Annual Report 2010 - Ministry of Finance and Planning

1 | DEVELOPMENT PERSPECTIVESThe Services sector, the largestcomponent of GDP, accounting for 60percent, grew by 8 percent from about3.3 percent in 2009 achieving thehighest ever annual growth since 2002.This growth particularly reflected thesigns of gradual exploitation of thepotential of the sector, particularlysuch areas as tourism and finance,in the post conflict era supported bythe gradual recovery of the globaleconomy. Accordingly, all the subsectors such as, hotels and restaurants,transport and communication, banking,insurance, real estate as well aswholesale and retail trade recordedpromising high growth rates during theyear. In addition, port related activitiesalso recovered gradually.Low InflationInflation, as measured by the annualaverage change in the ColomboConsumers’ Price Index (base=2002)(CCPI), remained low during theyear at single digit levels and endedup recording 5.9 percent in 2010in comparison to 3.4 percent in2009. The favourable supply sidedevelopments, lowering of certainadministered prices, and downwardrevision of import duties on selecteditems as well as prudent monetarypolicy stance were mainly attributableto the lower level of inflation in 2010.Declined Interest RatesThe market interest rates continuedto decline in 2010 with the lowerinflation and the continuous easingof the monetary policy stance of theCentral Bank by further reducing itspolicy interest rates i.e. Repurchaseand Reverse Repurchase rate, in thewake of lower inflation outlook tospur the credit growth to supporteconomic activity. The yield rates ofGovernment securities also declinedfollowing the easing of the monetarypolicy stance of the Central Bank.Accordingly, the yield rates at theprimary Treasury bill market declinedby 49, 138 and 178 basis points for 91days, 180 days and 364 days maturityrespectively. Meanwhile, the yieldrates for Government securities withlonger maturities were also declinedconsiderably.In 2010, the Government wasable to issue a 10-year TreasuryBond, facilitated by the favourablemacroeconomic environmentthereby extending the yield curvefor Government securities. TheGovernment also issued Sri LankaDevelopment Bonds (SLDBs) atrelatively lower yield margins forlonger maturities, i.e with interest ratesof six month LIBOR plus a spreadranging from 350 basis points to 395basis points with maturity periods oftwo to three years. Meanwhile,Sri Lanka successfully concludedits third international sovereignbond issue of USD 1,000 million in2010 with a maturity period on tenyears benefiting from the improveddomestic economic conditions andthe improvement in foreign investorconfidence as a result of the peacefulenvironment prevailed in the country,upgrading of the country’s sovereignrating 1 and the continuation of theStand-By Arrangement (SBA) facilitywith the International Monetary Fund(IMF). The interest rate applicable onthis ten year international sovereignbond was 6.25 percent comparedto the similar bonds issued in 2007and 2009 with interest rates of 8.25percent and 7.25 percent, respectivelywith a maturity period of five years.The continuous issuance of sovereignbonds has enabled Sri Lanka togradually but steadily position itselfin the international financial markets,which will be beneficial to the countryin the future in searching avenuesto meet financing requirements as amiddle income country. Meanwhile,the non-resident investments in rupeedenominated Government securitieswere also increased considerably in2010.In responding to the reduction ofpolicy interest rates by the CentralBank, the deposit and lending rateswere also declined. Accordingly, theAverage Weighted Deposit Rate(AWDR) of the commercial banksdeclined by 178 basis points to 6.23percent while the Average WeightedLending Rate (AWLR) also declinedsignificantly by 261 basis points to 14.8percent by end 2010. Benefiting fromthe lower interest rates and reflectingthe gradual recovery of economicactivity, private sector credit, ona year-on-year basis, increasedsignificantly by 25 percent in 2010reflecting a strong rebound from thedecline recorded in 2009.Favourable ExternalEnvironmentThe gradual recovery of the globaleconomy, improved conditions in theinternational financial markets as wellas favorable domestic macroeconomicconditions reinforced the continuousrecovery of the external sector in 2010.The imports rebounded strongly withhigher intermediate and investmentimports. Exports were also recoveredstrongly. It is particularly noteworthythat Sri Lanka was able to enhance itsexports to major destinations althoughthe concessions under the GeneralizedSystem of Preferences Plus (GSP+)were withdrawn in August 2010.Despite the fact that higher importexpenditure than the earnings from1 Fitch Ratings Service has assigned the country’s long-term foreign and local currency Issuer Default Ratings at “B+” with a “positive” outlook.S&P has raised its long-term foreign currency sovereign credit rating on Sri Lanka to “B+” from “B” while affirming the ”stable” outlook.Meanwhile, Moody’s Investors Service has assigned a “B1” foreign currency issuer rating to Sri Lanka with “stable” outlook.26