Road development projects

The Southern Highway (Completion by 2011) The Colombo - Katunayake Expressway (Completion by 2012) The Colombo Outer Circular Road (Completion by 2013)

Port and Airport development projects

The South Colombo Harbour Project, (Phase 1 Completion by 2012) The Hambantota Port Development Project (Phase 1 : Completed) The Oluwil Port Development Project (Completion by 2011) Second International Airport (Phase 1 : in 2012)

Several water supply projects Rural infrastructure development projects Widulamu Lanka (Targeting 100% electricity coverage)
13

EXTERNAL SECTOR

14

EXTERNAL SECTOR OUTLOOK IMPROVED

Graduated to Middle-Income Country status by IMF Successful issue of 10- year sovereign bond amounting to US dollars 1 bn Sovereign ratings upgraded by all rating agencies during the year IMF SBA facility continued
Rating Agency S&P Fitch Moodys Current Rating B+ B+ B1
Issuance of Sovereign Bonds
US$ mn 1000 8 %

8.25

8.5

7.4
500

7.5 7

6.25
0 2007 2009 2010

6.5 6

Amount

Yield (%)

Outlook Stable Positive Stable

15

EXPORT EARNINGS RECOVERED STRONGLY IN 2010...

Earnings from exports increased by 17.3%
Earnings from Exports
1,000

Both Agricultural and Industrial exports increased Attractive prices in the international markets Gradual recovery of global demand Productivity improvements
Growth led by Industrial exports - textile and garments, rubber products, machinery and equipment Agricultural exports also recorded a healthy growth led by higher tea and rubber prices

900
800 US $ million 700 600 500 400 Jan Feb Mar Apr May Jun
2008

Jul
2009

Aug Sep Oct Nov Dec

2010

Exports by Destinations
2010
Other 16% Middle East 12% UK Belgium12%Luxemburg 5% Germany 5% Italy 6% EU-Other 7% USA 21%

Asia 16%

16

EXPORTS WEATHERED THE GSP+ WITHDRAWAL CHALLENGE

USD Mn.

Exports of Garments to EU

Despite the withdrawal of the GSP+ scheme since August 2010, apparel exports to all major regions increased. Nearly 87 per cent of Sri Lankas garment exports goes to the EU and the USA.
Garment and Textile Exports Destinations (US$ Mn) Region EU region U.S.A. Other Total 2009 1,629 1,285 360 3,274 2010 1,678 1,356 470 3,504 Growth (%) 3.0 5.5 30.6 7.0 Share 47.9 38.7 13.4 100.0

230
210

190
170 150 130 110 90 70 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 2010

Exports of Garments to USA

USD Mn.

190
170 150 130 110 90 70 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 2010

17

EXPENDITURE ON IMPORTS ALSO INCREASED...

Expenditure on imports increased by 32.4% Reflecting higher international commodity prices Increased volumes with economic expansion Growth led by intermediate goods, mainly petroleum imports Imports of non-food consumer goods also increased - supported by tax reductions Investment goods imports increased reflecting the rapid recovery of the economy
US $ million 1,600 1,400 1,200 1,000 800 600 400 Jan Feb Mar Apr May Jun
2008

Expenditure on Imports

Jul

Aug Sep
2010

Oct Nov Dec

2009

Imports by Origin - 2010

Other 16% EU 11% USA 1%

Middle East 14%

India 19%

Trade deficit expanded to US$ 5,205 mn in 2010 compared to US$ 3,122 mn in 2009.

Asia Other 18%

China 9%

Singapore 12%

18

INTERNATIONAL CRUDE OIL PRICES INCREASED IN 2010 COMPARED TO LOWER PRICES IN THE PREVIOUS YEAR
The average import price of crude oil increased to US dollars 80 per barrel in 2010 from US dollars 62 per barrel in 2009. International crude oil prices increased to US dollars 92 p.b by the end of 2010 from US $ 70- 80 p.b during the first half. Crude Oil prices further increased in 2011 due to increased demand and supply disruptions due to geo-political tensions in some oil producing countries.
US$/bbl

130 120 110 100 90 80 70 60 50 40 30

09' Jan

International Crude Oil Prices (Brent) Monthly Average

Nov

10' Jan

Nov

11' Jan

Mar

Mar

May

May

19

Mar

Jul

Sep

Jul

Sep

WORKERS REMITTANCES GREW SHARPLY

Workers remittances exceeded USD 4.1 billion in 2010, up by 23.6% compared to USD 3.3 billion in 2009.

Workers Remittances
4500 4000 3500 3000
2,918 2,502 2,161 1,919 3,330 4,166

Region-wise Workers Remittances

Far East Asia, 6.1 South East Asia, 3.0 Australia & NewZealand , 1.7 Europe other, 4.1 Middle East, 59.9 Other, 3.3

US$ mn.

2500 2000 1500 1000 2004 2005

1,564

2006

2007

2008

2009

2010 (Prov)

EU, 18.1 North America, 3.8

20

TOURISM REBOUNDED SIGNIFICANTLY...

Tourist arrivals increased by 46.1% to 654,476 in 2010, surpassing the previous record of 566,202 arrivals in 2004. Major tourist generating countries, such as USA, UK, Germany, Australia and Japan relaxed travel advisories.
Tourist Arrivals
700 654 650
No. of Tourists ('000)

Tourist arrivals by country/region of residence (Jan-Dec 2010)

Middle East 6%

600 550 501 500 450 400 400 350 300 337 393

566

549

560 494 438 448

Eastern Europe 5% North America 6% Aus/NZ 6% East Asia 11%

Other 1%

Western Europe 39%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Maldives 5%

Other South Asia 2% India 19%

21

EXTERNAL CURRENT ACCOUNT DEFICIT MORE THAN OFFSET BY CAPITAL AND FINANCIAL ACCOUNT SURPLUS...
Item Exports Imports US dollars million 2009 7,085 10,207 2010 8,307 13,512

Trade balance
Services (net) Income (net) Current Transfers (net)

-3,122
391 -488 3,005

-5,205
698 -572 3,660
4,000 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 -4,000 -5,000 -6,000 -7,000
2005

Balance of Payments
2,725 921

Current Account
Capital Account Financial Account

-214
233 2,361

-1,418
164 2,713
USD mn

Overall balance

2,725

921

Current account deficit as a percentage of GDP was 2.9% in 2010

2006

2007

2008

2009

2010

Trade Balance

Current Account Balance

Overall Balance

22

GROSS OFFICIAL RESERVES REACHED RECORD HIGH LEVELS

Reserves increased to USD 6.6 billion (equivalent to 5.9 months of imports) by end 2010
Gross Official Reserves (without ACU) and Months of Imports
8.0 7.0 6.0 7.0 6.0

USD bn.

5.0 4.0 4.0 3.0 3.0 2.0 1.0 0.0

Jul-08 Jul-09 Jan-08 Jan-09 Mar-08 Mar-09 Jan-10 Sep-08 Nov-08 Sep-09 Nov-09 Mar-10 Jul-10 Sep-10 May-08 May-09 May-10 Nov-10

2.0 1.0 0.0

Gross Official Reserves (Left Axis)

Months of Imports (Right Axis)

Months of Imports

5.0

23

INCREASED FOREIGN EXCHANGE INFLOWS EXERTED PRESSURE ON THE RUPEE TO APPRECIATE...

The rupee appreciated against the US dollar by 3.1% in 2010 and moved in different directions against other currencies.
Rs.

Daily Exchange Rate Movements Against Euro

Rs
120

Daily Exchange Rate Movements Against US Dollar

115

180 175 170 165 160 155 150 145 140 135 130
Oct-07 Oct-08 Oct-09 Apr-07 Apr-08 Apr-09 Apr-10 Oct-10 Jan-07 Jan-09 Jan-10
Jan-08

Rs. 1.4

Daily Exchange Rate Movements Against Japanese Yen

1.2

1.0

0.8
Oct-07 Oct-08 Oct-09 Apr-07 Apr-08 Apr-09
Apr-10

110
Rs. 3.0

Daily Exchange Rate Movements Against Indian Rupee

Rs. 230 220 210

Daily Exchange Rate Movements Against Sterling Pound

105
Jan-07 Jan-08 Jan-09 Jan-10 Jul-07 Jul-08 Jul-09 Oct-07 Oct-08 Oct-09 Jul-10
Apr-07 Apr-08 Apr-09 Apr-10

Oct-10

200
2.5

190 180 170 160

2.0
Oct-08 Oct-09 Apr-08 Apr-09 Apr-10
Apr-07

150
Apr-08 Apr-09 Apr-10
Apr-07
Oct-10
Oct-07

Jul-07

Jul-08

Jul-09

Jan-08

Jan-09

Jan-10

Jan-07

Oct-07

Oct-08

Oct-09

Jul-10

24

Oct-10

Jul-07

Jul-08

Jul-09

Jul-10

Jan-07

Jan-08

Jan-09

Jan-10

Oct-10

Jan-07

Jan-08

Jan-09

Jan-10

Jul-07

Jul-08

Jul-09

Jul-10

Jul-07

Jul-08

Jul-10

Jul-09

FISCAL SECTOR

25

GOVERNMENT REVENUE

Total revenue increased by 16.9 per cent to Rs. 818.2 billion The declining trend observed in the revenue to GDP ratio during the last three years reversed with the higher mobilisation of both tax and non tax revenue. Major reforms to the tax system were introduced in the budget for 2011 to improve revenue collection.
Government Revenue (as a percentage of GDP)
18 16 14 Per cent 12 10 8 6 14.6 14.2 13.3 12.8 13.0 16.3 1.7 15.8 1.6 14.9 1.6 14.5 1.7 14.6 1.7

4
2 0 2006 2007 2008 2009 Non Tax Revenue Tax Revenue 2010 Pro.

26

GOVERNMENT EXPENDITURE
Total expenditure and net lending declined to 22.9 per cent of GDP
due to the efforts by the government to curtail recurrent expenditure, while maintaining capital expenditure at a desired level

Recurrent expenditure, as a percentage of GDP, declined significantly

to 16.7 per cent in 2010 from 18.2 per cent in 2009.
Government Expenditure (as a percentage of GDP)
30 25 Per cent 20 15 10 5 0 2006 2007 2008 Capital and Net Lending 2009 Recurrent 2010 Pro. 18.6 18.2 24.3 5.6 23.5 6.1 24.9 22.6 6.7 5.7 22.9 6.1

17.4

16.9

16.7

27

BUDGET DEFICIT
The overall fiscal deficit declined to 7.9 per cent of GDP in 2010,
within the original estimate of 8 per cent of GDP, and below the deficit of 9.9 per cent recorded in 2009.
Overall Fiscal Deficit (as a percentage of GDP)
2006 0 -1 -2 Per cent -3 -4 -5 -6 -7 -8 -9 -10 -9.9 -7.0 -6.9 -7.0 -7.9 2007 2008 2009 2010 Pro.

28

FINANCING THE BUDGET DEFICIT

The greater availability of external resources reduced borrowings from the domestic market. The government reduced its reliance on bank financing to bridge the governments resource gap, reducing the inflationary impact of deficit financing. The government raised low cost external financing during the year taking the advantage of the favourable conditions prevailing in the international financial market and improved investor confidence.
Deficit Financing (as a percentage of GDP)
6 5 4 Per cent 3 2 1 0 -1 2006 2007 Domestic Non Bank and Other 2.9 2.7 1.4 0.4 -0.1 2008 2009 0.0 2010 Pro. Foreign Loans 3.6 2.8 2.7 4.4 4.8

4.1

4.4 3.6

1.0

Domestic Bank Borrowings

29

GOVERNMENT DEBT
Government debt as a percentage of GDP declined to 81.9 per cent in
2010 from 86.2 per cent in the previous year.

The lower borrowing requirement, the appreciation of the rupee vis-vis major foreign currencies and higher economic growth contributed to the reduction in the debt to GDP ratio.
Outstanding Government Debt (as a percentage of GDP)
100 90 80 70 60 50 40 30 20 10 0

87.9

85.0

81.4

86.2

81.9

Per cent

37.5

37.1

32.8

36.5

36.1

50.3

47.9

48.5

49.8

45.8

2006

2007 Foreign

2008 Domestic

2009

2010 Pro.

30

MONETARY AND FINANCIAL SECTORS

31

INFLATION REMAINED SUBDUED DURING THE YEAR

Annual average inflation was 5.9% in December 2010. Year-on-year inflation in December 2010 was 6.9%
Colombo Consumers Price Index (% change)
30
28.2
30

Contribution to Headline Inflation from Key Categories

25
23.4 Per cent

25 20

Per cent 6.9 5.9

Dec-07 Dec-08 Dec-09

20

15 10

15
10 5 0

5
0 -5

Year-on-Year

Annual Average

Dec-10

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Aug-08

Aug-09

Aug-10

Jun-08

Jun-09

Feb-08

Feb-09

Feb-10

Jun-10

Oct-10

Other Food and Non Alcholic Beverages

Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Transport Inflation, y-o-y (CCPI=2002)

32

MARKET INTEREST RATES DECLINED IN LINE WITH THE REDUCTION IN POLICY RATES
Improved outlook for prices helped maintaining accommodative monetary policy stance Central Bank reduced its policy interest rates to spur growth of credit to support economic activity:
Repo by 25 bps, and Reverse Repo by 75 bps
20 18 16 Per cent 14 12 10 8 6
29-Jul-09 31-Mar-09 24-Feb-10 26-Mar-10 27-Oct-09 24-Jul-10 31-Dec-08 26-Nov-09 26-Dec-09 22-Oct-10 21-Nov-10 28-Aug-09 27-Sep-09 23-Aug-10 30-May-09 25-May-10 22-Sep-10 21-Dec-10 30-Apr-09 30-Jan-09 29-Jun-09 25-Jan-10 25-Apr-10 1-Mar-09 24-Jun-10

Policy Interest Rates of the Central Bank and the Average Weighted Call Money Rate

17.00 16.50 14.75 13.00 11.75 10.25 11.50 11.00 9.00 8.50 10.50 8.00 9.75 7.50 9.50 7.25

9.00

Weighted Average Call Money Rate Reverse Repo

Repo Penal Rate

Weighted average call money rate continued to remain stable within the policy rate corridor
33

Market interest rates continued to adjust downwards

Secondary Market Yield Curve for Government Securities
22
23

Deposit Rates of Commercial Banks, Treasury bill yield and Monthly AWPR

20 18 Per cent 16 14 12 10 8

end Dec 2008 end Dec 2009 end Dec 2010

21 19

17
Per cent

15 13 11 9 7 5 3 Dec-07 Dec-08 Dec-09 Mar-08 Mar-09

6
0 1 2 3 4 5 6

Years

Monthly AWPR

AWDR

T-bill yield (91-day)

Mar-10

AWFDR

34

Dec-10

Jun-08

Jun-09

Sep-08

Sep-09

Jun-10

Sep-10

CONTINUED HIGH RUPEE LIQUIDITY REMAINED CHALLENGING

High liquidity was mainly due to Central Bank purchases of foreign exchange Excess liquidity was absorbed through OMO
Forex Swaps Sales of CBSL securities Repos using Government securities (held by CBSL & borrowed)
Rs.billion

Excess Money Market Liquidity absorbed by the Central Bank through OMO
175 150 125 100 75 50 25 0 28-Dec-09 13-Nov-09 15-Aug-09 28-Mar-10 12-May-10 10-Aug-10 23-Dec-10 26-Jun-10 29-Sep-09 11-Feb-10 24-Sep-10 8-Nov-10 1-Jul-09

Term Repos FX SWAPs Central Bank Securities sold on a Term basis Overnight Repos and Central Bank Securities sold on an Overnight basis

35

RESERVE MONEY TARGET REVISED TO ACCOMMODATE DEVELOPMENTS IN THE ECONOMY

Increase in the currency held by the public resulted in Reserve Money growing above the target during the first half of 2010 In July, original projections revised incorporating,
Higher economic growth than initially expected Fiscal data as per the Budget 2010 approved in July
Reserve Money - Target Vs. Actual
355 350 345 340 335 330 325 320 315 310 305 300 Mar-10 Jun-10 Targeted Reserve Money Sep-10 Dec-10 Annual Avg Actual Reserve Money

Rs. bn

36

CREDIT TO THE PRIVATE SECTOR CONTINUED ITS HIGH GROWTH MOMENTUM

Private sector credit increased by 25.1% (y-o-y) by end 2010 compared to a contraction of 5.8% at end 2009.
Credit extended to the Private Sector in 2010
60 50 40 Rs. bn 30 20 10 Jun-10 May-10 Mar-10 Aug-10 Nov-10 Dec-10 Apr-10 Feb-10 Sep-10 Oct-10 Jan-10 Jul-10
25.1

30 25 20

35.0

15 10 5 0 -5 -10

Monthly change in private sector credit flows (Absolute terms)

Growth % (year-on-year)

Per cent

37

GROWTH IN BROAD MONEY

Average growth of M2b during the year was 15.3% compared to the target of 15% for the year. The increase during the year was due to the expansion of domestic credit, particularly credit granted to the private sector.
Expansion in Monetary Aggregates (Y-o-y)
% 35 30 25 20 15 10 5 0 (5) (10) Mar-08 Mar-09 May-08 May-09 Mar-10 May-10 Jan-08 Jan-09 Nov-08 Nov-09 Jan-10 Nov-10 Sep-08 Sep-09 Sep-10 Jul-08 Jul-09 Jul-10
20.9 18.8
15.8

Reserve Money

M1

M2b

NFA of the banking system declined in 2010.

38

FINANCIAL SYSTEM STABILITY FURTHER IMPROVED..

Supported by expansionary economic activities and supportive regulatory and supervisory measures Leading indicators relating to institutions, markets, payment systems and safety nets improved
Financial Institutions:
o Increased - credit growth, profitability, capital adequacy and loan provision. o Reduced - non-performing loans (NPLs)
Capital Adequacy Ratios of the Banking Sector

Financial Markets: High liquidity, high investor confidence Payment systems: Use of RTGS, CITS, SLIPS, credit cards, debit cards increased (value by 41.4%, volume 10.8%) Safety net: Mandatory deposit insurance, introduction of regulations to encourage prudence in operations, rules to CSE

39

FINANCIAL SYSTEM STABILITY FURTHER IMPROVED

The Central Bank further strengthened its supervisory and regulatory measures Rehabilitated the six RFCs affected by the liquidity crisis prevailed at the end of 2008.

Improvements to the payment and settlement systems continued in 2010.

The expansion of the branch network of financial institutions continued
Expansion of Financial Services Item end 2009 end 2010 Change in 2010 Total Of which: North & East 90 29

Bank Branches

1,847

1,937

Other Banking Outlets *

ATMs RFCs SLCs
* Excluding Student savings units

890
1,876 289 145

988
2,009 376 224

98
133 98 44

23
36 41 15

40

THE PERFORMANCE OF THE COLOMBO STOCK EXCHANGE WAS IMPRESSIVE

All Share Price Index (ASPI) and Milanka Price Index (MPI) increased by around 96% and 83.4%, respectively, during the year 2010. Market capitalisation increased to Rs.2.2 trillion at end 2010 from Rs.1 trillion at end 2009 There were 10 IPOs during 2010, and all were heavily oversubscribed. The IPOs yielded Rs.5.34 billion.
Colombo Stock Exchange - Price Indices
9,000 8,000 7,000 6,000 6,000 5,000 4,000 3,000 26-Mar-10 21-May-10 13-Aug-10 31-Dec-10 18-Jun-10 26-Feb-10 10-Sep-10 23-Apr-10 29-Jan-10 5-Nov-10 16-Jul-10 3-Dec-10 1-Jan-10 8-Oct-10 4,000 2,000 0 14,000 12,000 10,000

Index Points

Daily Turnover (Right axis)

ASPI

MPI

41

Rs.mn

8,000

KEY MACROECONOMIC CHALLENGES

42

KEY MACROECONOMIC CHALLENGES

Maintaining and further strengthening the significant macroeconomic achievements realised in 2010. Addressing possible labour market tightening Closing output gap Continuing Fiscal Consolidation process Rising international commodity prices including oil prices Exports: Further diversification of products and markets and effective use of existing bilateral trade agreements Improving doing business environment and attracting non-debt creating capital Transforming Sri Lanka into a strategically important economic centre: need for central and co-ordinated actions Necessary reforms to the institutional framework of key public enterprises to operate them more efficiently and in a commercially sustainable way to reflect market conditions.
43

THERE ARE 20 BOX ARTICLES IN THE REPORT. SOME SELECTED ARTICLES ARE
The Ease of Doing Business Ranking Doubling Per Capita Income

Voluntary Pension Fund A Social Security Scheme to Increase Domestic Savings

Infrastructure for Inclusive Growth Expanding Opportunities for Higher Education Global Warming and Carbon Credits Trends in Global Foreign Direct Investment (FDI) Flows and Prospects for Attracting FDI to Sri Lanka Government Debt Sustainability Strengthening the Framework for Monetary Policy Regulations for the Microfinance Sector

Investments by the Employees Provident Fund in the Stock Market

Major Economic Policy Changes and Measures: 2010

44