2014 is the eighth consecutive year that the Central Bank announces

its plans and policy direction for the forthcoming period

to all stakeholders.

Since the first Road Map in 2007, the Central Bank has been at the

forefront of a remarkable transformation of

the Sri Lankan economy…

2

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

The Central Bank is thankful to many, for the continued support… • The President and Minister of Finance, His Excellency Mahinda Rajapaksa for continuing to

provide us admirable leadership and direction

• Senior Minister of International Monetary Cooperation and Deputy Minister of Finance and

Planning, Hon. Dr. Sarath Amunugama for his unceasing guidance and assistance

• Secretary to the Treasury, Dr. P. B. Jayasundera, for his outstanding commitment towards the

maintenance of sound macro fundamentals in the economy

• Members of the Monetary Board, Mrs. Mano Ramanathan, Mr. Nimal Welgama and

Mr. Neil Umagiliya for their unstinted support and prudent advice

• Deputy Governors, Dr. Nandalal Weerasinghe, Mr. Ananda Silva and Mrs. Chandra

Premaratne (who retired from the Bank in 2013)

• Assistant Governors, Heads of Departments, particularly the Director of Economic Research,

Mrs. Swarna Gunaratne and the staff of the Economic Research Department for today’s

effort, as well as all staff of the Central Bank who have worked with utmost commitment,

enthusiasm and proficiency to fulfill the key objectives of the Central Bank

• The Consultative Committees on Monetary Policy, Financial System Stability and all other committees for the prudent and timely policy counsel

4

The year 2013* was a year of many notable achievements, having successfully responded to the economic stabilisation package that was implemented in 2012…

*Figures for 2013 in this presentation are provisional

• Economic growth rebounded (7.2% expected in 2013)

• Level of investment maintained at over 30% of GDP

• Headline inflation declined to 4.7% (59 months in single digits)

• Core inflation at its lowest levels (2.1% in December 2013)

• Unemployment remained at low levels (4.5% in H1-2013)

• Exports expected to grow by 6.9% with monthly export earnings exceeding US$ 1bn since October 2013

• Trade Deficit estimated to contract by 8.7%

• Tourist arrivals at record levels

• Remittances estimated to reach US$ 6.7 bn

• FDI surpassed US$ 1 bn for the third consecutive year

• BOP recorded a surplus of US$ 700 mn

• Foreign Reserves at healthy levels: US$ 7.1 bn (4.5 months of imports)

• The rupee remained stable amidst global market volatility

• Budget Deficit declined to 5.8% of GDP in 2013 from 6.4% in 2012

• Debt to GDP Ratio declined to 78.0% in 2013 from 79.1% in 2012

• Policy rates reduced by 100 bps

• Market interest rates declined by 61-452 bps

• Private sector credit picked up

• Credit to public corporations moderated sharply

• Stability of the Banking sector preserved throughout the year supported by strong capitalisation and liquidity conditions

Real Sector Developments

and Inflation

External Sector

Monetary and

Financial Sector

Fiscal

Sector

2013

5

Source: IMF, WEO Database - Oct 2013

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

6

Source: IMF, WEO Database - Oct 2013

Mixed signals were observed in advanced economies, and weaker prospects were noted in emerging economies… • US economy was growing at a moderate

pace and the Fed announced gradual tapering of QE

• Some recovery in economic activity was visible in the Euro area while risk of a contraction declined

• Japan’s growth picked up in H1 2013, but slowed in Q3

• EMEs and developing country growth rates were down about 3% since 2010, with significant slowdowns in Brazil, China, India and Russia

7

• However, EMEs continued to account for the bulk of global growth

• Net capital flows to EMEs have been negative in recent months, both in terms of bonds and equity

Source: IMF, WEO Database - Oct 2013

The effect of global uncertainties was experienced closer home in South Asia as well…

• South Asia faced greater economic turbulence while regional inflation remained highest amongst developing economies

• India’s growth forecasts were downgraded by IMF and WB, as a result of:

– High headline inflation

– Heavy capital outflows

– Sharp depreciation of the Indian rupee

8

However, amidst the challenging global environment, Sri Lanka’s economy remained resilient & on track…

• The economy returned to the high growth trajectory, with the vigilant and prudent policies of the Central Bank and the Government

• Notable growth of over 7% was observed in all key sectors of the economy in Q3-2013; a first since Q1-2006

9

GDP growth to be around 7.2% in 2013

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

The Agriculture sector strengthened with high growth in paddy & fisheries sectors…

• The sector expanded by 7.0% in Q3-2013

- Paddy production recorded a growth of 56.5% in Q3 due to the increased harvest in the Yala season

- Fish production increased by 9.9% in Q3

- However, tea, rubber and coconut production declined due to adverse weather conditions

10

Agriculture sector is expected to grow by 4.1% in 2013

The Industry sector recorded the highest sectoral growth for the fifth consecutive year…

• All sub-sectors of the Industry sector performed well in Q3-2013

Sector Q3 Growth 2013 Y-o-Y %

Industry 8.1

Mining and Quarrying 12.5

Manufacturing 6.0

Factory Industry 6.8

Electricity, Gas and Water 11.2

Construction 10.0

Favorable macroeconomic conditions, increased economic activities, expansion of infrastructure development and gradual recovery of major trading partner economies supported the growth momentum of the Industry sector

11

Industry sector is expected to grow by 9.2% in 2013

* Q4 2013 is an estimate

The Services sector gathered momentum in 2013…

• The sector expanded by 7.9% in Q3-2013

• Noteworthy improvements in all sub-sectors in the Services sector in Q3-2013

– Wholesale and Retail Trade (7.6%)

– Hotels and Restaurants (13.6%)

– Transport and Communication (11.8%)

– Banking, Insurance and Real estate, etc. (6.7%)

12

The Services sector is expected to grow by 6.7% in 2013

Growth was broad based & inclusive, with higher contributions from lagging provinces… • The dominance of the Western Province is diminishing and the

contribution by other provinces to GDP is on the rise…

13

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

Unemployment & poverty continued to remain low…

• Increased employment was seen in all key sectors of the economy and all employment categories

• Due to the higher labour force participation of females, labour force participation rate (LFPR) increased significantly to 54.2%

• However, unemployment rate rose to 4.5% in the H1-2013 mainly due to the entry of new job seekers to the labour market

• Employment generation continued to increase with expanding economic activities

14

• Overall productivity has improved over the past few years

• This improvement is seen in all key sectors of the economy

• High productivity would help to achieve high and balanced economic growth and to contain inflationary pressures

Labour productivity also continued to rise… 15

Source: APO productivity Database 2013

Source: UNDP

Prosperity, as measured by the Global Prosperity Index, as well as the HDI improved…

Sri Lanka was ranked 60th in the world in the Global Prosperity Index: • Highest ranked in South Asia

16

Sri Lanka was ranked 92nd in the world in the Human Development Index: • Sri Lanka is the highest ranked country

in South Asia • Sri Lanka has advanced to the high

human development category from the medium human development category

In the External sector, earnings from merchandise exports recovered strongly from the slowdown seen in 2012… • Earnings from exports increased

steadily from June 2013 – Gradual recovery in main export

destinations

– Favourable prices and high agricultural volume exports

• Earnings from exports grew by 5.6% to US$ 9,400 mn during the period Jan-Nov 2013 – Industrial exports grew by 4.1%

– Agricultural exports grew by 10.6%

17

Export earnings are estimated to record around US$ 10,452 mn (an increase of 6.9%) in 2013

Key strategic interventions resulted in expenditure on imports declining during the year… • Expenditure on imports declined

– Policy measures adopted in 2012 to rationalise imports had the desired effect

– Lower international commodity prices

– Favourable weather conditions

• Cumulative expenditure on imports declined by 2.5% to US$ 17,231 mn during the first 11 months of 2013 – Consumer goods increased by 4.5%

– Intermediate goods declined by 2.8%

– Investment goods declined by 5.9%

18

Import expenditure is estimated to record around US$ 19,046 mn (a decline of 0.7%) in 2013

Projection for Dec. 2013

Reflecting these developments, the trade balance contracted to targeted levels…

• The cumulative deficit in the trade account declined by 10.7% to US$ 7,831 mn during the first 11 months of 2013 from the corresponding period of 2012

19

• The trade deficit is expected to contract to US$ 8,594 mn (12.8% of GDP) in 2013

20

13 (E

st)

20

12

1.0 US$ bn

1,005,605 arrivals

1.4 US$ bn

1,170,000 arrivals

Tourist arrivals and earnings continued to increase… Earnings from tourism During the period Jan-Nov 2013,

– Tourist arrivals increased by 15% to 1,016,228 – Earnings from tourism increased by 24% to US$ 1,120 mn – Tourist arrivals from non traditional markets such as China and

Russia increased significantly – Western Europe continued to remain the foremost source of

tourists

20

Computer and Information services inflows bolstered the trade in services…

20

13 (E

st)

20

12

436 US$ mn

471 US$ mn

• Computer and Information Services are emerging as a sector with high growth potential

• Presently, over 300 IT, BPO and KPO companies employ more than 60,000 Sri Lankans

21

(Excluding KPO Services)

Earnings from transportation services also increased significantly in 2013…

20

13 (E

st)

20

12

254 US$ mn

418 US$ mn

22

Workers’ remittances maintained its high growth momentum...

Main reasons for the increase:

• Increased labour migration under professional and skilled categories

• Improved awareness on the benefits of remitting money through formal channels

• Introduction of new web based money transferring systems to facilitate remitting money swiftly to Sri Lanka

23

• Departures for foreign employment during the first nine months of 2013 stood at 221,760, which is an increase of 5.6%

• Increase of migrant workers of the skilled and professional category by 28%

20

13 (E

st)

20

12

6.0 US$ bn

6.7 US$ bn

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

The current account deficit is expected to reduce to US$ 2.6 bn or 3.9% of GDP in 2013, down from 6.6% in 2012

24

In addition, substantial foreign inflows to the capital and financial account were observed…

25

• FDI inflows: (Jan-Sep 2013): US$ 870 mn (during Jan-Sep 2012, FDI inflows were US$ 615 mn)

• Net portfolio investment inflows: (Jan-Dec 2013): US$ 270 mn

– Primary Market: US$ 91 mn & Secondary Market: US$ 179 mn

• Project loans to the Government: US$ 1.5 bn (Jan-Oct 2013)

• Net inflows from sale of Government securities: Treasury Bills and Treasury Bonds (Jan-Dec 2013): US$ 493 mn

• Receipt of Government Grants: US$ 24 mn (Jan-Oct 2013)

• Foreign Borrowings by Banks: US$ 1,548 mn (Jan-Oct 2013)

• Corporate Sector inflows: US$ 650 mn (Jan-Sep 2013)

These positive external sector developments resulted in further improvements in the BOP in 2013…

The BOP improved from a surplus of US$ 151 mn in 2012, to a surplus of over US$ 700 mn in 2013

26

In that background, the Sri Lankan Rupee was able to face the global market turmoil effectively, with minimal Central Bank intervention… • The Rupee appreciated until the first week of June 2013

• Thereafter, over the next 3 months, with the expectation of a possible exit of foreign investors from Government securities market with the likely tapering of the US bond buying programme, the rupee depreciated by 5.0%

• Since early September, the Rupee has gained value against the US dollar by about 1.6%

• Overall, by end 2013, the Rupee depreciated by 2.7% against the US dollar, 4.7% against the Sterling Pound, and 6.8% against the Euro. The Rupee appreciated by 10.2% against the Indian Rupee, 13.3% against the Australian dollar and 18.8% against the Japanese yen

27

In the latest AREAER, the IMF has reclassified Sri Lanka’s exchange rate

regime as floating w.e.f. 9th February 2012

Throughout the year, gross official reserves were maintained at healthy levels… • Substantial inflows of foreign exchange from different sources (private corporates,

banks) helped swell Sri Lanka’s reserves to around US$ 7.1 bn by end 2013

The healthy reserve position was supported by the inflow of funds from foreign sources, which have been continuously encouraged in order to bridge the savings-investment gap

• The level of reserves was equivalent to 4.5 months of imports compared to the internationally accepted norm of 3 months

• Based on the new risk weighted reserve adequacy metrics proposed by IMF (where risk factors are assigned specific weights), Sri Lanka’s reserves were well above the 100% benchmark

28

The International reserves were also managed efficiently amidst global market volatility... • The Central Bank has been able to earn positive returns through

effective International reserve management, in spite of severe uncertainties in global financial markets

Year Absolute Return

(US$ mn) CBSL Return

(%) 2 Year US Govt

Treasuries Average Return (%)

2010 341.0 6.2 0.7

2011 430.0 6.6 0.4

2012 222.7 4.0 0.3

2013 197.0 3.3 0.3

29

Inflation continued on a moderate path with supply improvements and prudent monetary management…

Inflation declined during the year due to: • The lagged effect of the effective monetary policy stance • Fiscal discipline due to contraction of fiscal deficit • Absence of significant supply-side shocks domestically • Moderation of global commodity prices

30

Core Inflation (End 2013)

—Year-on-year: 2.1%

—Annual average: 4.4%

Headline Inflation (End 2013)

—Year-on-year: 4.7%

—Annual average: 6.9%

Maintaining single digit inflation for nearly 5 consecutive years has given a new meaning to price stability…

31

Monetary policy decisions taken in a forward looking framework have proved effective…

32

Market interest rates have responded appropriately to monetary policy easing… • Market interest rates on deposits

gradually adjusted downwards during the year

• Prime lending rates were quick to adjust downwards in response to monetary policy easing

• However, commercial banks’ longer term lending rates, which remained downward rigid in the first half of the year, started adjusting downwards in the second half

• Increased levels of liquidity and improved foreign investor appetite reflected positively on the yield rates on government securities

33

With the lag effect of monetary policy in 2012, credit to the private sector decelerated, but turned around in the second half of the year…

Compared to the net increase in private sector credit of Rs. 111 bn in the first 9 months of the year, the increase in October and November was Rs. 49.5 bn

• Year-on-year growth of credit extended to the private sector slowed to 7.3% in November 2013, from 17.6% at end 2012

Monthly increase in Private Sector Credit (Rs. bn)

34

2012

Rs. bn 2013

Rs. bn Credit Growth

in 2013

Jan 44.6 9.7 15.5%

Feb 55.3 18.0 13.3%

Mar 55.3 9.5 10.9%

Apr 18.7 7.6 10.2%

May 36.1 18.3 9.3%

Jun 19.0 11.4 8.9%

Jul 35.7 28.5 8.4%

Aug 14.5 3.2 7.9%

Sep 9.8 4.9 7.6%

Oct 29.5 27.2 7.4%

Nov 24.1 22.2 7.3%

Dec 9.9

Total 352.6 160.6

Reasons for lower private sector credit growth were several…

35

Meanwhile, credit to public corporations moderated due to repayments by key SOEs…

• Credit to public corporations increased by around Rs. 15.5 bn during Jan-Nov 2013, compared to Rs. 94 bn in 2012

• During Sep-Nov 2013, however, public corporations made repayments of about Rs. 56.3 bn to the banking system, mainly reflecting improved financial performances of CEB and CPC

36

Cost reflective tariff revisions helped CEB to recover, and generate a modest profit… • CEB revised the tariffs w.e.f. 20 April 2013,

which resulted in the overall average tariff increasing by around 20% to mitigate the substantial losses incurred by the institution

• Average Hydro:Thermal ratio (59:41) during the first ten months of 2013 was significantly higher than the corresponding period of last year (22:78)

• As a result, CEB has recorded an operating profit of Rs. 20.3 bn during the first ten months of 2013, in comparison to a loss of Rs. 52.8 bn during the corresponding period of the previous year

The addition of 600 MW by stage 2 and stage 3 of Norochcholai Coal Power Plant to the system by April 2014 will help sustain the performance of CEB while reducing the dependence on a single source of fuel

37

CEB’s lower reliance on petroleum and CPC’s own price revision helped contain the losses of CPC…

However, measures were taken to contain the losses of the CPC via;

• Increase in Domestic Petroleum prices in February 2013

• Revision of the price of furnace oil by Rs. 25/- per liter w.e.f. 1 April 2013 to curb losses on the sale of furnace oil supplied to CEB for thermal power generation

These measures reduced the losses of CPC to Rs. 6.8 bn during the first ten months of 2013, compared to the loss of Rs. 87.0 bn recorded during the corresponding period of 2012

38

CPC incurred losses mainly due to below-cost sales of petroleum products for power generation, high subsidy for kerosene, and overproduced low-end products such as furnace oil and naphtha

Improvements in other SOEs were also welcome…

• Transshipment handling improved significantly

• Colombo South Port, which possesses facilities on par with leading international ports, was declared open on August 2013

• Oluvil Port, which provides convenient and cost effective access to and from the southeastern region, was opened in September 2013

• New Ports of Colombo and Hambantota were declared as free ports

Sri Lanka Ports Authority

• ‘Gami Sariya’ and ‘Sisu Sariya’ services were continued

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

Sri Lanka Transport Board

39

• Passenger transportation increased significantly

• 2 Diesel multiple units, 3 new locomotives and 15 rehabilitated passenger carriages were added to the fleet

• Northern railway line from Omanthai to Kilinochchi was completed in mid-September

• Development of railway stations to provide additional convenience to passengers

• Gradual increase of luxury passenger services to facilitate both tourists and local passengers

Sri Lanka Railways

• Air passengers and volume of cargo increased, reflecting the increase in demand associated with tourism and business activities

• Implementation of plans to purchase thirteen aircrafts to support rapid development in tourism and aviation sectors

SriLankan Airlines

In the meantime, Net Credit to the Government (NCG) was higher than anticipated, although the Central Bank’s NCG declined sharply… • NCG from the banking system increased by Rs. 280.3 bn during Jan-Nov 2013

• However, NCG from the Central Bank declined by Rs. 151.1 bn during the period

40

With these developments, overall monetary expansion was somewhat higher than projected in 2013… • Year-on-year growth of broad money

(M2b) decelerated from the high levels observed in 2012

• Average growth of broad money (M2b) decreased to 16.5% during Jan-Nov 2013 compared to 20.2% in 2012

• Reserve money growth was in line with the projected path during the year while it remained marginally above the projected levels in the second quarter of 2013

41

Month 2011 2012 2013

January 16.7 20.1 18.3

February 17.7 21.9 17.0

March 17.5 22.8 15.6

April 18.4 22.9 15.2

May 19.4 20.9 16.3

June 20.7 20.5 15.8

July 20.7 19.8 16.4

August 20.6 20.2 15.3

September 20.7 18.9 16.3

October 19.8 18.2 18.3

November 20.6 18.1 16.7

December 19.1 17.6 16.0 (proj)

Y-o-Y Growth of M2b (Per cent)

369

1,855

30

26

52

12

252

The Central Bank’s active communication with its stakeholders helped manage market expectations effectively…

42

The Central Bank established a first-of-a-kind Economic History Museum at the newly refurbished Central Point Building…

43

In fulfillment of its Financial System Stability objective, the Central Bank continued to ensure a robust and resilient banking sector…

44

• Focusing on risk based supervision

• Calibrating the business models and processes of banks

• Assisting and harmonising with the emerging needs in the growing economy

Strengthened supervisory

and regulatory framework

Banking Services 2012 2013 (Sept)

Branches 3,359 3,426

Other Outlets 3,031 3,031

ATMs 2,415 2,496

2009 2013

Density Rank Density Rank

Western 18.3 1 20.7 2

Southern 13.2 2 16.1 4

Sabaragamuwa 11.3 6 13.5 8

North Western 10.7 7 12.9 9

Central 11.5 5 14.4 7

Uva 11.6 4 14.5 6

North Central 12.6 3 16.1 4

Eastern 10.2 8 16.7 3

Northern 9.9 9 21.5 1

*Bank Branches per 100,000 population

Despite many challenges faced during 2013, the banking sector expanded in terms of both business volumes and outreach…

45

Within 4 years, the Banking Density ranking of the Northern Province, rose from the lowest to the highest!

Banking Density* by Province

The funding structure of the Sri Lankan Banking Sector started undergoing a positive change…

The funding structure of the Sri Lankan Banking Sector commenced a change process, with the recent orientation for funding towards local debt and equity markets and foreign borrowing

46

The banking sector, on the strength of their Balance Sheets, raised US$ 1,548.3 mn in 2013 (US$ 973 mn in 2012) through foreign borrowings…

47

In the meantime, the banking sector indicators reflected continued resilience…

48

Several key policies were adopted in 2013… • Issued Directions on the implementation of the Supervisory

Review Process for banks, in accordance with the Pillar 2 of the Basel II Capital Accord.

Further strengthened the Internal Capital Adequacy Assessment Processes (ICAAP) and Risk Management Frameworks of banks

• Issued Directions to regulate the exposure of the banking sector to the stock market.

Streamlined the Regulations on the exposure of the banking sector to the stock market

• Issued Guidelines to banks on statutory reporting and adoption of the new Accounting Standards.

Facilitated adoption of new Sri Lanka Accounting Standards (LKASs) and Sri Lanka Financial Reporting Standards (SLFRSs)

• Prescribed formats for the preparation and publication of interim and annual financial statements.

Enhanced the disclosure requirements with a view of greater transparency

• Work is in progress to enter into Memoranda of Understanding (MOU) with several foreign regulatory authorities.

Established stronger communications channels for Home-host relationships and with other regulators

• Maximum levels were prescribed: • Interest rates: 24%

• Penal interest rates: 2% above the applicable rate

Reduced the interest rates on loans and advances in line with the low interest rate regime prevailing in the country, and the low interest rates prevailing in other peer emerging economies

• Exemptions were granted for foreign borrowings of: • LCBs up to US$ 50 mn each during 2013 to 2015

• National Savings Bank, National Development Bank PLC and DFCC

Liberalised foreign borrowings of Licensed Banks

49

During the year, a number of financial risk assessment techniques were also used to assist in micro & macro-prudential policy setting….

50

Test/Indicator What it does Test is based on….

Sensitivity Stress Testing

Gauges resilience to shocks relating to credit risk, market risk, liquidity risk and exchange risk (Quarterly)

Information of individual banks and banking industry, relevant to each risk category

Macro Stress Testing

Assesses resilience of the financial system to extreme but plausible macro-economic shocks (Quarterly)

Selected macro-economic variables and its impact on the asset quality of the banking sector

Banking Soundness Index (BSI)

Assesses the soundness (financial stability) of the banking sector (Quarterly)

Selected financial soundness indicators (capital, asset quality, profitability, liquidity, management soundness, efficiency, sensitivity to market risk)

Financial Market Stability Indicator (FMSI)

Assesses the stability of the financial markets over a period of time for any buildup of risks (Monthly/ Quarterly)

Analysis of 10 variables associated with money and bond market, forex market and equity market

Macro-economic Stability Indicator (MESI)

Assesses macro-economic stability (Quarterly) Analysis of key indicators of the real, external, fiscal and monetary sectors of the domestic economy and global developments

Financial System Stability Indicator (FSSI)

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

Analysis of 3 major indices, BSI, FMSI and MESI

Network Analysis

Analyse the interconnectedness of the banking sector and identify the impact of failure of a systemically important bank on the entire banking system

Inter-bank exposures quantified through Network Analysis

Overall, the non-bank sector assets & funding improved…

• During the past 5 years, the NBFI sector recorded a CAGR of 23%

• Deposits were the major source of funding, representing 47% of the total liabilities

• Capital Funds increased by 14% to Rs. 95 bn • Accommodations accounted for 78% of assets,

while accommodations growth has moderated to 19%

• Asset quality of the sector deteriorated, with NPA ratio increasing from 5.0% in 2012 to 6.1% in 2013, mainly due to the decline in gold prices affecting pawning portfolios

51

Several new policy measures were implemented to strengthen the NBFI sector…

• The scope of the Structural Changes Direction was broadened to be in line with present financial sector developments

• Regulations were issued regarding the writing off of accommodations on related parties

• Regulatory framework on debt instruments was issued covering: – Debt Instruments Direction

– Interest Rates Direction

– Liquidity Direction

• Guideline on adoption of Sri Lanka Accounting Standards (LKAS) 32, 39 and Sri Lanka Financial Reporting Standards (SLFRS) 7, was issued

• Amendments to the Corporate Governance Direction were issued

52

The monitoring and campaigning against prohibited schemes continued…

• Published many press notices and used other media to inform the public to deposit money in banks and non-bank financial institutions that are supervised by the Central bank

• Carried out many Awareness Programmes to regularly highlight the negative implications of participating, promoting, and engaging in prohibited schemes throughout the country

53

Regional development improved & inclusive growth was experienced due to Central Bank efforts… • In 2013, RDD operated 14

loan schemes and several awareness programmes

All sectors

2013

No. of Beneficiaries

Loan Amount Rs. mn

Agriculture 96,685 8,232

SME 25,314 5,284

Micro Finance 42,572 2,534

Housing 2,028 211

Total 166,599 16,261

No. of Mass Media Programmes conducted by RDD in 2013

Radio programmes 16

Newspaper advertisements / articles 100

TV programmes 2

No. of Programmes conducted by RDD in 2013

Financial literacy 63

Entrepreneurship development 37

54

Improving financial inclusion & capacity building were actively pursued… Programmes

Conducted by Provincial Offices

No. of Programmes

No. of Participants

Financial Literacy 69 5,674

Workshops for MSMEs 13 1,067

Best Practices in Agri-Business

37 1,692

Skills Development 78 3,285

CBSL Credit Schemes 64 3,853

Credit Camps 26 1,647

Other Awareness Programmes

249 23,682

Total 536 40,900

• A survey to measure financial inclusiveness was conducted covering 18 districts

• The Central Bank continued to undertake special programmes

• Programmes conducted by the Central Bank Provincial Offices covered

– security features of currency notes – risk associated with investing in

unauthorised finance institutions and prohibited schemes

– benefits of investing in government securities

– seminars for school children and teachers

– exchange control regulations – training for bankers

55

The FIU expanded its awareness campaigns further… • Four programmes for reporting sectors; Insurance

Companies and Stock Brokering Firms

• A special training programme for High Court Judges on Money Laundering and Terrorist Financing focusing more on financial crimes

• Eleven training programmes for the officials of Licensed Banks

• Nineteen awareness programmes for officials of financial institutions, government institutions and Sri Lanka Police in Colombo, Jaffna and Anuradhapura Districts

56

Several steps were also taken to improve Financial Intelligence… • Issued Know-Your-Customer and Customer Due Diligence Rules to

all authorised money changers

• Amended the Convention on the Suppression of Terrorist Financing Act, No. 25 of 2005

• Took necessary action to ensure the level of compliance to the recommendations and best practices of Financial Action Task Force (FATF), the international policy setter on Anti Money Laundering and Countering Financing of Terrorism

• Bringing the total number of MOUs to 24, signed four MOUs with;

– Japan Financial Intelligence Centre (JAFIC) – Lebanon Special Investigations Commission (SIC) – Costa Rica FIU – Denmark FIU

57

The Payment & Settlement Systems were expanded & strengthened… • Facilitated the establishment of the Common ATM switch in July 2013 to

utilise the ATM network in the country more efficiently and effectively to reduce transaction costs in the financial system

• Issued Payment Cards and Mobile Payment Systems Regulations No. 1 of 2013 replacing the Service Providers of Payment Cards Regulations No. 1 of 2009 to strengthen the regulatory framework

• Introduced Line-encryption technology for POS terminals to ensure secured environment for payment card operations

• Issued licences to 3 new service providers to engage in debit card business

• Issued a licence to a mobile telecommunication network operator to operate an e-money scheme

• Approved the proposal made by a licensed telecommunication network operator to issue stored value cards with near field communication technology for passenger transport sector

58

A Clean Note Policy was initiated and many steps were taken to upgrade the quality of the currency notes in circulation… • Improved currency notes sorting

standards of Banks by issuing guidelines on sorting parameters

• Educated the public regarding proper currency handling practices through public awareness campaigns

• Collected unfit notes from bus stations, railway stations, temples and from the public at exhibitions, CBSL counters, etc.

• Conducted unfit currency note exchange programmes with hotels, public transport sector, economic centres, money changers, etc.

59

Value and Number of Currency Notes and Coins in Circulation (as at end 2013)

Value (Rs.) Number of Pieces

Notes 332.4 bn 825.5 mn

Coins 7.4 bn 4,354.6 mn

• Engaged new suppliers for minting and supplying of coins for circulation (2013 – 2015)

• Improved the currency processing system by installing new automated currency processing machines to increase efficiency in processing

• Reduced coin issue cost substantially by conducting island wide coin collection programmes and by reissuing idle coins into circulation

• Increased public awareness to preserve the public confidence in currency and to minimise the incidence of counterfeit notes

At the same time, improvements to currency management continued…

• Issued the third commemorative currency note in Sri Lanka to mark the CHOGM 2013

60

The steps taken by the SEC & CSE to improve stock market activity were commendable… • The ASPI and S&P SL 20 Index

increased by 4.8% and 5.8%, respectively, during the year, compared to end 2012

• Market capitalisation increased to Rs. 2.5 tn at end 2013 from Rs. 2.2 tn at end 2012

• There was 1 IPO through which Rs. 494.4 mn raised and 09 rights issues through which Rs. 25.5 bn was mobilised in 2013

• The net cumulative foreign inflows to the stock market amounted to US$ 264 mn

61

The corporate debt market also showed signs of finally taking off… • Funds raised through

debentures (IPOs) amounted to Rs. 68.3 bn during the year, compared to Rs. 12.5 bn in 2012

• In addition to the financial sector, several non-financial institutions also raised funds through debentures in 2013

62

Funds Raised Through Listed Debentures (2012-2013)

Rs. bn

2012 2013

Banks 12.5 35.4

LCBs 12.5 33.4

LSBs - 2.0

LFCs - 21.9

Non Financial Institutions - 11.0

Total 12.5 68.3

Source: Colombo Stock Exchange

The total value of the EPF during the first 9 months of 2013 grew by 12.4%, mainly due to improved members’ contributions and healthy investment income…

Item Jan-Sep

2012 Jan-Sep 2013*

Change (%)

Total number of member accounts (mn)

14.6** 14.7 0.68

Contributing member accounts (mn)

2.3** 2.4 4.3

Total contributions (Rs. mn)

52,025 57,596 10.7

Total refunds (Rs. mn)

36,481 36,949 1.3

Number of refunds

87,304 83,046 (4.9)

Total liability to members (Rs. bn)

997.0 1,139.8 14.3

Total value of the Fund (Rs. bn)

1,112.9 1,250.7 12.4

Selected Key Information of the Fund

* Provisional ** As at 31.12.2012 * Annualised growth

63

The total income of the Fund grew by 11.9% during the first 9 months of 2013…

Type

2012 2013*

Value (Rs. bn)

Share % Value

(Rs.bn) Share %

Govt. Securities 1,035 90.5 1, 137 90.9

Equities 59 5.1 67 5.4

Corporate

Debentures and

Other

8 0.7 10 0.8

Reverse Repo 3 0.3 3 0.2

Fixed Assets

and Net Current

Assets

39 3.4 34 2.7

Total 1,144 100.0 1,251 100.0

Composition of Assets

*As at 30/09/2013 (Provisional)

Investment Income 2012 Jan -

Sep (Rs.mn)

2013 Jan -Sep*

(Rs.mn)

Change (%)

Gross Interest 66,785 76,930

Amortization

Gain/(Loss) 14,702 13,207

Interest and

Amortization 81,487 90,137

Dividends 1,467 2,467

Others 560 885

Total 83,514 93,489 11.9%

Summary of Gross Investment Income

*(Provisional)

64

Net Profit of the Fund

2011 2012 2013 (Est)

Profit (Rs. mn)

As a % of Net worth

of the Fund

Profit (Rs. mn)

As a % of Net worth

of the Fund

Profit (Rs. mn)

As a % of Net worth

of the Fund

107,202 10.53 111,829 9.77 128,847 9.85

The EPF’s rates of returns were consistently higher than inflation & rates of other competitors… • EPF provided a positive real rate of return to members in the

past few years

65

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

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

6.4% of GDP in 2012

66

Recurrent expenditure has been rationalised, & although revenues reduced, public investment has been maintained at around 6% of GDP… • Total expenditure and net lending during 2013 is estimated to decline to 19.7%

of GDP from 20.5% of GDP during 2012

• Average public investment from 2006 to 2013 (8 years): 6.2% of GDP

67

* Final appropriation to be done in March 2014

The Central Bank also made substantial profit transfers to the Government, which assisted the Government to maintain its Fiscal deficit targets…

68

• From 1977 to 2005, over a period of 29 Years, the Central Bank made profit transfers amounting to Rs. 61.0 bn to the Government.

• However, since 2006, over the past 8 years, the Central Bank has been able to make profit transfers of Rs. 138.4 bn to the Government.

The prudent management of the public debt helped to lengthen the average time to maturity of the debt stock…

• For the first time, ATM of the domestic debt was lengthened to around 5 years:

- Conversion of short term debt into low cost long term debt

- Issue of 30-year T-bond for the first time in history

69

Rs. 6.8 trillion worth Public Debt is under the Central Bank’s management

Debt servicing costs also declined sharply… • Interest cost, as a percentage

of GDP, improved to 4.2% at the end of 2013 from 5.4% in 2012 driven by strategic debt management initiatives:

- Efficient use of foreign investments

- Resources through SLDBs

- Stand by arrangements from the Middle Eastern banks

• The net saving to the GOSL as interest cost is estimated to be around Rs. 80 bn during the next 30 years

70

• These improvements were recorded at a time when many other countries experienced higher Debt to GDP ratios in 2013

The Debt to GDP ratio improved continuously… 71

Debt to GDP ratio is estimated to improve to around 78% in 2013 compared to 79.1% in 2012

Source: IMF, WEO Database - Oct 2013

Many improvements took place in the Government Securities market… • Efficiency of the primary auction system was improved

– A Half-yearly Treasury bond calendar is now in place

– Competition at primary auctions increased through increasing the participation

• Initiatives were taken to broaden and deepen the Secondary market, while improving transparency – Commenced developing an E-trading platform

– Commenced work on a guaranteed central clearing arrangement on net-settlement basis for G-securities, listed debt instruments and shares

– Commenced preparing of necessary standard documentation for market repo and short selling

– Established access to the Middle East markets

– Covered short selling introduced

72

In the meantime, the Government continued with the mega-scale infrastructure development plan, which has improved the country’s productive capacity significantly…

73

Road development projects The Southern Expressway Project - 126 km

• Phase 1 - Completed • Phase 2 - Completion by early 2014

Northern Railway Project - 146 km • Railway line from Omanthai to Kilinochchi (63 km) was

completed in September 2013

The Colombo-Katunayake Expressway - 26 km • Completed in October 2013

The Colombo Outer Circular Highway Project - 29 km • Phase 1 - Completion by early 2014

Northern Expressway • Feasibility study in progress

Kandy-Badulla Alternate Highway Project-34 km • Feasibility study done

Power projects 900 MW Norochcholai Coal Power Plant

• Phase 1: (300 MW) – Commissioned • Phase 2: Unit 1 (300 MW) – Completion by early 2014

Unit 2 (300 MW) – Completion by April 2014

120 MW Uma Oya Hydro Power Project • Completion 2015

500 MW Sampur Coal Power Project • Completion 2018

20 MW Moragahakanda and Kaluganga Reservoir Project • In Progress

Port development projects The South Colombo Harbour Project

• Commissioned in August 2013

The Hambantota Port Development Project • Phase 1 - Completed • Phase 2 - Completion 2015

The Oluvil Port Development Project • Opened in September 2013

The Kankasanthurai Port Development Project • In Progress

Airport development projects Second International Airport at Mattala

• Opened in March 2013

BIA Expansion Project • To be completed by February 2017

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

• In Progress

Ongoing rural infrastructure development projects Gama Neguma, Maga Neguma, Small Irrigation projects and Kirigammana projects

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

74

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

75

Overall, the sovereign credit ratings were maintained, but it was believed that a country rating upgrade was warranted… Sovereign Downgrades during

2012/2013 Fitch Ratings

Spain A to BBB Cyprus BBB to BB- Belgium AA+ to AA Greece CCC to C Slovenia A Negative to BBB+ negative Egypt B+ to B- negative Japan AA+ to A+ stable

Standard & Poor’s France AAA to AA+ Negative Spain AA- to BB- Portugal BBB- to BB Negative Slovenia AA- to A South Africa A- to BBB negative Italy BBB+ to BB negative Cyprus B to C stable Egypt B to CCC+ stable Argentina B- to B- negative European Union AAA to AA+

Moody’s South Africa A3 to Baa1 France Aaa (Negative) to Aa1 Spain A3 to Baa3 Cyprus Ba1 to B3 Greece Ca to C Pakistan B3 to Caa1 Italy Baa2 to Baa2 (Negative) Egypt B3 to Caa1 (Negative)

76

• Fitch and S&P credit ratings remained unchanged

• Moody’s revised the rating outlook from “Positive” to “Stable” in July 2013 citing inadequate development in the external sector and a slowdown in fiscal consolidation

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

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

• Sri Lanka was ranked 85th in 2014,

• The World Bank acknowledged Sri Lanka’s recent reforms in:

– Dealing with construction permits

– Paying taxes – Getting electricity – Trading across borders

• Sri Lanka’s DB ranking improved in absolute terms

77

Perceptions of business confidence as per LMD-Nielsen BCI showed signs of improvement…

78

Sri Lanka successfully hosted the CHOGM 2013, and many other events, which helped to showcase Sri Lanka & build its new brand… • Several events associated with CHOGM were

also organised:

– People’s Forum in Hikkaduwa

– Youth Forum in Hambantota

– Business Forum in Colombo

• International conference on building resilience

• Serendib International Cup (Rugby)

• Arugam Bay Surf Classic

• FIBA Asia Under 16 Women’s Championships

• Colombo Night Races

• Carlton Super Sevens International Rugby Tournament

• Sri Lanka Challenge – The tuk tuk adventure

79

The Central Bank continued its close coordination with International Organisations… • In February 2013, the Governor led a delegation of

senior bankers to the Sultanate of Oman and Abu Dhabi to strengthen the investment relationship with the region

• In April and July 2013, the Governor led two delegations to the US to engage with key politicians, investors, opinion leaders and influential media

• In September 2013, the Governor led a delegation of banking sector top executives to engage with representatives from the People’s Bank of China and other banks operating in China

80

Many international observers commented positively on Sri Lanka’s developments…

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

- Tony Abbott, Prime Minister of Australia

“Sri Lanka has an excellent record on bringing children aged 5–14 years into school, following seven decades of universal free primary and secondary education."

- Reza Hossaini, Sri Lanka Country Representative, UNICEF

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

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

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

- Dr Firdosi Mehta, Sri Lanka Country Representative, WHO

81

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

- Naoyuki Shinohara, Deputy Managing Director of IMF

Unit 2000 2005 2013 (Est/Proj) Remarks Real GDP Growth (Avg. for 5 years ending)

% 5.0 4.0 6.7 Substantially higher growth

trajectory

GDP US$ mn 16,596 24,406 67,374 176% increase in 8 years!

Unemployment % 7.6 7.2 4.5(1H) Steady progress

Inflation (Annual Average) % 6.2 11.0 6.9 Almost 5 years at single digit levels

Current Account Deficit % of GDP 6.4 2.7 3.9 Satisfactory progress being made

Tourist Arrivals ‘000 400 549 1,170 Remarkable increase after the

conflict

Remittances US$ mn 1,160 1,968 6,650 Steady y-o-y growth, & 237%

increase in 8 years

FDI Inflows US$ mn 175 272 1,459 Steady growth

Gross Official Reserves US$ mn 911 2,735 7,128 Consistent improvement and

steady progress Months of Imports 1.5 3.7 4.5

Exchange Rate (End Period) Rs./US$ 80.06 102.12 130.75 Stable levels maintained

Budget Deficit % of GDP 9.5 7.0 5.8 Important progress towards fiscal

consolidation

Public Debt % of GDP 96.9 90.6 78.0 Moving steadily towards greater

sustainability

Broad Money Growth (M2b) % 12.9 19.1 16.0 Close to projected levels

Private Sector Credit Growth % 11.8 21.5 8.0 Adequate and sustainable

Stock Market Capitalisation Rs. bn 88.8 584.0 2,459.9 Reflects peace dividend and

corporate sector vibrancy

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

82

and… Per Capita

income has been on track with the

ambitious targets…

83

Now, let us focus on the Road Map 2014, covering the Monetary and External Sector Policies, as well as Financial Sector Policies for 2014 and beyond…

84

The conduct of monetary policy will be fashioned towards realising a sound medium term macroeconomic framework…

The following potential risks could pose challenges to the above projections: • Uncertain weather conditions • Geopolitical tensions • Unwinding of accommodative monetary policies in advanced economies • Slower growth in global demand

85

Indicator Unit 2013 (Est) Projections

2014 2015 2016

Real Sector and Inflation

Real GDP Growth % 7.2 7.8 8.2 8.5

Total Investment % of GDP 31.0 32.0 32.5 33.0

GDP Deflator % 7.0 6.0 5.5 5.0

Headline Inflation % 4.7 5.0 4.5 4.0

External Sector

Trade Balance % of GDP -12.8 -11.6 -10.2 -8.4

Current Account Balance % of GDP -3.9 -2.4 -1.0 0.1

Overall Balance US$ mn 700 1,500 1,750 3,700

Fiscal Sector

Current Account Balance % of GDP -0.5 1.1 1.6 2.3

Overall Balance % of GDP -5.8 -5.2 -4.4 -3.8

Government Debt % of GDP 78.0 74.3 70.6 65.0

Monetary Sector

Broad Money Growth (M2b) % 16.0 14.0 14.0 14.0

Private Sector Credit Growth (in M2b) % 8.0 16.0 17.0 17.0

A sustained real economic growth of over 8% is targeted in the medium term…

86

Diversification needed for sustained growth will continue to be based on the 5+1 Hub concept…

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

87

The Maritime hub will focus on unlocking value of Sri Lanka’s ocean resources… • Significant investments in the sector

have created a unique opportunity for Sri Lanka to become a complete logistics provider from a mere cargo handler

• Accordingly, the second wave of maritime development is expected to be centred on developing related services such as

– vessel trading

– financial services

– legal services, and

– crew training

Proposals in the Budget to develop the maritime sector…

• Increased duties on boat imports to develop the local boat building industry

• Reduced taxes on profits of shipping lines, freight forwarders and logistics industry services to incentivise training of local professionals in the industry

Private sector has responded to emerging opportunities in the maritime sector

88

Speedy headway will be made towards realising an Aviation hub…

89

• Sri Lanka ranks 4th in the Asia Pacific region as per the periodic safety audit of the International Civil Aviation Organisation

Aviation Achievements in 2013

Potential as an Aviation hub enhanced by being centrally positioned in the strongest and fastest growing route of regional travel flows

Development of Flying schools and Aerospace Engineering schools

BIA and MRIA expansion will be completed in 2017 and will have the capacity to handle over 20 million passengers

Investment opportunities in the proximity of MRIA as it is a free port

Ratmalana to be developed as a city airport and to accommodate international traffic of private jets

Proposed expansion of SriLankan Airlines will lead to further growth in the aviation sector

• Creating a reputed Aircraft Maintenance, Repair and Overhaul (MRO) facility for the South Asian region

• SriLankan Airlines commissioned its new A320 Hangar in 2013

• New fleet equipped with fuel saving technology, which will increase efficiency and improve profitability

Private sector investments will lead the next wave of investment in aviation

Clean and Light Aviation related manufacturing

Steady pipeline of investments will assure energy security & strengthen the emerging Energy hub…

First commercial production of Sri Lanka’s gas fields is expected to commence in 2016

Sri Lanka is building capacities to provide oil trade-related ancillary services

The existing capacity at Sapugaskanda Crude Oil Refinery will be increased

• Construction to commence Before October 2014

• Construction of coal unloading port to be completed

Before mid 2018

• Power Plant to be commissioned

Before end 2018

Schedule of the Sampur Coal Power project of 500 MW

90

• 600 MW from Norochcholai Coal Power Plant to be added to the national grid Mid 2014

• 120 MW Uma Oya Hydro Power Plant to be added to the national grid Before end 2015

The addition of new power plants will help increase total installed capacity of the country by around 36% to 4,575 MW by end 2018

Other Key Electricity Generation Projects

Infrastructure to transport oil from ships to Muthurajawela will be improved

3.1 US$ bn

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

91

• With the improvements in commercial activity, infrastructure, and health and education facilities, the number of tourists on extended stay is expected to increase

• This trend is likely to continue resulting in a substantial increase in tourist earnings in the period ahead

• 268 projects were in the pipeline by end June 2013, of these, final approval was granted for 136 projects

• The industry needs to add around 22,500 rooms to the current capacity by 2016 to meet the projected tourist arrivals

20

13 (E

st)

20

12

1.0 US$ bn

20

16 (P

roj)

1,005,605 arrivals

1.4 US$ bn 1,170,000 arrivals

2,500,000 arrivals

Development of skills for emerging sectors will bolster the Knowledge hub… • High levels of literacy rates, enrollment ratios and gender equality will

pave the way for a dynamic education sector

• In addition to education that is provided free up to University

level, a strong drive to uplift the quality standards of domestic

educational institutions will be implemented

• Programme to reduce resource disparities between rural and

urban schools through the transformation of 1,000 secondary

schools and 5,000 primary schools

• Special focus on IT education with provision of ‘Mahindodaya Technical

Laboratories’ in 1,000 secondary schools and the introduction of the

“Technology” stream at the GCE Advanced Level examinations

• High allocations from Budget to carry out “Medium term Development

Programme” which encompasses the establishment of new faculties,

capacity expansion of existing faculties and advanced degrees

• Private sector investment to play an important role in the

education sector

• Transforming the existing universities into new world class universities

will turn the country into a net exporter of education services

92

The activities relating to all these hubs will spearhead the transformation of the country into a Commercial and Business hub…

• That will probably encourage the relocation of many regional operating headquarters and regional offices of international establishments

93

The declaration of Hambantota and Colombo South ports as free ports is also expected to attract significant private sector investments

Infrastructure & Public Utilities development, together with skills enhancement will also facilitate the Commercial Hub… • Fast tracked expressway and road development projects

have reduced transportation costs and enhanced access to markets through improvements in urban-rural linkages

• Healthy pace of growth in the telecommunications sector has resulted in high mobile penetration, rapidly growing internet penetration and increased potential in mobile related and e-commerce activities

• Public utilities are being developed to cater to the emerging world class city of Colombo

• Productive and skilled labour force with large pools of professionals as a result of government’s commitment to free education and health will create a knowledge-driven economy

94

The Health sector will also evolve to produce world class healthcare, while supporting a healthier nation… • Availability of healthcare services is widespread with 593 government

hospitals and 197 private hospitals

• Reduced prevalence of communicable and infectious diseases is evidence of the success of Sri Lanka’s health sector

• The country has potential to emerge as a Medical hub in the future due to: - Its strategic and convenient location, which can serve the Middle East, East Africa and

the Far East

- Growing number of internationally qualified medical specialists in the country

- The country’s focus on upliftment and modernisation of health sector through the Budget 2014

o Increased intake and expansion of subject areas available at the Postgraduate level to encourage high calibre research and advanced medical studies

o Increased availability of specialised medical services through the setting up of a Centre of Medical Excellence

o Increased number of medical specialists

95

Potential foreign exchange earnings through health service exports could be substantial

• Established industries such as the apparel sector have already commenced backward integration

• Free port areas will help attract more sophisticated industries to the country

It is also encouraging that since of late, some signs of diversification is seen in industrial activity, reflecting the dawn of the “Drive to Maturity”*…

Motor Vehicle Assembly • Assembling of a full range of vehicles, from compact cars

and vans to luxury SUVs and commercial vehicles Boat Building • 20 to 25 active boat yards around the country produces

various types of boats for local and international markets Computer Assembling Plants • A PC assembly plant in Hambantota was officially declared

open in November 2013 Mobile Phone Manufacturing • Assembling smartphones for the first time in history under

a pilot project in November 2013

* W.W.Rostow, Stages of Economic Growth

96

• Focused efforts to enhance Productivity

of labour as well as capital will be a

vital and integral part of the overall

macroeconomic policy framework

• New employment opportunities would

result in labour migrating from the

agriculture/informal sectors to

emerging sectors, resulting in increased

labour productivity in all sectors

• Increasing productivity of capital could

lower the Investment/GDP ratio

required to achieve high economic

growth

97

Achieving a US$ 100 bn economy would demand a significant improvement in the productivity levels of the current workforce

Source: APO productivity Database 2013

The direct & indirect effect of these activities on growth, employment & earnings will be significant…

In that background, merchandise exports are also expected to increase, strengthening the trade balance…

98

Projections for Merchandise Trade US$ mn

2012 2013E 2014P 2015P 2016P

Exports 9,774 10,452 12,050 14,100 16,920

Imports 19,183 19,046 21,020 23,180 25,498

Trade Balance -9,409 -8,594 -8,970 -9,080 -8,578

% of GDP -15.8 -12.8 -11.6 -10.2 -8.4

Structural Measures taken to Promote Exports

• Promote value addition of raw exports (eg: tea, rubber, cinnamon)

• Improving backward linkages

• Declaring ports in Colombo and Hambantota as free ports, thereby encouraging entrepot trade

• Placing on zero duty or making duty free selected raw materials and machinery used for production of goods for export

• Providing tax concessions for exporters and related R&D

• Passing Finance Act No. 12 of 2012 towards transforming Sri Lanka into a commercial hub

• Negotiating bilateral agreements with potential trading partners

• Establishing Preferential Trade Arrangements (PTAs)

Trade deficit as a % of GDP is expected to improve to 12.8% in 2013 and to 11.6% in 2014

1,513 US$ mn

661 US$ mn

At the same time, as a result of many other real sector developments, trade in Services is also expected to accelerate sharply… Computer and Information Services (Excluding KPO Services)

20

13 (E

st)

20

12

436 US$ mn

20

16 (P

roj)

471 US$ mn

Transportation Services – Freight and Other Port Related Services

20

13 (E

st)

20

12

20

16 (P

roj)

254 US$ mn

418 US$ mn

99

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

9.0 US$ bn

Workers’ remittances are also expected to continue to cushion the external sector while providing a useful source of employment…

• Inflows from remittances are expected to exceed US$ 10 bn by 2017

• Structural changes in the economy are expected to moderate the growth of inflows from remittances in the future – The growth of the services related economy (BPO/KPO/Tourism/Port) would lead

a decreased demand for overseas employment

– Creation of further new employment opportunities in the country

– Reduction in lower skilled migration such as housemaids, although earnings and remittances per worker would be higher due to skilled worker migration

20

12

20

16 (P

roj)

6.0 US$ bn

[10.1% of GDP] [8.9% of GDP]

20

13 (E

st)

6.6 US$ bn

[9.9% of GDP]

100

As a consequence, the Current Account balance is expected to improve faster than anticipated in the past…

• Increased inflows from workers’ remittances, tourism and service exports will mitigate the impact of the trade deficit

101

2011 2012 2013E 2014P 2015P 2016P

US$ mn -4,615 -3,915 -2,650 -1,872 -858 74

% of GDP -7.8 -6.6 -3.9 -2.4 -1.0 0.1

Projections for the Current Account

External financing will continue to bridge the savings-investment gap, although the gap will contract gradually over the medium term… • Domestic savings will be encouraged

through positive real returns at benign levels even in the low interest rate environment envisaged

• Debt and Equity markets will continue to be incentivised as outlined in the Budgets 2013 and 2014, while private sector will be further encouraged to raise funds overseas

102

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

The realisation of expected capital flows, along with the improving current account, will result in continuous favourable outcomes in the BOP…

• Accordingly, a BOP surplus of around US$ 3.7 bn is expected by 2016

103

Reflecting these projections, the Sri Lankan Rupee is expected to strengthen, & Foreign Reserves to increase in the medium term… • The Central Bank will continuously

assess the developments in the domestic as well as international foreign exchange markets to identify risks to the stability of the rupee

• Central Bank direct intervention will be at minimal levels, and only in the event there are signs of excessive fluctuations will the Bank absorb or supply foreign exchange, as and when required

104

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

The management of official foreign reserves will be based on multiple strategies…

• The objectives of international reserve management will be three fold:

– to maintain a comfortable level of reserves

– to obtain an attractive return, and

– to maintain a less volatile exchange rate

• Strategies will include the following:

– Further diversify into new markets and new instruments

– Strengthen regional cooperation and minimise “round tripping” of foreign resources

105

Asia creates the resources, invests in Western countries, and often borrows same funds at a higher rate from Western investors!

106 In this context, the Central Bank will engage with other Central Banks in Asia to gradually reduce the impact of “round tripping”…

Benefits of avoiding high levels of round-tripping • Improve reserve and liquidity

levels • Attract higher returns • Mitigate risks through

diversification • Access wider range of markets • Strengthen relationships and

help capacity building

When Asia invests in the West, it is termed

“Investment by Asia”.

When the West invests in Asia, it is termed

“Borrowings by Asia”!

In the fiscal sector, the major reforms implemented in the recent past are expected to enhance revenue mobilisation… • Revenue in 2013 is expected to be 13.6% of GDP, down from 13.9% of GDP in

2012. However, Government revenue reflected a turnaround of its declining trend in the second half of 2013

• In the medium term, revenue is expected to reach 15 to 16% of GDP with the expected improvements in the tax base & tax administration, and greater tax compliance

Further efforts to enhance tax revenue were highlighted in the Budget 2014: • Broadening the tax base • Minimising opportunities for

manipulations • Improving efficiency and

simplicity • Rationalising tax rates

107

The planned fiscal consolidation for the medium term is very welcome…

• Total expenditure and net lending during 2013 is estimated to decline to 19.7% of GDP from 20.5% of GDP during 2012

• Continuous efforts have been made to rationalise recurrent expenditure: Salaries and wages, interest payments, and transfers and subsidies are in a declining trend, as a % of GDP

108

As % of GDP 2009 2010 2011 2012 2013E 2014P

Salaries and wages 5.6 5.4 4.9 4.6 4.5 4.1

Interest payments 6.4 6.3 5.5 5.4 5.1 4.4

Current transfers and

subsidies 3.9 3.5 3.3 3.1 2.9 2.9

The current account is expected to record a surplus in 2014, after 26 years, reflecting the rebound in revenue and the rationalisation of recurrent expenditure

It is encouraging that the fiscal consolidation is to be achieved while public investment levels are to be maintained at satisfactory levels… • Public investment is to be maintained at

over 6% of GDP in the medium term

• The surplus in the revenue account will be used to finance part of the public investment programme, thereby reducing the borrowing requirement

• Emphasis is to be given to strategic mega infrastructure development projects, infrastructure in lagging regions, education and health

109

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

In this scenario, the budget deficit is expected to narrow substantially… • In 2014, budget deficit is expected to decline further to 5.2% of GDP

from 5.8% in 2013

• By 2016, the fiscal deficit will be reduced to below 4% of GDP

110

Resultant lower budgetary financing requirement will ease the need to rely on bank borrowing, thereby allowing the Central Bank to maintain monetary expansion at desired levels, reducing crowding out of private investment, and reducing demand pressures on inflation

In the meantime, the planned improvements in key SOEs will ease the Government’s contingent liabilities… Ceylon Electricity Board (CEB)

• A long term generation expansion plan for

the period of 2013-2032 has been submitted

to the Public Utilities Commission focusing

on:

- Least cost generation using low cost

sources efficiently

- Providing reliable and quality electricity

while expanding capacity

Ceylon Petroleum Corporation (CPC) • Government guarantee provided to the CPC to enable the raising of long term capital

to restore its depleted pipeline network in budget 2014

• Implementing a price revision policy with regular price revisions in line with

international prices would benefit both the CPC and energy users

111

Given these expectations in different sectors, the Central Bank is confident that inflation could be contained at around 5% or below, in the medium term…

• In 2014, the tolerable range of inflation during the year would be 4-6%

• Thereafter, until 2016, 3-5% would be the tolerable range of inflation

112

The conduct of monetary policy will continue to be based on monetary targeting with greater focus on managing inflation expectations...

Dec-12

Dec-13

(Est) Dec-14 (Proj)

Broad Money

y-o-y % change 17.6 16.0 14.0

Reserve Money

y-o-y % change 10.2 0.9* 14.0

Credit to the Private Sector

y-o-y % change 17.6 8.0 16.0

Rules of Thumb for Monetary Easing

• Inflation and inflation expectations ease

• Economic growth remains below potential

• Aggregate demand is low

• Monetary and credit expansion take place at lower rates than projected

* Actual. The sharp decline is due to the reduction in SRR effective 1st July 2013.

Monetary Projections Rules of Thumb for Monetary Tightening

• Demand driven inflation and adverse inflation expectations build up

• Signs of economic overheating occur

• Aggregate demand expands at a high rate

• Excessive monetary and credit expansion take place

113

In the meantime, the Government has already announced the increase of the capital of the Central Bank to Rs. 50 billion, to reflect its strength & stability… • Capital funds of the Central

Bank have been substantially increased since 2008

114

• Considering the Central Bank’s responsibilities and recent trends in the economy, the Budget 2014 proposed to increase the capital of the Central Bank further to Rs. 50 bn, by capitalising its reserves

* Proposed

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

The Strength of the Central Bank Balance Sheet will enable the Central Bank to introduce an uncollateralised Standing Deposit Facility in conducting OMO…

115

With immediate effect, the current Policy Rate Corridor will be renamed as the Standing Rate Corridor (SRC)

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

• The current Standing Repurchase Facility will be renamed as the Standing Deposit Facility (SDF), and provide the floor rate for the placement of excess funds of the banking system

• The current Standing Reverse Repurchase Facility will be renamed as the Standing Lending Facility (SLF), and provide the ceiling rate for the lending of funds to the banking system

• OMO auctions will continue unchanged, with Repo or Reverse Repo auctions, depending on liquidity conditions

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

116

Accordingly, effective 2nd January 2014, the new key policy interest rates of the Central Bank, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) will be 6.50% and 8.00%, respectively

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

• The compression of the Standing Rate Corridor is expected to narrow the interest spread of banks further

• Lending rates are expected to decline substantially, but with lower spreads and low inflation, savers will still earn a reasonable real interest rate

• Spread between short term lending and deposit rates are expected to reduce to 2.5% by end 2015

• A narrower spread is expected with regard to long term rates

117

Source: World Development Indicators, 2012

With the improvement in the trade balance, the margin deposit requirement against LCs for the importation of vehicles will also be removed with immediate effect…

• With currencies of several trading partner economies depreciating sharply against the Sri Lankan rupee in mid-2013, the Central Bank imposed a minimum cash margin requirement of 100% against Letters of Credit opened with commercial banks for the import of some categories of motor vehicles

118

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

Even in the future, policy trade-offs will be given due attention to maintain a balanced approach to decision making

119 It is a matter of satisfaction that the past 4 years have been among the only 5 years of HIGH GROWTH + LOW INFLATION years in the post-1977 period…

It is also another matter of satisfaction that the decades old “vicious cycle” has now been replaced with the present day “virtuous cycle”…

Sri Lanka was trapped in a “vicious” cycle for more than 5 decades

120

Sri Lanka is currently experiencing a “virtuous” cycle

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

121

The Central Bank’s communication policy & delivering on projections will continue to play a key role in managing expectations…

• Regular press releases based on an advance release calendar

• Press releases on important economic events

• Regular statistical releases, & statutory and other publications

• Special Presentations by senior management of the Central Bank

• Continued dialogue with the domestic financial sector and international investors

• Creating awareness among media personnel & financial sector employees

• Continued use of Social media

• The Governor will be on with immediate effect

122

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

With advanced technology and improved information flows, and considering the importance of market expectations for the success of macroeconomic policies, the Central Bank will continue to provide information to all stakeholders in an effective manner

Going forward, the Central Bank will also ensure that its future macroeconomic policies will be fashioned so that the country will avoid the possible “Middle Income Trap”…

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

123

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

* Estimate for 2013

Meanwhile, Sri Lanka will also graduate to the IMF’s SDDS data reporting category of countries in 2014…

124

• By graduating to Special Data Dissemination Standard (SDDS) from the current General Data Dissemination System (GDDS) status, Sri Lanka will firmly commit to further improving data coverage, periodicity and timeliness of data categories of all sectors of the economy

• SDDS has helped countries to: – Improve Sovereign ratings

– Lower Sovereign borrowing costs

– Lower corporate borrowing costs, and

– Improve functioning of domestic financial markets

Graduating to SDDS will enable analysts to understand Sri Lanka’s economic progress more closely

To sustain the positive outlook of the economy, & to ensure Financial System Stability, the banking sector will need a new vision in the run-up to 2016, where…

• At least 5 Sri Lankan banks will have assets of Rs. 1 trillion or more, with such banks also having a strong regional presence

• There will be a reduced number of banks as a result of mergers and consolidations

• There will be a large Development Bank that will provide a substantial impetus to development banking activities in the country

• Banks will rely on new and effective IT applications

• Banks will have substantially lower interest margins through increased efficiency and prudent assets and liabilities management

• Foreign banks in Sri Lanka will demonstrate a greater participation in economic activities, and will be making significant contributions to the economy

125

Accordingly, over the next few years, the financial sector will be encouraged to move towards this new vision…

126

• The Central Bank’s policies will be forward looking and designed to balance potential worldwide policies and adjust to sudden volatilities

• Adequate capital and other buffers will be put in place to prepare the Sri Lankan financial sector to withstand business cycles, without sacrificing investment potential during periods of global economic downturn

• Greater cohesion and overall sectoral integration would provide a stronger thrust to propel the financial sector towards a more sustainable growth model

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

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

127

• Consolidation in the banking and the NBFI sectors will have to be encouraged, using the attractive tax concessions provided by the Government

• The regulatory framework will have to be re-designed to monitor the emerging business models of banks and NBFIs

• The regulatory regime will have to be strengthened, while encouraging diversification of sources of funding and business operations, including through foreign sources

• The risk profiles of banks and NBFIs will have to be identified and regulated in order to ensure overall stability of the financial sector and enhance public confidence

In that scenario, the present skewed* banking structure will need some structural changes to ensure that Banks & NBFIs will be equipped to play the required role in the envisaged US$ 100 bn economy…

128

Asset size of Present Banks Number of

banks Market share

Over Rs. 100 bn 11 89.4%

Domestic banks with less than Rs. 100 bn 12 7.4%

Foreign banks with less than Rs. 50 bn 10 3.2%

*

• The two large state commercial banks, BOC and PB, will be encouraged to grow and expand towards a stronger regional presence, and to operate with higher levels of capital

• The NSB will be encouraged to broad base their banking activities to contribute to the economy on a larger scale

• The Pradeshiya Sanwardhana Bank will be encouraged to serve the niche market of microfinance, targeting inclusive growth in the provinces

• The other smaller state banks will be encouraged to merge and play a more cohesive role, since at present these banks account for just 1.1% of the market share!

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

129

• The two Development banks, NDB and DFCC, will be encouraged to merge in order to create a strong development bank that could provide a broader impetus to development banking activities

• Foreign banks will be invited to demonstrate greater participation and contribution to the economy

• Commencing 2016, new foreign banks will have to be locally incorporated

The banks with assets less than Rs. 100 bn will be expected to grow beyond Rs. 100 bn through organic growth or consolidation/merger with other banks/NBFIs, over a reasonable time horizon…

130

In keeping with such vision, banks will be expected to submit broad plans by 30th June 2014 for possible mergers and/or consolidation, and for the greater participation in the economy

In the meantime, banks’ capital will be strengthened significantly…

Key Policy Measure Target Date

Increase in minimum capital requirement: Licensed Commercial Banks - minimum Rs. 10 bn Licensed Specialised Banks - minimum Rs. 5 bn

• Existing Banks, from 1st January 2016

• New Banks, from 1st January 2015

Migrate to the advanced approach under the Basel II Capital Adequacy Framework requirements by the implementation of Standardised Approach for calculating capital charge for operational risk under Pillar 1

• During 1st Quarter 2014

Adopt Basel III Capital Standards • Increase in quality and quantity of capital of bank; • Introduction of a capital conservation buffer with the

intention of creating capital buffers in good times that can be used to absorb shocks in periods of stress; and

• Introduction of a counter-cyclical buffer to reduce pro-cyclicality to prevent excessive credit growth

• During 3rd Quarter 2014: Issue of guidelines on parallel computation of the Capital Adequacy Ratio

• 3rd and 4th Quarters 2014: Supervisory observation period

• In November 2014: Issue Direction to maintain minimum capital ratios effective from 1st January 2015

131

…while the Risk Management Framework of banks will also be improved further…

Key Policy Measure Target Date

Issue guidelines on the Stress Testing Framework • During 1st Quarter 2014

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

• In 2014: Supervisory Observation period

• In November 2014: Issue Direction to maintain minimum LCR effective from 1st January 2015

Introduce a Regulatory Framework for Valuation of Immovable Property of Licensed Banks

• During 1st Quarter 2014

Introduce prudential requirements to regulate the exposure of the banking system to asset markets and other potential economic shocks and concentrations

• During 2014

132

Further, several new Regulatory measures will be implemented…

Key Policy Measure Target Date

Incorporate appropriate changes to existing regulatory framework in line with new accounting standards

• Introduction of the new off-site surveillance reporting system • Amendments to existing Directions and other regulations

• From 2nd Quarter 2014

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

• During 2nd Quarter 2014

Develop a comprehensive supervisory framework for consolidated supervision of banking groups

• During 2014

133

• Develop new Regulations on

– Liquidity Risk Management

– Framework for Valuation of Immovable Property of Licensed Banks

• Require banks to further strengthen

– The quantity and quality of capital to improve their loss absorbency capabilities

– The systems and processes to migrate to advanced approaches on the Basel II capital framework

– The management of banking risks in an integrated manner, and

– The governance, fitness and propriety of directors and senior management to establish operational accountability

The new regulatory framework will continue to be in line with international best practices…

134

• Adopt Standardised Approach for calculating capital charge for operational risk under Pillar 1 in compliance with Basel II Capital Adequacy Requirement

• Issue guidelines to strengthen

—The Stress Testing Framework of the Banking Sector

—Minimum Requirements in Core Banking System of Banks

• Amend the Banking Act to take into account the new developments in domestic and international financial markets

—Supervision of bank dominated financial groups to be strengthened

—Provisions to facilitate mergers and acquisition of banks to be introduced

—Bank resolution measures to be strengthened

The resulting outcomes will lead to a new “equilibrium” in the banking sector in Sri Lanka…

135

Larger aggregate capital base

Increased potential to finance large scale transactions

Increased investments by foreign investors

Improved level of efficiency and corresponding profitability

Availability of a full range of financial services at affordable costs

More effective supervision

• Increase the quality and quantity of capital to improve the NBFIs loss absorbency capabilities and enhance resilience to internal and external shocks

• Attract low cost, long term funds in the form of deposits/debt instruments

• Improve cost efficiencies in order to be competitive

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

• Manage risks in an integrated manner

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

At the same time, in order to ensure Financial System Stability while moving towards a US$ 100 bn economy, the consolidation of the NBFI sector will be vital…

136

The objective of merger/consolidation plan would be to fashion an NBFI sector that comprises of smaller number of large NBFIs, which are fully compliant with the Central Bank’s regulatory framework, and which will serve to…

• A corporate group will be allowed to operate only one NBFI after end June 2014

– Accordingly, they will be required to acquire/merge if they operate more than one NBFI. A group is to be defined as a holding company, which owns more than one NBFI, or where common shareholders or directors own controlling stakes in more than one NBFI

• Licensed Banks will be actively encouraged to acquire NBFIs

• Large NBFIs will be encouraged to acquire or merge with smaller NBFIs

• Smaller NBFIs will be encouraged to merge with one another to create large NBFIs

• New investors or banks or large NBFIs will be encouraged to acquire negative net worth NBFIs, or lowly capitalised NBFIs with the new equity investments being made directly into the negative net worth NBFIs or selected lowly capitalised NBFIs in order to supplement the capital of such NBFIs

– When a new investor makes an equity investment of that nature, a matching long term advance will be made through the Sri Lanka Deposit Insurance and Liquidity Support Scheme, on concessionary terms

• Consultancy fees for merger and consolidation processes will be paid by the Central Bank to facilitate the process

• The Central Bank will also establish a separate unit headed by an Assistant Governor to assist in the merger/consolidation process

Accordingly, a NBFI sector consolidation plan will be implemented with incentives proposed from the 2014 budget …

137

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

Consolidation/Merger Strategy Target Date for Completion

• A group could operate only one NBFI June 2014

• Directors who own controlling shares in more than one NBFI to arrange for the merger between the NBFIs

June 2014

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

NBFIs, which are currently having negative net worth are

expected to be absorbed by December 2014:

Others to be completed by 2015

• Increase of minimum core capital of a LFC to Rs. 1 bn 1st January 2016

• Increase of minimum core capital of a LFC to Rs. 1.5 bn 1st January 2018

When the consolidation process is completed, the NBFI sector is expected to comprise about 20 NBFIs, each with an asset base of around Rs. 20 bn

138

Simultaneously, the Central Bank will significantly enhance the level of regulatory action in the NBFI sector, and will…

139

• Introduce a system of lower leverage ratios to NBFIs which are only partially-compliant with the Directions of the Central Bank

• Publish the maximum deposit levels for each NBFI on a quarterly basis, beginning 2Q, 2014

• Introduce a liquidity support fund for NBFIs which require short term liquidity support, by 2H, 2014

• Closely monitor the implementation of the proposed consolidation/merger plan

• Strengthen the risk focused regulatory and supervisory system

• Use an online early warning system to identify emerging risks in an NBFI

• Impose penalties on, and/or disqualify from holding office, key management personnel when there are continued non-compliances of Central Bank Directions

• Review and follow up the rehabilitation process of weak companies in the NBFI sector, and revive such companies in keeping with the proposed medium term consolidation plan

• Expedite the investigation processes on unauthorised finance businesses

In this newly emerging scenario, certain marketing practices currently pursued by Banks & NBFIs will have to be discontinued…

• Lottery schemes will be prohibited

• New guidelines will be issued on non-interest incentive schemes offered by banks to mobilise deposits

• Accuracy of disclosures on interest rates, fees and charges, etc. will be closely monitored

• The implementation of the current Directions on Customer Charter of banks will be enforced

• More focused attention will be given to customers’ complaints and consumer protection, so as to address grievances in an efficient and timely manner

140

The emerging macro-economic fundamentals will be ideal for the introduction of effective superannuation products by Banks and NBFIs…

141

• Therefore, Banks, NBFIs and Insurance companies will be encouraged to develop and introduce effective and innovative long term superannuation products to provide more opportunities to long term savers:

– Annuities

– Pension products, including Employer sponsored pension products

– Insurance schemes with pension plans

– Long term Super-savings accounts

Such products will also fulfill the emerging need for long term savings instruments that are needed to fund long term projects…

The current and impending low interest regime is likely to be challenging to savers who are dependent on interest income

With regard to public debt management, a Medium Term Debt management Strategy (MTDS) to achieve the targeted composition of the debt will be pursued…

• Further improvements in debt sustainability to be effected

• Advanced risk management systems to be implemented to assess the underlying risk on an ongoing basis

• Average time to maturity (ATM) of domestic debt portfolio to be further improved

Indicator 2013E Annual Target

2014P 2015P 2016P

Debt/GDP ratio (%) 78.0 74.3 70.6 65.0

Average Time to Maturity of Domestic Debt (years) 4.8 5.5 6.0 6.5

Ratio of Short-term Domestic Debt to Total Domestic Debt (%) 25 24 23 22

Share of Foreign Currency Debt to Total Debt (%) 43 40 37 35

142

In addition, the on-going efforts to tighten the amortization cost will continue…

• In 2014, the amortization saving, compared with 2013 is expected to amount to over Rs. 100 bn!

143

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

In the meantime, a deeper secondary market for Government Securities will be developed… • Secondary market for Government securities (G-sec) will be

broadened and deepened while improving transparency

• The E-trading platform will be extended, with two-way quotes made mandatory

• A Central Counter Party (CCP) System will be established together with SEC, CSE and LankaClear, and settlement of all G-sec transactions will be made only through such CCP

• Limited instruments for the derivative market will be introduced, once the cash market is developed

• Access to alternative international funding sources, which will enhance and diversify funding options, will be supported

144

International financial agencies have already shown interest to issue local currency bonds to finance long term projects, which will help the development of the bond market further

The development of the entire debt market is expected to be substantially supported through the establishment of the CCP… • It will act as the clearing agency for Government and corporate debt

instruments

• It will act as the seller to buyers, and buyer to sellers, and therefore the credit risk will be mitigated and counterparty confirmations will not be necessary

• It will ensure that all outright transactions undertaken through the proposed E-trading platform and OTC will be cleared

• It will provide for the net settlement of cash and securities

145

The resulting measures will effectively establish a longer term yield curve for secondary market transactions…

146

• Issue of a half-yearly Treasury bond calendar

• Implementation of the Government borrowing programme in a prudent manner to ensure gradual reduction in market yield rates

• Promotion of competition among foreign investors by establishing strong access to the Middle-East and Far East markets

• Prudent management of foreign participants in investments in Government securities

The continuation of effective currency management practices will be aimed at reducing the cost of currency supply… • The “Clean Note Policy” will continue, and currency notes that are unfit for

circulation will be withdrawn and destroyed through a robust process

• Services of banks will be utilised to establish exchange counters to improve currency exchange facilities

• Continued education of the general public and other stakeholders will be carried out to increase awareness of good habits of handling currency notes and coins. The increased public awareness will preserve the public confidence in currency and minimise the incidence of counterfeit notes

• The coin collection programme will be continued in order to recirculate idle coins. Banks will be instructed to collect the tills issued by them to their customers within a period of 12 months, in order to bring coins back to circulation

147

Improved technology will be applied to increase the level of efficiency of currency management... • Cash operations of commercial banks will be

improved to ensure compliance with the Central Bank guidelines

• The efficiency in unfit notes shredding process will be increased while maintaining a healthy environment by procuring a new offline currency shredder

• Banks will be encouraged to exchange good quality currency notes among themselves, and thereby reduce the processing cost of currency to both banks and the Central Bank

• Steps will be taken to increase the quality and lifespan of currency notes, by introducing new Currency note packing solutions

148

A new series of coins representing the Districts of Sri Lanka will be issued in 2014… • The designs for the new series of Rs. 10 coins will depict one or

more of unique Archeological, Cultural, Economic, Environmental, Religious or Social characteristics of each District

Example: The Rs. 10 coin depicting the Colombo District will portray certain city sights and the Colombo Port

149

To safeguard the integrity of financial transactions, constant vigilance and risk assessment will be maintained… • The Financial Transactions Reporting Act, No. 6 of 2006 will be

amended to augment the existing regulatory mechanism

• Coverage will be expanded to issue rules/guidelines to designated Non-finance businesses, specifically NPOs, NGOs and INGOs

• A comprehensive National Risk Assessment on AML/CFT vulnerabilities will be carried out

• The co-operation in exchanging financial intelligence with domestic and international agencies (FIUs), will be enhanced through MOUs

150

Exchange Control policies will be further relaxed to support the growing external environment… • The development of corporate debt market will be

facilitated by widening the permitted instruments available for investments by non-residents

• Permission will be granted to companies that earn foreign exchange, to lend in foreign currency to companies in the same group

• A borrowing scheme will be implemented for companies in priority sectors that promote the five hubs and tourism

• The acquisition of leasehold rights of properties by non-residents will be facilitated

• Permission will be granted for banks to lend to FEEA holders for any purpose

• The investment limits for overseas investments will be increased

• Sri Lankan corporates will be permitted to list their shares in stock exchanges abroad

• Different accounts introduced for non-nationals who seek residency in Sri Lanka under special schemes will be amalgamated

• The minimum balance requirements in SFIDA will be removed

151

Policies will be introduced to facilitate day to day foreign exchange transactions of residents

• Permit the issue of travel cards

• Permit making payments in advance to meet requirements to secure student Visa

• Permit companies in construction industry to use available funds in FEEA to make payments relating to new overseas projects

• Remove the requirement to obtain permission to make amendments to LCs relating to imports

The Monitoring Division of the ECD will be reorganised in order to build a strong database to analyse foreign exchange inflows and outflows

Regional development strategies will be given a high level of support to…

• Promote Small and Medium Scale Enterprises (SMEs) to reach new heights covering female entrepreneurs, young entrepreneurs and innovative enterprises

• Facilitate the diversification of the Agriculture sector focusing on promoting export agriculture, scientific farming techniques, mechanisation of farm activities, thereby improving agricultural productivity

• Facilitate the commercial scale dairy industry to modernise, and improve productivity of all activities related to the dairy supply chain, in order to achieve self sufficiency in milk

• Facilitate the establishment of Business Support Units and Business Revival Units in order to support SMEs

152

Sector Amount Rs Mn

Beneficiaries

Agriculture 9,800 117,000

SME 8,050 23,180

Microfinance 1,485 20,600

Dairy 2,000 400

Total 21,335 161,180

Regional development activities will concentrate on providing affordable finance for the SME sector, while also focusing on the lagging regions & needy sectors…

153

Programme No of

Programmes

Expected No. of

Participants

Financial Literacy/School Leavers/ Loan Beneficiaries

120 11,000

Entrepreneurship Development

620 27,300

Training of Trainers and Bankers

50 2,500

Post and Pre Harvest Technology

16 800

Business Start-up 12 1,200

Business Revival 12 1,200

Total 830 44,000

• In 2014, loans to the value of Rs. 21.3 bn will be targeted to be granted through concessionary financing schemes implemented by the Central Bank

• Awareness building and training programmes for SMEs will be continued in 2014

Women empowerment & financial inclusion will be given high priority during 2014…

154

Measures commenced in 2013 • Women entrepreneurs in Jaffna

were linked to supermarkets to sell their produce

• Women entrepreneurs in the Wanni region were linked to wholesale buyers in Colombo to sell their produce

• New projects were introduced in areas where the competency levels of women are considerably high

• Banks were permitted to utilise investment fund account to lend to women entrepreneurship ventures with capital up to Rs. 10 mn

New measures in 2014 & beyond… • Women will be encouraged to take

leadership roles in micro finance activities - Women’s participation was close to 80%

in certain micro finance projects

• Women entrepreneurs with talent and potential will be identified in order to graduate them from micro enterprises to small and medium scale levels

• Special workshops will be conducted for women entrepreneurs to impart new skills and technologies to them

• Female school leavers will be encouraged to undertake new ventures

• 50% of Saubagya loans will be targeted for female entrepreneurs

Major improvements to the Payments & Settlements platform will be carried out in order to be prepared for the future… • Improvements in the national payment system

including CCAPS will be facilitated and the participation of banks and non-bank service providers in developing payment and settlement systems, will be promoted

• The supervisory framework will be strengthened and supervision of Licensed Service Providers of Payment Cards and Mobile Payment Systems will be continued

• The business continuity policy to ensure operational reliability of the systematically important LankaSettle System, will be continued

• The risk factors to the system will be identified and policy measures to mitigate such risks will be adopted to ensure payment and settlement system stability

• The LankaSettle System will be assessed continuously against the new core principles of CPSS in order to identify and address any deficiencies

155

2013E 2016P

Average No. of RTGS Transactions per day (High value payments)

1,300 2,500

Average No. of non-cash Retail Payments per day

395,000 750,000

RTGS/SSSS System Availability

99.92% 99.99%

Expectations for the Payments System in a US$ 100 bn Economy

The EPF will continue to implement diversification strategies to maximise returns in the projected future low interest rate environment…

• Accordingly, the EPF will systematically continue to diversify its investment portfolio in order to provide better returns to its members

• Such diversification strategy will include:

– Diversification into new instruments

– Investments in foreign currency denominated instruments

– Increase participation in secondary market activities

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

156

With easing monetary conditions, fiscal consolidation and low volatility of inflation, market interest rates are expected to remain low, thereby providing a challenging environment for the EPF to generate high returns in the medium to long term

EPF will also continue to improve its services to enhance efficiency, thereby providing a better service to its members & employer firms... • Registration of all employers who have more than 50

employees to receive the member contributions and details through e-media

- Nearly 80% of its 2.3 million members will be covered by this scheme

- Such initiative will also help to improve the Doing Business ranking of Sri Lanka

• Complete and maintain a member database with a Unique Identification Number

• Establish an Electronic Data Base Management System

and an e-record room by replacing the existing master files by Q2 2014 with electronic records

• Minimise operational risk in a high network dependent environment

157

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

*Annual Report/Daily FT Supplement, April 2013

Going forward, the Medium Term Framework projections appear quite encouraging…

159

Indicator Unit 2013 (Est) Projections

2014 2015 2016

Real Sector and Inflation

Real GDP Growth % 7.2 7.8 8.2 8.5

Total Investment % of GDP 31.0 32.0 32.5 33.0

GDP Deflator % 7.0 6.0 5.5 5.0

Headline Inflation % 4.7 5.0 4.5 4.0

External Sector

Trade Balance % of GDP -12.8 -11.6 -10.2 -8.4

Current Account Balance % of GDP -3.9 -2.4 -1.0 0.1

Overall Balance US$ mn 700 1,500 1,750 3,700

Fiscal Sector

Current Account Balance % of GDP -0.5 1.1 1.6 2.3

Overall Balance % of GDP -5.8 -5.2 -4.4 -3.8

Government Debt % of GDP 78.0 74.3 70.6 65.0

Monetary Sector

Broad Money Growth (M2b) % 16.0 14.0 14.0 14.0

Private Sector Credit Growth (in M2b) % 8.0 16.0 17.0 17.0

The realisation of those projections will probably be reflected in the changes that will soon be visible in the Colombo City Skyline…

Source: Colombo Central Business District Town Planning Study, December 2013

160

Source: Colombo Central Business District Town Planning Study, December 2013

The new skyline will also mirror the growing opportunities & the optimism in the economy…

161

162

163