Economy grows by 6.8% in '07

The economy grew by 6.8 per cent in 2007, the annual average rate of unemployment reached its lowest ever recorded level of 6 per cent, while the per capita income rose further to US$ 1,617 in 2007.

The monetary policy strategy of the Central Bank with a focused quantitative target approach was more effective in containing monetary expansion, thereby curtailing demand-pull inflation the Central Banks said in its Annual Report.

The growth in reserve money was contained well within the targets and restricted to 10.2 per cent, the lowest growth in the last five years.

This helped to neutralise almost fully, the borrowings by the Government from the banking sector, which increased significantly in 2006, were contained at the budgeted level during 2007.

However, credit to public corporations increased substantially compared to the expected level entirely due to increased borrowings by the Ceylon Petroleum Corporation (CPC).

The Financial sector remained resilient and stable in 2007, despite increased pressures from external and domestic macroeconomic and financial market developments. The key financial institutions maintained their soundness through high profitability, increased capital levels and improved asset quality within an enhanced regulatory and supervisory framework, which has strengthened their resilience and risk absorption capacity.

During 2007, the reach of the banking sector in the country improved with the expansion of the branch network of both licensed specialised banks (LSB) and licensed commercial banks (LCB).

The supervisory and regulatory framework governing the financial sector was upgraded with several directives and measures introduced to strengthen the soundness of both banks and non-bank financial institutions.

The preparatory work for the implementation of the Basel II Capital Adequacy Framework for banks from 2008 was completed. The adoption of Basel II is expected to improve the soundness and risk management of banks by better aligning the bank's capital with its risk profile and by providing more comprehensive capital coverage for credit, market and operational risks.

A direction on corporate governance for banks was issued by the Central Bank and a mandatory code for companies listed on the CSE was issued by the Securities and Exchange Commission (SEC).

Meanwhile, industrial sector performance also benefited significantly from the Generalised System of Preferences (GSP+) granted by the EU countries, and from bilateral and regional trade agreements during the year.

However, the industrial sector needs to be able to compete without preferential market access as non-reciprocal preferential market access such as GSP+ could be withdrawn for non-economic reasons, the Central Bank said.

Despite turbulence in the worldwide stock markets due to the sub prime issue, the Colombo Stock Exchange (CSE) attracted more foreign inflows on both gross and net basis, confirming investor confidence in Sri Lanka.

The report was presented to President Mahinda Rajapaksa by Central Bank Governor Ajith Nivard Cabraal yesterday.