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| Amarananda S. Jayawardena,
Governor of the Central Bank |
| Photo by James Overly |
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| Santhusht Jayasuriya, Deputy
Director General for Promotions of Sri Lanka’s
Board of Investment |
| Photo by James Overly |
The Colombo Stock Exchange was named the best performing
stock market in Asia last year after posting a 31
percent increase over the previous year, and a 38
percent increase in the year before that. The Exchange
leads a robust private financial sector that is
steadily strengthening.
The current Sri Lankan government has placed the
financial sector at the head of the reform process,
says Central Bank Governor Amarananda S. Jayawardena.
The governor says the objective is to reduce the
state share of the banking sector from 80 percent
to less than 50 percent. “A good financial
sector is our objective,” Jayawardena says,
“and has been since 1977. We want our banking
sector to be internationally competitive.”
“Of the 26 banks operating in Sri Lanka,”
the governor says, “I would classify 18 of
them as ‘strong.’”
The government now aims for the state banking share
not to exceed 50 percent of the market. Pursuing
this goal has been problematic, because the two
largely state-owned banks, which previously commanded
80 percent of the banking business, are not performing
as strongly. They are holding large amounts of non-performing
loans.
In early March, Treasury Secretary Charitha Ratwatte
claimed the second biggest state bank, People’s
Bank, needs an emergency injection of 9 billion
rupees (roughly $90 million) to meet capital adequacy
ratio requirements.
Jayawardena says, “Overall, our debt ratio
is about 13%, but the private banks are significantly
better than that.”
Jayawardena cites recent improvements in the banking
system, such as the first real time settlement system
in South Asia, and strong computerization and communications
systems connecting the banking system to the international
financial markets.
“Movement in the capital account is now by
and large open,” he says, but acknowledges
that large transactions are still monitored, a vestige
of controls put in place after the Asian financial
crisis of a few years ago
The role of the central bank is also being reformed,
Jayawardena says. “The central bank has been
the money provider to the banking system, but we
are getting out of that.”
Overall, the governor maintains, the public sector
finances are improving. Interest rates are stable,
now in single digits. Inflation has also been held
to single digits, a significant decrease from recent
years. Growth in the money supply has been restrained.
The rupee exchange rate is stable, and is balanced
against a basket of 24 currencies.
“We don’t allow the government to borrow
commercially abroad, but rupee debt is our problem
– it’s about 55 percent of GDP,”
he says. Reducing this debt is a primary government
goal, he adds.
As a part of fiscal reform, the government has introduced
a value added tax. This act is designed to replace
weak administration and enforcement of the existing
income tax regime. Of course, the new tax is giving
rise to complaints, and Jayawardena acknowledges
that it will take some “getting used to.”
When it comes to economic and fiscal goals and politics
in Sri Lanka, Jayawardena stresses that there is,
and historically has been, broad consensus between
government and opposition parties that has held
through changes in government. “This is extremely
important to investors,” he emphasizes.
Making a pitch for foreign investment, the governor
says, “Sri Lanka is an up and coming, free
market economy,” the governor says. “This
is a place where every prospect pleases.”
Investors are indeed responding. Finance Minister
K.N. Choksy announced in late January that foreign
direct investment had doubled in 2002 over the year
previous. As the ceasefire holds and the peace process
continues, the prospect of an inflow of large amounts
of assistance funds for infrastructure rebuilding
is attracting numerous foreign investors.
Best prospects for investment, according to Santhusht
Jayasuriya, Deputy Director General for Promotions
of Sri Lanka’s Board of Investment include
infrastructure building, ports, airports, roads,
tourism, information technology, agribusiness, light
manufacturing, and services.
Railroads are one of the major transport sectors
for which Sri Lanka seeks foreign investors.
Photo by Alex Kersis
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