Lankan roadmap for monetary and financial sector

The Central Bank this week released its monetary policy for 2007 spelling out controlling inflationary pressures, managing reserves to guarantee confidence in the economy together with enhancing regulatory framework such as expanding the Financial Investigations Unit (FIU) and enhancing measures to address terrorist financing, money laundering, pyramid schemes and financial scams.

Outlining the possible challenges for 2007, Nivard Cabraal, Governor Central Bank told a high profile gathering of businessmen and corporate leaders that responding to the impact of continuing high budget deficits, maintaining economic growth while controlling inflationary pressures and encouraging the government to promote economic and infrastructure development while maintaining debt stock at sustainable levels take priority.

In an optimistic note, he said that the economy is expected to be broad-based and grow by 7.5 percent, the current and planned infrastructure projects will facilitate the growth, the external sector expected to record overall balance of payment surplus of about US$ 200 million and the exports sector is expected to grow at 10 percent, while the imports are projected to grow at 12 percent.

“The Medium Term Macro Framework (MTMF), indicates that the budget deficit in 2007 will be contained at around 7.2 percent of GDP,” he said, adding that 2007 year end Reserve Money Target is set at 16 percent from the 2006 year end, plus 1.6 percent and the 2007 year-end Broad Money Target is set at 16 percent from the 2006 year-end target, plus 1.6 percent.
“Broad-base share ownership of banks will reduce the concentration of ownership and thereby address conflicts of interest among large shareholders,” he said, adding that the regulator is looking to manage currency issues to ensure that rupee notes and coins are available to the public in required denominations upon demand maintain quality standards in notes and coins, upgrade security features mainly in high denomination notes and conduct aggressive public awareness programs especially for cash handlers of commercial banks .

The Central Bank will also bring legal and regulatory framework and introduce new laws on debt recovery, asset management, Credit Information, Electronic Transactions, Computer Crimes, Micro Finance Institutions, Finance Leasing Finance Companies and Business Recovery.

Cabraal said that the continuing high growth in private sector credit could also pose threats to price as well as financial system stability. “It could deteriorate the quality of the assets of commercial banks and that situation could increase the risk of high non-performing loans in the future and such expansion of credit could generate inflationary pressures in the economy through increased aggregate demand,” he explained, adding that with the rapid and intense integration of the Sri Lankan economy with global financial markets, money laundering, terrorist financing and pyramid schemes could threaten financial stability.

He noted that a continuing high budget deficit could also pose a formidable challenge in the conduct of monetary policy.

“As such deficit requires borrowings by the government from the banking system, it makes it difficult to maintain the monetary expansion along a pre-determined, tight path,” he said, adding that maintaining a comfortable and reasonable level of foreign currency reserves in order to be able to mitigate the impacts of external shocks is also a challenging task for any developing country.

Cabraal said that the Central Bank will also facilitate the adoption of the internationally accepted accounting and reporting standards such as IAS 32, IAS 39 and IFRS 7 by banks.

“A continuous dialogue will be maintained with the external auditors and other relevant institutions with respect to the operations of banks, the publication of accounts and adoption of international accounting standards,” he explained.