Annual Report 2010 - Ministry of Finance and Planning

Ministry of Finance and Planning Sri Lanka > Annual Report 2010Chart 1.2 > Composition of Ageing PopulationChart 1.3 > Exchange Rate and Inflation: 2005-201012030%7011525%Percent of Total Above 60 Years60504030201001971 1981 2001 2010 2020Est 2025Est 2050EstExchange rate (Rs )11010510095902005 - Jan2005 - Apr2005 - Jul2005 - Oct2006 - Jan2006 - Apr2006 - Jul2006 - Oct2007 - Jan2007 - Apr2007 - Jul2007 - Oct2008 - Jan2008 - Apr2008 - Jul2008 - Oct2009 - Jan2009 - Apr2009 - Jul2009 - Oct2010 - Jan2010 - Apr2010 - Jul2010 - Dec20%15%10%5%0%Inflation (p-p)60-69 Years 70-79 Years 80+ YearsExchange rate USD/LKR (Left Axis )Inflation based on CCPI (Right Axis )Food Security and Inflation: Thetrends in global commodity prices andcontinued rising demand from emergingeconomies for food commoditiesis a challenge for small economies likeSri Lanka in managing inflation. Whilemonetary–fiscal coordination is essentialin managing credit demand, vulnerabilityin food prices makes monetarypolicy actions less effective. Hence,removal of supply side constraints forfood production must receive highpriority. In this context, the Governmentinitiatives such as “Divi Neguma”are laudable in making householdsless vulnerable for market fluctuations.It is essential that food agriculture,livestock and fisheries are placed onan aggressive production drive to seesuccess in inflation management andfood security.State Owned Enterprises andFiscal Sector: The performanceof state owned enterprises (SOEs)requires considerable surveillanceto improve their finances. Criticalassessment of financial performanceand annual accounts underscore thevulnerability of country’s fiscal performancefor underperforming stateenterprises. The appointment of competentsenior management teams,particularly in respect of finance,procurement and human resourcestogether with commitment, controlbased budget management practicesand required adjustments to emergingmarket conditions need to berespected in the performance of stateenterprises. In particular, a strongdiscipline in financial management inSOEs is essential for rapid growth.Emerging Shift Towards ServiceBased Consumption: In the contextof rising middle income status, theconsumption pattern of the consumersis shifting towards increased relianceon electricity, water, telephones,fuel and transport, gas, consumer durables,fast food items and less weighton primary consumer items, thusrequiring the society a steady flow ofincome. Ageing population particularlyrequires social security systems tocope up with such challenges. Growingincidence of Non Communicable Deceaseswill require urgent preventivehealth care systems as well.Exchange Rate and Inflation: Inflationis a combine occurrence of supplyshortfalls, particularly in food (bothproduction and distribution issues),and demand pressures emanatingfrom both public and private sectors.Monetary policy actions without thesupport of highly productive real economycannot counter inflation. Also,increased exports and reduction inimports through sufficient investmentsin import replacement industries isessential to sustain a stableexchange rate.29