Fiscal system stability to be strengthened

Hiran H.Senewiratne

The new Finance Companies Act and the Banking Act to regulate the banks and finance companies will strengthen the fiscal system stability in the country, Central Bank (CB) Governor Ajith Nivard Cabraal said.

“With the implementation of both Acts we could build the confidence of the people,” Cabraal said at a media conference held to release the Annual Report of the Central Bank of Sri Lanka for 2008.

“The Central Bank has also given a clear indication to relax monetary policy as it is quite conducive because the inflation rate has reached a single digit while the bank interest rates have been reduced by two percent recently,” he said.

He said the fiscal sector demonstrated a mixed performance in 2008. The relatively better fiscal performance experienced during the first nine months of 2008 changed significantly during the last quarter of the year and resulted in deviations in the annual outcome of some key fiscal aggregates.

Cabraal also said during the first nine month period of the year, total revenue continued to increase at a relatively high rate of 22 percent while total expenditure and net lending increased by 20 percent.

Further, the financing mix between domestic and foreign sources were fairly good and the Government continued to repay the outstanding debt to the Central Bank until September 2008, he said.

Central Bank, Chief Economist/Director of Economic Research Dr Nandalal Weerasinghe said that exports grew by around 10 percent during the first nine months of the year, despite many challenges.

Further, import expenditure grew sharply by 33.7 percent on account of the unprecedentedly high petroleum and commodity prices in the international markets and widened the trade deficit by 88.1 percent by end September 2008.

The widened trade deficit was partly offset by the increased private remittances, which grew by well above 20 percent throughout the first nine months, helping contain the current account deficit.

Dr Weerasinghe also said the net foreign short-term inflows to the Government and the private sector peaked at US$ 1,004 million by end September 2008 and helped generate a surplus in the capital and financial account.

This was more than sufficient to finance the higher current account deficit, generating a surplus by end September 2008.

“The resulting slowdown in global growth, particularly in the advanced economies including the United States, led to a substantial decline in global demand for energy and other commodities,” he said. “Therefore, exports, which suffered from the contraction in global demand towards the end of the year, declined by 2.8 percent in the last quarter. This set-back led exports to grow by 6.5 percent in 2008,” he said.

The global financial crisis led the prices of most commodities to plummet during the fourth quarter of 2008.

The unexpected decline in prices led imports to decelerate very rapidly, to record a flat growth in the last quarter.

As a result, imports grew by 24.0 percent in 2008 leading to the substantial expansion in the trade deficit in 2008.