Operating Environment

The Global Economy

Despite the sharp decline in oil prices during the second half of 2014, the world economic outlook (IMF, October 2014 and January 2015) continues to be subdued, weighed down by the legacies of the global financial crisis and a cloudy future. World output grew by 3.3% in 2014, same as the growth in 2013.

Recovery was seen in advanced economies, with growth projected to rise to 2.4% in both 2015 and 2016 from 2.2% in 2014. However, there is divergence between the US with a forecast economic growth of 3.6% and the Euro area and Japan, which are expected to post weaker perfomances.

A stable growth in emerging markets and developing economies was seen in 2014, with growth projected at 4.3% in 2015 and higher in 2016. However, this has to be viewed in the context of slowing down of growth in China and a negative outlook of growth in Russia.

The windfall gains from lower oil prices have helped many oil-importing developing economies, although there is some uncertainty in the future direction of prices. Most of the benefits accrue to Governments which subsidise fuel prices, which may use this opportunity to introduce reforms while allowing some relief to pass on to consumers.

The Sri Lankan Economy

Sri Lanka recorded a GDP growth of 7.4% in 2014 compared to 7.2% the previous year. The service sector remained the main contributor to GDP with a share of 57%, followed by industry and agriculture sectors accounting for 33% and 10% respectively. The service sector recorded an increase of 7% mainly driven by the expansion in the wholesale and retail trade, hotels and restaurants, transport and communication, banking, insurance and real estate sub-sectors.

The country’s external sector remained stable during 2014 with strong inflows in terms of exports, tourist earning, worker remittance and foreign direct investments, while the overall balance of payments recorded a surplus of USD 1.37 billion. Sri Lanka’s gross official reserves remained around US$ 8.2 billion in December 2014. The Sri Lanka Rupee (LKR) remained relatively stable throughout the year.

Looking ahead, the Sri Lankan economy is expected to grow by 7% in 2015, fuelled by investments, improved macroeconomic stability and improving global economic conditions. Inflation is expected to remain at mid single-digit levels. Supply of credit from the domestic banking sector for development activities is likely to rise on the back of greater inflows of foreign debt and equity into the domestic capital market.

The Banking Sector

The Sri Lankan banking sector remained strong with healthy capital and liquidity levels. Loans and advances picked up towards the latter part of the year, largely driven by the infrastructure, construction, trading, financial services, manufacturing, healthcare and education sectors.

The banking sector recorded a marginal improvement in profitability due to the lagged effect of reducing interest rates on deposits compared to loans and advances. This was mitigated to some extent by gains made on investments in securities and lower provision requirements on account of recovery of non-performing loans (NPL).

Banking Sector Highlights

Assets growth 17.3 16.5
Loans growth 13.7 8.8
Deposits growth 12.4 15.0
Borrowings growth 42.6 26.2
SLAR 39.5 37.7
Gross NPL ratio 4.2 5.6
ROA – after tax 1.4 1.3