Giving an indication of the intentions of the Sri Lankan Government on the direction its fiscal consolidation measures is headed, the Central Bank of Sri Lanka said on Monday that reforms were required for key public sector enterprises to operate more efficiently.
Recently, both the Lanka IndianOil Corporation and the government-owned Ceylon Petroleum Corporation had hiked fuel prices without any announcement. Lanka IOC first hiked diesel prices and CPC followed suit more than a month later.
In its 61{+s}{+t} Annual Report of the Monetary Board, the Bank said: “The impact of disturbances arising from adverse external developments, including price movements of commodities such as crude oil, could also be lessened through the implementation of necessary reforms to the institutional framework of key public enterprises to operate them more efficiently and in a commercially sustainable way to reflect market conditions. These changes will support the ongoing fiscal consolidation process, which would in turn strengthen demand management policies.”
Robust growth
The Bank noted with satisfaction that all key sectors of the economy — industry, agriculture and services — had recorded robust growth. The economy itself grew at an unprecedented eight per cent. The Bank detailed steps to deal with the excess liquidity in the system, a problem that has been pointed out by many multilateral agencies, including the International Monetary Fund.
The build-up of excess liquidity was largely due to the absorption of foreign exchange inflows to the country by the Central Bank with a view to preventing an undue appreciation of the rupee.
The issue of the sovereign bond in October to international investors, net foreign investments in Treasury bonds and Treasury bills, and other inflows of foreign funds to both the government and the private sector, resulted in the excess of foreign exchange in the domestic foreign exchange market during the first three quarters of the year.
Liquidity management
The Central Bank continued its efforts to manage liquidity, thereby stabilising interest rates and guiding reserve money along the targeted path. As the stock of government securities held by the Central Bank depleted, the Bank issued its own securities to absorb liquidity on overnight and term bases.
Foreign exchange swap agreements, adopted under open market operations (OMO) in 2009, were also utilised to absorb a portion of the excess liquidity.
From October 20, 2010, the overnight and term auctions under OMO were discontinued as the primary market yield rate on three-month Treasury bills declined to levels below the Bank's Repurchase rate, an outcome of intense competition among banks, who had a large volume of excess liquidity, to acquire short term government securities to manage their portfolios.