CB to target inflation broadly and introduce nice, crisp notes

The Central Bank (CB) is gearing to “target” inflation in a broader sense this year, while giving recognition to the major structural changes that have taken place in the economy, its top official said.
Presenting the CB's Road Map - Monetary and Financial Sector Policies for 2012 and beyond CB Governor Nivard Cabraal told an eminent gathering that a cohesive and integrated monetary policy framework which will also take into account the new emerging policy environment is to be fashioned.
He added that this framework will include the tightening of the global supply conditions amidst rising demand (which is pressurizing prices).

"Climate change, natural calamities, and widespread political unrest, which are continuing to cause turmoil to global demand-supply conditions and adding further uncertainty, the Euro Debt Crisis, shrinking confidence in governments and the financial markets as well as the low growth in the global economy will be included,” Mr. Cabraal explained.

The CB expects that 2012 will see major contributions towards an 8% growth from the agricultural, industry and services sectors. The CB plans to strengthen its currency management and soiled notes, Mr. Cabraal said will be a thing of the past. “We will issue fresh notes to replace the soiled ones and the country will attract a better image (especially amongst foreigners) with nice crisp notes," he added.

Mr. Cabraal added that the growth in 2011 is estimated at 8.3% and this is the first time in history that Sri Lanka managed to record over 8% growth in two consecutive years. He noted that last year’s GDP is estimated to exceed US$ 59 billion and that GDP per capita is estimated to reach US$ 2,830.

“Inflation steadied at mid-single digit level and we comparatively maintained a low interest rate environment,” he said, noting that savings and investments were also on a steady growth path, while the external trade was on a buoyant path last year. "We will want to deliver single digit inflation between 5.0 and 6.0 % in 2012," he added.

With substantial forex inflows this year to the tune of more than US$ 25 billion, the CB says exports will reach US$ 12.5 billion. Mr. Cabraal noted that as a result of CB’s policies, the exchange rate last year didn't suffer unnecessary volatility. “The Central Bank absorbed and supplied foreign currency to avoid excessive volatility in the domestic foreign exchange market and to maintain stability, while also accommodating the high growth driven demand for the increased import of intermediate and investment goods,” he said, adding that overall, the currency depreciated against the US dollar by 2.6% in 2011.

He also added that the CB has saved Treasury Rs 1 billion through interest rate (management).
It was observed that “Hawala” and “Hundi” informal and illegal schemes seem to be still operating, leading to a possible leakage of over US$1.5 billion and that "money changing” operations do not seem to be providing the desired results, and currency smuggling seems to be on the increase.

Mr. Cabraal added that close co-operation with the IMF will continue with a follow-up or surveillance programme, which is to be negotiated. "A Financial Stability Assessment Program (FSAP) is expected to be conducted this year in collaboration with the IMF and World Bank to further strengthen the financial system stability," he said.

He called on the banks to diversify the sources of funding and business operations while strengthening integration with regional and international financial markets. "Banks should upgrade the systems and processes to facilitate increasing business activities and expanding the range of products, services and delivery channels to cater to the emerging needs of the economy," he said.

He also said that banks should concentrate on cost efficiency and resource utilisation to improve profitability, while addressing human capital issues including increased staff requirements and improved management to cater to the evolving financial environment.