Economy to take a hit from global developments

The impact of global developments, such as Brexit, recent Presidential?elections in the United States (US) as?well as interest rate hikes by the US Federal Reserve, the forthcoming elections in France and Germany in Europe, the projected slowdown in the Chinese economy, as well as economic?conditions in Sri Lanka?s major trading?partners, including India, Japan, Russia?and the Middle East, will have a
significant influence on the domestic?economy, the Central Bank of Sri Lanka (CBSL) said today.

Governor of the Central Bank of Sri Lanka?Dr. Indrajit Coomaraswamy said that trends in oil prices and international?capital flows, following the?normalisation of interest rates in the US?are likely to be particularly important.

“We also expect that changes to?government tax structure and supply?shortages stemming from weather related?developments as well as shocks?that could arise due to possible reversal?of global commodity prices could cause temporary variations in price levels. In?particular, if current drought conditions prevail, there could be adverse?implications on price levels, while?impacting on economic activities, notably agriculture and power?generation.?As in the past, it is expected that the Government would take timely measures?to counter the adverse supply side?effects on prices, thus mitigating?adverse inflation expectations of the?general public, he said while presenting the CBSL Monetary and Financial Sector Policies for 2017 and Beyond.

Accordingly, he says it is anticipated that?inflation expectations would broadly?remain anchored in the medium-term with appropriate demand management?policies, supported by timely supply side measures.

The Central Bank has sought to preserve?the soundness, efficiency and stability of?the financial system primarily through?the regulation and supervision of all?major categories of financial institutions, ensuring sound and safe payment and?settlement systems as well as?establishing risk management systems?and instilling good corporate?governance standards and practices in?the financial sector while promoting?financial inclusion.

“In the medium-term, our overall aim is to?ensure the stability in the financial sector?through identifying emerging?vulnerabilities in this sector; adopting?early corrective actions; and?implementing a series of measures to?further strengthen financial institutions,?markets, infrastructure and safety nets.?Our medium-term plan is to have a?financial system, which offers the full?range of financial products and services?to all economic sectors, including?agriculture, infrastructure,?manufacturing, particularly small and?medium enterprises (SMEs), and trade?to achieve broader economic objectives?of our country. We need to have a wellplanned?and an ambitious agenda for?financial sector development and?reforms ranging across financial sector?policies with a vision of innovative,?robust and competitive financial
systems,” Coomaraswamy said.

He also said that primary dealers play a vital role in trading of Government securities and market making. Further, there is high?potential to deepen the debt securities?market in the country.

“Hence, we need?to have a clearly stated policy?framework for Primary Dealers. This will further enhance the safety of investments in the Government?securities market,” he said.

Accordingly, he noted that the CBSL has already revisited the existing regulatory?framework of primary dealers and?based on those findings, CBSL will?introduce an appropriate regulatory?framework for primary dealers in line?with the latest developments in the?market by benchmarking the global standards. CBSL also expects to establish?and implement a restructuring?mechanism for distressed primary?dealers. (Colombo Gazette)