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5. How did we prepare for these shocks?
* The prudent policies we pursued have helped us to minimize the impact of external shocks, on the domestic financial system.
* The Central Bank has been vigilant in maintaining stable interest rates and exchange rate to protect the domestic economy and strengthen it. Our exchange rate was stable for over one year now. We have opened the Treasury Bill and Bond Markets to foreign investors with carefully placed limits, while creating a buffer to meet the threat of a sudden capital flight.
* The Central Bank has been highly concerned about the adverse implications that would arise due to any indisciplined lending by banks. Because of this reason, we directed all the banks to make a general provision of 1 percent on performing loans and advances, in November 2006. We also increased the Risk Weight applicable for Housing Loans from 50% to 55% in November 2006. At that time, business community and the media found fault with us. But now, we have been proved right.
* We placed a limit on commercial banks’ borrowing from abroad to 15 per cent of their capital.
* The Central Bank took measures to formalize and strengthen the banking supervision activities and to educate the banks on the management of risks. We also issued new far reaching and landmark directions on Corporate Governance, Limits on shareholdings, Maximum accommodation and single borrower limits, and enforced these new directions stringently.
* Internationally, the Central Bank invested its external reserves with highly rated international banks, basically with foreign Central Banks, and thereby ensured the 100 per cent security and safety of its own reserves.
* We absorbed an additional US dollars 600 million from the foreign exchange market, in the first 8 months of this year. This has enabled the Central Bank to supply such foreign
exchange in a situation where there is a need to supply external funds into the market to keep it stable.
* We dealt with inflation in Sri Lanka in a decisive manner, and it is gradually declining now. We expect this trend to continue in the coming months as well. When other countries are having severe increases and are in fact doubling or tripling their inflation figures, we are experiencing a decline in our inflation rate.
* We took the tough decision of passing-though the high oil prices early. Most of the other countries took that decision later and are today experiencing rising inflation rates, thereby compounding the problem of the credit crunch.
* We indicated our policies well in advance through our “Road Map’, which has now become a very important way of communicating our overall action plans and policy directions. We will issue our next Road Map at the beginning of next year.
