Central Bank Governor Prof. W.D Lakshman addresses the 2020 Road Map launch yesterday – Pic by Ruwan Walpola
New Governor stresses Sri Lanka needs innovative policies emanating from and backed by fresh thinking
Emphasises people-centric Govt. cannot ignore social and human development objectives, especially when Sri Lanka is ready for economic take-off
Already announced tax relief measures expected to stimulate economy while actively contributing to improve business confidence
Any revenue shortfall to be largely offset by action taken to eliminate unproductive current expenditures and to prioritise capital expenditure
Fiscal consolidation path remains intact and level of public debt stock remains sustainable
By Nisthar Cassim
Central Bank yesterday declared the economy is at a crossroads and could leapfrog despite challenges if reforms and right policies are pursued.
Launching the 2020 Road Map Central Bank’s new Governor Prof. W.D. Lakshman clarified that though decades of policymaking have produced many improvements, the economy was at a crossroads with many tough challenges.
He listed those as below potential growth, persistence of poverty pockets, underutilisation of productive resources, inadequate expansion and diversification of exports, shortfall of non-debt creating capital inflows, large credit and interest rate cycles, and high fiscal deficits and public debt levels. According to him, these challenges have been the outcomes of policy as well as non-policy factors and need to be addressed decisively for the economy to take-off to a high and sustainable growth path. For this, Prof. Lakshman said Sri Lanka needs innovative policies emanating from and backed by fresh innovative thinking.
He recalled that developments in the past few years have shown that, at times, there was a trade-off between macroeconomic stability and economic growth. However he pointed out that whilst stability is important, a people-centric Government cannot ignore its social and human development objectives, especially when Sri Lanka is ready for its economic take-off.
“We intend to pursue our efforts to find solutions to balance these conflicting objectives of public policy, without compromising economic and price stability and financial system stability,” the Governor said.
“At this juncture, Sri Lanka strives to make the next economic leap forward. There are many domestic and international challenges, much of which are of an economic and structural nature,” he said.
“I strongly believe that the economy possesses the potential to overcome these challenges,” emphasised the Governor and quoted the famous words of Sir Winston Churchill: “The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.”
Addressing bankers, diplomats and officials, Prof. Lakshman appealed: “Let us also begin to see opportunities in the difficulties we encounter.”
“We hope, together with fiscal and other authorities, to formulate policies that will support a sustained revival of real economic activity through improved utilisation of domestic resources, both physical and human. This would help achieving the goal of the Government to create productive employment opportunities in the economy on a large scale,” the Governor said.
He said the already announced tax relief measures are expected to stimulate the economy while actively contributing to improve business confidence. “Any revenue shortfall due to the changes in taxes announced recently is expected to be largely offset by action taken to eliminate unproductive current expenditures and to prioritise capital expenditures. It is expected that the fiscal consolidation path remains intact and the level of public debt stock remains sustainable,” the Governor said.
Prof. Lakshman also said it was time to use the extensive human resource base built up over the years and new investments backed up by conducive medium to long-term policies, to enhance production growth and expansion of productive employment opportunities.
Such employment enhancing growth, he said, would be the most effective mechanism to eradicate poverty as well as to achieve balanced regional development.
It was pointed out that as in the past, the Central Bank will work with fiscal authorities to improve conditions of fiscal consolidation for sustained price as well as macroeconomic stability.
“We hope that the Government would take further measures to rationalise expenditure and that revenue would go up as a result of the revival in economic activity. Required reforms are expected to widen the tax base, improve tax administration and compliance.”
“Strengthening State-owned business enterprises through implementing essential reforms would enhance Government revenues and reduce the fiscal burden to maintain such entities, while ensuring better service delivery for the public and the business community,” Prof. Lakshman said.
In this regard, the Central Bank welcomed the ongoing efforts to improve the operational efficiency of State-owned enterprises through a streamlined process to appoint professionals to manage such entities.
Going forward, he said the production economy will be strengthened, helped by availability of required infrastructure facilities, the prevalence of conducive policy measures, attraction of export oriented FDIs, and the maintenance of appropriate fiscal and monetary conditions. “The maintenance of competitive exchange rate will also help. These will lead to a sustained improvement in the country’s balance of payments position as well,” the Governor added.
On the part of the Central Bank of Sri Lanka as the apex institution in money matters, the Governor assured it will continue to guide Sri Lanka to reach new heights in socioeconomic achievement.
He said that in a challenging global and domestic environment, the Central Bank has achieved a great deal in meeting its objectives of maintaining economic and price stability and financial system stability, with a view to encouraging and promoting the development of the productive resources of Sri Lanka.
“Going forward, in line with the philosophy of the new Government, the Central Bank will continue to improve its contribution for the economy to progress as an upper-middle income economy through equitable and inclusive growth of real economic activity of the country,” he emphasised.
In this context, this Road Map, the 13th by the Central Bank, expects to enunciate the broad policy framework that the Central Bank intends to pursue in 2020 and the medium term, enabling all stakeholders of the economy to adjust their own future policy plans.
The Road Map 2020 was outlined under the following headings: The Central Bank’s monetary policy strategy and policies for 2020 and beyond; The Central Bank’s policies related to the financial sector performance and stability in 2020 and beyond and Policies Related to Ancillary and Agency Functions.
CB Chief urges banks to rethink credit policies; wants shift from risk averse mindset
- Monetary regulator to review caps on lending rates mid 2020; credit to private sector to pick up to around 12-13%
Central Bank yesterday urged banks to rethink their credit disbursement policies for the better, stating that the traditional ‘risk averse’ mindset has deprived emerging entrepreneurs and new ventures of much-needed initial capital.
“I urge Sri Lanka’s banking sector to rethink its credit disbursement policies, as the traditional ‘risk averse’ mindset has deprived emerging entrepreneurs and new ventures of much needed initial capital,” emphasised Central Bank Governor Prof. W.D. Lakshman yesterday at the launch of its 2020 Road Map.
He said credit schemes that take into consideration the specific challenges faced by startups have failed to develop. “The absence of dedicated development finance institutions is felt strongly, particularly at a time when the SMEs require support from the banking sector for survival during the phase of economic downturn as well as during the period of their take-off,” he opined.
Noting that in 2019 credit growth was low compared to envisaged levels, the Governor said going forward, the Central Bank expects a boost in the growth of credit and money supply with the envisaged further reduction in lending rates and the anticipated improvement in investor sentiments.
“Growth of credit to the private sector is expected to pick up to around 12-13% by end 2020. This is sufficient to support a revival of economic activity,” he said adding that the Central Bank expects to review the caps on lending rates, once the financial institutions meet the stipulated reduction in lending rates and credit flows normalise during the year.
“In an environment of monetary and fiscal stimulus, measures are to be implemented in the near future to enhance credit flows to small and medium scale enterprises (SMEs). These measures are expected to accelerate credit growth to the private sector in 2020 and beyond, and enable a speedy revival of economic activity,” Prof. Lakshman said.
A relief package for reviving SMEs is being designed, particularly targeting non performing advances. For those who seek relief under this package, suspension of legal action and rescheduling of loans along with some interest rate concession have been proposed.
The revival of businesses of such borrowers is expected to be facilitated through a grace period for capital repayments and a short-term working capital loan. For borrowers in the performing category, a new facility with extended repayment periods including a grace period for capital repayments under reasonable interest rates is being considered.
Recapping 2019, the Governor said that the banking sector expanded modestly during 2019. It exhibited resilience by maintaining capital and liquidity levels well above the regulatory requirements, despite challenging domestic and global conditions. The Central Bank continued to strengthen the regulatory framework based on international regulations and best practices during 2019 in order to improve system resilience.
He recalled that the Central Bank took a tight monetary policy stance until 2018 in view of high rates of credit and monetary expansion and adverse balance of payments pressures at the time. It now maintains an accommodative monetary policy stance in view of subdued economic growth, muted inflationary pressures and rapidly decelerating private sector credit amidst high nominal and real market interest rates.
The Central Bank reduced the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by a total of 2.50 percentage points in November 2018 and in March 2019. The objective was to provide adequate levels of liquidity to the domestic money market. Helped also by global developments, the Central Bank reduced policy interest rates by a total of 100 basis points in two steps, first in May and then in August 2019.
“In spite of monetary policy easing, market interest rates remained high in both nominal and real terms. Private sector credit growth decelerated sharply, particularly during the first half of 2019. This prompted the Central Bank to take regulatory actions of imposing caps on deposit interest rates of financial institutions. This was done in April 2019, with a view to addressing the issue of weak transmission of monetary policy measures,” he said.
With deposit interest rates and cost of funds declining, the Central Bank removed the caps on deposit interest rates of licensed banks and imposed caps on lending rates in September 2019. “The intention was to induce a sizeable reduction in lending rates, thereby increasing credit flows to support the revival of economic growth. As a result, most market interest rates declined, notably during the second half of 2019,” he said.
Engagement with IMF will continue with changes if needed: CB
The Central Bank yesterday reassured that the engagement with the International Monetary Fund (IMF) will continue with changes if necessary.
“We hope to engage with the IMF and other international agencies remaining within the overall national policy framework, negotiating for changes in the IMF program where changes are considered required,” Central Bank Governor Prof. W.D. Lakshman told the 2020 Road Map launch.
During the year 2019, Sri Lanka went through the fifth and sixth reviews of the Extended Fund Facility (EFF) of the International Monetary Fund (IMF) successfully and received the sixth and seventh tranches of disbursements.
So far under the three year Extended Fund Facility program Sri Lanka has received $ 1.3 billion via seven tranches. The program was extended till June.
Governor Prof. Lakshman said the continuation of the EFF program with the IMF is likely to be instrumental in supporting external sector stability in the medium term.
However he stressed: “A sustained improvement in the external sector however, requires policies aimed at promoting domestic production and export of goods and services and inflows of the non-debt-creating type.”
2019 economic growth forecast at 2.8%
- Single-digit inflation maintained for 11th consecutive year; range of 4-6% targeted for 2020
Central Bank yesterday revealed that the economy in 2019 is likely to have grown by 2.8% whilst the country had managed to maintain single digit inflation for the 11th consecutive year.
“The economy grew at a slow pace of 2.6% in real terms in the first nine months of 2019. The rate of growth for the whole year is likely to be around 2.8%,” Central Bank Governor Prof. W.D. Lakshman said yesterday at the launch of 2020 Road Map.
“The Sri Lankan economy faced significant challenges in 2019, emanating from movements in the global economy as well as domestic developments,” he said, whilst noting even in the years immediately preceding 2019, economic growth was sluggish, with the country failing to maintain the high growth momentum observed in the immediate aftermath of the end of the internal conflict.
In 2019, the Governor said fiscal and monetary measures put in place in the past to stabilise balance of payments and fiscal balances, and adverse consequences of the Easter Sunday terrorist attacks, combined with the then prevailing political uncertainties have substantially weighed down on the performance of the Sri Lankan economy.
The spillover effects of the Easter Sunday attacks in particular were felt across almost all spheres of economic activity, especially in the second quarter of the year. Consequently, below potential economic growth performance continued through 2019.
Policy uncertainty led to weak investor confidence and low levels of investment. Recurring natural disasters worsened conditions. The inability to address structural issues leading to a weak production economy, has caused this persistent slowdown.
On the inflation front, the country has experienced single digit levels of inflation for the past eleven years. This is an achievement we in the Central Bank are rightly proud of, given its mandated role to ensure economic and price stability in the country.
Sri Lanka appears to have broken off from its post-1977 history of highly volatile, often double digit levels of inflation. Behind these inflation achievements however, lies conditions of subdued aggregate demand. This implies a negative output gap that needs to be filled urgently by utilising the available policy space.
On the inflation front, the Governor said the country has experienced single digit levels of inflation for the past 11 years. “This is an achievement we in the Central Bank are rightly proud of, given its mandated role to ensure economic and price stability in the country,” he added.
However he noted that behind these inflation achievements however, lies conditions of subdued aggregate demand. “This implies a negative output gap that needs to be filled urgently by utilising the available policy space,” he said.
The monetary policy framework of the Central Bank, in the recent past, has been one of flexible inflation targeting. This is a subject of ongoing intellectual debate around the world. The Central Bank will continue to improve its policy framework in this area, with due emphasis on monetary stability for real sector growth.
The maintenance of mid-single digit levels of inflation is an essential component of macroeconomic stability; it will protect vulnerable sections of the population; equally, perhaps more, important at times of low inflation, is shared, employment-creating production growth.
He told the 2020 Road Map launch that the Central Bank expects to pursue its resolve to maintain inflation within a range of 4-6% through a transparent, coherent, and accountable monetary policy framework going forward.
“Maintaining inflation at stable levels would help improve economic prosperity of Sri Lanka. In this regard, the Central Bank will continue its dialogue with fiscal authorities,” Prof. Lakshman said. Adjustments to the Monetary Law Act to align it with global best practices are also envisaged.
Improving Central Bank governance, enhancing its independence, transparency and accountability, as well as enhancing fiscal-monetary coordination to achieve price stability, are all extremely desirable features. At the same time, financial sector oversight and macro prudential policies are to be strengthened to ensure financial system stability, the Governor said.
It was pointed out that in the coming years, as the country progresses towards a higher growth trajectory, close monetary-fiscal coordination was essential to sustain price stability – the conducive platform for further growth.
“In this context, the Central Bank will work closely with fiscal and other Government authorities to ensure a sustained improvement in the production economy and generate productive employment opportunities. Changes in demand conditions will of course be monitored with a view to undertaking proactive policy measures to ensure low and stable levels of inflation,” the Governor added.