Saturday, January 5, 2013

Sri Lanka entering 2013 with better prospects: Treasury Secretary

Jan 05, 2013 (LBO) - Sri Lanka is entering 2013 with an improving external environment, a stable exchange rate and favourable weather for agriculture, compared to last year, Treasury Secretary P B Jayasundera said.

 "Though there have been severe floods, the damage has been minimal as far as production activities are concerned," Jayasundera told reporters.

 "All reservoirs are full. In my judgment water resources that we have been blessed with in the last few weeks is worth about two billion dollars if somebody wants to put a number on that."

He said about 70 percent of power was now hydro, tea and rubber production was good and the Maha (main) cultivation season would be "exceptional".

In 2012 Sri Lanka has had 4.5 months of drought, which in addition to hurting rice and tea production had also hit power generation, he said.

Sri Lanka entered 2012 amidst a severe balance of payments crisis after the state manipulated energy prices with bank loans which were in turn accommodated by central bank credit (printed money) through sterilized foreign exchange sales.

Corrective measures were taken in February 2012 with energy prices hiked, interest rates raised and the currency floated to reduce interventions and sterilized foreign exchange sales.

Jayasundera said the trade deficit and imports had reduced.

A trade deficit is created because domestic economic agents earn foreign money outside the merchandise exports, such as by working abroad (exports of labour) and the state and private firm borrow abroad (exports of debt).

 However from that from mid 2011 to about April 2012 the Central Bank had injected about 200 billion rupees into the banking system as rupee reserves, driving up credit and imports to unsustainable levels.

The exchange rate after falling to about 134 to the US dollar from 110 then improved to about 128 and again fell to below 130 rupees, which some analysts have attributed to large volumes of term auctions of money conducted by the monetary authority.

The exchange rate ended the year around 127.50 rupees, a depreciation of about 10 percent.

The monetary upheavals pushed Sri Lanka's inflation rose to 9.2 percent in 2012 compared to mid single digits the Central Bank has generated in previous years, but was still better than its record throughout the 1980s and early 1990s.

"Price stability has come due to the monetary and fiscal co-ordination that prevailed," he said.

This year Sri Lanka is expected to post a budget deficit of about 6.2 to 6.3 percent of gross domestic product helped by 33 billion rupees of central bank profits or about half a percent of GDP.

Jayasundera said the external environment was also looking better with the US congress having reached a fiscal deal, adjustments to some European countries seen to be having positive effects.

He said India's adjustments are taking place and China was "bouncing back".

Sri Lanka is expected to have grown by around 6.5 percent of GDP in 2012.

"We are approaching 2013 with an optimism of the economy bouncing back to 7.5 of GDP- the Central Bank has already projected," Jayasundera said.

"We will not go into revisions at this stage, but when final numbers of the Central Bank comes probably we will look at the benefits of favourable weather, the global recovery."

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