Business Times

CB sees rapid social development in post-war era

The Central Bank (CB) is expecting rapid social development in the post war period and a substantial increase in the demand for diversified financial facilities. Accordingly, the CB’s monetary and financial sector policies for 2010 and beyond are intended to strengthen the institutional and market infrastructure and remove impediments. The domestic economy is expected to grow, reaching 7% to 9% in the medium term. According to the Road Map announced this week, higher capital and financial inflows into the private sector and to the government will be more than adequate to finance the deficit in the current account.

The approved estimates for the first four months of 2010 under the governments Vote on Account is Rs.197.5 billion for recurrent expenditure (excluding interest payments), Rs.158.9 billion for capital expenditure and Rs.6.2 billion for advance account outflow. After the general election, the annual budget for 2010 is expected to be presented to Parliament.

The performance of the capital markets was described as outstanding in the Road Map with the All Share Price Index (ASPI) and the Milanka Index recording growth of about 125% and 136% during 2009. Market capitalization exceeded Rs.1,000 billion for the first time ever in October 2009 and improved to Rs.1,092 billion by the end of December 2009. The Colombo Stock Exchange (CSE) surpassed the highest ever turnover recorded for a given year. With final figures yet not available, the economy is expected to grow by 3.5% in 2009 while the gradual recovery of the global economy and the end to the conflict is expected to provide a strong impetus to the domestic economy in 2010 and beyond. The economy is poised to record a higher growth of around 7% to 9% in the medium-term.

Some of the highlights of the presentation were plans to set up an Export/Import (EXIM) Bank to provide financial assistance to exporters and importers and promote the country’s international trade in goods, services and investment. CB Governor Ajith Nivaard Cabraal said the capital currently contemplated is US$200 million.

Mr. Cabraal also spoke on initiating the transformation of the existing framework of the Employees’ Provident Fund (EPF) to a banking model. This would establish a sound risk return profile to generate a positive real rate of return over the long term. The CB will also initiate enrolling of the ‘informal sector’ labour force and self-employed persons amounting to 500,000 by 2012 and 2,000,000 by 2015.

On the external front, exports and imports are projected to increase in the medium term, thereby generating higher economic activities in the economy. Despite the expected increase in workers’ remittances and higher inflows to the services account, the current account is expected to record a deficit less than 3% in the medium term. On the fiscal front, the overall budget deficit is expected to reduce over the medium term. The improvement in the financial position of both the government and public corporations is expected to release resources to the private sector.

The broad money supply is expected to grow on average by 14.5% in 2010. The targeted broad money growth is slightly higher than the rate of growth of nominal GDP mainly due to the base effect of lower monetary expansion during the first half of 2009. The annual average growth in reserve money is also targeted at 14. The main sources of expansion in reserve money would be the expansion in net foreign assets (NFA) of the CB. At the same time, net domestic assets (NDA) of the CB are expected to contract. The balance of payments (BOP) which constitutes the NFA component in reserve money is projected to record a surplus of US$700 million in 2010.

The private sector is expected to make a substantial recovery in 2010. The major source of the expansion of NDA would be the increase in credit to the private sector. Hence, the growth in credit to the private sector is expected to return to positive territory by the second quarter of 2010. It is expected to increase, reaching a year-on-year growth of around 13% by end December. An improvement in the financial operations of major public corporations including the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) is expected. The performance of public corporations would depend to some extent on the price of crude oil and fertilizer in the international markets.

Inflation is expected to be contained within single digits in 2010. On an annual average basis, inflation is projected to be about 5 to 10% by end 2010. The public sector will need to function in line with stipulated norms. Any substantial increase in credit to the public sector could put the vulnerable recovery in the private sector at risk by exerting upward pressure on market interest rates. Also, an undue increase in the overall money supply caused by accommodating increases in credit to all sectors could endanger the projected low inflation environment in the ensuing period.

The CB stated that the move of the Department of Census and Statistics (DCS) to update the existing Colombo Consumer Price Index (CCPI) in 2010, based on the findings of the Household Income and Expenditure Survey – 2006/2007, is a welcome move.

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