Central Bank to further relax exchange controls

Sri Lankan companies to be listed in foreign stock exchanges:

by Gamini WARUSHAMANA

The Central Bank (CB) will further relax foreign exchange control this year and grant local listed companies to be listed in foreign stock exchanges, issue redeemable preference shares to non residents with specific minimum redemption basis, Central Bank Governor Ajith Nivard Cabraal said.

He was presenting a Road Map; Monetary and Financial Sector Policies for 2012 and beyond, at the Central Bank last week.

He said that the Government will also permit broadbased money changing operations in the formal sector, including the issue of general money changing licences to hotels and restaurants registered with the Tourist Board.

Specialised banks and registered finance companies too will be permitted to open and maintain NRFC and RFC accounts from this year, he said.

Cabraal reiterated that there was no need to downgrade the growth forecast and that the country can achieve the eight percent growth target despite the slow recovery in the US and Europe.

He explained the basis of the Central Bank’s optimism under gloomy global conditions, while some economists warn of hard times some countries have already downgraded its growth forecasts for 2012.

According to Cabraal, Agriculture is expected to expand at 7.3 percent compared to 2.0 percent in 2011.

Favourable weather conditions and expansion in cultivation in the North and the East will result in a 14.2 percent growth in the paddy sector.

The fisheries sector will expand at 9.8 percent due to favourable weather and improved marketing and infrastructure facilities. Growth in the tea sector will be at 1.4 percent backed by productivity improvement among tea smallholders. The Government expects 5.5 percent growth in the coconut sector.

Expansion in the industrial sector, will be at 9.0 percent, which is lower compared to 10.1 percent in 2011. Industrial sector growth will be backed by the expected strong 12.2 percent growth in the construction sector, 11.8 percent in mining and quarrying, 8.0 percent in cottage industries and 7.9 percent growth in electricity.

Service sector expansion is estimated at 7.7 percent compared to 8.6 percent in 2011 and the growth in the sector will be backed by a strong 22.1 percent growth in the hotel and restaurant sector with expected growth in tourism. Domestic trade will grow at 8.2 percent, post and telecommunications will grow by 10.2 percent and financial services by 8.2 percent.

Cabraal said that macroeconomic conditions and policies would be fashioned to support high growth in 2012. Government policy support covers areas such as prudent macroeconomic management, strengthened investor confidence, promotion of agriculture and industrial products in traditional and non traditional export markets, continued support to increase agricultural productivity, increase in fish harvest and promotion of FDI for infrastructure and tourism sectors.

The Central Bank will be keen to accommodate the higher growth of economic activity, although priority would be to check inflationary pressure in the economy. The monetory policy will be formed to achieve mid-single digit inflation. Broad money growth would be designed to accommodate growth, while ensuring the achievement of an inflation target.

Fiscal deficit is expected to decline to 6.2 percent from 7.0 percent in 2011. Domestic financing will be Rs.16.5 billion higher compared to 2011 and will reach Rs. 271.6 billion. External sector performance is expected to undergo a major structural change in 2012. A $ 825 million BOP surplus is expected with continued trade deficit. However, the trade deficit will be cushioned by $ 1.2 billion earnings from tourism, $6.5 billion remittances and $2 billion FDI inflow.

Under these circumstances the multidimensional and broad monetory policy will be implemented keeping policy rates as a key instrument of the Central Bank, while continuing the policy interest rate corridor approach. The exchange rate will be reviewed as a key stabilisation factor of the economy and Cabraal defended his vision of maintaining rigid exchange rate policy.

He said that control of imports will reverse growth and there are a lot of investment and intermediary goods among imports that are essential to maintain the growth momentum.

The policies for financial system stability in 2012 and beyond have been formulated with the vision of a banking sector in a $ 100 billion economy by 2016. According to these projections by 2016, assets of the banking sector would reach Rs.8,000 billion from Rs.4,100 billion today. Lending is projected to reach Rs.5,000 billion against Rs.2,500 billion today while reaching a broader spectrum of corporate and households.

The net interest margin is projected to decline to 3.3 percent from the current 4.2 percent. Market capitalisation of the CSE is projected to reach 70 percent of GDP by 2016. The outstanding corporate bond market will increase from Rs.100 billion to Rs. 1 trillion by 2016.