The government has also endorsed this move to adopt a FIT regime as stated in its Vision 2025 policy document. In order to successfully implement the FIT framework, we have formulated a road map outlining several milestones to be completed by the government and the Central Bank, including the necessary  3  legislative, institutional and operational changes. The International Monetary Fund (IMF) has also recognised our move towards FIT by giving us necessary technical assistance on capacity building. The Central Bank accommodated greater flexibility in the exchange rate in 2017 by allowing market forces to determine the rate. The market reacted positively to this policy initiative by reviving the spot market. The Central Bank continued to absorb foreign exchange from the domestic interbank foreign exchange market in order to build up the quantum of nonborrowed foreign exchange reserves. This move also helped to smoothen the exchange rate behaviour. There were even some instances of appreciation of the rupee in 2017, indicating significant inflows to the foreign exchange market. Sri Lanka also received the fourth tranche of the Extended Fund Facility (EFF) of the IMF in December 2017. A total of US dollars 759.9 million has been received so far. This confirms Sri Lanka’s satisfactory performance in achieving IMF-EFF targets during 2017 in terms of specified performance criteria and certain structural benchmarks. Earnings from exports increased owing to the recovery in key export markets, the Central Bank policy of maintaining exchange rate flexibility, conducive external trade policies and improved macroeconomic conditions of the country.

Accordingly, initiatives are underway to assign ratings to banks based on a combination of quantitative and qualitative indicators that will assess their efficiency and sustainability. During the course of this year, we expect to finalise the bank examination  methodology based on the Bank Sustainability Risk Index (BSRI) to facilitate the transition from an annual ‘on-site’ examination approach to a ‘risk-based’ supervision approach. Further, we intend to incorporate BSRI to examination reports of all licensed banks and assign a supervisory rating grade for banks with effect from 2019, on a staggered basis. Banks have also been engaged in the implementation of Basel III capital standards and implementation is to be completed by 1 January 2019. While banks have been working on the improvement of their capital adequacy ratios, a capital conservation buffer and a surcharge on domestic systemically important banks have been imposed to ensure that banks actively build capital buffers. The direction to increase the existing minimum capital requirements was targeted at improving the quality of capital to ensure that these buffers are of a more resilient nature. This will help safeguard the banking sector during periods of excessive credit growth and/or adverse economic conditions. It will also minimise the systemic risk arising from the interconnectedness among banks. Under the Basel III guidelines, banks will also be required to comply with guidelines regarding a Net Stable Funding Ratio with due consideration to the composition of their assets and off-balance sheet exposures.