|Thursday, 1 May 2003|
by Jayantha Sri Nissanka
The Central Bank (CB) said yesterday that Sri Lanka can achieve seven to eight percent GDP growth rate if the peace process continues and the government implements the proposed reforms without any delay.
Central Bank Governor, A. S. Jayawardena releasing the 53rd annual report to the press yesterday in Colombo said that spontaneous reaction was derived from the peace process for the economic recovery last year.
"Last year a four percent economic growth rate was recorded, in contrast to a contraction of 1.5 percent GDP in 2001, mainly thanks to the peace process,strong fiscal consolidation efforts and other reforms", the Governor said.
He said that the Government introduced very important reforms aimed at improving the efficiency of the economy and to improve the use of resources. The main reform introduced by the Government was to reduce the budget deficit to 8.9 percent of the GDP last year from 10.8 percent in 2001.
"This is a significant achievement because since independence we have had budget deficit every year except for one year which brought pressure on the economy. It affects the poor people more and this is why poor people remain poor for a long time with a high unemployment rate of nine percent. However, it is satisfactory to note that the basic disease had been tackled and we believe we can continue it in the future", Governor Jayawardene said.
He said that the Government's commitment to continue and maintain fiscal discipline, was demonstrated by the enactment of the Fiscal Management (Responsibility) Act to progressively reduce the deficit. In addition, several reforms in the labour market and financial sector were made markets more efficient.
"We are expecting a major surge in the economic reforms since the Government got IMF assistance, as the policies are on the correct track. The ADB, the World Bank and the international community have also come forward in support. They are encouraged due to the Government's genuine commitment to achieve a peaceful settlement to the ethnic conflict", he said.
Director Economic Research of the Central Bank, A. G. Karunasena commenting on the progress of the economy during last year said that in 2002 Sri Lanka's economy recorded an annual growth rate of four percent, recovering progressively from the contraction of 1.5 per cent in 2001. Consequently, the per capita income in real terms rose by three percent, improving living conditions of the people. On the production side, the growth was largely reflected in the services and agricultural, while the industrial sector recorded only a marginal recovery due to weak export demand. The services sector accounted for about 80 percent of the overall growth in 2002, benefiting mainly from the recovery in trade, transport, port services and tourism and a continuation of the growth momentum in the telecommunication and financial sectors. Agriculture and allied activities accounted for about 13 percent of overall growth, reflecting the recovery in paddy, tea, rubber, other agricultural crops and fishing. On the demand side, growth was mainly driven by improved domestic consumer demand, stimulated by improved security conditions and distribution facilities, with the progress in the peace process, while the growth impetus from investment expansion and export demand remained weak. Overall, the macroeconomic stability improved as a result of a reduction of the fiscal deficit as well as the external current account deficit.
Despite the increased consumer demand and increases in administered prices, inflation, as by the Colombo Consumers' Price Index, declined throughout the year to a level of 9.6 percent in 2002 from 14.2 percent in 2001. This was the combined effect of a tight monetary policy stance pursued by the Central Bank since mid-2000 on the demand side, and improved domestic supply conditions, the relative stability of the rupee and easing of import prices, on the supply side. Maintaining this declining trend is critical for containing the still high inflationary expectations in the economy.
With regard to the highlights of the operations of the Central Bank itself, the modernisation process, designed to streamline the functions of the Central Bank and make it more effective in discharging its functions, was continued in 2002. The Monetary Law Act was amended to sharpen the focus of the bank's objectives, expand its governing board, increase the flexibility and effectiveness of monetary policy, improve the country's payment and settlement system and strengthen the regulatory role of the bank. New human resource policies were introduced to build up a strong stock of human capital. A voluntary retirement scheme was implemented to create a lean and efficient organisation, while the departmental structure of the bank was reorganised to improve functional efficiency. The bank has adopted International Accounting Standards (IAS) in preparing its accounts, in line with best international practices, while its accounts were audited in terms of International Auditing Standards (IAuS), as a part of improving the safeguards.
In view of the importance of financial sector stability, the bank has strengthened its supervisory and regulatory role. The capital adequacy ratio imposed on licensed commercial banks is being increased, while foreign currency banking units are being made subject to several prudential norms hitherto applicable only to domestic banking units. The licence of a licensed specialised bank, which had become insolvent due to imprudent operations, was revoked, but this did not exert any systematic impact. The bank has also carried out several awareness campaigns to educate investors and make them more conscious of the risk-return trade off and the dangers of investing in unregulated institutions.
This increased awareness would help to increase the stability of the financial sector. Action has also been taken to improve the bank's data dissemination and increase the transparency of its monetary policy. The Central Bank set up a financial Sector Reform Committee to study the financial sector issues and make recommendations for its improvement. The bank will continue to modernise and streamline its functions as an ongoing process, in its efforts to continue to improve and discharge of its statutory functions and support a dynamic financial sector.
Produced by Lake House