state of the economy srilanka- 2010

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State of the Economy

as reflected in the

Central Bank Annual Report

2010

Economic Research Department

27 April 2011

1

Central Bank of Sri Lanka



The Statutory Requirement

Part 1 - The state of the economy, its performance, policies andissues

Part 2 - Accounts and operations of the Central Bank

Part 3 - Major administrative measures adopted by theMonetary Board in 2010

Part 4 - Major legislative enactments in 2010 relating to the

functions and operations of the Central Bank andbanking institutions in Sri Lanka

- Statistical Appendix

61st Annual Report of the Monetary Board submitted to the Hon.

Minister of Finance under Section 35 of the Monetary Law Act.

2



2010 : THE FIRST FULL YEAR AFTER THE END OF THE

THREE-DECADE LONG CONFLICT

Accommodative monetary policy

Fiscal consolidation

Strengthened financial sector stability

High economic growth

Improved resilience

Increased stability

Increased social welfare

Peace

Improved investor confidence

Favourable macroeconomic condition

Gradual recovery of the global economy

A favourable

environment

Appropriate

policies

Outcome

3



HOWEVER, THERE WERE SOME CHALLENGES…

•Rising commodity prices, including crude oil in theinternational market

• Natural disasters

• Geo-political disturbances in a number of countries/

regions

• Sovereign debt crisis in Europe

• Delayed unwinding of fiscal stimuli provided during

the crisis period

4



REAL SECTOR

5



ECONOMY RECOVERED STRONGLY IN 2010…

6.2

7.06.3

4.3

1.62.1

4.2

6.2

7.18.5 8.0

8.6

1

2

3

4

5

6

7

89

2 0 0 8 - Q 1

2 0 0 8 - Q 2

2 0 0 8 - Q 3

2 0 0 8 - Q 4

2 0 0 9 - Q 1

2 0 0 9 - Q 2

2 0 0 9 - Q 3

2 0 0 9 - Q 4

2 0 1 0 - Q 1

2 0 1 0 - Q 2

2 0 1 0 - Q 3

2 0 1 0 - Q 4

P e r c e n t

899841 870

9481030

1241

1421

1617

2014 2057

2399

0

500

1000

1500

2000

2500

3000

2 000 2 001 2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010

Prov.

Per capita GDP (US $)

Source : Department of Census and Statistics

Quarterly GDP Growth Rates

6

• The economic recoverywhich commenced in

mid 2009, continued in

2010



THE GROWTH WAS BROAD BASED…

GDP Sectoral Growth and Shares (%)

SectorGrowth (%) Share to the GDP (%)

2009 2010 2009 2010

Agriculture 3.2 7.0 12.0 11.9

Industry 4.2 8.4 28.6 28.7

Services 3.3 8.0 59.3 59.3

GDP 3.5 8.0 100.0 100.0

• All key sectors of the economy grew by 7% - 8% compared to the3% - 4% growth in 2009.


7



INCREASED PERFORMANCE IN ALL KEY SECTORS IN 2010

Agriculture grew by 7.0%

• Favourable weather conditions

• Increased paddy, tea, rubber, fish, milk, minor

agricultural crops production

• Continued Govt. Support : fertiliser, minimum paddy

purchase price, extension services, new planting and

re-planting subsidy, high quality seeds

• Significant contribution from the Northern and the

Eastern provinces

Industry grew by 8.4%

• Improved domestic and external demand

• Export market oriented : textiles & apparel, rubber

based, leather, fabricated metal products

•

Domestic market oriented : food and beverages,ceramic products, cement and building materials

• Improved infrastructure facilities, revival of economic

activity, productivity improvement also helped

Services grew by 8.0%

• All sub-sectors performed well – Wholesale and retail trade

• Export and Import trade

– Transport and Communication

– Tourism

– Banking and Insurance

GDP and Sectoral Performance (Growth Rates)

0

1

2

3

4

5

6

7

8

9

2005 2006 2007 2008 2009 2010

P e r c e n t

Agriculture Industry Services Gross Domestic Product

8



• Telephone density

increased to 100.8 in

2010 from 86.6 in

2009

SOME SELECTED INDICATORS…

• Electricity generation

increased by 8.4%

• Hydro power generation

increased by 45.2%

• 53% of total electricity

generation was Hydro

• Electrification level

increased to 90%

• The Port of Colombo

handled 4.1mn

containers in 2010

• Transshipment handling

increased by 18%

• Cargo handling

increased by 26.7%

• Total vehicle

registration recovered

and increased by 76%

• Registration of buses

increased by 237%

• Registration of cars

increased by 300%

9

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 T

e l e p h o n e s p e r 1 0 0 p e r s o n s

Fixed Access Total (including Cellular phones)

Telephone Density

-

1

2

3

4

5

6

7

2005 2006 2007 2008 2009 2010

G W h .

( ' 0 0 0 )

Power Generation

Hydro Thermal & Other

0

1

2

3

4

5

2006 2007 2008 2009 2010

T E U s i n m n .

Volume of Container Handlingand Transshipment

Container Handling Transshipments

10

15

20

25

30

35

100

150

200

250

300

350

400

2006 2007 2008 2009 2010

Motor Vehicle Registrations

(in ‘000)

Total Vehicle Registrations (LHA)

Monthly Average (RHA)



BOTH SAVINGS AND INVESTMENT INCREASED…

Savings and Investment as a % of GDP

10

Item 2005 2006 2007 2008 2009 2010Investment 26.8 28.0 28.0 27.6 24.4 27.8

Private 22.4 23.9 22.6 21.1 17.9 21.6

Government 4.4 4.1 5.4 6.5 6.6 6.2

National savings 23.8 22.3 23.3 17.8 23.7 24.7

Domestic savings 17.9 17.0 17.6 13.9 17.9 18.7

Net factor income 5.9 5.4 5.8 3.9 5.8 6.0

Savings-Investment Gap -3.0 -5.7 -4.7 -9.8 -0.7 -3.1

Savings and Investment (% of GDP)

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010

P e r

c e n t

Investment Savings



UNEMPLOYMENT RATE DECLINED

• Unemployment rate declined to 4.9% in

2010 from 5.8% in 2009

‒ Increased economic activities

‒ Reconstruction and resettlement

programmes

‒ Increased self-employment

opportunities‒ Steady increase in foreign

employment

• Need measures to increase labour

productivity in agriculture through

improved seeds, technology &innovation, mechanisation, extension

services, etc. to address possible labour

shortages.

Unemployment (1990-2010)

15.9

12.3

11.310.5

9.2 8.9

7.6 7.98.8 8.4 8.3

7.7

6.56

5.45.8

4.9

0

2

4

6

8

10

12

14

16

1 9 9 0

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

P e r c e n t

Source : DCS

11



28.8

22.7

15.2

7.6

0

5

10

15

20

25

30

35

1995/1996 2002 2006/2007 2009/2010

p e r c e n t

Poverty Head Count Index (a)

POVERTY LEVEL HAS DECLINED RAPIDLY…

• Decline in poverty surpassed the target

set under MDGs

‒ Headcount index, halved from 15.2%

(2006/07) to 7.6% (2009/10)

‒ Significant decline in poverty levels in

estate and rural sectors

• Poverty alleviation programmes

continued

‒ Samurdhi subsidy programme

‒ Nutrition allowance programme

‒ Samurdhi social security programme

‒ Kerosene subsidy stamp programme

‒ Income support schemes & Community

development programmes

Sector

Poverty HCI

2006/07 2009

Sri Lanka 15.2 7.6

Urban 6.7 6.5

Rural 15.7 7.7

Estate 32.0 9.2



12

(a) Based on household income & expenditure survey 2006/2007



INFRASTRUCTURE DEVELOPMENT PROGRAMME WAS ON TRACK…

13

– Extensive Colombo City Development Plan

– Power projects• 900 MW Norochcholai Coal Power Plant (Phase 1 - 300MW Completed, Phase 2 : 2013)

• 150 MW Upper Kothmale Hydro Power Plant (Completion by 2011)

• Uma Oya Hydro Power Project (Completion by 2015)

• Moragahakanda and Kaluganga Reservoir Project (Commenced)

– Road development projects• The Southern Highway (Completion by 2011)

• The Colombo - Katunayake Expressway (Completion by 2012)

• The Colombo Outer Circular Road (Completion by 2013)

– Port and Airport development projects

• The South Colombo Harbour Project, (Phase 1 Completion by 2012)

• The Hambantota Port Development Project (Phase 1 : Completed)

• The Oluwil Port Development Project (Completion by 2011)

• Second International Airport (Phase 1 : in 2012)

– Several water supply projects

– Rural infrastructure development projects

– “Widulamu Lanka” (Targeting 100% electricity coverage)



EXTERNAL SECTOR

14



EXTERNAL SECTOR OUTLOOK IMPROVED

• Graduated to Middle-Income Country

status by IMF

• Successful issue of 10- year sovereign

bond amounting to US dollars 1 bn

• Sovereign ratings upgraded by all

rating agencies during the year

• IMF – SBA facility continued

Rating

Agency

Current

RatingOutlook

S&P B+ Stable

Fitch B+ Positive

Moody’s B1 Stable

8.25

7.4

6.25

6

6.5

7

7.5

8

8.5

0

500

1000

2007 2009 2010

%US$ mn

Issuance of Sovereign Bonds

Amount Yield (%)

15



EXPORT EARNINGS RECOVERED STRONGLY IN 2010...

Exports by Destinations

Earnings from exports increased by 17.3%

–Both Agricultural and Industrialexports increased

– Attractive prices in the international

markets

– Gradual recovery of global demand

–

Productivity improvements• Growth led by Industrial exports - textile

and garments, rubber products,

machinery and equipment

• Agricultural exports also recorded a

healthy growth – led by higher tea andrubber prices

400

500

600

700

800

900

1,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

U S $ m i l l i o n

2008 2009 2010

Earnings from Exports

16

UK

12%Belgium-

Luxemburg

5%

Germany

5%

Italy

6%

EU-Other

7%

USA

21%

Asia

16%

Middle East

12%

Other

16%

2010



Garment and Textile Exports Destinations (US$ Mn)

Region 2009 2010 Growth (%) Share

EU region 1,629 1,678 3.0 47.9

U.S.A. 1,285 1,356 5.5 38.7

Other 360 470 30.6 13.4

Total 3,274 3,504 7.0 100.0

EXPORTS WEATHERED THE GSP+ WITHDRAWAL CHALLENGE…

• Despite the withdrawal of theGSP+ scheme since August 2010,apparel exports to all majorregions increased.

• Nearly 87 per cent of Sri Lanka’s

garment exports goes to the EUand the USA.

70

90

110

130

150

170

190

210

230


USD Mn.Exports of Garments to EU

2009 2010

50

70

90

110

130

150

170

190


USD Mn.

Exports of Garments to USA

2009 2010

17



EXPENDITURE ON IMPORTS ALSO INCREASED...

Expenditure on Imports Expenditure on imports increased by 32.4%

– Reflecting higher international

commodity prices

– Increased volumes with economic

expansion

•

Growth led by intermediate goods, mainlypetroleum imports

• Imports of non-food consumer goods also

increased - supported by tax reductions

• Investment goods imports increased

reflecting the rapid recovery of theeconomy

Trade deficit expanded to US$ 5,205 mn in 2010 compared

to US$ 3,122 mn in 2009.

400

600

800

1,000

1,200

1,400

1,600


U S $ m i l l i o n

2008 2009 2010

Imports by Origin - 2010

18

EU

11%USA

1%

India

19%

Singapore

12%China

9%

Asia Other

18%

Middle East

14%

Other

16%



INTERNATIONAL CRUDE OIL PRICES INCREASED IN 2010 COMPARED TO LOWER PRICES IN THE PREVIOUS YEAR… • The average import price of crude oil

increased to US dollars 80 per barrelin 2010 from US dollars 62 per barrelin 2009.

• International crude oil pricesincreased to US dollars 92 p.b by theend of 2010 from US $ 70- 80 p.bduring the first half.

• Crude Oil prices further increased in

2011 due to increased demand andsupply disruptions due to geo-politicaltensions in some oil producingcountries.

19

30

40

50

60

70

80

90

100

110

120

130

0 9 ' J a n

M a r

M a y J u

l

S e p

N o v

1 0 ' J a n

M a r

M a y J u

l

S e p

N o v

1 1 ' J a n

M a r

U S $ / b b l

International Crude Oil Prices (Brent)

Monthly Average



WORKERS’ REMITTANCES GREW SHARPLY…

1,564

1,9192,161

2,502

2,918

3,330

4,166

1000

1500

2000

2500

3000

3500

4000

4500

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0 ( P r o v )

U S $ m n .

Workers’ Remittances

Far EastAsia, 6.1

Other, 3.3

North

America, 3.8

EU, 18.1

Europe

other, 4.1

Australia &

NewZealand

, 1.7

South East

Asia, 3.0

Middle East,59.9

Region-wise Workers’ Remittances

Workers’ remittances exceeded USD 4.1 billion in 2010, up by 23.6% compared

to USD 3.3 billion in 2009.

20



TOURISM REBOUNDED SIGNIFICANTLY...

Western Europe

39%

Other South Asia

2%

India

19%

Maldives

5%

East Asia

11%

Aus/NZ6%

North America

6%

Eastern Europe

5%

Middle East

6%Other

1%

Tourist arrivals by country/region of residence

(Jan-Dec 2010)

Tourist arrivals increased by 46.1% to 654,476 in 2010, surpassing the previous

record of 566,202 arrivals in 2004.

Major tourist generating countries, such as USA, UK, Germany, Australia and

Japan relaxed travel advisories.

400

337

393

501

566549

560

494

438 448

654

300

350

400

450

500

550

600

650

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

N o .

o f T o u r i s t s ( ' 0 0 0 )

Tourist Arrivals

21



EXTERNAL CURRENT ACCOUNT DEFICIT MORE THAN OFFSET

BY CAPITAL AND FINANCIAL ACCOUNT SURPLUS...

• Current account deficit as a percentage of

GDP was 2.9% in 2010

2,725

921

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000-1,000

0

1,000

2,000

3,000

4,000

2005 2006 2007 2008 2009 2010

U S D m n

Trade Balance Current Account Balance Overall Balance

Balance of Payments

22

ItemUS dollars million

2009 2010

Exports 7,085 8,307

Imports 10,207 13,512

Trade balance -3,122 -5,205

Services (net) 391 698

Income (net) -488 -572

Current Transfers (net) 3,005 3,660

Current Account -214 -1,418

Capital Account 233 164

Financial Account 2,361 2,713

Overall balance 2,725 921



GROSS OFFICIAL RESERVES REACHED RECORD HIGH LEVELS… • Reserves increased to USD 6.6 billion (equivalent to 5.9 months of

imports) by end 2010

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

M

o n t h s o f I m p o r t s

U S D b n .

Gross Off icial Reserves (Left Axis) Months of Imports (Right Axis)

Gross Official Reserves (without ACU) and Months of Imports

23



105

110

115

120

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

Rs Daily Exchange Rate Movements Against US Dollar

INCREASED FOREIGN EXCHANGE INFLOWS EXERTED

PRESSURE ON THE RUPEE TO APPRECIATE...

• The rupee appreciated against the US dollar by 3.1% in2010 and moved in different directions against othercurrencies.

24

150

160

170

180

190

200

210

220

230

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

Rs.Daily Exchange Rate Movements Against Sterling Pound

130

135

140

145

150

155

160

165

170

175

180

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

Rs.Daily Exchange Rate Movements Against Euro

0.8

1.0

1.2

1.4

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

Rs.

Daily Exchange Ra te Movements Against JapaneseYen

2.0

2.5

3.0

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

Rs.Daily Exchange Rate Movements Against Indian Rupee



FISCAL SECTOR

25



GOVERNMENT REVENUE Total revenue increased by 16.9 per cent to Rs. 818.2 billion

The declining trend observed in the revenue to GDP ratio during the lastthree years reversed with the higher mobilisation of both tax and non tax

revenue.

Major reforms to the tax system were introduced in the budget for 2011 to

improve revenue collection.

Government Revenue (as a percentage of GDP)

26

14.6 14.2 13.3 12.8 13.0

1.7 1.61.6 1.7 1.7

16.3 15.814.9 14.5 14.6

0

2

4

6

8

10

12

14

16

18

2006 2007 2008 2009 2010 Pro.

P e r c e n t

Non Tax Revenue Tax Revenue



GOVERNMENT EXPENDITURE Total expenditure and net lending declined to 22.9 per cent of GDP

due to the efforts by the government to curtail recurrent expenditure,

while maintaining capital expenditure at a desired level

Recurrent expenditure, as a percentage of GDP, declined significantly

to 16.7 per cent in 2010 from 18.2 per cent in 2009.

Government Expenditure (as a percentage of GDP)

27

18.6 17.4 16.9 18.2 16.7

5.66.1 5.7

6.76.1

24.3 23.522.6

24.9

22.9

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 Pro.

P e r c e n t

Capital and Net Lending Recurrent



BUDGET DEFICIT The overall fiscal deficit declined to 7.9 per cent of GDP in 2010,

within the original estimate of 8 per cent of GDP, and below the

deficit of 9.9 per cent recorded in 2009.

Overall Fiscal Deficit (as a percentage of GDP)

28

-7.0 -6.9 -7.0

-9.9

-7.9

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

2006 2007 2008 2009 2010 Pro.

P e r c e n t



Deficit Financing (as a percentage of GDP)

FINANCING THE BUDGET DEFICIT The greater availability of external resources reduced borrowings from

the domestic market.

The government reduced its reliance on bank financing to bridge thegovernment’s resource gap, reducing the inflationary impact of deficitfinancing.

The government raised low cost external financing during the year takingthe advantage of the favourable conditions prevailing in the internationalfinancial market and improved investor confidence.

29

2.9

3.6

2.7

4.13.6

2.7

0.4

4.4

1.0

0.0

1.4

2.8

-0.1

4.84.4

-1

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 Pro.

P e

r c e n t

Domestic Non Bank and Other Domestic Bank Borrowings Foreign Loans



GOVERNMENT DEBT Government debt as a percentage of GDP declined to 81.9 per cent in

2010 from 86.2 per cent in the previous year.

The lower borrowing requirement, the appreciation of the rupee vis-à-vis major foreign currencies and higher economic growthcontributed to the reduction in the debt to GDP ratio.

Outstanding Government Debt (as a percentage of GDP)

30

50.3 47.9 48.5 49.8 45.8

37.5 37.1 32.836.5

36.1

87.9 85.081.4

86.281.9

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 Pro.

P e r c e n t

Foreign Domestic



MONETARY AND FINANCIAL

SECTORS

31



-5

0

5

10

15

20

25

30

J a n - 0 6

M a r - 0 6

M a y - 0 6

J u l - 0 6

S e p - 0 6

N o v - 0 6

J a n - 0 7

M a r - 0 7

M a y - 0 7

J u l - 0 7

S e p - 0 7

N o v - 0 7

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

P e r c e n t

Other Transport

Food and Non Alcholic Beverages Inflat ion, y-o-y (CCPI=2002)

INFLATION REMAINED SUBDUED DURING THE YEAR…

• Annual average inflation was 5.9% in December 2010.

• Year-on-year inflation in December 2010 was 6.9%

28.2

6.9

23.4

5.9

0

5

10

15

20

25

30

D e c - 0 7

F e b - 0 8

A p r - 0 8

J u n - 0 8

A u g - 0 8

O c t - 0 8

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

O c t - 1 0

D e c - 1 0

P e r c e n t

Year-on-Year Annual Average

Colombo Consumers’ Price Index (% change)

32

Contribution to Headline Inflation from Key Categories



MARKET INTEREST RATES DECLINED IN LINE WITH THE REDUCTION IN POLICY RATES…

• Improved outlook for priceshelped maintainingaccommodative monetary policystance

• Central Bank reduced its policyinterest rates to spur growth of credit to support economicactivity:

– Repo by 25 bps, and

– Reverse Repo by 75 bps

• Weighted average call money ratecontinued to remain stable withinthe policy rate corridor

Policy Interest Rates of the Central Bank andthe Average Weighted Call Money Rate

10.259.00

8.508.00 7.50 7.25

11.75 11.5011.00 10.509.75 9.50

9.00

17.0016.50

14.75

13.00

6

8

10

12

14

16

18

20

3 1 - D e c - 0 8

3 0 - J a n - 0 9

1 - M a r - 0 9

3 1 - M a r - 0 9

3 0 - A p r - 0 9

3 0 - M a y - 0 9

2 9 - J u n - 0 9

2 9 - J u l - 0 9

2 8 - A u g - 0 9

2 7 - S e p - 0 9

2 7 - O c t - 0 9

2 6 - N o v - 0 9

2 6 - D e c - 0 9

2 5 - J a n - 1 0

2 4 - F e b - 1 0

2 6 - M a r - 1 0

2 5 - A p r - 1 0

2 5 - M a y - 1 0

2 4 - J u n - 1 0

2 4 - J u l - 1 0

2 3 - A u g - 1 0

2 2 - S e p - 1 0

2 2 - O c t - 1 0

2 1 - N o v - 1 0

2 1 - D e c - 1 0

P e r c e n t

Weighted Average Call Money Rate RepoReverse Repo Penal Rate

33



Market interest rates continued to

adjust downwards

Deposit Rates of Commercial Banks,

Treasury bill yield and Monthly AWPR

3

5

7

9

11

13

15

17

19

21

23

D e c - 0 7

M a r - 0 8

J u n - 0 8

S e p - 0 8

D e c - 0 8

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

J u n - 1 0

S e p - 1 0

D e c - 1 0

P e r c e n t

Monthly AWPR AWDR T-bill yield (91-day) AWFDR

34

6

8

10

12

14

16

18

20

22

0 1 2 3 4 5 6

P e r c e n t

Years

Secondary Market Yield Curve for GovernmentSecurities

end Dec 2008

end Dec 2009

end Dec 2010



CONTINUED HIGH RUPEE LIQUIDITY REMAINED CHALLENGING…

0

25

50

75

100

125

150

175

1 - J u l - 0 9

1 5 - A u g - 0 9

2 9 - S e p - 0 9

1 3 - N o v - 0 9

2 8 - D e c - 0 9

1 1 - F e b - 1 0

2 8 - M a r - 1 0

1 2 - M a y - 1 0

2 6 - J u n - 1 0

1 0 - A u g - 1 0

2 4 - S e p - 1 0

8 - N o v - 1 0

2 3 - D e c - 1 0

R s . b i l l i o n

Term Repos

FX SWAPs

Central Bank Securities sold on a Term basis

Overnight Repos and Central Bank Securities sold on an Overnight basis

High liquidity was mainlydue to

Central Bank purchases of

foreign exchange

Excess liquidity was

absorbed through OMO Forex Swaps

Sales of CBSL securities

Repos using Governmentsecurities (held by CBSL &

borrowed)

35

Excess Money Market Liquidity absorbedby the Central Bank through OMO



RESERVE MONEY TARGET REVISED TO ACCOMMODATE DEVELOPMENTS IN THE ECONOMY… • Increase in the currency held by the public resulted in Reserve Money growing

above the target during the first half of 2010

• In July, original projections revised incorporating,

– Higher economic growth than initially expected

– Fiscal data as per the Budget 2010 approved in July

36

300

305

310

315

320325

330

335

340

345

350

355

Mar-10 Jun-10 Sep-10 Dec-10 Annual Avg

R s

. b n

Reserve Money - Target Vs. Actual

Targeted Reserve Money Actual Reserve Money

CREDIT TO THE PRIVATE SECTOR CONTINUED ITS HIGH GROWTH



CREDIT TO THE PRIVATE SECTOR CONTINUED ITS HIGH GROWTH

MOMENTUM…

• Private sector credit increased by 25.1% (y-o-y) by end

2010 compared to a contraction of 5.8% at end 2009.

Credit extended to the Private Sector in 2010

37

35.0

25.1

-10

-5

0

5

10

15

20

25

30

-

10

20

30

40

50

60

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

P e r c e n t

R s .

b n

Monthly change in private sector credit flows (Absolute terms) Growth % (year-on-year)



GROWTH IN BROAD MONEY

• Average growth of M2b

during the year was 15.3%

compared to the target of

15% for the year.

• The increase during the

year was due to the

expansion of domestic

credit, particularly credit

granted to the private

sector.

• NFA of the banking system

declined in 2010.

Expansion in Monetary Aggregates (Y-o-y)

18.820.9

15.8

(10)

(5)

0

5

10

15

20

25

30

35

J a n - 0 8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0 8

N o v - 0 8

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

%

Reserve Money M1 M2b

38



FINANCIAL SYSTEM STABILITY FURTHER IMPROVED..• Supported by expansionary economic activities and supportive

regulatory and supervisory measures

• Leading indicators relating to institutions, markets, payment systems and

safety nets improved

39

Financial Institutions:o Increased - credit growth, profitability,

capital adequacy and loan provision.

o Reduced - non-performing loans (NPLs)

Financial Markets: High liquidity, high

investor confidence

Payment systems: Use of RTGS, CITS,

SLIPS, credit cards, debit cards increased

(value by 41.4%, volume 10.8%)

Safety net: Mandatory deposit insurance,

introduction of regulations to encourage

prudence in operations, rules to CSE

Capital Adequacy Ratios of the Banking Sector



FINANCIAL SYSTEM STABILITY FURTHER IMPROVED…

• The Central Bank further strengthened its supervisory and regulatory measures

• Rehabilitated the six RFCs affected by the liquidity crisis prevailed at the end of 2008.

• Improvements to the payment and settlement systems continued in 2010.

• The expansion of the branch network of financial institutions continued

40

Expansion of Financial Services

* Excluding Student savings units

Item end 2009 end 2010 Change in 2010

Total Of which:

North & East

Bank Branches 1,847 1,937 90 29

Other Banking Outlets * 890 988 98 23

ATMs 1,876 2,009 133 36

RFCs 289 376 98 41

SLCs 145 224 44 15



THE PERFORMANCE OF THE COLOMBO STOCK EXCHANGE WAS IMPRESSIVE…• All Share Price Index (ASPI) and

Milanka Price Index (MPI) increased

by around 96% and 83.4%,

respectively, during the year 2010.

• Market capitalisation increased to

Rs.2.2 trillion at end 2010 from Rs.1

trillion at end 2009

• There were 10 IPOs during 2010, and

all were heavily oversubscribed. The

IPOs yielded Rs.5.34 billion.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1 - J a n - 1 0

2 9 - J a n - 1 0

2 6 - F e b - 1 0

2 6 - M a r - 1 0

2 3 - A p r - 1 0

2 1 - M a y - 1 0

1 8 - J u n - 1 0

1 6 - J u l - 1 0

1 3 - A u g - 1 0

1 0 - S e p - 1 0

8 - O c t - 1 0

5 - N o v - 1 0

3 - D e c - 1 0

3 1 - D e c - 1 0

R s . n

I n d e x P o i n t s

Daily Turnover (Right axis) ASPI MPI

Colombo Stock Exchange - Price Indices

41



KEY MACROECONOMIC

CHALLENGES…

42



KEY MACROECONOMIC CHALLENGES • Maintaining and further strengthening the significant macroeconomic

achievements realised in 2010.

• Addressing possible labour market tightening

• Closing output gap

• Continuing Fiscal Consolidation process

• Rising international commodity prices including oil prices

• Exports: Further diversification of products and markets and effective use of existing bilateral trade agreements

• Improving doing business environment and attracting non-debt creatingcapital

• Transforming Sri Lanka into a strategically important economic centre:

need for central and co-ordinated actions

• Necessary reforms to the institutional framework of key public enterprises tooperate them more efficiently and in a commercially sustainable way to reflectmarket conditions.

43



THERE ARE 20 BOX ARTICLES IN THE REPORT.SOME SELECTED ARTICLES ARE… •

The Ease of Doing Business Ranking• Doubling Per Capita Income

• Voluntary Pension Fund – A Social Security Scheme to Increase Domestic Savings

• Infrastructure for Inclusive Growth

• Expanding Opportunities for Higher Education

• Global Warming and Carbon Credits

• Trends in Global Foreign Direct Investment (FDI) Flows and Prospects forAttracting FDI to Sri Lanka

• Government Debt Sustainability

• Strengthening the Framework for Monetary Policy

• Regulations for the Microfinance Sector

• Investments by the Employees’ Provident Fund in the Stock Market

• Major Economic Policy Changes and Measures: 2010

state of the economy srilanka- 2010

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