State of the Economy

as reflected in

the Central Bank Annual Report - 2015

K. M. Mahinda Siriwardana
Director of Economic Research
Central Bank of Sri Lanka
10 May 2016

The Statutory Requirement

Section 35 of the Monetary Law Act:
Within four months after the end of each financial year, the Monetary Board shall submit to
the Minister in charge of the subject of Finance and shall publish an annual report on the
condition of the Central Bank and a review of the policies and measures adopted by the
Monetary Board during the financial year and an analysis of the economic and financial
circumstances which prompted those policies and measures

Contents of the Annual Report

Part 1 -

The state of the economy, its performance, policies and issues

Part 2 -

Accounts and operations of the Central Bank

Part 3 -

Major administrative measures adopted by the Monetary Board in 2015

Part 4 -

Major legislative enactments in 2015 relating to the functions and operations of the
Central Bank and banking institutions in Sri Lanka

Appendix Tables
Special Appendix Tables

Part 1:
State of the Economy, Its Performance, Policies and
Issues
Chapter 1

Economic, Price and Financial System Stability, Outlook and

Policies

Chapter 2

National Output, Expenditure and Income

Chapter 3

Economic and Social Infrastructure

Chapter 4

Prices, Wages, Employment and Productivity

Chapter 5

External Sector Developments and Policies

Chapter 6

Fiscal Policy and Government Finance

Chapter 7

Monetary Policy, Money, Credit and Interest Rates

Chapter 8

Financial Sector Developments and System Stability

Domestic and Global Environment in 2015

A slowdown in the growth of demand for traditional export
markets impacting the export sector
Strengthening US economy prompted short term capital
outflows
The slowing down of net financial inflows, including worker
remittances
The positive impact of lower international commodity prices
Rebounded domestic consumption due to rise in incomes
High money and credit growth and rising underlying
inflationary pressures

Domestic and Global Environment in 2015

Moderately successful efforts to reverse the downward trend
in government revenue
Overruns in the government expenditure with increased
budget deficits
Delay in the policy responses to volatile global economic
conditions after the general election
Central Bank policy actions to address adverse implications of
growing demand pressures on price stability and financial
system stability

Sri Lankan economy grew by 4.8% during 2015 in real

terms, compared to 4.9% in 2014

6.0
5.6

2015-Q3

2015-Q1

2014-Q4

2014-Q3

2015-Q4

2.5

4.5

5.8
7.0

6.4

4.4

2015-Q2

10.3
5.0

6.4

7.7

7.8
2.2

2014-Q2

1.3

2014-Q1

0.5

2013-Q4

2013-Q3

2013-Q2

2013-Q1

2012-Q4

2012-Q3

2012-Q2

2012-Q1

2011-Q3

2011-Q2

2011-Q1

2010-Q4

2010-Q3

2010-Q2

2011-Q4

Base Year 2002

7.6

8.2

4.0

6.8
5.9

6.1
3.6

6.3
6.8

4.8
5.2

7.9

9.7
6.4

8.0

8.3
7.6

8.5
9.2

8.1
7.2

9.8

8.0

8.6

8.0

8.5
7.1

18
16
14
12
10
8
6
4
2
0

16.1

Quarterly Real GDP Growth (Year-on-Year)

2010-Q1

Department of Census and Statistics (DCS) revised the base year for national
accounts statistics to 2010 from 2002.
The United Nations System of National Accounts (SNA) 2008 standard was adopted.
This captures the changes in the economic structure of Sri Lanka over the past
decade and introduces new economic activities such as IT programming consultancy
and related activities, information services, and professional services, etc.

Per cent

Base Year 2010

Growth was broad-based with positive contributions by

all major sectors
Services (GDP share 56.6%): 5.3%

Financial Services Activities : 15.8%

Real Estate Activities: 9.6%
Transport Activities: 5.5%
Wholesale and Retail Trade : 4.7%
Education, Professional Services and
Accommodation, Food and Beverage Services
activities declined

Economic Activity

Annual Growth Rates (%)

2011

2012

2013

2014

2015

Services

8.9

11.2

3.8

5.2

5.3

Industries

9.3

9.0

4.1

3.5

3.0

Agriculture, Forestry
and Fishing

4.6

3.9

3.2

4.9

5.5

GDP

8.4

9.1

3.4

4.9

4.8

Industries (GDP share 26.2%): 3.0%

Manufacturing activities grew by 4.7%, mainly contributed by manufacture of food, beverages and tobacco products,
and other manufacturing and repair and installation of machinery and equipment, which grew by 5.6% and 16.4%,
respectively
Electricity, water and waste treatment activities contributed positively
Construction, and mining and quarrying activities contracted by 0.9% each
Manufacture of textiles, wearing apparel and leather related products recorded no growth

Agriculture, Forestry and Fishing (GDP share 7.9%): 5.5%

Growing of Vegetables and Rice increased by 24.9 % and 23.3%, respectively, while Fruits and Animal
Production increased by 16.5% and 8.0%, respectively
Fresh Water Fishing and Growing of Rubber contracted by 11.2% and 10.2%, respectively, while Growing of
Tea contracted by 2.6%
7

Accommodative policies and favourable weather

conditions amidst challenges supported economic activity
Monetary and fiscal policies were largely
accommodative
A low and stable inflation environment and low interest
rates continued supporting the economy
Fiscal measures, such as increase in public sector salaries
and downward revision of administrative prices of fuel,
LP gas, bus fare, etc., also contributed positively to induce
the demand

Agriculture largely benefitted from the favourable

weather conditions

Nevertheless, several domestic and global

developments affected the economic activity
Change in policy direction and attempts to re-evaluate large
infrastructure projects affect the growth momentum and
delayed possible capacity expansion in the economy.
Slower than expected recovery in advanced economies,
moderation in economic activities in China, and the
economic distress in Russia and some Middle East countries
dragged down the demand for exports.
Spillovers from the subdued performance in the world
economy weighed on domestic economic activities.
A slowdown in the growth of demand in Sri Lankas
traditional export markets impacted the export sector.
9

Growth was largely driven by an increase in

consumption with modest contribution of investments

Per cent

Public consumption expenditure grew at a high rate (13.4%)

reflecting the increase in salaries of public sector employees.
Private consumption expenditure also grew (8.4%) due to the low
interest rate environment and increased real wages.
However, growth in
Savings and Investment (% of GDP)
investment activities
45
40
decelerated to 0.6% from
32.0
35
30.1
30
4.8% in 2014.
24.0
22.6
25
20
Domestic savings declined to
15
10
22.6% of GDP mainly due to
5
an increase in government
0
2011
2012
2013
2014
2015
dissavings and the
Gross Investment Gross Domestic Savings
slowdown in private savings.
(a) The data is based on the base year 2010 GDP estimates of the Department of
Census and Statistics

10

GDP per capita increased to USD 3,924 in 2015 from

USD 3,853 in 2014
Per Capita GDP
4,500

3,853

4,000

3,924

3,500

3,000

2,744

2,500
2,000
1,500

1242

1,000 869
500

2015 Est.

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

US$

GDP per capita was estimated

at Rs. 533,398 for 2015
compared to Rs. 503,032 in
2014, recording a 6.0%
growth in comparison to 7.9%
in 2014.
This was mainly attributable
to the growth in nominal GDP
(7.0%) in the midst of a fairly
stable mid-year population
growth level (0.9%).
Country is gradually moving
to upper middle income
status.

11

The low and stable inflation environment continued

supporting the economy
Feb
Inflation remained low due to:

Dec
2014

Jan
2016

2016

Mar
2016

Apr
2016

Headline inflation (%) based on CCPI

Downward adjustment of
administered prices
Favourable supply side
developments

Dec
2015

Y-o-Y

2.1

2.8

0.9

2.7

2.0

3.1

Annual average

3.3

0.9

0.7

0.9

1.1

1.3

Headline inflation (%) based on NCPI

Well contained inflation

expectations in the economy
Relatively low international
commodity prices including oil

Y-o-Y

4.2

-0.7

1.7

2.2

Annual average

3.8

2.9

2.6

2.4

Core inflation (%) based on CCPI

Y-o-Y

3.2

4.5

4.6

5.7

4.5

4.5

Annual average

3.5

3.1

3.3

3.7

3.9

4.1

Movements in Inflation
CCPI (2006/2007 = 100

NCPI (2013 = 100)

11.0

14.0

Headline (Y-o-Y) based on NCPI

Mar-16

Feb-16

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

Headline (Annual Avg.) based on CCPI

Jul-15

Headline (Y-o-Y) based on CCPI

-1.0

Jun-15

Core (Y-o-Y)

1.0

May-15

Core (Annual avg)

3.0

Apr-15

-1.0

5.0

Mar-15

4.0

7.0

Feb-15

9.0

Jan-15

Per cent

9.0

Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Apr-14
Aug-14
Dec-14
Apr-15
Aug-15
Dec-15
Apr-16

Per cent

19.0

12

Unemployment rate increased to 4.6% during 2015,

compared to 4.3% recorded in 2014

Annual Unemployment Rate

18
16

15.9

14
12

10
8
6

7.6
4.0

4.6

4
2
0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Per cent

Female unemployment rate

increased from 6.5% to 7.6%
Male unemployment rate
declined marginally from
3.1% to 3.0%
Increase in unemployment
among youth and those with
GCE A/L qualifications and
above was notable (from
8.1% in 2014 to 9.2% in
2015).

Labour force participation rate (LFPR) increased to 53.8% from 53.3% with
increased participation of rural sector females
Although the LFPR increased, the new economic activities or the expansion of
existing economic activities were not sufficient to absorb additional new labour
into the labour force.
13

Having achieved the MDG of halving poverty between 2000-2015,

Sri Lanka now faces the challenge of addressing regional
disparities and income inequality under SDGs
It is needed to implement policies that will
reach the extreme poor, especially in
peripheral districts.
As there is a legitimate right for the poor to
have access to the socioeconomic
infrastructure of the country, the government
has the responsibility of addressing the issues
on a systematic basis.

Spatial Distribution of Poverty in

Sri Lanka - 2012/13

Income Inequality - Share of Income

Richest 10% of the
Households

4.5%

38.0%

Middle 70% of the

Households

57.5%

Poorest 20% of the

Households

14

Improving economic and social infrastructure remained

an integral part of the overall development drive
Several key infrastructure projects were completed during
the year.
Phase II of the Outer Circular Highway (OCH)
JaffnaKankesanthurai and the Madhu Thalaimannar sectors of the
Northern railway line were opened to the public
Construction of phase I of the East Container Terminal (ECT) at port
of Colombo

Number of infrastructure projects were initiated during the

year.
Central Expressway Project (CEP)
the Google Loon Project
However, in the absence of an efficient public transportation system,
traffic volumes continued to exceed the capacity of roads.
15

Improving economic and social infrastructure remained

an integral part of the overall development drive
Broad conceptual framework of the Western Region Megapolis Master
Plan was drafted and the plan was unveiled in January 2016.
Port City Project was permitted to recommence in first half of 2016.

Lotus Tower project, Phase III of the OCH, the Extension of the Southern
Expressway from Matara to Hambantota, Uma Oya Multipurpose
Development project, Phase II of the Hambantota port and Road Sector
Assistance Project II (Phase-II), progressed during the year.
Limitations in the fiscal space could constrain public investments required to
expand and improve the quality of infrastructure.

Hence, funding of infrastructure investment projects in a number of countries

has increasingly taken the form of equity financing, which is able to attract
private capital for infrastructure investments.
16

Social indicators continued to improve with enhanced

government investment on human development
Indicator
Human Development Index (HDI)
HDI World Rank
Number of persons per doctor (Government health sector)
Number of hospital beds (Government health sector)
available per 1,000 persons
School density (area covered by a school) (sq. km)
Student teacher ratio in Government schools
Level of electrification (%)
Telephone penetration (connections per 100 persons)
Accessibility to safe drinking water (%)
Poverty headcount ratio (%)

2014
0.752
74
1,155

2015
0.757
73
1,079

3.7
6.5
18
98
120.0
2009/10
87.7
8.9

3.7
6.5
17
98.5
128.7
2012/13
89.7
6.7

A healthier workforce with market oriented skills is necessary to sustain

a high level of economic growth in the future.
17

Telecommunication sector continued to progress in line

with the remarkable advancement and innovation in the
global telecommunications technology
Telephone density increased to
128.7 in 2015 from 120.0 in 2014.
Number of mobile telephone
connections increased by 10.2%.
Telephone Penetration

Telephones per 100 Persons

140
120
100

99.5
87.8

98.7

106.5

116.3

80
60
40
20
0

17.3

16.9

13.2

13.0

12.4

2011

2012

2013

2014

2015

Cellular

Fixed Access

Government and Google Inc.

signed an agreement to initiate the
Google Loon project in July 2015,
which will cover the entire Island
with 4G internet.
Successful implementation of the
project will provide enhanced
accessibility to high-speed,
affordable internet across the
Island.
18

Electricity generation mix has been significantly

improved
Total electricity generation in 2015
increased by 5.9% to 13,090 GWh, from
12,357 GWh in 2014, facilitating the
increased demand for energy
Cumulative effect of increased hydro and
coal power generation helped to lower
fuel oil generation
Electricity sales increased by 6.5% to
11,786 GWh in 2015 in comparison to the
growth of 4.2% in 2014
Optimal use of hydro and coal power sources
through minimised overflows in reservoirs and
appropriate timing of maintenance stoppages,
is vital to further enhance the financial viability
of the Ceylon Electricity Board.

Electricity Generation Mix

NCRE
9.9%

2014
Hydro
(excluding
Mini Hydro)
29.4%

Coal
25.9%

Fuel Oil
34.8%

NCRE
11.2%

Coal
33.9%

2015
Hydro
(excluding Mini
Hydro)
37.5%

Fuel Oil
17.4%

19

Road development continued to be a key policy

priority of the government in 2015, while passenger
transportation displayed some progress
Road Development

Passenger kilometrage of SLTB and private buses

increased by 19.6% and 6.1%, respectively, during
the year.
Rail passenger kilometrage increased by 8.3%.
Registration of motor vehicles increased
substantially during 2015 by 55.7%.

New Registrations of Motor Vehicles

70,000
60,000
50,000
40,000
30,000
20,000
10,000

Other (includes Buses, Dual Purpose, Goods Transport and Land Vehicles)

Motor Cycles

Three Wheelers

Jan-16

Sep-15

May-15

Jan-15

Sep-14

May-14

Jan-14

Sep-13

May-13

Jan-13

Sep-12

May-12

Jan-12

Sep-11

May-11

Jan-11

Completion of extensions to
the national expressway
network continued while
construction work of new
expressways was initiated.
Several road construction,
rehabilitation and
maintenance projects were
in progress during 2015.
A number of measures were
taken to reduce traffic
congestion in major cities
and improve road safety.

Number

Passenger Transportation

Motor Cars

20

Reflecting the increase in tourist arrivals, air passenger

movements increased by 9.3% to 8.5 mn during 2015
Air Passenger and Air Cargo Handling
9

250

8
200

7
6

Millions

100

3
2

50

1
0

0
2011

2012

2013

Passenger Handling
Cargo Handling (Right Axis)

2014

2015

Transit Passengers

MT ('000)

150

Through Bandaranaike International

Airport (BIA):
Transit passengers increased by
4.1% to 1.2 mn
Total volume of cargo handling
increased by 11.8%
No. of aircraft handled
increased by 4.6% to 57,823
SriLankan Airlines (SLA) recorded an
operating loss of Rs. 10.6 bn in 2015
compared to Rs. 29.0 bn in 2014

Engineering designs of Phase 2 Stage 2 of the BIA expansion project were

mostly completed during 2015.

21

Port of Colombo recorded its highest annual container

throughput during the year
Container Handling, Transshipment
Volume and Ship Arrivals
4,800
5,000

4,600
4,000

TEUs ('000)

3,000

4,200

2,000

4,000

1,000

3,800
3,600

0
2011

2012

Total Container Handling

Ship Arrivals (Right Axis)

2013

2014

2015

Transshipments

Number

4,400

Total container handling in 2015

increased by 5.7% to 5.2 mn TEUs
from 4.9 mn TEUs in 2014
Container ship arrivals to Colombo
Port increased by 12.5%
Total container handling of the
Colombo International Container
Terminal (CICT) grew substantially by
127.5%
However, the performance of all other
terminals deteriorated during the
year

Construction of Phase I of the East Container Terminal (ECT) at port of Colombo was
completed in 2015.
The construction of Phase II of the Hambantota port continued in 2015.
22

In the external sector, earnings from exports contracted by 5.6%

in 2015 reflecting a decline across almost all major export
categories
Category
Agricultural Exports
Tea
Rubber
Spices
Sea Food
Industrial Exports
Textiles and Garments
Rubber Products
Transport Equipment
Mineral Exports
Total Exports

2014
2015 (a)
Value
Value
(US$ mn.)
(US$ mn.)
2,793.9
2,481.5
1,628.3
1,340.5
45.3
26.1
264.6
377.4
252.7
163.1
8,262.0
7,975.6
4,929.9
4,820.2
889.8
761.2
151.8
243.7
59.5
28.4
11,130.1
10,504.9

Y-o-Y
Change
%
-11.2
-17.7
-42.3
42.7
-35.5
-3.5
-2.2
-14.5
60.5
-52.3
-5.6

Exports by Destination

Decline in international commodity prices,

slower pace of growth in advanced economies,
geopolitical uncertainties, and restrictions by
the EU on fish imports contributed to the
decline.
23

Overall expenditure on imports declined by 2.5%, although

expenditure on non-fuel imports increased significantly by 9.6%
Category

2014
Value
(US$ mn.)

2015 (a)
Value
(US$ mn.)

Y-o-Y
Change
%

Consumer Goods

3,852.5

4,713.5

22.3

Food and Beverages

Vehicles

1,633.7
896.7

1,627.8
1,359.6

-0.4
51.6

11,397.7

9,638.2

-15.4

4,597.3

2,699.6

-41.3

Investment Goods

4,152.2

4,567.0

10.0

Building Materials
Transport Equipment

1,308.9
707.3

1,352.0
930.9

3.3
31.6

19,416.8

18,934.6

-2.5

Intermediate Goods
Fuel

Total Imports

Fuel import bill declined by USD 1.9 bn to USD 2.7

bn due to the significant decline in international oil
prices.

However, higher expenditure on importation of

personal motor vehicles and other consumer
durables contributed to the increase in non-fuel
imports.

Imports by Origin

24

Higher decline in exports resulted in the expansion of

the trade deficit in 2015...
Trade Deficit

Terms of Trade

Trade deficit expanded marginally to USD

8,430 mn in 2015 from USD 8,287 mn
recorded in 2014.
However, as a percentage of GDP, the
deficit in the trade balance decreased to
10.2% in 2015 from 10.4% in 2014.

Significantly large decline recorded in

import prices led by petroleum, in
comparison to the reduction in export
prices, led the terms of trade to improve
by 2.3% in 2015.

Exports, Imports and Trade Balance

Terms of Trade and Trade Indices

25

150
Index Points (2010=100)

US$ billion

20
15
10
5

0
-5
-10

Exports

2011

Imports

2012

2013

Trade Balance

2014

2015

130
110

90
70
2011

2012

2013

Exports-Volume

Imports-Volume

Imports-Unit Value

Terms of Trade

2014

2015
Exports-Unit Value

25

Earnings from tourism increased significantly even

though workers' remittances witnessed a moderation

Workers Remittances
Workers remittances declined by 0.5% to
USD 6,980 mn
This was largely attributable to the fall in
income of oil exporting countries in the
Middle East
Labour migration under the skilled category,
including professionals, had increased by 12.5 %

1,798

3,000

1,527

1,600
1,275

1,200

1,006

800

2,981

2,500
2,000

2,431

856

3,500

1,500

1,715

US$ million

Tourist Arrivals (000')

2,000

1,000
400

830

1,039

2011 2012
Tourist Arrivals

500
2013 2014 2015
Earnings from Tourism (right axis)

Workers Remittances
7500
7,018

6,980

2014

2015

7000

US$ million

Tourist arrivals
Tourist arrivals increased to 1.8 mn
Tourist arrivals from all major regions,
except Eastern Europe, increased
Earnings from tourism increased by 22.6%
to USD 2,981 mn

Tourist Arrivals and Earnings from

Tourism

6,407

6500
5,985

6000
5500

5,145

5000
2011

2012

2013

26

External current account deficit in 2015 remained

broadly unchanged compared to 2014 levels
Balance of Payments
3
0
-3

% of GDP

Current account deficit remained

largely unchanged as a result of
the surpluses in the services and
secondary income accounts
Merchandise trade and
primary income deficits
widened
However, services and
secondary income accounts
registered surpluses
Satisfactory performance in
travel, transportation and
telecommunications,
computer and information
services sub sectors witnessed

-6
-9

-12
-15
-18
2011

2012

Trade Balance
Overall Balance

2013

2014

2015

Current Account Balance

Current account deficit amounted to

USD 2,009 mn in 2015 compared to
USD 1,998 mn recorded a year earlier.
As a percentage of GDP, it narrowed
slightly to 2.4% in 2015, compared to
2.5% in 2014.
27

The BOP deteriorated in 2015 largely due to lower than

expected financial inflows and higher capital outflows

In 2015, the BOP recorded an overall deficit of USD 1,489 mn in comparison

to the surplus of USD 1,369 mn recorded in 2014.
Modest performance of the current account together with comparatively low
level of inflows to the financial account and higher outflows contributed to
the deterioration of the BOP.
Gross official reserves declined to USD 7.3 bn (equivalent to 4.6 months of
imports of goods) at end 2015 from USD 8.2 bn at end 2014.
Gross Official Reserves
12

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

11
10

US$ billion

US$ million

Inflows to the Financial Account

9
8
7
6

2011

2012

2013

2014

2015

Foreign Direct Investment Inflows (excluding foreign loans to the BOI companies)
Inflows to the Private Sector and Banking Sector
Inflows to the Government

11/Q1
11/Q2
11/Q3
11/Q4
12/Q1
12/Q2
12/Q3
12/Q4
13/Q1
13/Q2
13/Q3
13/Q4
14/Q1
14/Q2
14/Q3
14/Q4
15/Q1
15/Q2
15/Q3
15/Q4

Total Foreign Assets

Gross Official Reserves

28

Total external debt increased marginally due to the

moderate level of inflows on account of foreign loans,
and substantial debt service payments

External Debt
60
65

50

40

55

30
45
20
10

35
2011
2012
2013
2014
2015
Short Term
Medium and Long Term
Total External Debt as a % GDP (right axis)

Inflow of non-debt creating financial flows (FDI and services exports) need
to be increased significantly to compensate additional future borrowing
requirements.
29

% of GDP

Total external debt stock amounted to USD

44.8 bn as at end 2015 compared to USD
42.9 bn as at end 2014.
Total external debt increased to 54.4% of
GDP as at end 2015, from 53.6% as at end
2014.
Debt service payments on external debt
obligations increased significantly to USD
4,684 mn.
Ratio of debt service payments as a % of
export of goods and services increased to
27.7%.

US$ billion

Central Bank allowed greater flexibility in the

determination of the exchange rate in September 2015

Sri Lankan rupee remained broadly stable during the first eight months of 2015, but
depreciated thereafter to record an annual depreciation of 9%
A substantial pressure on the domestic foreign exchange market was witnessed due to:
lower than expected inflows to the current and financial accounts
foreign exchange outflows on account of increased imports and debt service
payments
reversal of foreign investments from the government securities market
Effective exchange rate indices also depreciated during 2015, improving the countrys
external competitiveness
Exchange Rate Movements

145

Effective Exchange Rate Indices (24 currency, 2010=100)

Nominal Exchange Rate against the US Dollar

115

135

110

Index Point

140

125
120

105
100
95
90

115

NEER

REER

Nov-15

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Dec-15

Sep-15

Jun-15

Mar-15

Dec-14

Sep-14

Jun-14

Mar-14

Dec-13

Sep-13

Jun-13

Apr-13

Dec-12

Sep-12

Jul-12

Apr-12

110

Jan-14

85
Jan-12

Rs./US$

130

30

Fiscal management in 2015 was extremely challenging

due to various domestic and global developments
During the year, fiscal performance reflected the challenges
faced by the government
Domestic challenges:
Uncertainty prevailed in the inter-election period
Slowdown in economic activity

External sector related issues:

Tightened international financial market conditions
Slowdown in foreign inflows

A notable deviation from fiscal targets announced in January

2015 in the Interim Budget for 2015 was observed despite
improvements in some areas

31

The performance in the government finances reflects

serious structural weaknesses in the government budget
As reflected in the sizable deficit
(2.2%) in the revenue account
(current account) of the budget,
the countrys revenue is not
sufficient even to finance the
maintenance expenditure of the
government.
Government is forced to recourse
to borrowings even for its day-today operations.
This weakness in the structure of
the budget lessens the channeling
of adequate expenditure for
development needs.

Measures taken by the Government

Redrafting of tax laws with technical

assistance from the IMF to simplify the tax
laws
Improvements in tax administration, including
the automation of revenue agencies:
Revenue Administration Management
Information System (RAMIS) at Inland
Revenue Department (IRD)
Single Window System (SWS) at Sri
Lanka Customs
Integrated Treasury Management
Information System (ITMIS) at the
Ministry of Finance (MOF)
Introducing the zero based budgeting system
by the MOF
Setting up of Budget Implementation and
Monitoring Unit (BIMU) to ensure close
monitoring of expenditure programmes

32

Government revenue increased both in nominal terms

and as a percentage of GDP in 2015
Government revenue as a % of GDP increased to 13.0% in 2015 from
11.4% in 2014, although it remained lower than the Budgetary target of
13.3% for 2015:
Government Revenue (as a % of GDP)
14
12

Percentage of GDP

In nominal terms, total

revenue increased by
21.7% to Rs.1,455 bn
Increased revenue
collection from excise
duties, income taxes and
import duties
Non tax revenue declined
due to the decline in
profit and dividend
transfers of SOBEs and
declined interest and rent
income

13.4
1.7

12.0

11.9

1.6

1.4

10.4

10.5

10.1

2012

2013

2014

10

11.4

13.0
0.9

1.4

8
6

11.7

12.1

4
2
0
2011

Non tax revenue

2015

Tax revenue

33

Total expenditure increased reflecting a significant increase

in both recurrent expenditure and public investment

Total expenditure and net lending increased by 27.5% to Rs.2,290 bn in 2015.

Recurrent expenditure increased by 28.6% to Rs.1,702 bn, exceeding the
budgetary target of Rs.1,552 bn.
Expenditure overrun reflected the increased expenditure on salaries and
wages, interest payments, current transfers and subsidies.
Public investment increased by 23.9% to Rs. 602.8 bn in 2015.
Government Expenditure (as a % of GDP)
25.0

20.0
Per cent

20.5

19.9
5.7

15.0

17.8

17.4

17.2

4.9

4.8

4.5

13.0

12.6

12.7

5.3

10.0
14.2
5.0

15.2

0.0
2011

2012
2013
Capital and Net lending

2014
Recurrent

2015

34

Key fiscal balances deviated from the annual targets

Budget deficit increased to 7.4% of GDP in 2015 compared to 5.7% of GDP
recorded in 2014 and the annual target of 4.4% of GDP envisaged in the
Budget for 2015.
Budget Deficit (as a % of GDP)
2011

2012

2013

-5.6

-5.4

2014

2015

0.0
-1.0

Per cent of GDP

Current account deficit,

which indicates the
governments dissaving,
increased to 2.2% of GDP in
2015 from 1.2% of GDP in the
previous year.
Primary deficit, calculated
excluding the interest
payments from the overall
deficit, increased to 2.9% of
GDP.

-2.0
-3.0
-4.0
-5.0
-6.0
-7.0

-8.0

-5.7

-6.2
-7.4

35

In financing the budget deficit, the government relied

mainly on domestic sources of financing
Net domestic financing increased from Rs. 379 bn in 2014 to Rs. 593 bn
in 2015, a significant deviation from the annual estimate of Rs. 208 bn.
Of the total net domestic financing, 50.8% was raised from the non-bank
sector.
Government borrowings from the banking sector also increased largely
exceeding the annual estimate of Rs. 70 bn.
Sources of Bank Financing

Deficit Financing (as a % of GDP)

8
6.2

5.6

6
Rs. billion

3.0

4
3

1.3
3.3

5.7

2.1

400

300
2.0
2.7

0.9

0.6

2
1

5.4

500

0.8
2.7

2.4

3.1

1.5

Foreign financing

2012

2.6
1.2

2013

Domestic non bank financing

2014

100
0

-100
-200

0
2011

200

Rs bn

7.4

2015

Domestic bank financing

2011

2012

Central Bank

2013

2014

2015 Pro

Commercial Banks

36

Debt to GDP ratio increased reflecting a deterioration in

fiscal sector performance, exchange rate depreciation
and relatively low economic growth

Total government debt to GDP ratio increased to 76.0% at end 2015 from 70.7% at
end 2014.
In nominal terms, total outstanding government debt increased by 15.0% to Rs.
8,503 bn at end 2015.
Increased level of borrowings, the significant depreciation of the rupee against
major foreign currencies and relatively low economic growth contributed to this
increase.

Share of domestic debt in total

government debt stood at 58.3%
at end 2015.
Average time to maturity of the
domestic debt stock increased to
6.28 years by end 2015 from 5.75
years in the previous year,
indicating the higher issuance of
medium and long term
government securities.

Government Debt (as a % of GDP)

80
70
60

Per cent of GDP

50

76.0

71.1

68.7

70.8

70.7

32.3

31.7

30.9

29.8

38.8

37.0

40.0

40.9

44.3

2011

2012

2013

2014

2015

31.7

40
30
20
10
0

Foreign

Domestic

37

Monetary aggregates increased at a higher than

projected rate in 2015
Year-on-Year Growth of Monetary Aggregates
Reserve money expanded at a
relatively high pace during 2015

30
25

Per cent

20
15

10
5
0

M1

M2b

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

Feb-15

Dec-14

Oct-14

Aug-14

Jun-14

Apr-14

Feb-14

Dec-13

Oct-13

Aug-13

Jun-13

Reserve Money

M4

Contribution to Year-on-Year Change in

Broad Money - M2b (Assets Side)
1,200
800
400
0
-400

Net Foreign Assets

Credit to Public Corporations

Net Credit to the Government

Credit to the Private Sector

38

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

Feb-15

Dec-14

Oct-14

Aug-14

Jun-14

Apr-14

Feb-14

Dec-13

Oct-13

Aug-13

Jun-13

Apr-13

-800

Feb-13

Rs. billion

Monetary expansion was entirely

due to the increase in net
domestic assets (NDA)
Net foreign assets (NFA) of the
banking system recorded a
contraction

Apr-13

Broad money (M2b) growth

accelerated during 2015 beyond
the projected levels

Feb-13

Dec-12

-5

Dec-12

Continued expansion of reserve

money was mainly due to the
significant increase in currency in
circulation

35

Monetary expansion reflects increased demand for

domestic credit from both the public and private sectors

During 2015, domestic credit extended

by the banking system expanded
significantly due to increases in;
Net credit to the government (NCG)
Credit to public corporations
Credit to the private sector

Annual Increase in Domestic Credit

1,100
900

500
300
100

Credit to the Private Sector

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

-100

2001

Rs. billion

700

Net Credit to the Government

NCG extended by the banking

system increased substantially by
Rs. 323.6 bn compared to the
increase of Rs. 134.6 bn recorded in
2014.
Increased reliance of the
government on domestic financing
amidst delays in the receipt of
foreign financial flows led to an
increase in NCG.
Credit to public corporations
increased by Rs. 76.9 bn in 2015 in
comparison to the increase of Rs.
80.9 bn observed in 2014.

Credit to Public Corporations

39

In response to continued relaxed monetary conditions,

credit extended to the private sector by commercial
banks expanded substantially in 2015
Credit to the Private Sector by Commercial
Banks
40
150
30

20
50

10

OBUs

DBUs

Oct-15

Dec-15

Jun-15

Aug-15

Apr-15

Feb-15

Oct-14

Dec-14

Jun-14

Aug-14

Apr-14

Feb-14

Oct-13

Dec-13

Jun-13

Aug-13

Apr-13

Feb-13

-10

Dec-12

-50

Y-o-Y Credit Growth (Right Axis)

40

Per cent

100

Rs. billion

Credit to the private sector, which

bottomed out at 0.8% in July
2014, steadily expanded and
recorded a growth of 25.1 % by
end 2015.
Expansion in credit to the private
sector in absolute terms during
2015 was Rs. 691.4 bn.
Sharp increase in credit to the
private sector was due to low
market lending rates and
aggressive marketing campaigns
by lending institutions.

Credit disbursed to all major sectors of the economy

expanded during the year
Credit flows to the Services sector
and the Industry sector expanded
significantly by 34.1% and 25.0%,
respectively.
Compared to the contraction in
2014, a growth of 7.5% was
observed in credit flows to the
Agriculture and Fishing sector.
Personal Loans and Advances
(including loans for purchasing
consumer durables, health and
education services and pawning
and credit card balances) increased
by 18.3%.

Year-on-Year Growth of Private Sector Credit

to Key Sectors (%)
-5.8
3.3
3.9

Agriculture and Fishing

13.2
7.5
24.3
14.9

Industry

27.8
24.5
25.0
15.0
23.5
25.6

Services

40.6
34.1
-11.1
-5.7

Personal Loans and Advances

3.1
17.8
18.3

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

41

Although a relaxed monetary policy stance was maintained

in 2015, a gradual tightening was initiated towards end 2015
to pre-empt the emergence of excessive demand pressures
Monetary Relaxing
(commenced at end 2012)
02Mar2015

The 5.00%
special SDF rate
was withdrawn
SDF was
removed with
the revival of
credit growth

15Apr2015

SDFR and SLFR

reduced by 50
bps
Policy rates
were reduced
to further boost
the credit
growth

Monetary Tightening
(commenced at end 2015)
30Dec2015

SRR was
increased by 1.5
percentage
points
SRR was
increased to
reduce excess
liquidity and
raise market
interest rates

19Feb2016

SDFR and SLFR

increased by 50
bps

Policy rates
were increased
to contain high
credit and
money growth

Monetary policy measures were supported by external sector policies and macro-prudential measures

Sep 2015: Exchange rate was allowed to be determined based on demand and supply conditions in the foreign
exchange market
Oct 2015: A minimum cash margin requirement of 100% was imposed against Letters of Credit opened with
commercial banks for the importation of motor vehicles
Dec 2015: A maximum Loan to Value (LTV) ratio of 70% was imposed in respect of loans and advances granted
for the purpose of purchase or utilisation of motor vehicles by banks and financial institutions
42

Market interest rates remained low during 2015 although

some upward movements were witnessed intermittently
15
14
13
12
11
10
9
8
7
6
5

Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15

per cent

Standing Rate Corridor and

Selected Market Interest Rates

Standing Rate Corridor

Treasury Bill Yield (91-days)
AWDR

AWCMR (month-end)
Monthly AWPR

Movement of Secondary Market Yields for

Government Securities
10
9
8
7
6

91-Day

182-Day

364-Day

3-Year

4-Year

5-Year

2-Year

43

Dec-15

Oct-15

Sep-15

Aug-15

Jun-15

May-15

Mar-15

Feb-15

Dec-14

Nov-14

Sep-14

Aug-14

Jun-14

May-14

Mar-14

Feb-14

Dec-13

Per cent

Interbank call money market rates

responded to policy adjustments and
changing liquidity conditions in the
domestic money market.
With the decline in market liquidity
levels, a gradual upward adjustment
in overnight interest rates was
observed since August 2015
Yield rates on government securities
increased during 2015.
Although most of the market interest
rates remained low during the year,
with the policy actions by the Central
Banks, market rates trended upwards
towards end 2015.

In 2015, the financial sector expanded further reflecting the

underlying economic performance and supportive prudential
regulatory measures
Total Assets of the Financial System
A number of regulatory policies were
introduced in 2015 to further
strengthen the risk management and
public confidence in the financial
sector

Financial inclusion and

infrastructure improved further
in 2015:

6,583 banking outlets and 3,558 ATMs

spread throughout the island.
Providing credit to promote high
potential and promising SMEs was given
priority in 2015.
The Central Bank continued to engage in
activities promoting access to finance
with a view to enhancing financial
inclusiveness and balanced growth in the
economy.

Banking Sector
Central Bank
Licensed Commercial Banks
Licensed Specialised Banks
Other Deposit Taking Financial
Institutions
Licensed Finance Companies
Co-operative Rural Banks
Thrift and Credit Co-operative Societies
Specialised Financial Institutions
Specialised Leasing Companies
Primary Dealers
Stock Brokers
Unit Trusts / Unit Trust Management
Companies
Market Intermediaries (c)
Venture Capital Companies
Contractual Savings Institutions
Insurance Companies
Employees' Provident Fund
Employees' Trust Fund
Approved Pension and Provident Funds
Public Service Provident Fund
Total

2014 (a)
2015 (b)
Rs. bn
Share (%)
Rs. bn Share (%)
8,442
70.3
9,503
69.6
1,471
12.2
1,426
10.4
5,884
49.0
6,974
51.1
1,087
9.1
1,103
8.1
857
743
103
11

7.1
6.2
0.8
0.1

1,042
915
116
11

7.6
6.7
0.8
0.1

441
72
195
11

3.7
0.6
1.6
0.1

544
81
283
10

4.0
0.6
2.0
0.1

127
29
7

1.1
0.2
0.1

130
32
8

1.0
0.2
0.1

2,275
414
1,487
199
134
41
12,015

18.9
3.4
12.4
1.7
1.1
0.3
100.0

2,573
454
1,665
223
185
46
13,662

18.8
3.3
12.2
1.6
1.4
0.3
100.0

(a) Revised
Source: Central Bank of Sri Lanka
(b) Provisional
(c) Includes Underwriters, Investment Managers and Margin Providers.

44

Banking sector strengthened further while maintaining

stability
Profitability Indicators of the Banking Sector

25

4.2

4.1

19.8

20.3

3.5

3.5

3.5

16.0

16.6

16.1

4
3
2

20
15
10

1.7

1.7

1.3

1.4

1.3

2013

2014

2015

Per cent

Banking sector total assets increased by

15.9% in 2015.
Increased rupee lending activities of
domestic banks, funded mainly through
customer deposits, was the key of the asset
growth.
NPL ratio of the financial sector declined to
3.2% at the end of 2015 from 4.2% in 2014.

Per cent

5
0

2011

2012

Interest Margin (LHS)

Return on Assets (LHS)

Return on Equity (RHS)

Non-Performing Loans of the Banking Sector

3.2

150
2.6
100

4
3

2.2

2.1

14.2

3.8

1.7

Rs. billion

3.7

16.0

20
16.6

4,000

Per cent

3.8

17.6
16.3

3,000

14.4

14.7

14.9

14.1
11.9

10

2,000
5

1,000

50

15

Per cent

6
4.2

200

Rs. billion

5,000

5.6

250

Capital Adequacy Ratio of the Banking Sector

0
2011

2012

2013

Gross NPL Volume (LHS)

2014

2015

Gross NPL Ratio (RHS)

0
2011

2012

Risk Weighted Assets (LHS)

2013

2014

Core CAR (RHS)

2015

Total CAR (RHS)

Net NPL Ratio (RHS)

45

Stock market recorded a sluggish performance with

volatile movements in the price indices in 2015
Daily average turnover of the CSE declined by 25.1% to Rs. 1,060 mn in 2015
from Rs. 1,415 mn in 2014.
All Share Price Index (ASPI) declined by 5.5% to 6,894 points.
S&P SL20 Index declined by 11.3% to 3,626 points.

9,000

16,000

8,000

14,000

7,000

12,000

6,000

10,000

5,000

8,000

4,000

6,000

3,000

2,000

4,000

1,000

2,000

0
2011

0
2012

Daily Turnover (RHS)

2013

2014

ASPI (LHS)

2015

S&P SL20 Index (LHS)

46

Rs. million

ASPI, S&P SL20 Index & Daily Turnover at the CSE

Price Index

Reversal of capital
flows from emerging
markets resulted in
foreign outflows from
the equity market
during 2015.

Key Highlights of the Economy in 2015

Real Sector
and Inflation

External
Sector

Fiscal
Sector

Sri Lanka economy grew by 4.8%

GDP amounted to USD 82.3 bn
GDP per capita increased to US$ 3,924
Headline inflation fell further to low-single digits
Core inflation increased gradually

Trade deficit expanded to US$ 8,430 mn

Slowdown in the foreign exchange inflows and increased outflows from the
government securities market deteriorated the external position
Balance of Payments recorded an overall deficit of US$ 1,489 mn
Greater flexibility was allowed in the determination of the exchange rate

Government revenue as well as expenditure increased

Budget deficit rose to 7.4% of GDP against the target of 4.4% of GDP
Central Government debt was recorded at 76.0% of GDP

Monetary
Sector

Credit to the private sector increased by Rs. 691 bn (25.1% growth)

Net credit to government expanded by Rs. 324 bn exceeding the budgetary target
Broad money growth accelerated to 17.8%
A gradual tightening of monetary policy was commenced from end 2015

Financial
Sector

Financial system remained stable

Business operations of the banking sector expanded
Total assets and asset quality of the banking sector improved
Capital of the banking sector was maintained at a healthy level

47

In the medium term Sri Lankas economy is projected to

expand towards a higher growth trajectory with improved
macroeconomic fundamentals ...
Real Sector
Sri Lankas economy is projected to expand at a rate of 5.8% in 2016, and strengthen
over the medium term to achieve a higher growth path of around 7%

External Sector
Positive developments in the domestic and global economies with recent policy
initiatives are expected to result in a favourable outlook for the external sector

Fiscal Sector
With the strengthened fiscal consolidation process, the budget deficit is expected to
be reduced to 3.5% of GDP by 2020, while the debt to GDP ratio is to be reduced to
60.0%

Monetary Sector
The conduct of monetary policy will focus on maintaining inflation in mid-single digit
levels while facilitating the economy to realise its potential
48

Medium Term Macroeconomic Framework: 2016-2019

Indicator

Unit

2014

2015
(provisional)

Projections

2016

2017

2018

2019

Real Sector
Real GDP Growth
GDP at Market Prices
Annual Average Inflation
Per Capita GDP
Total Investment
Domestic Savings
National Savings

%
Rs.bn
%
US$
% of GDP
% of GDP
% of GDP

4.9
10,448
3.3
3,853
32.0
24.0
29.5

4.8
11,183
0.9
3,924
30.1
22.6
27.8

5.8
12,307
4.0
4,008
30.3
23.8
28.1

6.3
13,614
4.0
4,298
30.9
24.6
29.1

7.0
15,155
4.0
4,704
31.0
25.3
29.5

7.0
16,863
4.0
5,181
32.0
26.7
30.6

External Sector
Trade Gap
Exports
Imports
Current Account Balance
External Official Reserves

% of GDP
US$ mn
US$ mn
% of GDP
Months of Imports

-10.4
11,130
19,417
-2.5
5.1

-10.2
10,505
18,935
-2.4
4.6

-9.5
10,853
18,920
-2.1
4.0

-9.7
11,542
20,500
-1.8
4.2

-9.7
12,057
21,940
-1.5
4.5

-9.6
12,589
23,387
-1.4
4.6

% of GDP
% of GDP
% of GDP
% of GDP
% of GDP

11.5
17.2
-1.2
-5.7
70.7

13.1
20.5
-2.2
-7.4
76.0

12.7
18.0
-1.4
-5.4
74.0

13.5
18.5
-0.7
-5.0
70.0

13.9
18.4
0.0
-4.5
66.0

14.9
18.9
0.6
-4.0
63.0

%
%

13.4
8.8

17.8
25.1

9.0
12.0

10.5
11.0

11.5
11.5

11.5
12.0

Fiscal Sector
Total Revenue and Grants
Expenditure and Net Lending
Current Account Balance
Overall Budget Deficit
Public Debt
Monetary Sector (d)
Broad Money Growth (M2b)
Growth in Credit to the Private Sector

49

Strong Need for Decisive Steps

The Annual Report 2015 highlights several issues and
challenges faced by the Sri Lankan economy, especially
structural vulnerabilities of the economy that had built up
over time.
Decisive steps are necessary to correct these vulnerabilities
to ensure the countrys progress along a high growth low
inflation path.
It is expected that with appropriate policies, the economy
will return to a high growth path in the medium term.

50

Issues and Policies(1)

Improving fiscal performance through essential reforms
Fiscal sector requires urgent attention of the government to implement reforms
on highest priority basis to achieve the envisaged fiscal consolidation targets,
thereby reducing pressure on the budget deficit and government debt, and
strengthen medium term fiscal sustainability.
Reforms in States Owned Enterprises (SOEs)

Unavoidable reforms in SOEs should be undertaken based on a carefully thought

strategy and implemented within the countrys socio-economic and political
context, while adequately explaining and educating the stakeholders and the
general public on the rationale and potential medium to long-term consequences
in the absence of those reforms.
Introducing of a Robust Pricing Formula for Petroleum Products
A robust pricing formula for domestic petroleum products is essential to ensure
the commercial viability of the Ceylon Petroleum Corporation, while passing the
effects of global oil price variations transparently to domestic users. This is also
required for other SOEs as well.
51

Issues and Policies(2)

Attracting Non-Debt Creating FDI and Long-term Financial
Flows

A concerted effort is required to overcome the challenge of attracting more

non-debt creating foreign investment flows such as FDI and growth promoting
long term financial flows to maintain the resilience of the external sector
against various shocks.
Strengthening External Sector Sustainability though External
Trade
Achieving a sustainable current account deficit, and establishing the external
sector sustainability would depend on the performance of external trade,
consistent with the development needs and external competitiveness of Sri
Lankan products abroad.
Optimal Utilisation of Trade Agreements and Arrangements
For enhanced market access and export product diversification, exporters
should utilise existing trade facilities optimally and take advantage of existing
trade agreements.

52

Issues and Policies(3)

Proactive Policies for Inclusive Growth
Despite continued public investment in socioeconomic infrastructure,
development challenges arising from the countrys transition into a middle
income economy have to be tackled through proactive policies, which are
properly targeted and centred on creating an inclusive growth.
Meeting High Quality Human Capital Needs
With the structural transformation the country, effective measures are
required to meet the growing demand for high quality human capital needs.
Evolution of the Current Education System
The evolution of the current education system into a demand driven one is
essential to capitalise on the substantial investment that it has made in the
education sector even prior to independence and to sustain its achievements.

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Issues and Policies(4)

Addressing the Issues in the Agriculture Sector

The agriculture sector is saddled with major issues such as low productivity,
lack of diversification, food insecurity and inefficiency in water management
as well as the natural challenge of climate change and requires several
corrective measures.
Addressing the Issues in the Planation Sector
Increasing cost of production, outdated machinery, low yields, old age of
crops, low value addition and inadequate diversification remain key issues in
the plantation sector and greater efforts are necessary from all stakeholders to
make the plantation sector more profitable and sustainable.
Promoting Public Private Partnerships (PPPs)
In order to create an enabling socioeconomic infrastructure and lucrative
livelihood opportunities amidst constraints on public resources, the
government will have to actively consider innovative mechanisms, such as
PPPs, to meet the rising funding gap.

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Issues and Policies(5)

Addressing the Chronic Kidney Disease of Unknown Origin
Chronic Kidney Disease of Unknown Origin (CKDu) has been a serious health
issue in Sri Lanka over the past two decades and it would be vital to adopt
measures with a view to controlling the epidemic.
Improvements of Public Transport
Immediate improvements to public transport are needed to curb the economic
loss caused by road traffic congestion.
Development of Renewable Energy
Ongoing changes in weather patterns and volatilities associated with fuel prices
reiterate the need for strengthening of the national policy on renewable energy
development, while undertaking initiatives to overcome barriers to increase the
sustainability of low cost energy generation.

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Issues and Policies(6)

Sustainability of Pension and Superannuation Schemes
With the acceleration of population ageing, there is a need to ensure the
sustainability of the public sector pension scheme, while introducing market
oriented pension and superannuation schemes that ensure a wider coverage of
the labour force
Enhancing Financial Deepening
Financial deepening through the raising of efficiency of financial intermediation,
introduction of a diverse range of financial products and services, and improving
access to formal finance would be pivotal to the sustenance of the high growth
momentum of the economy
Exploiting the Potential of the Strategic Location
The strategic position of the island of Sri Lanka in the Indian Ocean in the
middle of the maritime silk route from China to Europe must be exploited to
harness the potential of the country

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Box Articles in Annual Report 2015(1)

Fiscal Space for Stability and Resilience
Given the governments borrowing constraints, fiscal space must be
created through reforms in the tax and expenditure structures.
Fiscal policy should aim at increasing the tax/GDP ratio, improving the
efficiency of expenditure management, improving the performance of
state owned enterprises (SOEs) and reforming labour markets.
The Socioeconomic Challenges of Poverty, Income Inequality and
Child Under-nutrition in Sri Lanka

These three challenges, if not addressed, can severely undermine

economic growth and result in social unrest.
The government needs to continue its efforts to create a growth process
where the entire populace can benefit - sharing prosperity through
inclusive growth.

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Box Articles in Annual Report 2015(2)

Business Conditions Surveys as a Signal of Business Sentiment
Business Outlook Survey (BOS) and Purchasing Mangers Index (PMI)
enable policy makers to gather real time information about the
economy in a timely and more forward looking manner.
BOS provides a snapshot of business sentiment regarding the ongoing
and expected state of economic activities.

Renewable Energy for Electricity Generation

There has been a growing interest towards using renewable energy in
both developed and developing countries, realising its sustainability,
economic benefits and less adverse impact on the environment.
Policy cohesion is required to inspire private sector and overcome the
techno-economic barriers to reap benefits of renewable energy.

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Box Articles in Annual Report 2015(3)

Non-state Sector Participation in Providing Higher Education in
Sri Lanka
Higher education has been well recognised as a priority in improving
productivity and innovation to sustain high economic growth.
The unprecedented demand for higher education in Sri Lanka
necessitated a rethink of the existing model of providing higher
education, given the limited fiscal space in the government budget.

Sustainable Development Goals

World leaders unveiled the new global Sustainable Development Goals

(SDGs).
Although Sri Lanka has already achieved some, out of the total number
of 169 targets under SDGs, a strong collective effort of all stakeholders
is required.
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Box Articles in Annual Report 2015(4)

A National Consumer Price Index for Sri Lanka
The NCPI reflects more recent changes in the patterns of consumption
and expenditure, as revealed by the Household Income and Expenditure
Survey.
NCPI provides a broader perspective on the economys price trends and
movements.

Tourism Industry: Prospects and Challenges

The tourism industry has been experiencing a rapid expansion and
diversification, becoming the third largest foreign exchange earner in the
country.
As a growing industry, Sri Lankan tourism industry faces challenges
including inadequacy of hotel rooms, requirement of skilled labour, and
the need for an innovative approach with a well-focused strategy.

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Box Articles in Annual Report 2015(5)

Population Ageing: Challenges and the Way Forward
Sri Lankas population is the oldest in South Asia and is also one of the
fastest ageing populations in the world.
It is imperative to understand the needs of the elderly while uncovering
ways and means by which they can actively contribute to the growth of
the country.
Modifications to the Monetary Policy Framework in Sri Lanka
Several weaknesses that have been observed with regard to the
monetary targeting framework in Sri Lanka, including the weakening
relationship between money supply and inflation.
In line with the global tendency, the Central Bank has also been
improving its monetary policy framework and increasingly aligning it
with a Flexible Inflation Targeting framework.

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Box Articles in Annual Report 2015(6)

Cyber Risk Management in Banks
Cyber risk refers to the risk of financial loss, operational disruption or
reputational damage due to some kind of failure in IT systems.
Individual banks as well as the Government and the Central Bank have
been continuously implementing different cyber risk management
procedures.

New Regulatory and Supervisory Approaches in Ensuring the Safety

and Soundness of Banks
The bank regulators seek promoting the safety and soundness of banks
and the banking system through regulation and supervision.
The Global Financial Crisis and the subsequent European Crisis
emphasized the need to factor in the build-up of risks and
concentrations during economic booms and its subsequent effects
during economic slowdowns.
The Central Bank further strengthened macroprudential surveillance to
identify any systemic risks by developing various indicators to help
detect and assess systemic risks.
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Box Articles in Annual Report 2015(7)

Main Findings of the Survey on Microcredit
A survey on microcredit was conducted with the objective of
understanding the developments in the microcredit sector and assessing
the status of financial literacy and financial inclusion.
Majority of microcredit loans were concentrated among females.
The majority of the loans were used for business purposes and able to
increase their profit/revenue.

Implementation of a Risk-Based Approach to Anti Money Laundering

and Countering the Financing of Terrorism
Under the Risk-Based Approach (RBA), it is required to identify, assess
and understand the Money Laundering and Terrorist Financing risks to
which they are exposed and take Anti-Money Laundering / Countering
Financing of Terrorism controlling measures in order to mitigate those
risks effectively.
The primary objective of the implementation of the RBA to AML/CFT is
to protect financial systems being misused by criminals.
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Box Articles in Annual Report 2015(8)

Major Economic Policy Changes and Measures: 2015
This includes major economic policy changes and measures
implemented during 2015 as well as those that have been implemented
during the first three months of 2016 and policy measures envisaged to
be taken in the near future.
Details of fiscal incentives granted for the development of the real sector
are included in policy measures under the fiscal sector.
New Risk Management Framework of the Central Bank of Sri Lanka
The Central Bank follows Three Lines of Defense risk management
model under the new risk management framework.
First Line of Defense - proper internal risk management systems and controls
Second Line of Defense - assessing, monitoring, and reporting financial risks
Third Line of Defense - the independent audit function of the Central Bank

The new risk management system would help to create a risk

management culture in the Central Bank.
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Thank You

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