CB highlights challenges to financial stability
The Central Bank (CB) interpreted the high security expenditure that
is inevitable this year as an advantage as the terrorism threat is all
over the world and called upon the business community to continue with
their investment plans in Sri Lanka.
Describing the challenges in meeting price, economic stability and
financial system stability in 2007 and beyond, CB's Road Map: Monetary
and Financial Sector Policies for 2007 report, looks at high defence
expenditure from a different angle and said that because all concerns
regarding security provides a certain "discount" which could be an
advantage in a highly competitive global business field.
The report recognises the high crude oil price as the major challenge
It increases the import bill, widening the current account deficit,
adversely impacts on the exchange rate stability, raises domestic fuel
prices causing a serious supply side shock and raises inflation, it
The report highlights all possible external and internal shocks and
vulnerabilities to the financial system stability.
The continuing high growth in private sector credit could pose a
threat to price and financial system stability.
First it could deteriorate the quality of assets of commercial banks
and this could increase the risk of high non-performing loans in the
future. Such expansion of credit could generate inflationary pressure in
the economy through increased aggregate demand.
The financial stability of the country will also be threatened by
money laundering, terrorist financing and pyramid schemes as a result of
rapid integration of the Sri Lankan economy with global financial
markets. To arrest such situations, the report proposes a continued
regulatory vigilance and timely intervention.
Continuing the high budget deficit is another challenge in the
conduct of monetary policy. Such deficit requires borrowings by the
government from the banking system, making it difficult to maintain the
monetary expansion along a pre-determined, tight path.
The report said that though rapid infrastructure development is a
strong contributory factor towards achieving sustainable high growth,
the timely mobilisation of resources for infrastructure development
while maintaining budget deficit and debt at reasonable levels are
challenges for a developing country such as Sri Lanka.
Maintaining foreign currency reserves at a reasonable level is also a
challenge. Maintaining a sound reserve level is important to mitigate
external shocks and to ensure the exchange rate fluctuations within a
However, the 2006 Financial stability report of the CB said that the
financial system in the country is resilient and that there are no
imminent threats that may endanger its stability.
Emergence of South Asia as a new force in the world economy would
provide new opportunities for Sri Lanka to achieve higher economic
growth. Simultaneously geo political uncertainties that would impact
global economic stability would pose a threat to meet external sector
targets in 2007, the report said.