Central Bank’s 61st Annual Report says:
2011 challenging; growth forecast remains at 8.5%
Governor Central Bank Ajith Nivaard Cabraal presents copies of
the Annual Report 2010 to President Mahinda Rajapaksa. Minister
of Economic Development Basil Rajapaksa and Deputy Minister
Finance and Planning Geethanjana Gunawardena look on.
Sri Lanka”s economy grew by an impressive 8.0 percent in 2010,
reflecting a fast recovery from the setback suffered in 2009 and moved
to a high and sustainable growth path. All key sectors of the economy
demonstrated a commendable performance in 2010, underpinned by the
peaceful domestic environment, improved investor confidence, favourable
macroeconomic conditions and gradual recovery of the global economy from
one of the deepest recessions in history.
Commendable performance by key sectors
* Recovery in government revenue supported expansion in
* Increased capital/financial flows resulted in balance of
payments recording a surplus
* Mandatory deposit scheme introduced for licensed
Inflation continued to remain low at around mid-single digit levels
and the benign outlook for inflation enabled the Central Bank to ease
its monetary policy stance further in 2010. While significant demand
pressures were absent, improved domestic supply conditions, downward
adjustments of certain administered prices and the reduction of import
duties on several consumer items had a favourable impact on prices.
The Central Bank reduced its policy interest rates; the Repurchase
rate and the Reverse Repurchase rate, with a view to supporting economic
The growth of broad money was driven by the increase in commercial
banks’ credit to the private sector reflecting the broadbased demand for
credit with the recovery in domestic economic activity as well as
increased post-conflict capacity expansion.
However, monetary management could be challenging in the period ahead
owing to possible continued high growth in domestic credit as well as a
possible increase in capital inflows, thus requiring close monitoring of
macroeconomic developments and formulating appropriate demand management
policies to prevent the build-up of excessive demand pressures.
An encouraging improvement in the overall fiscal situation was
witnessed in 2010 with the recovery in government revenue supported by
the expansion of economic activity, the addressing of certain persistent
structural issues in the tax system, as well as the containment of
The overall deficit was reduced to 7.9 percent of GDP in 2010 from
9.9 percent in 2009. The government has affirmed its ongoing commitment
to fiscal consolidation by reducing the budget deficit to 6.8 percent in
2011 and to below 5 percent in the medium term.
In line with the recommendations of the Presidential Commission on
Taxation, several vital revisions were introduced to the tax structure
focusing on the simplification of the tax system, rationalising
exemptions, improving tax compliance and strengthening tax
In addition, steps were taken to streamline the tax concessions
granted under the Board of Investment (BOI) Act focusing on larger and
The continued fiscal consolidation efforts would reinforce the
conduct of monetary policy in achieving economic and price stability.
The external sector, which made a remarkable turnaround since the second
quarter of 2009, continued to improve in 2010. Both exports and imports
recovered strongly, while increased earnings from the tourism industry
and higher inward remittances offset the widening trade deficit to a
great extent, reducing the external current account deficit. Increased
capital and financial flows resulted in the balance of payments (BOP)
recording a surplus in 2010, further strengthening external reserves of
With favourable macroeconomic conditions and the recovery in economic
activity and also with the supportive regulatory and supervisory
framework, the performance and stability of the financial sector
strengthened in 2010.
This improved performance was reflected in all prudential indicators.
Credit flows significantly recovered, profitability improved, capital
adequacy further increased above the threshold and the ratio of non
performing loans declined, while provisions for loan losses increased.
The performance of finance companies in distress also improved
rapidly, while financial markets continued to remain liquid. The branch
network of banks and other financial institutions expanded, particularly
with the measures taken by the Central Bank to promote financial service
delivery to the Northern and Eastern provinces. Improvements to the
payments system continued. A mandatory deposit insurance scheme was
introduced in 2010 for licensed banks and finance companies to protect
small depositors. However, intermediation costs that still remain high,
as reflected by high interest rate margins, and the sluggish development
in the corporate debt securities market continue to remain areas of
In 2010, the Sri Lankan economy recorded an impressive growth of 8.0
percent, the highest annual rate of growth reported in the last three
decades. This far exceeds the average annual growth of 4.9 percent
recorded since the liberalisation of the economy in 1977. This
remarkable performance was supported by the restoration of permanent
peace, which created an environment conducive for the expansion in
economic activity, the strong macroeconomic environment, increased
domestic demand, the development of infrastructure facilities, improved
external demand with the gradual recovery in the global economy and
favourable domestic weather conditions.
The improved performance in all key sectors of the economy
contributed towards the high economic growth in 2010. The agriculture
sector, which contributed around 11.9 percent of the GDP in 2010, grew
by 7.0 percent, compared to 3.2 percent in 2009, mainly driven by the
increased production of paddy, tea, rubber and minor export crops along
with significant improvements in the fisheries sector output. Benefiting
from favourable weather conditions, the tea sub-sector registered the
highest ever annual production of 329 million kg compared to the
distressed output in 2009, while rubber production also continued to
In 2010, the first full year of operation subsequent to the ending of
the three-decade long conflict, the economy of Sri Lanka has displayed
its true potential, with impressive macroeconomic achievements. The
challenge for policy-makers today is to sustain these achievements with
macroeconomic stability in the face of more frequent internal and
external shocks. While appropriate demand management policies are
required to maintain low and stable inflation, effective addressing of
supply-side impediments is also needed.
The continuous advancement of productivity, the adoption of new
technology and human capital development would reduce the pressure on
the labour market, while improvements to physical infrastructure and
appropriate changes to the regulatory framework need to be pursued to
facilitate greater labour mobility as well as greater labour
availability to maintain the expected high growth.
The diversification of exports, in terms of products and markets, is
needed to increase the resilience of the economy to external
disturbances, and to this end, the effective utilisation of existing
bilateral and multilateral treaties and actively pursuing the
establishment of further trade relations with emerging regional markets
as well as promoting private sector investment and strengthening the
“Doing Business” environment are necessary.
The impact of disturbances arising from adverse external developments
including price movements of commodities such as crude oil, could also
be lessened through the implementation of necessary reforms to the
institutional framework of key public enterprises to operate them more
efficiently and in a commercially sustainable way to reflect market
conditions. These changes will support the ongoing fiscal consolidation
process, which would in turn strengthen demand management policies.