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1.1 Overview

Sri Lankas economygrew by an impressive

8.0 per cent in 2010,

reflecting a fast recovery from

the setback suffered in 2009 and

moved to a high and sustainable

growth path. All key sectors of

the economy demonstrated a

commendable performance in

2010, underpinned by the peaceful

domestic environment, improved

investor confidence, favourable

macroeconomic conditions and

gradual recovery of the global

economy from one of the deepest

recessions in history. Beig

itio the vobe itio

otook ebe the Cet Bk to

cotie its ccootive oety

poicy stce with the oetio

o iteest tes i ket

segets sppotig ecooic

ctivity. The isc sittio ipove

cosieby, iy eectig the

ipoveet i evee peoce

s we s the cotiet o

ecet expeite. The exte

secto, which e ekbe

to sice the seco qte

o 2009, cotie to ipove i

2010. Both expots ipotsecovee stogy, whie icese

eigs o the tois isty

highe iw eittces oset

the wieig te eicit to get

extet, ecig the exte cet

ccot eicit. Icese cpit

ici ows este i the bce

o pyets (BOP) ecoig

sps i 2010, the stegtheig

exte eseves o the coty.

Sppote by the vobe

coecooic evioet

the sppotive egtoy

spevisoy ewok, the

ici secto ispye ipove

peoce ici syste

stbiity stegthee.

Inflation continued to remain

low at around mid-single digit

levels and the benign outlook

for inflation enabled the Central

Bank to ease its monetary policy

stance further in 2010. Whie

sigiict e pesses wee

bset, ipove oestic sppy

coitios, oww jstets o

ceti iistee pices the

ectio o ipot ties o seve

ECONOMIC, PRICE AND

FINANCIAL SYSTEM STABILITY,OUTLOOK AND POLICIES

1

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Cet Bk o Si lk a repot - 2010

cose ites h vobe ipct o pices.

The Cet Bk ece its poicy iteest tes;

the repchse te the revese repchse

te, by 25 bsis poits ech, i Jy 2010 the

revese repchse te by the 50 bsis

poits i agst 2010 with view to sppotig

ecooic ctivity the. mket iteest tes

cotie to jst owws i ie with the poicy

te ectios the ove gowth o oety

ggegtes eie cosistet with the evisge

pth. The gowth o bo oey (m2b

) gy

eceete to 13.6 pe cet by Septebe 2010,

beoe pickig p to 15.8 pe cet by e 2010. This

gowth ws ive by the icese i coeci

bks ceit to the pivte secto, which gyose to eco ye-o-ye gowth o 25.1 pe

cet by e 2010 o egtive 5.8 pe cet

t e 2009, eectig the bobse e

o ceit with the ecovey i oestic ecooic

ctivity s we s icese post-coict cpcity

expsio. Howeve, oety geet

co be chegig i the peio he owig to

possibe cotie high gowth i oestic ceit

s we s possibe icese i cpit iows,

ths eqiig cose oitoig o coecooic

eveopets otig ppopite e

geet poicies to pevet the bi-p oexcessive e pesses.

An encouraging improvement in the overall

fiscal situation was witnessed in 2010 with the

recovery in government revenue supported by the

expansion of economic activity, the addressing

of certain persistent structural issues in the tax

system, as well as the containment of recurrent

expenditure. The ove eicit ws ece to

7.9 pe cet o GdP i 2010 o 9.9 pe cet i

2009. The goveet hs ie its ogoig

coitet to isc cosoitio by ecig the

bget eicit to 6.8 pe cet i 2011 to beow

5 pe cet i the ei te. I ie with the

ecoetios o the Pesieti Coissio

o Txtio, seve vit evisios wee itoce

to the tx stcte ocsig o the sipiictio

o the tx syste, tioisig exeptios,

ipovig tx copice stegtheig tx

iisttio. I itio, steps wee tke to

steie the tx cocessios gte e theBo o Ivestet (BOI) act ocsig o ge

sttegic ivestets. The cotie isc

cosoitio eots wo eioce the coct o

oety poicy i chievig ecooic pice

stbiity.

With favourable macroeconomic conditions

and the recovery in economic activity, the

performance and stability of the financial sector

strengthened in 2010. This ipove peoce

ws eecte i peti iictos. Ceit

ows sigiicty ecovee, poitbiity ipove,

cpit eqcy the icese bove the

thesho the tio o o peoig os

ecie, whie povisios o o osses icese.

The peoce o ice copies i istess

so ipove piy, whie ici kets

cotie to ei iqi. The bch etwok o

bks othe ici istittios expe,

0

1

2

3

4

5

6

7

8

9

10

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

4

5

6

7

Gro

wth(percent)

Unemployment(percent)

Quarterly Growth (left axis) Unemployment (right axis)

Quarterly Growth and UnemploymentChart 1.1

0

5

10

15

20

25

30

Jan-

05

Jul-05

Jan-

06

Jul-06

Jan-

07

Jul-07

Jan-

08

Jul-08

Jan-

09

Jul-09

Jan-

10

Jul-10

Percent

InflationChart 1.2

Year-on-year Inflation (CCPI, base=2002)

Annual Average Inflation (CCPI, base=2002)

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pticy with the eses tke by the Cet

Bk to poote ici sevice eivey to the

nothe Este povices. Ipoveets

to the pyets syste cotie. a toy

eposit isce schee ws itoce i 2010

o icese bks ice copies to potect

s epositos. Howeve, iteeitio costs

tht sti ei high, s eecte by high iteest

te gis, the sggish eveopet i the

copote ebt secities ket cotie to ei

es o jo coce.

In terms of raising the social welfare of

people, the ultimate goal of macroeconomic

policy, the decline in poverty that surpasses

the target set under Millennium Development

Goals (MDGs) and the continuous decline in

unemployment are commendable achievements.

The Povety Hecot Iex hve o 15.2 pe

cet i 2006/07 to 7.6 pe cet ccoig to the

ist-o iotio o the Hoseho Icoe

Expeite Svey 2009/10 cocte by the

deptet o Cess Sttistics, whie the

ipoveets wee oe poiet i the

estte sectos. By 2010, the epoyet te

(excig the nothe Este povices),

which ws 8.8 pe cet i 2002 h ecie to 4.9

pe cet. Howeve, the pogess is eqie,

especiy i isig epoyet oppotities o

the ivig sts o peope i the nothe

Este povices.

In 2010, the first full year of operation

subsequent to the ending of the three-decade

long conflict, the economy of Sri Lanka has

displayed its true potential, with impressive

macroeconomic achievements. The chege

o poicykes toy is to ssti these

Extreme Weather Conditions and its ImpactBOX 1 Sri Lankas Graduation to Middle-Income Status from the PRGT Eligible Country List

Sri Lanka was graduated to middle-income status

from the list of Poverty Reduction and Growth

Trust (PRGT) eligible countries, in January

2010 by the International Monetary Fund

(IMF). The decision to graduate Sri Lanka intomiddle-income status came after its Executive

Board approved a new eligibility framework

for countries that use the IMFs concessional

financial resources under PRGT.1 A country is

graduated from the PRGT eligibility category if

it (a) has enjoyed income per capita well above

the International Development Association (IDA)

threshold for a sustainable period; (b) has the

capacity for durable and substantial access to

international financial markets; and (c) does not

face serious short-term vulnerabilities, such as asharp drop in per capita income, loss of market

access, etc.2

The specific factors that have been considered by

IMF in graduating Sri Lanka include, mainly:

(a) the strong economic performance in recent

years has lifted Sri Lankas per capita income

substantially, reaching US dollars 2,014

by 2008,3 well above the prevailing IDA

threshold and has been on a steady upward

trend for, at least, the last 5 years;

(b) gradual decline of projected external

debt over the medium term, ensuring a

sustainable level of public debt with timely

implementation of fiscal consolidation;

and,

(c) benefits accrued from increased access to

capital markets in recent years, thus meeting

the market access criterion of IMF, as reflected,

for instance, in heavily oversubscription of

the five-year international sovereign bond

issued in 2009.4

Following this graduation to middle-income

status, Sri Lanka projected strongly in international

financial markets and it will continue to do so,

further opening up for international financial

markets, thereby attracting more investments, in

the coming years.

1 However, the World Bank classification of income groups are as follows; low income

(less than US dollars 995); low-middle income (US dollars 996 - 3,945); upper-middle

income (US dollars 3,946 - 12,195); and high income (US dollars 12,196 or more).2 See IMFs Public Information Notice (PIN), No.10/16 (February 2010). http://www.

imf.org/external/np/sec/pn/2010/pn1016.htm.

3 Sri Lankas per capita GDP increased to US dollars 2,399 in 2010 from US dollars

2,057 in 2009.4 Sri Lanka raised US dollars 1 billion from the international sovereign bond issue in

2010, with a ten-year maturity at a very competitive rate.

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chieveets with coecooic stbiity i the

ce o oe eqet ite exte shocks.

Whie ppopite e geet poicies

e eqie to iti ow stbe itio,

eective essig o sppy-sie ipeiets

is so eee. The cotios vceet o

poctivity, the optio o ew techoogy h cpit eveopet wo ece the

pesse o the bo ket, whie ipoveets

to physic istcte ppopite chges

to the egtoy ewok ee to be pse to

ciitte gete bo obiity s we s gete

bo vibiity to iti the expecte high

gowth. The ivesiictio o expots, i tes o

pocts kets, is eee to icese the

esiiece o the ecooy to exte istbces,

to this e, the eective tiistio o existig

bite tite teties ctivey

pesig the estbishet o the te etios

with eegig egio kets s we s pootig

pivte secto ivestet stegtheig the

doig Bsiess evioet e ecessy.

The ipct o istbces isig o vese

exte eveopets icig pice oveets

o cooities sch s ce oi, co so be

essee thogh the ipeettio o ecessy

eos to the istittio ewok o key pbic

etepises to opete the oe eiciety i

coeciy sstibe wy to eect ket

coitios. These chges wi sppot the ogoig

isc cosoitio pocess, which wo i t

stegthe e geet poicies.

1.2 Macroeconomic Developments,

Stability and Policy Responses

in 2010

Real Sector Developments

In 2010, the Sri Lankan economy recorded

an impressive growth of 8.0 per cent, the

highest annual rate of growth reported in

the last three decades.1 This excees the

vege gowth o 4.9 pe cet ecoe

sice the ibeistio o the ecooy i 1977.

This ekbe peoce ws sppote by

the estotio o peet pece, which cete

evioet cocive o the expsio i

ecooic ctivity, the stog coecooic

evioet, icese oestic e, the

eveopet o istcte ciities, ipove

exte e with the g ecovey i thegob ecooy vobe oestic wethe

coitios.

The improved performance in all key sectors

of the economy contributed towards the high

economic growth in 2010. The agicte secto,

which cotibte o 11.9 pe cet o the GdP

i 2010, gew by 7.0 pe cet, cope to 3.2

pe cet i 2009, iy ive by the icese

poctio o py, te, bbe io expot

cops og with sigiict ipoveets i the

isheies secto otpt. Howeve, cocot poctio

ecie by 19 pe cet, iy eectig the g

eect o vese wethe coitios. The Isty

secto gew by 8.4 pe cet sppote by icese

oestic exte e with ehce

ivesto cose coiece. Ipove

peoce i isties, sch s oo

beveges, bbe bse pocts, texties

gets cope with icese peoce i

the costctio secto icese hyopowegeetio cotibte to this gowth. The she

o the Isty secto i tot GdP icese

giy to 28.7 pe cet i 2010. The Sevices

secto gew by 8.0 pe cet i 2010. The whoese

eti sb secto, which ccots o the gest

she i the Sevices secto, gew by 7.5 pe cet

with ehce peoce i both oestic

exte tig ctivity. The hotes estts

sb secto gew shpy by bot 39.8 pe cet

epie by the stog peoce i tois.

Othe jo sb sectos sch s tspot

coictios, bkig, isce e

estte so ecoe sigiicty highe gowth

tes cope to 2009.

Reflecting the increased availability of

employment opportunities alongside enhanced

economic activity, the unemployment rate,

which increased marginally to 5.8 per cent with

the slowing down of economic activity in 2009,1 Peviosy Si lk hs ecoe ecooic gowth o 8.2 pe cet i 1968 1978.

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declined even below the 2008 level to 4.9 per

cent in 2010. Whie the bo oce pticiptio

te ecie giy o 48.7 pe cet i 2009

to 48.1 pe cet i 2010, the be o epoye

pesos icese by 1.4 pe cet to 7.71 iio

i 2010. The she o the Sevices secto i tot

epoyet icese o 42.3 pe cet i 2009

to 43.1 pe cet i 2010, tht o the Istysecto ecie o 25.1 pe cet to 24.2 pe

cet i 2010. I tes o epoyet stts, the

she o ow ccot wokes icese i 2010.

Howeve, etivey high epoyet og

yoth, i ptic og ecte yoth, eis

coce.

Both export and domestic agriculture

contributed to the improved performance in

the Agriculture sector. Beeitig o vobe

wethe coitios, the te sb secto egistee

the highest eve poctio o 329 iio kg

cope to the istesse otpt i 2009, whie

bbe poctio so cotie to icese.

Expot gict cops sch s coves, peppe

cio cotibte positivey to the ipove

peoce i the agicte secto. Withi

oestic gicte, py poctio ecoe

ipessive gowth i 2010 e to icese

extet o ctivtio pticy i the nothe

Este povices, vobe wethe coitios

the cotitio o gicte sppot

schees. Cocot poctio ecie sigiicty

by 19 pe cet i 2010, sg poctio

so ecoe gi ecie. The sigiict

expsio i ishey ctivities i the nothe

Este povices gey cotibte to theicese i ish poctio by 12 pe cet i 2010,

whie oestic ik poctio icese otby

with the coitte eots to ehce oestic

ik poctio.

Prices of key agricultural crops remained

high in 2010. Te pices t the Coobo te

ctio ecoe histoic high eves with icese

e o Si lk te. The vege pices

o vieties o bbe icese e to the

sevee sppy shotges o t bbe i the

itetio ket icese e e to

gob ecooic ecovey high ce oi pices.

The ecie i the cocot poctio togethe

with icese e o isti sge

e cocot pices to ise sigiicty. despite

the icese py poctio i both sesos,

pices eie stbe ssiste by the itevetio

o the goveet thogh its py pchsig

Agriculture 295,097 315,644 12.0 11.9 3.2 7.0 11.0 10.5Agriculture, Livestock and Forestry 266,208 283,236 10.9 10.7 2.8 6.4 8.8 8.7Fishing 28,888 32,407 1.2 1.2 6.9 12.2 2.2 1.8

Industry 701,129 760,219 28.6 28.7 4.2 8.4 33.9 30.1Mining and Quarrying 52,030 60,079 2.1 2.3 8.2 15.5 4.7 4.1Manufacturing 427,334 458,660 17.4 17.3 3.3 7.3 16.3 16.0Electricity, Gas and Water 58,974 63,567 2.4 2.4 3.7 7.8 2.5 2.3Construction 162,790 177,912 6.6 6.7 5.6 9.3 10.3 7.7

Services 1,452,988 1,569,569 59.3 59.3 3.3 8.0 55.2 59.4Wholesale and Retail Trade 570,698 613,320 23.3 23.2 -0.2 7.5 -1.4 21.7Hotels and Restaurants 9,901 13,845 0.4 0.5 13.3 39.8 1.4 2.0Transport and Communication 329,578 368,653 13.5 13.9 6.3 11.9 23.4 19.9Banking, Insurance and Real Estate etc. 217,819 234,255 8.9 8.9 5.7 7.5 14.1 8.4Ownership of Dwellings 74,051 74,692 3.0 2.8 1.3 0.9 1.1 0.3Government Services 191,778 202,187 7.8 7.6 5.9 5.4 12.8 5.3Private Services 59,164 62,617 2.4 2.4 5.8 5.8 3.9 1.8

Gross Domestic Product 2,449,214 2,645,432 100.0 100.0 3.5 8.0 100.0 100.0Net Factor Income from Abroad -28,262 -33,931 49.8 -20.1

Gross National Product 2,420,952 2,611,500 4.8 7.9

Sector

2010 (b) 2010 (b) 2010 (b) 2010 (b)

Table 1.1 Gross National Product by Industrial Origin at Constant (2002) Prices

2009 (a) 2009 (a) 2009 (a) 2009 (a)

Value(Rs. million)

As a Share of GDP(%)

Rate of Change(%)

Contribution to Change(%)

(a) Revised(b) Provisional

Source: Department of Census and Statistics

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poge. The vege poce pice o iqi

ik icese to ecoge iy poctio.

Several measures were taken by the

government during 2010 to promote agriculture.

To ecoge te e-ptig ew ptig, the

sbsiy o te shoes ws icese whie

exteig the sbsiy o cocot e-ptig

ew ptig s we. despite the high isc oty,

the etiise sppot schee ws cotie

extee to cove cocot othe ie cops

o 2011. With view to pootig sppy o high

qity sees, thee-ye see eveopet

poge ws popose e pbic-pivte

pteship bsis.

The output of the Industrial sector recorded

a commendable growth of 8.4 per cent in 2010compared to 4.2 per cent in the previous year.

fctoy isty, which cotibte ppoxitey

54.6 pe cet to the tot isty otpt, ecoe

7.5 pe cet gowth ig 2010. The textie, weig

ppe ethe pocts ctegoy, which

ws vesey ecte by the gob ecooic

cisis, showe sigs o ecovey ig the st

qte o the ye espite the withw o GSP+

cocessios eective o agst 2010. The ppe

isty eie copetitive thogh icese

poctivity, ipove qity, ivesiictio

g ecovey i exte e. The high

gowth i oo, beveges tobcco pocts

ctegoy, which ccots o ey 48.0 pe cet o

the tot ctoy isty otpt, ws ive by the

expsio i oestic e pticy o

the nothe Este povices icese

tois-ete ctivity ig the ye. The jo

cotibtos to the icese otpt i expot ket

oiete isties wee ship biig epiig

tspot eqipet chiey. Theo etic ie pocts ctegoy so

peoe we ig the ye with high e

o ceet biig teis. The sbstti

ipoveet i hyopowe geetio ise

ve itio o the eecticity secto, whie the

costctio secto expe by 9.3 pe cet with

the cotitio o jo istcte eveopet

pojects s we s icese costctio ctivity i

the pivte secto.

The recovery in both domestic and external

demand and favourable macroeconomic

environment supported industrial sector growth

during 2010. The ecovey i oestic ecooic

ctivity with icese e o the nothe

Este povices, ow iteest tes, ow itio

icesig bsiess cose coiececete cocive ecooic evioet o

gowth i oestic ket oiete isties.

The expot ket oiete isties beeitte

o icese e o jo tig

pte coties with the g ecovey o the

gob ecooy, ipove poctivity, big

sttegies, ket ivesiictio sttegies the

expsio i poct potoios. The goveet hs

tke vios eses to oste the eveopet

o the isti secto egioise the isti

bse by eveopig isti esttes i vios

pts o the coty, pootig s- ei-

sce etepise (SmE) secto poviig

isc icetives to poote isties with highe

oestic ve itio.

The Services sector, which contributed 59.3

per cent of the GDP, grew at an encouraging

8.0 per cent, compared to 3.3 per cent in 2009.

The whoese eti te secto, ispye

ipessive gowth oowig egtive gowthi 2009, e to icese exte te with

the g ecovey o the gob ecooy

oestic te with the estotio o pece.

The hote estt sb secto showe

ipessive gowth with ebo i toist ivs

icese oestic tve. The tspot

teecoictios secto gew with the ipove

peoce i tspot, cgo hig, vitio

teecoictios sectos. The bkig,

isce e estte sb secto expewith icese icoe o ivestets

eig ctivities, oeig exchge opetios

wiee ici sevices thogh the expsio

o bk bches othe sevice otets.

Reflecting the recovery in economic activity,

consumption expenditure increased by 14.9

per cent in 2010, while savings and investment

of the country also recovered. as pecetge

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s pecetge o GdP i 2010 icese to 27.8

pe cet. The ecovey i tot ivestet este

i wieig the tio svigs ivestet

gp to 3.1 pe cet o GdP, which ws eecte i

highe eicit i the exte cet ccot.

Consumer price inflation continued to remain

at mid-single digit levels in 2010, with the annual

average increase of the Colombo Consumers

Price Index (CCPI, 2002=100) and its year-on-

year change recording 5.9 per cent and 6.9 per

cent, respectively, by end 2010. The etivey ow

stbe itio ig the ye ws iy e

to ipove oestic sppy coitios, sppotive

isc poicies ie by the jstet i ipot

ties oww evisios to iisteepices s we s the pet oety poicy

stce o the Cet Bk.

External Sector Developments

The external sector of the country further

improved in 2010 with favourable developments

on both domestic and external fronts. Si lks

gtio to the stts o ie-icoe

Item

2010 (b) 2010 (b) 2010 (b)

Table 1.2 Aggregate Demand and Savings Investment Gap

2009 (a) 2009 (a) 2009 (a)

Rs. billion Growth % As a percentage of GDP

1. Domestic Demand 5,149.2 6,114.1 2.7 18.7 106.5 109.1

1.1 Consumption 3,967.8 4,557.3 4.4 14.9 82.1 81.3

Private 3,116.2 3,684.7 1.0 18.2 64.4 65.8Public 851.5 872.6 19.3 2.5 17.6 15.6

1.2 Investment (Gross Domestic Capital Formation) 1,181.4 1,556.8 -2.8 31.8 24.4 27.8

Private 863.5 1,209.6 -7.1 40.1 17.9 21.6

Public 318.0 347.2 11.1 9.2 6.6 6.2

2. Net External Demand -313.9 -511.8 48.0 -63.0 -6.5 -9.1

Exports of Goods and Services 1,031.3 1,215.0 -5.9 17.8 21.3 21.7

Imports of Goods and Services 1,345.2 1,726.8 -20.8 28.4 27.8 30.8

3. Total Demand (GDP) (1 + 2) 4,835.3 5,602.3 9.6 15.9 100.0 100.0

4. Domestic Savings (3 - 1.1) 867.5 1,045.0 41.8 20.5 17.9 18.7

Private 1,047.5 1,163.8 49.6 11.1 21.7 20.7

Public -179.9 -118.9 -103.3 33.9 -3.7 -2.1

5. Net Factor Income from Abroad -55.8 -71.9 46.9 -28.8 -1.2 -1.3

6. Net Private Current Transfers 336.6 408.0 21.2 21.2 7.0 7.3

7. National Savings (4 + 5 + 6) 1,148.3 1,381.1 46.4 20.3 23.7 24.7

8. Savings Investment Gap

Domestic Savings - Investment (4 - 1.2) -313.9 -511.8 -6.5 -9.1National Savings - Investment (7 - 1.2) -33.1 -175.7 -0.7 -3.1

9. External Current Account Deficit without

Official Grants (2 + 5 + 6) (c) -33.1 -175.7 -0.7 -3.1

(a) Revised(b) Provisional(c) The difference with the BOP estimates is due to the time lag in compilation.

Sources: Department of Census and S tatistics

Central Bank of Sri Lanka

o GdP, pivte cosptio icese o 64.4

pe cet i 2009 to 65.8 pe cet i 2010, whie

goveet cosptio ecie o high eve

o 17.6 pe cet to 15.6 pe cet. Both oestic

svigs tio svigs icese, o

17.9 pe cet o GdP 23.7 pe cet o GdP,

espectivey, i 2009, to 18.7 pe cet 24.7 pe

cet, espectivey. Pivte ivestet ecovee

o 17.9 pe cet o GdP i 2009 to 21.6 pe

cet i 2010, whie pbic ivestet ecie

giy o 6.6 pe cet o GdP i 2009 to 6.2

pe cet i 2010, s est, tot ivestet

0

5

10

15

20

25

30

2006 2007 2008 2009 2010

Percent

Gross Investment Gross Domestic Savings

Savings and Investment

(as a percentage of GDP)Chart 1.3

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ecooy by the Itetio moety f (Imf)

i Jy 2010, ebe the coty to poject itse

stogy i itetio ici kets. upgig

o the soveeig ceit tig o the coty by

itetio tig gecies, the sccess

cotitio o the St-by ageet (SBa)

with the Imf, icese og te cpit ows tothe goveet icig the sccess issce

o the thi itetio soveeig bo i Octobe

2010 s we s icese iows to the pivte

secto hepe stegthe the peoce o the

exte secto. fthe extio o estictios o

oeig exchge tsctios so hepe ipove

ivesto coiece the exte secto.

External trade rebounded strongly in 2010,

reversing the sharp contraction observed during

the global recession of 2009. Eigs o

expots icese by 17.3 pe cet, eectig highe

eigs o the isti gict sectos.

Expeite o ipots gew by 32.8 pe cet, e

by iteeite goos ipots. as est, the

te eicit expe to uS os 5,205 iio i

2010. athogh expot eigs wee votie i the

ey pt o the ye ist cetities egig

the gob ecovey, they ipove tows the

tte pt o the ye, iictig ew gowth pth,

espite the withw o GSP+ cocessios. This

eecte the pece ivie the yis

o oc expotes. mewhie, itetio

cooity pices ose e to the gob ecooic

ecovey, highe e o cooities o

eegig ecooies, gob sppy costits.

Coseqety, gict expots cotie to

etch high pices i the itetio ket. Highe

cooity pices, pticy ce oi pices,

cse expeite o ipots to icese i 2010.

Ipots o cose bes, sch s peso

oto vehices eectoic goos so icese

oowig the ti ectios the icese i

oestic ecooic ctivity. Siiy, ipots oivestet goos so icese i 2010, e by

highe expeite o ipots o chiey

tspot eqipet.

External trade in services improved

significantly generating a higher surplus during

2010, while the income account continued to

record a deficit. a sb sectos o the sevices

ccot, iy tspottio, tve, copte

iotio, costctio isce

sevices, peoe we ig the ye. net

icoe o tspottio tve sevices

gew sbsttiy e to highe icoe o pots

vitio isties shp icese i

toist ivs. mewhie, the eicit i the icoe

ccot icese to uS os 572 iio i 2010

s otows o ccot o eptitio o poits

ivies exceee the iteest ee o

ivestets poits ee o tig o oeig

cecy oeig secities.

A substantial increase in inward workers

remittances to US dollars 4.1 billion helped

offset the trade deficit to a great extent in

2010. Estbishig coective geeets with

oveses epoyes o highe wges sies,

the expsio o the exchge hoses etwok

by coeci bks, icese i the be

o pesos tkig p high-e jobs oveses, the

goveets ogoig iititive to poote iw

eittces thogh o ches opeig

o ew bk bches i the nothe Este

povices wee istet i ttctig highe

eve o wokes eittces.

The external current account recorded a

deficit of US dollars 1,498 million or 2.9 per

cent of GDP in 2010. The cet ccot eicit

wiee e to ge te eicit, s est o

icese i ipot e sppote by the

US$billion

US$/barrel

0

20

40

60

80

100

120

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2006 2007 2008 2009 2010

Value of Petroleum Imports and

Average Price of Crude Oil ImportsChart 1.4

Value (left axis) Average Price (right axis)

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ecovey o oestic e expsio o

ecooic ctivity. Howeve, this ws we beow

the vege eicit o the pevios ew yes, with

the exceptio o 2009, which ecoe eicit

o 0.5 pe cet o GdP, eectig wek exte

oestic e i the cotext o the gob

ecessio.

Inflows to the capital and financial account

exceeded the current account deficit. The

ei og te o iows to thegoveet icese ig 2010 cope to

2009, iy e to ste isbseet o oeig

os to ice jo istcte eveopet

pojects. The thi itetio soveeig bo o

uS os 1 biio with teo o 10 yes ws

sccessy isse i Octobe 2010. Howeve,

oeig iect ivestets (fdIs), icig os

to BOI etepises, ecese the to uS os

516 iio i 2010, iy e to the ipct o the

gob ici cisis o oeig ici ows. net

oeig iows to the goveet pee secities

ket ecie i 2010, s the otstig ve

o goveet secities isse to oeiges

eche the xi owe iit o 10 pe

cet o the tot otstig ve o goveet

secities. mewhie, oeig o iows to the

pivte secto icese i 2010, whees shot

te et cpit otows ece, gey e to the

ecie i oeig ssets the icese i oeig

ibiities o coeci bks ig 2010, espite

the epyet o sbsttiy high oi ipot bisby the Ceyo Petoe Copotio (CPC) ig

2010.

In 2010, the BOP recorded a surplus of US

dollars 921 million, following a significantly

higher surplus of US dollars 2,725 million in

2009. Highe iows to the cpit ici

ccot, which exceee the cet ccot eicit

geete the sps i the ove bce o the

BOP. The ici iows to the goveet s

we s to the pivte secto o og te ivestet

cotibte to the sps i the BOP.

The external reserves of the country further

improved to record its highest level in 2010.

By e 2010, goss oici eseves (excig

aCu eceipts) icese to eco high eve o

uS os 6,610 iio (eqivet to 5.9 oths

o ipots) cope to uS os 5,097 iio

Table 1.3 External Sector Developments

ItemUS dollars million

2009 (a)

%Change

Source: Central Bank of Sri Lanka(a) Revised

(b) Provisional(c) Excluding Asian Clearing Union (ACU) receipts

2010 (b)

Exports 7,085 8,307 17.3 Agricultural Products 1,690 2,041 20.8Industrial Products 5,305 6,173 16.4

Mineral Exports 89 93 4.4Other Exports - - -

Imports 10,207 13,512 32.4Consumer Goods 1,972 2,870 45.6Intermediate Goods 5,669 7,496 32.2Investment Goods 2,451 2,970 21.2

Other 115 176 53.2

Trade Balance -3,122 -5,205 66.7Services (net) 391 698 78.5

Receipts 1,892 2,468 30.5Payments 1,501 1,770 18.0

Income (net) -488 -572 17.2

Receipts 116 323 178.7

Payments 603 895 48.5

Current Transfers (net) 3,005 3,660 21.8

Private Transfers (net) 2,927 3,608 23.3Receipts 3,330 4,116 23.6Payments 403 508 26.1

Official Transfers (net) 77 52 -31.9

Current Account -214 -1,418 562.8

Capital Account 233 164 -29.7

Financial Account 2,361 2,713 14.9Direct Investment (net) 384 435 13.3

Inflows 404 478 18.2Outflows 20 43 112.5

Private, Long Term (net) 79 149 88.0Inflows 390 580 48.6Outflows 311 431 38.6

Government, Long Term (net) 840 1,796 113.8Inflows 1,780 2,460 38.2Outflows 940 665 -29.3

Private, Short Term (net) -311 -198 -36.4of which:Portfolio Investment (net) -6 -230 3,728.9

Government, Short Term (net) 1,369 531 -61.2Errors and Omissions 346 -537

Overall Balance 2,725 921

Gross Official Reserves (c) 5,097 6,610Months of Imports 6.0 5.9

Total External Reserves (c) 6,770 8,035Months of Imports 8.0 7.1

Export Price Index 112.5 124.9Import Price Index 109.1 127.9Terms of Trade 103.1 97.6

Exchange Rates (Average) App(+)/Dep(-)Rs./US dollar 114.94 113.06 1.7

Rs./Japanese yen 1.23 1.29 -4.6Rs./Euro 160.21 150.10 6.7Rs./ Pound sterling 179.87 174.81 2.9

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t e 2009. Highe isbseets o poject

icig, cotitio o the Imf-SBa ciity, the

pocees o the thi itetio soveeig bo

isse, the bsoptio o oeig exchge o

the oestic oeig exchge ket cotibte

to the bip o eseves. mewhie, tot exte

ssets (excig aCu eceipts) icese by 19

pe cet to uS os 8,035 iio by e 2010

(eqivet to 7.1 oths o ipots), cope to

uS os 6,770 iio t e 2009.

The total external debt of the country as a

percentage of GDP moderated to 43.3 per cent

in 2010. Highe oeig iows to the goveet

icig the pocees o the soveeig bo

isse to ice istcte eveopet

pojects, isbseets e the Imf-SBa

ciity, which is ge by the Cet Bk,

wee the jo ctos tht cotibte to the

icese i the otstig exte ebt stock. O

the ei to og te ebt, the goveet ebt

ccote o 85.9 pe cet, whie the eie

epesete boowigs o the pivte secto

pbic copotios, ebt obigtios to the

Imf. The tot oeig ebt sevice pyets,

cosistig o otistio iteest pyets

s pecetge o expots o goos sevices,ecie o the sy high tio o 19.0 pe

cet i 2009 owig to cisis-ecte eve o expots

o goos sevices, to 15.2 pe cet i 2010.

The exchange rate policy in 2010 focused

mainly on maintaining stability in the domestic

foreign exchange market. I the ce o cotie

oeig exchge iows ito the oestic ket,

the Cet Bk egy bsobe oeig

exchge, i oe to itigte excessive votiity

i the exchge te to the stegthe the

eseve positio. Howeve, ig the st qte

o 2010, the Cet Bk h to sppy oeig

exchge to the ket to ese eqte oeig

exchge iqiity i the ce o sbstti otows

isig o the setteet o petoe bis.

Fiscal Sector Developments

Significant improvements in fiscal operations

in 2010 helped contain the overall fiscal deficit

at 7.9 per cent of GDP from 9.9 per cent in the

previous year.fo the ist seve oths o the ye,

isc opetios wee cocte iitiy e Vote

o accot ewok the e the povisios

o pgph 3 o atice 150 o the Costittio by

Pesieti decee. The bget o 2010 wsppove by the Piet i Jy 2010. despite

the ey i pesetig the bget the iite

scope o itocig ew evee expeite

eses, the ove isc eicit ws itie

withi the oigi tget o 8 pe cet o GdP.

The pickup in domestic economic activity

and the strong recovery in imports increased

government revenue in nominal terms above

the original target set in the budget for 2010.

revee s pecetge o GdP icese to 14.6

pe cet i 2010 o 14.5 pe cet i the pevios

ye. The tioistio o the ti stcte to o

bs the eov o the ipot ty schge

s we s the ectio o eective txes o

vios jo ipots, icig oto vehices,

cse sge i ipot e estt

icese i evee coectio o ipot ete

txes. Howeve, to itigte the ipct o isig

itetio cooity pices o the oestic

ket, the goveet evise txes o seve

key cooities, icig peto iese. I

itio, the goveet povie vios tx

cocessios to ssist isties ecte by the

gob ecooic ici cisis to sppot

ceti ietiie isties.

Government expenditure was maintained

within the original budgetary targets for

2010 with the strict monitoring of recurrent

expenditure, while maintaining capital

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

2006 2007 2008 2009 2010

US$billion

Trade Balance Current AccountBalance

Overall Balance

Balance of PaymentsChart 1.5

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expenditure for the accelerated implementation

of planned infrastructure projects. Tot

expeite et eig ecie o 24.9 pe

cet o GdP i 2009 to 22.9 pe cet o GdP i

2010. The ectio o tot expeite et

eig by 2 pecetge poits ws the cobie

otcoe o ectio i ecet expeiteby 1.5 pecetge poits cpit et

eig by 0.5 pecetge poits. Cocete eots

tke to tioise ecet expeite ebe

goveet expeite to be cotie withi

the oigi bgety octios, whie the pbic

ivestet poge ws cie ot gey

hiee.

The government relied more on external

sources to finance the fiscal deficit, thus

reducing pressure on the domestic market

and interest rates. Ipove ivesto coiece

the vobe boowig coitios tht

pevie i itetio ici kets ebe

the goveet to isse 10-ye itetio

soveeig bo t owe te o iteest o 6.25

pe cet, ttctig oe book o six ties

the ve o the bo to isse Si lk

deveopet Bos (SldBs) with extee

teo t owe iteest tes. I icig the

eicit thogh oestic soces, the goveetece its eice o bk icig, ths

eesig esoces to the pivte secto

esig pesse o oestic iteest tes. Tot

et oestic icig i 2010 ote to 3.6 pe

cet o GdP, whie et oeig icig ws 4.4

pe cet o GdP, which cosiste o oeig os

(3.5 pe cet o GdP) oeig ivestets

i goveet secities (0.9 pe cet o GdP).

mewhie, the otstig goveet ebt to

GdP tio ecie o 86.2 pe cet i 2009 to

81.9 pe cet i 2010 iy e to owe bget

eicit highe gowth i oi GdP.

Monetary Sector Developments

The Central Bank eased its monetary policy

stance further in 2010 by reducing the policy

interest rates in the second half of 2010 with

a view to stimulate credit growth to support

economic activity. The cotios eceetio i

oey sppy gowth ig the ist thee qtes

o 2010 eecte sbe e pesses,

whie the beig otook o oestic cose

pices popte the Cet Bk to cotie its

ccootive oety poicy stce ig the

ye. With the ectio i both the repchse

te the revese repchse te by 25 bsis

poits i Jy, the ectio o the tte by

50 bsis poits i agst, the poicy te coio ws

owe, by e 2010, the repchse te

ws 7.25 pe cet, whie the revese repchse

te ws 9.00 pe cet. Poicy tes wee ece

gi i Jy 2011, owig the coio

the, which hs sice eie boe by therepchse te o 7.00 pe cet the revese

repchse te o 8.50 pe cet.

Following the turnaround in rupee liquidity

in the domestic money market from mid 2009,

the money market liquidity continued to be in

excess in 2010. The bi-p o excess iqiity ws

gey e to the bsoptio o oeig exchge

iows to the coty by the Cet Bk with

0

5

10

15

20

25

30

2006 2007 2008 2009 2010

-12

-10

-8

-6

-4

-2

0

Percent

Percent

Expenditure(left axis)

Revenue and Grants(left axis)

Overall Deficit(right axis)

Revenue, Expenditure and Overall

Fiscal Deficit (as a percentage of GDP)Chart 1.6

0

10

20

30

40

50

60

2006 2007 2008 2009 2010

Percent

Domestic Foreign

Government Debt

(as a percentage of GDP)Chart 1.7

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view to pevetig e ppecitio o thepee. The isse o the soveeig bo i Octobe

to itetio ivestos, et oeig ivestets

i Tesy bos Tesy bis, othe

iows o oeig s to both the goveet

the pivte secto, este i the excess o oeig

exchge i the oestic oeig exchge ket

ig the ist thee qtes o the ye.

The Central Bank continued its efforts to

manage liquidity, thereby stabilising interest

rates and guiding reserve money along the

targeted path. as the stock o goveet

secities he by the Cet Bk epete, the

Bk isse its ow secities to bsob iqiity o

oveight te bses. foeig exchge swp

geeets, opte e ope ket opetios

(OmO) i 2009, wee so tiise to bsob potio

o the excess iqiity. I Octobe 2010, the Cet

Bk ipeete bo-boowig poge

the boowe bos wee se o OmO i the

tte pt o the ye to bsob the excess iqiityi the ket. mewhie, o 20 Octobe 2010,

the oveight te ctios e OmO wee

iscotie s the piy ket yie te o

thee-oth Tesy bis ecie to eves beow

the Bks repchse te, otcoe o itese

copetitio og bks, who h ge voe

o excess iqiity, to cqie shot te goveet

secities to ge thei potoios. accoigy,

ket pticipts cotie to pce thei excess

iqiity with the Cet Bk thogh the stig

ciity. By e 2010, the ove excess iqiity i

the oey ket ote to rs. 124.3 biio

cope to rs. 159.6 biio t e 2009.

The monetary operations of the Central

Bank continued within a monetary targetingframework and were guided by its monetary

programme, which is prepared taking into

account the projected key macroeconomic

developments. accoigy, bo oey (m2b

)

cotie to be the iteeite tget o oety

poicy, whie eseve oey, which is ike to

bo oey thogh tipie, eie the

Bks opetig tget o oety poicy. The

Cet Bks oety poge ws iitiy

pepe stiptig the tgets o vege

gowth o bo oey eseve oey t 14.5

pe cet ech. Sbseqety howeve, the Bk

evise the oety poge o the ye s

it bece eviet by i-ye tht the oestic

ecooy ws expig t highe te i 2010

th oigiy pojecte, it ws ecessy to

ice iotio o the goveet's bget

o 2010, which ws pesete to the Piet

i Je 2010. accoigy, the tgete gowth o

bo oey i 2010 ws evise pw to 15 pe

cet i Jy 2010. mewhie, otbe icese

i the cecy he by the pbic copoet

withi the oey sppy, pticy i view o the

estotio o ecooic ctivity i the nothe

Este povices, e to icese i the

cecy to eposit tio, i t eig to ecie

i the oey tipie. Tkig ito ccot these

eveopets, the tget o ye-o-ye gowth o

vege eseve oey ws ise to 21.2

pe cet i Jy 2010, cosistet with the pw

evisio to the bo oey tget.

Year-on-year growth of daily average reserve

money in 2010 was at a level consistent with

the target stipulated in the revised monetary

programme for 2010. Viewe o the soce

sie, the expsio o eseve oey ig the

ye 2010 ws etiey e to the icese i et

oeig ssets (nfa) o the Cet Bk. nfa

expe iy s the goveet se pt o

0

5

10

15

20

25

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Percent

Central Bank Policy Rates andSelected Market Interest Rates

Chart 1.8

Primary Market Yield on 364-day Treasury bills

Average Weighted Deposit Rate

Repurchase RateReverse Repurchase RatePenal Rate on Reverse Repo Transactions

Average Weighted Prime Lending Rate (Monthly)

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the s (uS os 492 iio) it ise by issig

soveeig bo i itetio kets to etie

Tesy bis he by the Bk otig to rs. 55

biio so the uS os 386 iio ths

ise to the Cet Bk. mewhie, et oestic

ssets (nda) o the Cet Bk ecese s

est o the sbstti ecie i the ot oTesy bis he by the Bk.

Annual average growth of broad money (M2b

)

was 15.3 per cent in 2010, remaining consistent

with the targeted growth of 15 per cent. O the

se sie, the gowth o bo oey ws eecte

i the iceses i both cecy he by the pbic

s we s eposits, pticy e eposits.

Iteest beig eposits, tht is, svigs tie

eposits (Qsi oey) he by the pbic with

coeci bks icese t sowe pce o

14.6 pe cet, ye-o-ye, i 2010, cope to

the gowth o 18.0 pe cet i 2009.

The expansion of broad money was driven

by the increase in NDA of the banking system

as NFA contracted during the year. The nda

expe gey e to the sbstti icese

i ceit obtie by the pivte secto o

coeci bks, which eboe stogy i

2010 ecoig ye-o-ye gowth o 25.1 pecet cope to egtive gowth o 5.8 pe cet

i 2009. The ecie i eig tes og with

ctos, sch s ipove post-coict ecooic

coitios, ehce bsiess coiece the

ecovey e wy i the gob ecooy hepe

sp ceit ows to the pivte secto. Ceit gte

to pbic copotios, pticy to the CPC, so

icese ig the ye, theeby cotibtig to

the oety expsio i 2010. Howeve, etceit gte to the goveet (nCG) ecie

ig the ye. mewhie, nfa o coeci

bks ecie pty e to the ecie i

pceets oveses by coeci bks, og

with icese i thei ivestets i Si lk

deveopet Bos (SldBs) ig the ye

sppyig oeig exchge to the CPC to sette oi

bis.

Following the reduction of the Central Banks

policy interest rates, market interest rates

adjusted further downwards in 2010, providing

additional impetus to economic activity. dig

the ye, the vege weighte c oey te

(aWCmr) cotie to hove o the ie

o the poicy iteest te coio, ths cotibtig

to the eective tsissio o oety poicy.

aso, yies o goveet secities ecie

ig the ye. mewhie, the secoy ket

yie cve o goveet secities, which shite

oww, extee to oge tities i 2010.This oww shit i the te stcte c so

be ttibte to the cotie excess iqiity i

the oey ket s we s the beig otook o

itio tht pevie. Coeci bks ece

thei eposits eig tes gy ig

2010 i espose to the esig o the oety

poicy stce by the Cet Bk. The eciig

te i iteest tes cotie ito 2011, s the

Cet Bk ece its poicy iteest tes the

i Jy 2011.

Financial Sector Performance and

System Stability

The performance of the overall financial

sector improved in 2010, leading to a

strengthening of the stability of the country's

financial system. I itio to the cotie

spevisoy eses etig to exitio

0

3

6

9

12

15

18

21

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

-10

-5

0

5

10

15

20

25

30

Pe

rcent

Year-on-yearC

hange(Percent)

Money, Credit and Interest RatesChart 1.9

Average Weighted Lending Rate of LCBs (left axis)

Credit granted to the Private Sector by LCBs (right axis)

M2b

(right axis)

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pobe esotio, seve egtoy eses

wee itoce to the stegthe the stbiity

o the ici secto, theeby ehcig pbic

coiece. The ipove peoce, which

ws eecte i eig iictos o ici

istittios, kets, pyet systes sety

ets, ws ecoe ist the esotio o coces stesses tht h ise i 2008 2009 e

to ceti oestic exte shocks vesey

ipctig o the pbic ivesto coiece

bsiess opetios.

Both bank and non bank financial institutions

displayed improved performance in 2010,

reflecting the increase in financial transactions

to facilitate the growing economy. The bkig

secto, which is the ost oit systeicy

ipott secto i the ici syste, gew t

high te, whie ecoig sigiicty high

eve o poitbiity. Cpit eqcy tios

iqiity tios i the bkig secto eie

we bove the stttoy iits. With eg to o

bk ici istittios, the egistee ice

copies (rfC) secto gy ecovee i

2010 te expeiecig iqiity pobes i 2009.

Tiey eses ipeete by the Cet Bk

estoe eposito coiece i rfCs. Speciise

esig copies (SlCs) cotie to gow i 2010

with ipoveet i ceit qity vobe

povisioig o b obt ccootios.

Key ici iictos o the piy ees i

goveet secities ipove ig 2010, whie

isk geet iictos wee itie withi

pet eves. The isce secto so epote

ipove peoce i 2010.

The expansion of the branch network of

financial institutions continued during 2010.The bkig etwok the expe with the

estbishet o 85 bches, 97 extesio oices

130 tote tee chies (aTms). Ot

o the ew bkig otets, 67 bches

77 extesio oices wee otsie the Weste

povice, icig 48 otets i the nothe

Este povices. aog with the issce o two

ew iceces, the tot be o rfCs icese

to 37, whie thei bch etwok icese by

98 ig the ye. The bch etwok o SlCs

the expe with the opeig o 44 bches,

o which, 15 wee opee i the nothe

Este povices.

The Central Bank further strengthened

its supervisory and regulatory framework to

improve the soundness and risk management

systems of banks. The ew egtoy eses

itoce ice the icese i the ii

cpit tht is eqie to be itie by icese

coeci bks (lCBs) icese speciise

bks (lSBs), o y stggee bsis

o 2010 to 2015; the ipeettio o

toy eposit isce schee, extio

o cssiictio o os s o peoig os;

the ectio o the eqie eve o gee o

oss povisios; the ppictio o the ssesseto the itess popiety to oices peoig

exective ctios; the eqieet o iste

ocy icopote pivte bks to obti istig

o the Coobo Stock Exchge (CSE) by 31

decebe 2011; the issig o diectios o

otsocig o ctivities. regtios wee isse

stiptig xi tes o iteest tht c be

oee by rfCs i oe to pevet hethy

copetitio og eposit tkig istittios

to sece pbic coiece sstibiity. The

tig o the fice Bsiess act to epce the

cet fice Copies act ws iise with

the ppov o the Cbiet o miistes the

Bi is to be pesete to the Piet i 2011. I

etio to SlCs, to ciitte thei te gowth with

pece, the eqie ii coe cpit

the eqie ii cpit o pbic copy

to qiy o egisttio wee icese o

stggee bsis.

During the year, efforts were made torehabilitate the RFCs affected by the liquidity

crisis. The jo eses ice the

ppoitet o gig get, ttctig ew

ivestos to ise cpit tkig ove the

geet, covetig eposit ibiities ebt

ito eqity, escheig o eposits iteest,

isposig o e estte popeties st tckig

the ecovey o o peoig ssets. I itio,

the Cet Bk Ceit Gtee Schee ws

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i pce to sppot the gtig o ceit to rfCs

by icese bks. accoigy, thee rfCs wee

be to coece o bsiess opetios,

whie gig gets o two rfCs hve bee

iscotie. Sttegic ivestos wee ietiie

o two rfCs, whie pospective ivestos o othe

rfCs wee e the eview e iigecepocess. a istesse rfCs wi be be to evive

thei bsiesses y ig 2011. Ivestigtios

ito istittios egey egge i ice

bsiess withot thoistio wee cotie,

whie ssistig cots with espect to peig

itigtio. Pe pbic weess poges,

sch s coty wie seis/wokshops wee

cocte vetiseets wee pce i

tio ewsppes to ecte the pbic o the

isks o ivestig i thoise istittios.

Action was taken to strengthen the

regulatory framework for insurance companies.

The popose eets to the regtio o

Isce Isty act to stegthe peti

egtio spevisio i oe to potect the

iteest o poicyhoes wee pesete to the

Piet i 2010. a isce copies wi

be eqie to ist o the stock exchge. The

eov o the w isk pei o Si lk by

the loo Joit Cgo Coittee i Je 2010

the ectio o the pei o teois cove

by the ntio Isce Tst f by 75 pe

cet i api 2010 wi ece the cost o isce

to poicyhoes.

Improvements to the payment and settlement

systems continued in 2010. The pocee o

gtig it-y iqiity ciity (Ilf) to istittios

e the e tie goss setteet (rTGS)

syste ws pge to ebe the to obti Ilft thei iscetio, evitig o poviig Ilf oy

o thei eqest. SlIPS ws pge to povie

oie coectivity to pticiptig istittios.

To eiite the tie g ssocite with the

oveet o physic cheqes to lkCe (Pvt)

lt, pticiptig bks wee istcte to cpte

the cheqe iges iecty t the bch eve

sbit those iges to lkCe (Pvt) lt.

The activity at the CSE rose to historically

high levels in 2010, and the CSE became one

of the best performing stock exchanges in

the world with all indicators recording high

performance. The a She Pice Iex (aSPI)

ose by 96 pe cet the mik Pice Iex

(mPI) icese by 83 pe cet i 2010, whie thesb secto pice iices icese. The be o

shes te icese o-o the vege

iy tove ose oe th thee-o. The

ket pice eigs tio icese the

the ket cpitistio o the CSE eche rs.

2.2 tiio by e 2010. net oeig ses icese

ive by the eistio o cpit gis ist

high pice iceses o y stocks, oe

oc ivestos egge i the ket. Thee wee

10 iiti pbic oes (IPOs) i 2010 wee

sigiicty ovesbscibe, whie 31 copies

e ights isses.

1.3 Global Economic Environment

and Outlook2

The global economy gradually recovered in

2010 from its deepest recession since the 1930s.

The gob ecovey co be gey ttibte to the

pickp i pivte e poicies tke tows

isc cosoitio exte ebcig,thogh it ws wekee by high epoyet

systeic isks eewe stesses i the

ici secto. accoig to the Wo Ecooic

Otook (WEO) o the Imf, the wo ecooy is

estite to hve expe by 5.0 pe cet i 2010

cope to its cotctio by 0.6 pe cet i 2009.

Beig the ess ecte by the ici toi

tht pecee the ecessio i 2009, eegig

ecooies cotie to be the egie o ecooic

ecovey i 2010. avce ecooies, whichwee wost hit by the ecooic owt i 2009,

wee estite to hve expe by 3.0 pe cet.

This oest gowth is piiy est o the wek

pivte oestic e i vce ecooies,

iy e to the peviig high epoyet

eves. The Jpese ecooy expe by

2 The ysis i this sectio is bse o the Wo Ecooic Otook o the Imf,Octobe 2010 Jy 2011 (pte), pbictios by the Wo Bk

the asi deveopet Bk.

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ivesiictio o its oeig ssets este i the

ppecitio o the Jpese ye, Koe wo

the eo. Cope with cotie cet ccot

spses i Jp, the ye ppecite shpy,

poptig the Jpese thoities to itevee i

the oeig exchge ket. Chi, sbseqet to

gi evtio o the cecy, too owethe eibi epecite giy to peseve

copetitiveess. Qtittive esig oce by

the Bk o Jp the ove by the uS fee

reseve to pchse p to uS os 600 biio

woth o og te goveet bos h ipct

o cecy oveets.

Equity and debt markets in many emerging

and developing economies improved with

increased foreign investment flows during 2010.

Howeve, osses wee epote i y eqity

kets i the Eope egio e to coces

bot sstibiity o the ecovey. The soveeig

ebt cisis tht sce ig the ist qte o

2010 s est o sstibe isc poicies i

soe Eo ebe ecooies hiee the gowth

pospects o the egio. as est, ivestos

ove wy o seve Eope ecooies,

the Imf the Eope Cet Bk

(ECB) cotie thei eots to big stbiity to the

Eope soveeig ebt ket. upeceete

iqiity ceit sppot sbstti isc

ctio i ecte coties este the ici

toi, oetig its vese ipct o Eopes

ecooic ctivity. Tows the tte pt o 2010,

thee wee sigs o ipoveets i gob ici

coitios, especiy i vce ecooies. The

bk eig coitios i vce ecooies

ipove whie isk spes cotie to tighte.

It is unlikely that there would be an early

reversal of quantitative easing policies bymonetary authorities in advanced economies, as

the recovery is still under way and unemployment

rates are still high, although deflationary

concerns have subsided. fo y eegig

ket ecooies, the est o qtittive esig

i vce ecooies, hs bee sbstti

iows o oeig cpit ppecitio o thei

exchge tes. Steiistio ctio by cet

bks i oe to itigte the ipct o expot

copetitiveess thogh excessive ppecitio

o thei cecies hs este i sigiict

steiistio costs to pevet the excess iqiity i

oestic oey kets o these eegig ket

ecooies, these ecooies hve tke steps

to sowow cpit ows thogh txig iows otows, itocig cps o ivestets,

whie stegtheig thei ici systes.

In response to various policy measures

adopted, the economic growth in 2011 is

expected to be encouraging, though several

downside risks remain. Ths , the ecooic

ecovey i the asi egio hs bee pi

stog. It is expecte tht the gowth i the eegig

ecooies wo ive the gob ecooic

ecovey i the shot to ei te. I its test

oecst, the Imf hs pojecte the gob gowth

i 2011 to be o 4.4 pe cet, e by eegig

eveopig ecooies, which e expecte to

gow t o 6.5 pe cet i 2011. The gowth

i vce ecooies is pojecte to be o

2.5 pe cet i 2011. Howeve, the peviig high

epoyet te, high isc eicits, ici

ibces, s we s geopoitic eveopets

i the nothe aic mie Este egios

s we s oe ecet eveopets i Jp

cse by t isstes sti pose cheges

to gob ecooic ecovey. The e o

eegy, iy i the o o petoe pocts

co, wo icese ove the ei te s

the gob ecooy is poise to ecove. Howeve,

sety coces t the Jpese ce ectos

t fkshi e ikey to exet pesse o

the e o petoe pocts co s

tete eegy soces o ce eegy i the

shot te. Give the icese e s esto expig ecooic ctivity, sppy-sie shocks

e to vese wethe coitios geopoitic

istbiity, cooity pices e expecte to

ei bove 2010 eves. The Imf hs pojecte

the cose pices i vce ecooies to

giy icese to o 1.6 pe cet, i

eegig eveopig ecooies, to stbiise t

o 6.0 pe cet.

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1.4 Medium Term Macroeconomic

Outlook, Challenges and

Policies

Supported by post-conflict optimism and

strengthening global demand, the medium term

outlook for Sri Lankas economy is encouraging.

foowig the 8.0 pe cet e gowth i the

ecooy i 2010, i the ei te, the ecooy

is expecte to gow by 8 - 9 pe cet pe .

Gete cpcity tiistio with the eveopet o

istcte ciities, expsio i the gicte

secto with ge cotibtio coig o

the nothe Este povices, ipove

poctivity, poct ket ivesiictio

expsio o isties, expsio o te

sevices sectos icig tois, pots,

tspottio, bkig isce, e expecte

to povie the eqie ipets o eisig sch

highe gowth pospects. fthe, the opeig p

o ew ivestet oppotities with the w o

pece, togethe with the coitet show by the

goveet by ipeetig ecessy chges

to the tx syste s we s ipovig opetios

o pbic etepises wi hep chieve highe gowth

eves i the ei te, whie esig ove

coecooic stbiity. mewhie, i oe toiti highe ecooic gowth, ivestet wi

ee to be gy gete to eve cose

to 35 pe cet o GdP, whie oestic svigs

eqies to be boght p to t est 25 pe cet o

GdP to sppot the evisge eve o ivestet i

the ei te.

While credit flows to the private sector is

expected to continue, these flows, together

with claims of the banking system on the

government and public corporations, will be

closely monitored to contain the build-up of

excessive demand pressures. Sppy-sie

ipoveets e expecte to cotie,

og with pet e geet poicies,

itio i the ei te is expecte to be

itie t i sige igit eve. mewhie,

the isc sttegy wi cotie to ocs o g

ectio o the ove isc eicit pbic ebt,

s evisge i the mei Te mco fisc

fewok. This wi be chieve thogh highe

tx evee coectio, sppote by sipiie tx

stcte, boee tx bse, the tioistio

o goveet ecet expeite pet

pbic ebt geet, whie itiig pbic

ivestet t eve tht c ciitte higheecooic gowth.

The external sector is expected to remain

strong in the medium term, enabling the

maintenance of an international reserve position

that is adequate to finance over 5 months of

imports. Give the g ecovey i the gob

ecooy, ipove poctivity ehce

poct qity o oestic etepises, expots e

expecte to iti its pw oet i the

othcoig yes. agict expots e expecte

to gow, e by the ttctive pices etche i the

itetio kets, which hs popee ctivtio

o gi s the hitheto tiise s

i the nothe Este povices. Gowth i

isti expots is so expecte to cceete

with the eegece o ew isties highe

eves o ve itio i existig isties. The

ppe isty hs e sigiict sties i the

itetio ve chi by icopotig esig

spects, cteig to epte itetio bs expig to hitheto tppe kets. Expots o

oo beveges, bbe pocts chiey

eqipet co so be eveope thogh

highe eves o ve itio the eveopet

o ew pocts. The expeite o ipots wo

so icese with the eveopet pojects o

the coty, ecostctio ctivities i the nothe

Este povices, the eveopet o the

tois isty othe expot oiete isties.

Ipots o cose bes e so expecte

to icese with the ipove ivig sts o

the peope. With the coissioig o the co

powe pt, expeite o petoe pocts is

expecte to be oset to soe extet by the ipots

o co, which is etivey chepe. The geopoitic

tesios i the oi pocig egios, e ikey to

exet pesse o itetio ce oi pices s

we s Si lks oi ipot bi, theeby o the

te eicit, pticy, i 2011. a key eveopet

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levels of foreign inflows to the government

and to the private sector including FDIs in 2011

and beyond. By e 2010, the goveret ha

a cative iacia coitet o aro uS

oars 7.1 biio ro Sri lakas eveopet

parters, i copariso to uS oars 6.6 biio

at e 2009. The project ipeetatio ratioor these coitets is i the rage o 2-5

years a is osty or irastrctre projects,

which wo aciitate the eveopet process

a earigs sorces o peope. I aitio,

ore fdIs are expecte to be reaise with

cotie eveopet work i the norther

a Easter provices, especiay i the toris

sector icig hotes, teecoicatio,

ports, property eveopet, agrictra a

aactrig sectors.

with regar to the BOP wo be that earigs ro

services wo recor sigiicat icreases i the

ei ter, spporte by icrease earigs

ro toris, port a airport reate activities

a ioratio techoogy. It is expecte that the

poitica tesios i the mie East wo ot have

a ajor ipact o iwar reittaces by expatriateworkers, which is ikey to reai a sigiicat sorce

o oreig exchage receipts that wo cotie to

ower the eicit i the crret accot. Spporte by

higher iacia ows to the goveret a private

sector icig fdI iows, the BOP is expecte

to recor a srps over the ei ter.

The relaxation of exchange controls, focused

fiscal incentives and improved macroeconomic

environment are expected to attract higher

Medium Term Macroeconomic Framework (a)Table 1.5

IndicatorProjections

Unit 2009 (b) 2010 (c) 2011 2012 2013 2014

Real SectorGDP at Market Prices Rs. bn 4,835 5,602 6,440 7,405 8,513 9,790Real GDP Growth % 3.5 8.0 8.5 9.0 9.5 9.5

GDP Deflator % 5.9 7.3 6.0 5.5 5.0 5.0Per Capita GDP US$ 2,057 2,399 2,794 3,200 3,660 4,190Total Investment % of GDP 24.4 27.8 29.5 32.0 33.0 34.0Domestic Savings % of GDP 17.9 18.7 19.9 23.2 25.0 27.0National Savings % of GDP 23.7 24.7 25.8 29.1 30.7 32.3

External Sector

Trade Gap US$ mn -3,122 -5,205 -6,762 -7,399 -7,993 -8,531Exports US$ mn 7,085 8,307 9,626 10,876 12,341 14,027Imports US$ mn 10,207 13,512 16,389 18,275 20,334 22,558

Services (net) US$ mn 391 698 1,148 1,487 1,778 2,209Current Account Balance US$ mn -214 -1,418 -2,140 -1,953 -1,738 -1,500Current Account Balance % of GDP -0.5 -2.9 -3.7 -2.9 -2.2 -1.7Overall Balance US$ mn 2,725 921 775 525 825 1,325External Official Reserves (d) (e) US$ mn 5,097 6,610 8,004 8,938 9,668 10,281

Debt Service Ratio (f) % 18.9 14.6 13.5 16.2 12.6 14.3Fiscal Sector

Total Revenue and Grants % of GDP 15.0 14.9 15.6 16.3 16.6 16.7Total Revenue % of GDP 14.5 14.6 15.2 16.0 16.5 16.5Grants % of GDP 0.5 0.3 0.4 0.3 0.2 0.2

Expenditure and Net Lending % of GDP 24.9 22.9 22.4 21.5 21.3 21.5Current Account Balance % of GDP -3.7 -2.1 -0.8 1.0 1.7 1.6Overall Budget Deficit % of GDP -9.9 -7.9 -6.8 -5.2 -4.8 -4.8

Domestic Financing % of GDP 5.1 3.6 4.6 4.2 3.9 3.9Government Debt % of GDP 86.2 81.9 80.0 75.0 71.0 67.0

Financial Sector (g)

Reserve Money Growth % 13.1 18.8 14.5 14.5 14.5 14.5Broad Money Growth (M

2b) % 18.6 15.8 14.5 14.5 14.5 14.5

Change in Credit to Government Rs. bn 57.4 -13.1 42.0 32.4 25.0 0.0Change in Credit to Private Sector Rs. bn -73.4 300.0 281.3 303.1 340.1 383.7Growth in Credit to Private Sector % -5.8 25.1 18.8 17.1 16.4 15.9

(a) Based on the information available by mid March 2011(b) Revised(c) Provisional(d) Excluding receipts of Asian Clearing Union(e) External official reserves include the proceeds from the IMF Stand-by Arrangement facility-2009.(f) Total debt service payments as a percentage of earnings from exports of goods and services

(g) Year-on-year growth in end year values

Sources: Ministry of Finance and Planning

Department of Census and Statistics

Central Bank of Sri Lanka

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The key challenge facing the economy in

the coming years is to maintain the significant

macroeconomic improvements that were

achieved in 2010. I 2010, ecooic gowth

eboe with otbe positive cotibtios

o key sectos whie itio ws kept e

coto. The exte secto peoe ekby oici eseves wee itie t

cootbe eve, whie isc cosoitio eots

ispye tgibe ests. Sppote by these

eveopets, ket iteest tes ecie

the ow o ceit to the pivte secto icese.

These coecooic chieveets e by o

es tivi, Si lks biity to eco these

i sige ye whe the jo ecooies

egio ecooies cotie to btte with vios

ecooic ibces, is ipessive. mitiig biig o these chieveets i the ei

te wi be the chege ce by poicykes,

ist ite exte shocks,

possibe e pesses. appopite e

geet poicies s we s essig sppy-

sie botteecks eectivey wo be ipetive to

sstiig coecooic stbiity.

Sri Lankas current and expected high growth

momentum has posed new questions about

tightening of the labour market conditions.The key iictios o tighteig e, ist, tht Si

lks epoyet te (excig the nothe

Este povices) hs gy ecie o

8.8 pe cet i 2002 to 4.9 pe cet by 2010,

seco, i tes o the be o hos woke pe

week, the pecetge o the 40 ps hos ctegoy

hs icese o 60.9 pe cet i 2002 to 67.6

pe cet by the thi qte o 2010. Howeve,

othe bo ket iictos poit tows the

possibe vibiity o poo o bo tht cobe bsobe ito the bo oce withot hvig

sigiict ipct o wges. I ptic, the bo

oce pticiptio te, i.e., the ecooicy ctive

poptio s pecetge o the wokig ge

poptio, hs ecie o 50.6 pe cet i 2002

to 48.1 pe cet i 2010, te tht co evese

with ket coitios, icesig the vibiity o

bo. Whie the Isty secto the Sevices

secto epoy 24.2 pe cet 43.1 pe cet o the

epoye, espectivey, the pecetge epoye

i the agicte secto is sti s high s 32.7 pe

cet. Whie the icese i hos woke sigs

ectio i eepoyet, it sti eis

seios coce pticy i the agicte

secto. The ogoig ipoveets to gict

poctivity icig echistio e expecteto psh ge popotio o the cet gict

bo oce wy o gicte, whie ogoig

istcte eveopets, i ptic, the

ipoveets to the o etwok, e expecte to

ciitte gete bo obiity. athogh Si lks

chic bo egtios wee pte ey i

the cet ece, bo exibiity sti eis

ow e to eg soci bies s we s the

istch betwee the vibe skis the skis

eqie. Soe possibe poicy eses tht cociitte gete bo obiity s we s gete

bo vibiity e, ecogig the optio o

ew techoogy icig copteistio to ece

bo eqieets whie icesig vibiity

o epoyet oesticy thogh itocig

exibe wokig hos, pootig pt tie wok,

ciittig wokig pets by poviig high qity

y ce te-schoo ce ciities o chie,

stegtheig soci secity ets, the cotitio

o ipoveets to istcte, i ptic,

itecity itcity tspot sevices, s we

s the possibe ectio i eptes o oeig

epoyet. Ipoveets i the sts o

ectio, i tes o qity eevce to the

ket ees, thogh eg ptig o schoo

tetiy ectio cic wi so ehce

bo obiity.

With the end of the conflict in mid-2009,

the economy swiftly moved to a high growth

trajectory and the excess capacity in theeconomy, i.e., the negative output gap, started to

narrow gradually. dig the coict, Si lks

poctive cpcity poctive esoces wee

highy e-tiise s est o both the iect

the iiect ipct o the vese secity

sittio. Howeve, sice i-2009,

ie esoces, especiy i the nothe

Este povices, bo, pticy by wy o

ece ee o iity pesoe gete

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ite-egio obiity, cpit, thogh the

opti tiistio o existig cpit, the e to

estctio o physic istcte thogh

owe cowig-ot o pivte ivestet, e beig

tiise oe poctivey o ecooic ctivity.

Whie owig o the otpt gp co sig

itioy pesses wtig ito the ecooy,the gete vibiity o esoces is expecte to

psh the poctio possibiity otie otws

isig poteti otpt, kig sigiict

stct bek i Si lks gowth eco.

mgig the siteos ipoveets i ct

poteti otpt i the ei te is othe

key chege ce by the ecooy i oe to

voi votiity i the gee pice eve.

The government displayed its commitment

to fiscal consolidation by reducing the overall

budget deficit from 9.9 per cent of GDP in

2009 to 7.9 per cent of GDP in 2010, with

improvements in both revenue collection and

expenditure management. The goveet so

ece its expose to the bkig secto with the

etieet o ge potio o Tesy bis he by

the Cet Bk the epyet o soe high

cost boowigs o coeci bks, ecig

cowig ot o pivte ivestet. With ceit to

the pivte secto eboig, isc cosoitiossiste the Bk to keep ove oety

expsio o tck i 2010, thogh ceit to

pbic copotios icese, isig coce.

The chege i the yes he is to cotie the

isc cosoitio pocess withot sippges. I

this espect, the bsece o se ici ees

by the goveet tht existe ig the yes

o coict sts sppotive o bette expeite

pig by isc thoities. at the se tie,

the goveet hs tke bo steps to essthe igeig pobes i the tx syste thogh

itocig chges tht wo ehce evee

coectio i the ei te by sipiyig

boeig the tx bse, tioisig the tx

cocessio egie stegtheig the tx

iisttio. It is expecte tht the ove bget

eicit wo ece the to 6.8 pe cet o GdP

i 2011 to beow 5 pe cet i the ei te,

the et oestic icig o the bget eicit

wo ei s pe. The isc cosoitio

pocess wo sppot the eective coct o

oety poicy hep the cotiet o

e-ive itioy pesses.

Improvements in the performance of

public enterprises also need to be continuedand strengthened to ease the pressure on

government fiscal operations and prevent

excessive monetary expansion. With thei

expose to the cttios i itetio ce

oi pices thei iect ipct o oestic pice

oveets, the CPC the Ceyo Eecticity

Bo (CEB) hve histoicy bee oc poits

i istittio eo. Whie soe sttegic

ipoveets hve occe i etio to the

CEB with owe expecte eice o high cost

petoe o powe geetio, the cotitio

o pe ipoveets wi ece its be

o the goveet bget. The CPC, which

is iecty ipcte by eqet cttios i

itetio ce oi pices the sggish

eye jstet o oestic pices, eqies

get ipoveets to its istittio ewok

to ke oestic pices jst oe exiby to

eect itetio ket coitios, y

o jstet o pices sho oy be to io-

ot shot te cttios. I itio to the CPC the CEB, thee e seve othe stte owe

etepises (SOEs) tht eithe opete with ow

eve o eiciecy o e o opetive. These

SOEs ee to be evitise withot the ey

to ke the vibe eithe e the goveet o

with pivte secto pticiptio i oe to eiite

thei excessive be o the pbic. aothe key

chege i gig sttegic etepises is the

ck o expetise geet skis, which

highights the ee o h cpit eveopetthogh eos to the syste o ectio.

The movements in international commodity

prices during the latter part of 2010 and so far

during 2011, in particular, those of crude oil,

once again highlight the possible challenges

to macroeconomic stability. The geopoitic

istbces i seve nothe aic mie

Este oi pocig coties the t

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cities oe ecety i Jp seve othe

coties hve ise itetio ce oi pices

tht vege o uS os 80 pe be i

2010, to ove uS os 110 by mch 2011. Whie

with the expecte ecovey i gob e i 2011

soe icese i eegy pices ws ticipte,

the cet tes show tht the pojectios oeegy pices by itetio gecies ey this

ye e ikey to ho. Whie thee wo be

oe-o icese i the oestic pice eve i

these ticipte iceses e psse o to

the cose, the vese coseqeces wo

be gete oe pesistet i bsobe by

the goveet o the CPC. The pss-thogh

o chges i eegy pices to the e se so

eses tht ecooic ecisios eect oe

eistic ipt pices. Cet eots to poote the

se o tetive eegy soces cosevtio

o eegy, by the se o hybi vehices, bette

o iscipie ipove o coitios,

bette pbic tspot, itocig ew pbic

tspottio systes, ee to be stegthee

expeite to esse the ipct o the ecooy

isig o high itetio ce oi pices.

With domestic peace and global economic

recovery under way, Sri Lankas exports have

the potential to reach a new growth trajectory,with significant levels of value addition, the

development of a range of new products and

the diversification of export markets. With skie

bo, ceti isties hve iese poteti to

ove the p the ve chi, i oe to oe ve

e pocts sevices to the gob ket

thogh the isio o oe techoogies

gete oeig ivestet. Ese o oig bsiess

ipove coecooic evioet co

ttct oe ivestets o the exptitecoity s we s oeig ivestos. Si lk

co so stive to cpte the ket o high

qity copoets o pocts, which titey

e ipote, ssebe e-expote by othe

coties. The ecet icese i eectic eqipet

expots eects potio o this iche ket. Whie

ivesiictio o expots ipoves the esiiece o

the ecooy to exte istbces, the ecet

tes i gob gowth pttes escoe the

vibiity o tppe kets pticy withi

eegig asi. fo ceties e oeig e

theete, Si lks expots oeig

te hve bee oiete tows the Weste

kets. Hece, it wo eqie speci eots to

ivesiy te tows eegig kets i asi.I this eg, the existig bite tite

te geeets ee to be stegthee

eegotite to eove poicy o poicy

obstces to te. It is ipetive tht tes e

we ioe o the beeits o te geeets,

so tht these e optiy tiise to ipove te.

This wo ise the st o ivig o the peope

o ebe coties s it ebes the to ejoy

wie ge o pocts sevices t owe costs.

Te pootio sho be e oe ket

iotio speciic to cpte gob sppy chis

tht hve iect ccess to the coses.

It is necessary for Sri Lanka to attract more

non debt creating foreign investment flows if it

is to increase the level of investment required

to maintain the envisaged economic growth

path, given the shortfall in domestic savings.

Cetig bsiess iey evioet is eee

to ipove ivesto coiece ttct oeig

ivestets. Whie the ecet extio o exchgecoto egtios, stegthee coecooic

evioet s we s the e-estbishet o

pece i the coty icetivise ivestet, the

steps ee to be tke to ecoge oeig

ivestets. Cety, Si lks kig i the

doig Bsiess Iex is 102 the goveet

hs tgete to ipove the kig to 30 by

2014. The goveet hs ey estbishe

wokig gop to ecoe eqie chges

to opetios o key istittios to ectiy existigwekesses ece bectic bies

costs t ech stge o ig bsiess

etepise, the Cet Bk cooites this

pocess o ipoveet with eevt istittios

the Wo Bk gop. The Bk pbishe

a Step by Step Gie to doig Bsiess i Si lk

i Octobe 2010 to povie iotio to ivestos.

Exectig the eqie eos s pe

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Extreme Weather Conditions and its ImpactBOX 2 The Ease of Doing Business Ranking

It is widely accepted that the corporate sector plays

a key role in economic development. Therefore,

governments seeking rapid development need to

focus attention on creating a conducive regulatory

framework that governs the corporate sector inthe country. Economic activities require good rules

including those that establish and clarify property

rights, reduce the cost of solving disputes, increase

the predictability of economic interaction and provide

contractual partners with provisions against abuse.

The existence of conducive rules not only increases

the dynamism of business but also its resilience

during economic and financial crisis.

The Doing Business project was initiated 9 years

ago by the World Bank and International FinanceCorporation (IFC). Its main goal is to provide an

objective basis for understanding and improving the

regulatory environment for business. Doing Business

2011: Making a Difference for Entrepreneurs is the

eighth in a series of annual reports investigating

regulations that enhance business activity and those

that constrain it. Doing Business presents quantitative

indicators on business regulations and the protection

of property rights that can be compared across 183

economies, from Afghanistan to Zimbabwe, over time.

A set of regulations affecting 9 stages of a businesss

life are measured: starting a business, dealing with

construction permits, registering property, gettingcredit, protecting investors, paying taxes, trading

across borders, enforcing contracts and closing a

business. Data in Doing Business 2011 are current

as of 01 June 2010. All topics are given equal weight

and the overall index is calculated as the ranking on

the simple average of percentile rankings on each

of the 9 topics. Two types of data are considered

for each stage of business. The first type is based on

laws and regulations, while the second is on time

and motion indicators. The indicators considered

for each stage of business are summarised inTable B 2.1.

The data for the Doing Business ranking is collected

through a questionnaire designed by the Doing

Business Team of the World Bank together

with academic advisers. The respondents to this

questionnaire (typically) include local experts, such

as lawyers, business consultants, accountants and

1 Starting a Business 6 Paying Taxes

Procedures, time, cost and paid-minimum capitalto open a new business

Number of tax payments, time to prepare and filetax returns and to pay taxes, total taxes as a shareof profit before all taxes borne

2 Dealing with Construction Permits 7 Trading across Borders

Procedures, time and cost to obtain construction

permits, inspections and utility connections

Documents, time and cost to export and import

3 Registering Property 8 Enforcing Contracts

Procedure, time and cost to transfer commercialreal estate

Procedures, time and cost to resolve a commercialdispute

4 Getting Credit 9 Closing a Business

Strength of legal rights index, depth of creditinformation index

Recovery rate in bankruptcy

5 Protecting Investors

Strength of investor protection index: extent ofdisclosure index, extent of director liability indexand ease of shareholder suits index

Doing Business Indicators 2011Table B 2.1

Source: http://www.doingbusiness.org

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government officials of the relevant country. Severalinteractions are conducted by the compilers of the

ranking, and these responses and data are tested

for robustness before the rankings are finalised. The

ranking of a particular country can change not only

when it implements reforms but also when other

countries implement reforms, when new countriesare introduced to the ranking and when there are

methodological changes in the ranking criteria.

According to the ranking for 2011, the highest ranking

(No. 1) was achieved by Singapore while Sri Lanka

was ranked 102 out of 183 economies. The worst

performing country was Chad (No. 183).

Limitations of the Doing Business Ranking

There are, however, several limitations in this ranking.

It is very important to note that the ranking captures

only a few of the large number of factors that matterto firms or investors or impact on competitiveness.

Macroeconomic stability, security, strength of

institutions, quality of infrastructure, size of domestic

market, corruption and skills of the labour force are

some of the factors not considered. In particular, it

does not consider the strength of the financial sector,

which could be considered a serious shortcoming

in view of the fact that the fragility of the financial

sector was one of the main causes of the recent

financial crisis. Although it measures the regulatory

environment, it does not measure all regulatory

goals in an economy. Even in the stages of business

considered, it does not cover all regulations. Another

limitation is that it is only relevant to the situation

faced by a corporate that exists in the countrys

largest business city and pertains only to a specific

form of business (domestic small and medium

limited liability companies), and therefore, is not

reflective of the situation that exists in other forms

of business (sole proprietorships, partnerships, etc.).

Also, a certain amount of judgment is involved in

the ranking. An underlying assumption made when

computing the ranking is that entrepreneurs have

all the required information with them and do not

need to spend time to search for the same. In actual

fact, this is not the case and search for information

involves considerable effort.

Benefits of Improving the Doing Business Ranking

Despite its shortcomings, the Doing Business ranking

is very useful for benchmarking. The ranking assesses

the regulatory environment in selected areas. A

conducive regulatory environment aids the growth of

the formal sector in an economy, whereas an onerous

regulatory environment forces businesses to remain in

the informal sector. Formal sector firms tend to grow

faster, be more productive, employ more workers

and have better access to credit, and thereby bring

greater benefits to the economy. In the area of trade,the quality of a countrys contracting environment is a

source of comparative advantage, while in the area

of credit, greater information sharing through credit

bureaus is associated with high bank profitability and

lower bank risks. Although Doing Business ranking

does not focus on regulations specific to foreign

investment, the ranking is one of the indicators

considered by foreign investors before deciding to

invest in a particular country. Therefore, improving

the countrys ranking will tend to attract more foreign

investment.Sri Lankas Doing Business Ranking

In Doing Business 2011, Sri Lankas ranking was

102 out of 183 economies. Its rankings in the 9 stages

of business evaluated in the 2011 report are given in

Table B 2.2.

It is clear that Sri Lankas performance in the different

stages varies considerably. Its performance in

the stages of Dealing with Construction Permits,

Registering Property, Paying of Taxes and Enforcing

Contracts is particularly weak as it ranks below 100of the 183 economies considered and therefore,

Doing Business 2011 Rank

Singapore Sri Lanka Chad

Ease of Doing Business 1 102 183

Starting a Business 4 34 182

Dealing with Construction Permits 2 169 101

Registering Property 15 155 137

Getting Credit 6 72 152

Protecting Investors 2 74 154

Paying Taxes 4 166 179

Trading Across Borders 1 72 171

Enforcing Contracts 13 137 164

Closing a Business 2 43 183

Table B 2.2

Sri Lankas Ranking in DoingBusiness 2011 Compared with the

Best and Worst PerformingEconomies

Source: http://www.doingbusiness.org

Indicator

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ceiby chievig the tgete kigs i the

itei yes e ecessy to boost the ivestet

cite eise the gowth poteti o the

ecooy.

The government has planned to transform

Sri Lanka into a strategically important economic

centre by developing five strategic hubs; a

knowledge hub, a commercial hub, a naval/

maritime hub, an aviation hub and an energy

hub, taking advantage of Sri Lankas strategic

location and resources. The i eeets o

kowege hb e to geete kowege, to

tse kowege to sites o ppictio to

tsit kowege to othes thogh ectio

tiig. The iiti ocs o the kowege hb

i Si lk hs bee i the e o iotio

techoogy. The