Road Map 2018

Following is an extract of the text of the address made by Central Bank Governor Dr Indrajit Coomaraswamy at the presentation of Road Map 2018, last Wednesday.

We are pleased to present the eleventh Road Map of the Central Bank of Sri Lanka. It is our belief that sharing our future policy direction and actions would help you to plan your business trajectory with more certainty.

The year 2017 was challenging. We have seen economy-wide effects due to inclement weather conditions. The drought and floods disturbed agriculture activities and agro-based industrial activities. Spillover effects of these adverse weather conditions impacted the other sectors of the economy as well. As a result, economic growth is expected to be subdued and lower than we projected at the beginning of the year.

The tight monetary policy stance of the Central Bank as well as the relatively tight fiscal policy stance of the government, which were adopted with the aim of regaining macroeconomic stability, partly affected public and private investment spending that also contributed to low economic growth. Consumer price inflation increased, mainly due to high food prices associated with weather-related domestic supply disruptions, revisions to indirect taxes and increased prices of imported commodities, making our efforts to anchor inflation expectations challenging.

Despite the tight monetary policy stance maintained by the Central Bank, growth of monetary aggregates was high during most of 2017, before decelerating to envisaged levels towards the end of the year. Although we have seen signs of a firm recovery in exports with better prospects in key export markets and the flexible exchange rate policy of the Central Bank, the trade account continued to be affected by a largely weather-induced increase in import expenditure.

The decline in workers’ remittances resulted in a reduction in the cushion against the widening trade deficit in the external current account. Although the fiscal sector has recorded notable improvements in terms of revenue collection, some slippage in the budget deficit is likely in 2017 mainly as a result of weather-related fiscal costs and higher interest payments. This could have an adverse impact on achieving the envisaged fiscal consolidation path, while complicating the conduct of monetary and exchange rate policies.

Despite these challenges, 2017 was a year when we made significant progress on many fronts through several policy measures taken by the Central Bank in coordination with the government. In response to these measures, macroeconomic stability is being restored and our economy is trending in the right direction.

FIT

The Central Bank has implemented several proactive policy measures during 2017 in order to achieve the core objectives of maintaining economic and price stability and financial system stability. Three frameworks have been put in place to improve the country’s overall macroeconomic conditions. Attention is also being paid to institutionalising them. The Central Bank is working towards implementing a Flexible Inflation Targeting (FIT) framework by 2020 to conduct monetary policy in a proactive and forward-looking manner. It has also adopted a more flexible exchange rate policy that promotes export competitiveness. The government is also committed to a revenue-based fiscal consolidation programme, which intends to bring down budget deficits and debt levels progressively. If we get fiscal policy and monetary policy right, then the pressure on the exchange rate would reduce. Let me discuss these frameworks in a detailed manner.

On the monetary policy framework, the Central Bank’s move towards introducing a FIT regime aims to maintain a low inflation environment on a sustained basis. The FIT framework is a data-driven, forward-looking and proactive monetary policy regime built upon three main pillars: strong fiscal policy support, effective monetary policy conduct, and strong central bank mandate and credibility. The government has also endorsed this move to adopt a FIT regime as stated in its Vision 2025 policy document.

In order to successfully implement the FIT framework, we have formulated a road map outlining several milestones to be completed by the government and the Central Bank, including the necessary legislative, institutional and operational changes. The International Monetary Fund (IMF) has also recognised our move towards FIT by giving us necessary technical assistance on capacity building.

Exchange rate

The Central Bank accommodated greater flexibility in the exchange rate in 2017 by allowing market forces to determine the rate. The market reacted positively to this policy initiative by reviving the spot market. The Central Bank continued to absorb foreign exchange from the domestic interbank foreign exchange market in order to build up the quantum of non-borrowed foreign exchange reserves. This move also helped to smoothen the exchange rate behaviour.

There were even some instances of appreciation of the rupee in 2017, indicating significant inflows to the foreign exchange market. Sri Lanka also received the fourth tranche of the Extended Fund Facility (EFF) of the IMF in December 2017. A total of US$ 759.9 million has been received so far. This confirms Sri Lanka’s satisfactory performance in achieving IMF-EFF targets during 2017 in terms of specified performance criteria and certain structural benchmarks. Earnings from exports increased owing to the recovery in key export markets, the Central Bank policy of maintaining exchange rate flexibility, conducive external trade policies and improved macroeconomic conditions of the country.

Further, the reinstatement of the EU GSP+ facility, the expected conclusion of the free trade agreements with Singapore, China and India and strong institutional and policy support are also expected to drive the momentum in exports.

We have seen an increased inflow of Foreign Direct Investment (FDI) in 2017 and we expect FDI to gain momentum through the commencement of the Hambantota industrial zone and the continuation of the Colombo Port City project. Higher inflows to the government securities market and the Colombo Stock Exchange (CSE) as well as long-term financial flows to the government were also witnessed during the year. With these developments on the external front, the Central Bank was able to build official reserves of over US$ 7.9 billion at the end of 2017.

Fiscal policy

On the fiscal front, the government has embarked on a revenue-based fiscal consolidation path to strengthen the country’s public finances. The government expects to reduce the budget deficit to 3.5% of GDP by 2020 and thereby reduce government debt to a sustainable level in the medium-term.

It is in the process of implementing several reforms aimed at improving government revenue collection while rationalising government expenditures to adhere to the envisaged fiscal consolidation path over the medium-term.

A positive primary balance is expected in 2017 for the first time since the early 1950s and a surplus in the current account is also expected in 2018 for the first time since 1987. The reform agenda of the government includes improving financial viability of the State Owned Enterprises (SOEs) to mitigate the budgetary implications for the government.

Financial sector

While introducing clear frameworks and reforms in relation to monetary and exchange rate policies in 2017, we have implemented several policy measures during 2017 to address the challenges in the financial sector and maintain a stable financial system for effective monetary policy transmission and to support sustainable growth. With a view to promote a dynamic and resilient financial sector, the regulatory and supervisory framework of the Central Bank was further strengthened in line with international standards and best practices. At present, our banking sector accounts for over Rs. 10 trillion in assets, while the non-bank financial institutions sector accounts for over Rs. 1 trillion in assets.

The implementation of Basel III capital standards was commenced in 2017 in order to develop a more robust banking sector. The framework to regulate the non-bank financial institutions was strengthened under challenging conditions, and resolution of distressed finance companies was also commenced.

During 2017, the Central Bank continued to strengthen the regulatory framework for the microfinance sector, and continued to combat the menace of illegal pyramid schemes with the assistance of other government agencies. Several measures were adopted to strengthen and modernise the payment and settlement infrastructure in order to develop an efficient and stable payment and settlement system in the country, as well as to pave the way towards a digital economy.

Being a trusted, professionally competent and strong institution, the Central Bank is entrusted with vital agency functions. Accordingly, as per our mandate, we carried out public debt management with the objective of mobilising the government’s financing requirements at the lowest possible cost and with a prudent degree of risk. The framework for public debt management was reinforced by introducing a transparent market-based auction mechanism for the issuance of government securities.

This has already resulted in desirable outcomes of lowering interest costs to the government, efficient price discovery and improved transmission of monetary policy signals across the benchmark yield curve. The Employees’ Provident Fund, which is the largest superannuation fund in the country, is managed by the Central Bank. It passed a significant milestone during 2017 with total assets of the Fund surpassing Rs. 2.0 trillion.

The Central Bank also continued to promote financial literacy and inclusiveness and helped entrepreneurship development through our credit schemes for agriculture and livestock, as well as the micro, small and medium scale enterprise (MSME) sectors. In addition, we also adopted measures to promote a clean note policy in the country and improvements were also made in currency operations and processing.

In 2017, the Central Bank implemented a new legislative and a policy framework for foreign exchange operations based on the Foreign Exchange Act, No. 12 of 2017. Provisions of the new Act are being implemented through the newly established Department of Foreign Exchange in the Central Bank focusing on reducing restrictions, excluding ambiguities, simplifying processes and enhancing efficiency associated with foreign exchange transactions while striving for clarity and convenience.

A significant amount of work needs to be done to improve Sri Lanka’s global ranking in the implementation of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations. The Financial Intelligence Unit of the Central Bank is taking several measures to address this with the assistance of key government Ministries and Departments as well as stakeholders such as Licensed Banks, Licensed Finance Companies, Regulators, Stock Brokers and Insurance Companies, and continued to enter into new MOUs with other country FIUs.

The Central Bank has already initiated several measures to enhance the economic stability of the country and it will continue with this endeavor in the future as well. Given improved economic fundamentals and stability, it is expected that the government will implement the necessary policy reforms to uplift the economy from the prevailing low growth trajectory to reach its potential level. The government’s Vision 2025 unveils the future policy direction of the country.

The Vision envisages transforming Sri Lanka into a hub of the Indian Ocean, with a knowledge-based, highly competitive, social-market economy. Accordingly, considering the limited scope of the domestic market, sustained future economic growth would have to be generated from external demand. Hence, effective and sustainable long-term policy measures have to be implemented for accessing foreign markets through exploiting trade and investment opportunities.

We also observe that frequent natural calamities hamper economic activity resulting in a moderation of economic expansion. This highlights the need for diversification of growth drivers in the economy as well as putting the necessary measures in place to strengthen the economy’s resilience through mainstreaming sustainability into the planning and budgeting processes and improving disaster preparedness.

In the global context, after having a series of economic distortions and negative shocks after the Global Financial Crisis, now the global economy is gradually recovering. Investment conditions have improved and global trade also rebounded in 2017. So, we need to exploit opportunities created by the revival of global growth supported by synchronized economic expansion in Europe, Japan and the US for the first time since the Global Financial Crisis.

Better prospects in Europe and the US, which are our two largest markets, are clearly tailwinds. This is growth positive for Sri Lanka. However, we should also be mindful that gradual normalisation of monetary policies in the advanced countries could pose some challenges to the economy on both external and fiscal fronts.

Sri Lanka is gradually transforming to upper middle income economy status. Sustained progress will inevitably involve greater integration with the world economy. While creating opportunities, this will also expose the economy to greater uncertainties and risks. In order to face the current and future challenges proactively, and to address the already identified deficiencies in the existing processes, the Central Bank, as outlined in its latest Strategic Plan for the medium term, expects to robustly strengthen its institutional frameworks by: a) enhancing the monetary policy framework; b) strengthening the financial sector oversight; c) modernising payment and settlements; and, d) upgrading public debt management.

The improved policy frameworks will enable the country to take advantage of greater integration, while mitigating the risks involved and increasing the resilience of the economy.

In this respect, as already mentioned, we are steadily progressing towards an effective FIT framework to ensure price stability. At the same time, we are striving to promote a dynamic and resilient financial sector in order to lower vulnerabilities in the financial system. This is a priority for achieving objectives in relation to growth, employment and incomes.

Modernising the infrastructure of the payments and settlements system to pave the path towards a less cash society and facilitating a digital economy are also important policy priorities in the medium term. We are also determined to strive for prudent debt management with a view to ensure debt sustainability, enhance effectiveness and transparency of the primary auction system, promote market development and minimise risks.

Price stability

The Central Bank is entrusted with the task of maintaining price stability. Price stability remains a key fundamental in fostering an environment conducive for sustained growth and securing rising living standards for the people.

The Central Bank seeks to achieve its price stability objective through the conduct of monetary policy. Based on the current monetary policy framework, we have been able to maintain inflation in single digits for close to a decade.

Going forward, the introduction of an effective FIT framework will improve our capacity to deliver price stability. This will provide a more propitious environment for growth and employment generation. Our motivation towards adopting inflation targeting as the monetary policy framework was signaled a number of years ago, as we recognised it as the most appropriate way to escape from the high inflation-low growth trap.

The weakened relationship between money and inflation and deepening financial markets were among the major factors that encouraged this move.

Under the proposed FIT framework, the Central Bank will aim to preserve price stability of the economy by targeting an inflation range of 4-6 per cent.

We believe that this target range is desirable for a country like ours in view of the vulnerability of the economy to supply or external shocks. We will employ market-based instruments, particularly the policy interest rates and open market operations (OMO) of the Central Bank, to influence market conditions and to navigate inflation in the targeted mid-single digit range.

Variables such as overall monetary expansion and credit disbursements to the private sector by commercial banks will remain as key indicative variables to guide monetary policy conduct. We have now progressed into a time-bound plan to make this leap towards FIT a reality. The period starting from 2018 will be vital in laying out required reforms to facilitate a smooth transition to a FIT framework.

In this context, we have identified three important pillars as the building blocks for adopting a FIT framework; 1. Strong Central Bank mandate and credibility 2. Effective monetary policy conduct 3. Strong fiscal policy support and commitment.

Liability management

We also see the proposed Liability Management Act of the government as a prudent strategy. It allows the government to manage public debt in a more flexible manner. Under this framework, the public debt manager would create a buffer fund to minimise the rollover risk of debt stock

eliminating the necessity for the Central Bank to provide financial assistance to the government at the beginning of each year as per the current provisions of the MLA.

Even more importantly, it will create the space to go beyond the government’s borrowing requirement in any given year to mobilise financing to address the current bunching of external debt payments from 2019. The government’s decision to earmark the proceeds of divestitures for liability management is also a very favourable development in this regard.

SOEs

The government’s commitment to reform state owned enterprises (SOEs) is commendable. In particular, automatic pricing mechanisms for fuel and electricity are expected to be introduced in March and September 2018, respectively. This will go a long way towards reducing the future financial losses of key SOEs and avoid large ad hoc adjustments in retail prices.

Not only will this be supportive of the effective conduct of monetary policy, but it will also have a positive impact on the balance sheets of both the government and the state banks.

Policies for 2018 and beyond

Being guided by its mandate, the Central Bank promotes a dynamic and resilient financial sector, which supports sustainable growth, primarily through regulation and supervision of financial institutions, ensuring sound and safe payment and settlement systems, establishing risk management systems and instilling good corporate governance standards and practices in the financial sector.

Falling in line with international standards and best practices, the Central Bank has introduced several policy reforms, in 2017, to strengthen the regulatory and supervisory framework relating to FIs under the purview of the Central Bank thus ensuring financial system stability.

It is also noteworthy to mention that we have re-established the Financial System Stability Consultative Committee (FSSCC) in 2017 comprising reputed and well-experienced professionals, experts as well as the representatives from the institutions and regulatory bodies in the financial sector. Inputs of the FSSCC are helpful in devising appropriate decisions for maintaining financial system stability.

Going forward, there is an overarching need to amend the Banking Act to ensure that the banking sector is guided by legislation which sufficiently accounts for the change in the sectoral landscape and the challenges that may arise as the sector rapidly grows and evolves, across the country and beyond. The Central Bank is proactively working with all relevant stakeholders of the banking sector and looks forward to finalising a new Banking Act in the near-term.

Strengthening the regulatory and supervisory framework for the banking sector remains at the centre of our financial sector policy. As such, we are continuing to upgrade and enhancethe bank examination methodology to ensure that the focus of examinations is not entirely a rule-based one that concentrates only on compliance, but also one which gives due consideration to the efficiency, effectiveness and sustainability of individual banks and the entire banking sector. Accordingly, initiatives are underway to assign ratings to banks based on a combination of quantitative and qualitative indicators that will assess their efficiency and sustainability.

During the course of this year, we expect to finalise the bank examination methodology based on the Bank Sustainability Risk Index (BSRI) to facilitate the transition from an annual ‘on-site’ examination approach to a ‘risk-based’ supervision approach. Further, we intend to incorporate BSRI to examination reports of all licensed banks and assign a supervisory rating grade for banks with effect from 2019, on a staggered basis.

Over the last five years, while the banking sector has grown approximately by 15% annually, the non-bank financial institutions sector has grown approximately by 20per cent. Although the sector accounts for a comparatively small share of around 8 per cent of the total assets of the financial system, the rapid growth and broad outreach of the sector necessitate proactive supervision and regulatory guidance.

While several regulations have been introduced to strengthen these institutions, some licensed finance companies have shown signs of stress, while the rapid expansion of certain others have been curtailed due to their lack of compliance with regulatory requirements.

This reiterates the need for continued strengthening of the existing regulatory framework of non-bank financial institutions to ensure the soundness of the sector and ontain its spillover effects on the whole system. Initiatives are already underway to resolve such weaknesses through mergers and recapitalisation of such finance companies through strategic investors.

It should also be mentioned that in addition to the Board of Directors, the senior management of these institutions are also equally responsible for the operations of the institutions.

ERM

While we make every possible effort to put other financial institutions in order,we have to put our own house in order. In line with this, implementing an Enterprise-wide Risk Management Framework (ERM) and strengthening compliance in the bank have been identified as one of our strategic priorities. In line with new trends in central banking in the area of risk management, implementation of an ERM framework helps to move away from a ‘silo based’ approach to a ‘whole of business’ approach to risk management.

ERM enables the integrated oversight of all risks across all levels, locationsand departments using a uniform approach with consistent foundations and organisational arrangements for designing, implementing, monitoring, reviewing and continuously improving risk management throughout the Central Bank. This will support more informedand risk-aware decision-making at the top, while strengthening the risk mitigation culture, enhancing internal governance, optimising risk management cost, and promoting efficient use of resources, while building confidence of stakeholders and the community at large.

Public Debt Management

We consider prudent debt management as one of the highest priorities given the challenge of managing a very large debt stock, while maintaining a proper mix between domestic and foreign financing. In fact, to break away from a potentially vicious cycle of debt, the Central Bank has made prudent debt management a bank-wide strategic priority in its mission to ensure debt sustainability.

As you all know, the Central Bank is responsible for raising, managing and servicing of government debt and carries out its functions with the objective of ensuring that the government’s financing requirements are met at the lowest possible cost in a timely manner, while ensuring the sustainability of debt obtained on behalf of the government. Following what was outlined in the previous Road Map, several measures were implemented in 2017 to enhance the transparency of debt management operations.

In July 2017, a new hybrid primary issuance system for Treasury bonds was introducedtoenhance the efficiency and transparency of the domestic borrowings of the government. We have also published an issuance calendar for government securities in the Central Bank website on a rolling basisto improve the transparency and predictability of the primary auction process and government securities market. Looking ahead, in 2018, we will continue to work towards enhancing the security, efficiency and transparency in public debt management further.

Subject to the enactment of the Liability Management Act,in early 2018, liability management measures will be executed in order to improve the underlying risk profile of the public debt stock. This would enable us to minimise the refinancing risk by altering the maturity profile of the outstanding debt stock. Also under this initiative, activities such as buy-back, switching and pre-funding arrangements will be explored, not only to increase tenor, but also to reduce cost.

Most importantly, we will take all steps necessary in the medium-term to establish a credible term structure of interest rates enabling to build up a long-term yield curve, while also smoothing the structure of debt. This would help reduce debt vulnerabilities. We have had a clean and unblemished track record with regard to debt repayment in the past. This must be continued and every effort will be made to do so.

EPF

As you all know, the Monetary Board of the Central Bank of Sri Lanka, as the safe custodian, is vested with all powers and responsibilities pertaining to management of the Employees’ Provident Fund (EPF). Being the largest superannuation fund in the country, the EPF passed a significant milestone during the year with total assets of the Fund surpassing Rs. 2.0 trillion.

It has grown at a compounded average rate of around 13 per cent during last 5 years. Several measures were taken, in 2017, to improve the overall quality of the services provided to members by way of streamlining operational activities. This was achieved by accelerating the automation process for collecting member contributions, real-time updating of member accounts and swift payment of refunds.

Notable improvements were also made to services offered for employers in their submission of EPF returns via an electronic platform, while we also partnered with a few licensed commercial banks to offer their EPF paying customers the facility to remit their member contributions online.

In addition, several measures were taken to enhance the accountability and transparency of the investment process with greater emphasis on improving the governance structure of fund management, including the establishment of an independent, internal department for risk management. Further, the assistance of the Asian Development Bank (ADB) and the World Bank was obtained to improve internal processes in line international best practices. As in the previous years, we have continued to provide members with the highest possible returns on their fund balances through profitable, yet prudent investments.

Forex management

Following the successful implementation of proposals announced in the Road Map for 2017, a new foreign exchange management framework was introduced in order to implement government policy.

Accordingly, the Department of Foreign Exchange was established in place of the Exchange Control Department to implement provisions of the new Foreign Exchange Act.

In addition, we have implemented several policies for further relaxation of capital transactions in 2017. The foreign exchange policies to be implemented in 2018 and beyond are basically focused upon facilitating integration with the current overall policy stance of the country which seeks to promote competitive advantages for Sri Lanka in the global business environment.

With the view of introducing an effective monitoring mechanism, a new ‘real time’ reporting and monitoring system is to be introduced for authorised dealers and restricted dealers in order to create a better database for macro-economic decision making through identifying patterns related to mobilisation of foreign exchange flows. Offsite surveillance will be strengthened as a part of the reporting requirement with the view of tracking and reducing non-compliances to improve market discipline.

Regional Development

The Central Bank continues to execute many concessionary development credit schemes through Participating Financial Institutions (PFIs), with a view of providing refinance facilities, interest subsidies and/or credit guarantees and credit supplementary services targeting development of agriculture and livestock, micro, small and medium scale enterprise (MSME) sectors, improving the financial inclusion and promoting balanced regional growth in the country. In order to strengthen effective credit delivery and to broaden the outreach of the formal financial sector, several loan schemes were introduced during 2017.

Further, the Central Bank facilitates all sectors of the economy by enhancing flow of credit and credit plus services and provision of non-financial support to achieve sustainable development and create a conducive financial environment to bring-in under-served segments of society to the formal financial sector.

Priority is also being attached to develop a National Financial Inclusion Strategy for the country. In addition, we plan to automate activities that pertainto registration of loan applications of borrowers and processing of refinance applications of PFIs and to focus on enhancing the efficiency of credit delivery mechanisms, thereby expediting the flow of credit to the needy sectors of the economy.

Going forward, the improved credit delivery mechanism along with other non-financial support extended will considerably enhance regional development efforts of the Central Bank. These efforts will also support achieving the goals of the National Food Production Programme of the government. ERM enables the integrated oversight of all risks across all levels, locations and departments using a uniform approach with consistent foundations and organisational arrangements for designing, implementing, monitoring, reviewing and continuously improving risk management throughout the Central Bank. This will support more informed and risk-aware decision-making at the top, while strengthening the risk mitigation culture, enhancing internal governance, optimising risk management cost, and promoting efficient use of resources, while building confidence of stakeholders and the community at large.

Public Debt Management

We consider prudent debt management as one of the highest priorities given the challenge of managing a very large debt stock, while maintaining a proper mix between domestic and foreign financing. In fact, to break away from a potentially vicious cycle of debt, the Central Bank has made prudent debt management a bank-wide strategic priority in its mission to ensure debt sustainability.

As you all know, the Central Bank is responsible for raising, managing and servicing of government debt and carries out its functions with the objective of ensuring that the government’s financing requirements are met at the lowest possible cost in a timely manner, while ensuring the sustainability of debt obtained on behalf of the government. Following what was outlined in the previous Road Map, several measures were implemented in 2017 to enhance the transparency of debt management operations.

In July 2017, a new hybrid primary issuance system for Treasury bonds was introduced to enhance the efficiency and transparency of the domestic borrowings of the government. We have also published an issuance calendar for government securities in the Central Bank website on a rolling basis to improve the transparency and predictability of the primary auction process and government securities market. Looking ahead, in 2018, we will continue to work towards enhancing the security, efficiency and transparency in public debt management further.

Subject to the enactment of the Liability Management Act,in early 2018, liability management measures will be executed in order to improve the underlying risk profile of the public debt stock. This would enable us to minimise the refinancing risk by altering the maturity profile of the outstanding debt stock. Also under this initiative, activities such as buy-back, switching and pre-funding arrangements will be explored, not only to increase tenor, but also to reduce cost.

Most importantly, we will take all steps necessary in the medium-term to establish a credible term structure of interest rates enabling to build up a long-term yield curve, while also smoothing the structure of debt. This would help reduce debt vulnerabilities. We have had a clean and unblemished track record with regard to debt repayment in the past. This must be continued and every effort will be made to do so.

EPF

As you all know, the Monetary Board of the Central Bank of Sri Lanka, as the safe custodian, is vested with all powers and responsibilities pertaining to management of the Employees’ Provident Fund (EPF). Being the largest superannuation fund in the country, the EPF passed a significant milestone during the year with total assets of the Fund surpassing Rs. 2.0 trillion.

It has grown at a compounded average rate of around 13 per cent during last 5 years. Several measures were taken, in 2017, to improve the overall quality of the services provided to members by way of streamlining operational activities. This was achieved by accelerating the automation process for collecting member contributions, real-time updating of member accounts and swift payment of refunds.

Notable improvements were also made to services offered for employers in their submission of EPF returns via an electronic platform, while we also partnered with a few licensed commercial banks to offer their EPF paying customers the facility to remit their member contributions online.

In addition, several measures were taken to enhance the accountability and transparency of the investment process with greater emphasis on improving the governance structure of fund management, including the establishment of an independent, internal department for risk management. Further, the assistance of the Asian Development Bank (ADB) and the World Bank was obtained to improve internal processes in line international best practices. As in the previous years, we have continued to provide members with the highest possible returns on their fund balances through profitable, yet prudent investments.

Forex management

Following the successful implementation of proposals announced in the Road Map for 2017, a new foreign exchange management framework was introduced in order to implement government policy.

Accordingly, the Department of Foreign Exchange was established in place of the Exchange Control Department to implement provisions of the new Foreign Exchange Act.

In addition, we have implemented several policies for further relaxation of capital transactions in 2017. The foreign exchange policies to be implemented in 2018 and beyond are basically focused upon facilitating integration with the current overall policy stance of the country which seeks to promote competitive advantages for Sri Lanka in the global business environment.

With the view of introducing an effective monitoring mechanism, a new ‘real time’ reporting and monitoring system is to be introduced for authorised dealers and restricted dealers in order to create a better database for macro-economic decision making through identifying patterns related to mobilisation of foreign exchange flows. Offsite surveillance will be strengthened as a part of the reporting requirement with the view of tracking and reducing non-compliances to improve market discipline.

Regional Development

The Central Bank continues to execute many concessionary development credit schemes through Participating Financial Institutions (PFIs), with a view of providing refinance facilities, interest subsidies and/or credit guarantees and credit supplementary services targeting development of agriculture and livestock, micro, small and medium scale enterprise (MSME) sectors, improving the financial inclusion and promoting balanced regional growth in the country. In order to strengthen effective credit delivery and to broaden the outreach of the formal financial sector, several loan schemes were introduced during 2017.

Further, the Central Bank facilitates all sectors of the economy by enhancing flow of credit and credit plus services and provision of non-financial support to achieve sustainable development and create a conducive financial environment to bring-in under-served segments of society to the formal financial sector.

Priority is also being attached to develop a National Financial Inclusion Strategy for the country. In addition, we plan to automate activities that pertain to registration of loan applications of borrowers and processing of refinance applications of PFIs and to focus on enhancing the efficiency of credit delivery mechanisms, thereby expediting the flow of credit to the needy sectors of the economy.

Going forward, the improved credit delivery mechanism along with other non-financial support extended will considerably enhance regional development efforts of the Central Bank. These efforts will also support achieving the goals of the National Food Production Programme of the government.