Sri Lankan shares fall to over 1-mth closing low on higher rates

(Reuters) - Sri Lankan stocks fell to a more than one-month low on Monday, losing for a sixth consecutive session, as investors stayed on the sidelines amid rising interest rates and political uncertainty ahead of parliamentary elections.

The main stock index fell 0.66 percent, or 47.17 points, to 7,136.33, its lowest close since Feb. 5, extending the fall to 2.48 percent in the last six sessions.

"Local institutional and high net-worth investors were fairly inactive in the market," TKS Securities (Pvt) Ltd said in a note to investors.

Analysts said investors were waiting for clarity on interest rates and on the political front.

The central bank removed a penalty rate of 5 percent on its repo rate with effect from March 2. The bank had imposed the penalty in September to discourage commercial banks from parking money with it at an interest rate of 6.5 percent.

The scrapping of the penalty resulted in a rise in t-bill yields of between 86 basis points and 91 basis points last Tuesday.

The central bank plans to raise 50 billion rupees ($376.36 million) through government securities this week, it said on its website.

Elections to Sri Lanka's 225-member parliament are expected to be announced after April 23 and it is unclear whether the ruling coalition led by President Maithripala Sirisena would contest unitedly or go to the polls separately.

Political analysts expect a hung parliament if Sirisena's coalition members contest separately in the polls.

Shares in Ceylon Tobacco Company Plc fell 1.93 percent, while Shalimar Estate declined 13.64 percent.

Turnover was 665.4 million rupees ($5 million), well below this year's daily average of 1.37 billion rupees.

Foreign investors were net buyers of 214.6 million rupees worth of shares, extending the year-to-date foreign inflow to 2.37 billion rupees.

($1 = 132.9500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

President’s attention towards Treasury Bond issue raising allegations against CB Governor: Three member committee appointed

President Maithripala Sirisena has directed that investigations be carried out into the allegations that the recent 30 year Treasury Bonds issue by the Central Bank had been carried out while enabling a certain Primary Dealer to gain capital profits.

The President’s media unit states that he has ordered the President’s secretary to appoint a three-member committee to investigate into this issue and if there are any irregularities in this Treasury Bond issue then severe punishment be meted out to the officials or individuals involved, whatever their status or positions.

Recently, the Central Bank of Sri Lanka announced the issue of Treasury Bonds to the value of Rs 01 billion maturing in 30 years. This particular Primary Dealer too had reportedly submitted its bid.

However, market sources state that this Primary Dealer had submitted bid for this auction requesting for Treasury Bonds worth Rs. 05 billion and that its interest rate was as high as 12.5 per cent.

By now, there are allegations that the Central Bank initially announcing the issue of bonds for only Rs. 01 billion but later increasing it to Rs. 10 billion and while the other dealers had bought these bonds at a normal interest rate of 11.73 per cent this particular dealer having bought the requested entire Treasury Bonds and most of them being at an interest rate as high as 12.5 per cent, raise suspicions.

Meanwhile, the Policy Planning and Economic Affairs Ministry had issued a statement on these allegations stating:

“At a meeting held on 26 February 2015 to ascertain the Government expenditure projections attended by the Minister of Finance, Minister of Highways, Investment Promotion and Higher Education, Secretary to the Treasury and the Governor of the Central Bank of Sri Lanka, it was decided that the Government needs additional funding of approx. Rs. 15 Billion on an urgent basis to fund the recommencement of Highways and road construction projects.

“The previous regime had not settled money owing to contractors and had not paid for lands acquired for road projects. The outstanding amount to be paid for land acquisition alone is Rs. 44 Billion.

“To complete the balance road construction work the Government needed Rs. 12 Billion as counterpart funds. Most of the loan agreements for these projects have already been signed. Although the Government will be renegotiating prices, it will continue with these projects. The Government’s immediate needs for cash to make payments for the bills in hand and to complete incomplete projects were to be met through the Treasury Bond issues in March 2015.

“The latest bond issue was opened on 27th Feb. 2015. The amount offered was Rs. 1 Billion. Thirty six offers were received amounting to Rs. 20 billion in bids. This enabled the Governor of the Central Bank of Sri Lanka to accept Rs. 10 Billion in accordance with the above decision.

“Around September 2014, when it became clear that the previous Government would hold Presidential Elections in early 2015, the then management of the Central Bank of Sri Lanka decided to reduce interest rates and yields on Sri Lanka Government bonds. As a consequence, the yield on the 10 year Sri Lanka Government bond declined from 9.23% in July 2014 to 7.88% in January 2015.

“Similarly, the yield on the Sri Lanka Government 30 year bond fell from 11.75% in May 2014 to 11.73% in February, 2015.

“The foreign exchange reserves of Sri Lanka have been falling sequentially since interest rates were lowered in September 2014. From a level of USD 9.2 billion from June 2014 they have come down to USD 7 billion in February, 2015. As a result, the exchange rate of the Sri Lanka rupee which has been under pressure depreciated by 1.2% in January 2015.

“The acceptance of Rs. 10 billion worth of bonds has also resulted in raising the interest rate on the 30 year bond to 11.5% which is where it stood in June 2014 before interest rates were reduced. Furthermore, the Central Bank of Sri Lanka has also scrapped the 3 day rule restriction that allowed Banks to park their funds in the Central Bank at the 6.5% base rate on 3 days a month and get 5% in all other days, a practice implemented in September 2014.

“The Government also decided that as far as possible all bonds should be through public auction. Private placement at pre agreed rates only helped favoured investors.

“It’s a well-known fact that during the last decade the intersection of finance and business was controlled by a few people with nexus to the Rajapaksa regime. They had access to vital information on transactions, which they used to earn undue profits. There were pre-arranged transactions with state owned institutions instead of public auctions open to stock brokers and large investors. Many stakeholders were adversely affected due to manipulations in the stock market. Two Chairpersons of the SEC lost their jobs trying to enforce the existing regulations. The Government is inquiring into these prior malpractices and will also investigate the alleged malpractices which are taking place at the Public Debt Department during bond auctions and private placements.

“Finally, the above change in policy and procedures relating to setting of interest rates was done in good faith and will result in several benefits to the Government and economy of Sri Lanka such as:

(a) the maintenance of a stable currency

(b) the maintenance of a clear and stable monetary policy conforming to international standards

(c) creating a liquid yield curve to enable the market to price risk.

(d) the transparent conduct in the sale of Government securities to the markets without pandering to vested interests

(e) the adoption of an appropriate monetary policy stance keeping with the current state of the finances of the Government of Sri Lanka; and

(f) ensuring sufficient funding for the Government in the next 6 months which will ensure no interruption to the implementation of policies announced in the budget and the 100 day programme.
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Committee appointed to investigate CBSL bond issue

President Maithripala Sirisena has appointed a three member committee to investigate alleged irregularities surrounding a recent bond issue by the Central Bank, the Presidents Media Division said today.
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Duty reduction of canned fish threatens local fishing industry - Tess Agro CEO laments bitterly

By Chanaka de Silva

Ceylon Finance Today: The reduction of the duties in imported canned fish has threatened the local fishing industry, a frontline local manufacturer charged in an interview with the Ceylon FT.

Sri Lanka is a country which is surrounded by the sea and now the country is surrounded by imported canned fish from China. The fish canning industry in particular is threatened by the new duty reduction of Rs. 50.00 per kilo on canned fish imports. This leaves the both local fisherman and the canners in a bind as some canning factories have already closed down unable to face the competition, Tess Agro PLC CEO Shiran Fernando told Ceylon FT.

If this situation remains unchecked the whole fisheries industry is at the risk of its stakeholders migrating to other professions as the one lucrative industry becomes non profitable, he cautioned. He also pointed out that the local fisheries industry was badly hit by a long drawn out war, which prevented fishermen from going out to sea, by which local fish prices sky-rocketed. However, now even if the war had ended, fish prices have not reduced. Furthermore, though now there were ample fish stocks there was not a large enough stock to influence the reduction of fish prices, he said. He also said that the recent reduction on canned fish had further aggravated the issue. If this was not monitored fast, new comers into this once very lucrative profession will keep away, he said.

This will only keep the fish prices high, and kill the local fish canning industry, he said
The recent duty reduction on the imported canned fish directly affects the local small fishermen. These fishermen who support their families with the small fish caught get good prices when their stock is purchased by the canners. The large seagoing trawlers that catch the Kelawalla for export is not affected by this.

Small fishermen who do not have traders to purchase their stocks are directly hit. We produce a high-quality product that has earned its place in the local market. But the Chinese imports come in without any quality assurances only a cheap price. Formerly there was a SLS standard that demanded the can should contain 60 percent of the can weight should be fish. That condition no longer exists for the importers, he noted.

He also said that the locally manufactured product was far superior to any imported fish can and said that they were willing to take the challenge to prove it. Our fish cans have been designed to provide a nutrition meal for especially the factory workers who live in boarding houses and do not have proper meals. The government should impose quality conditions on the quality of the product it lets into the country to be consumed by our people. For instance, they can specify certain criteria such as the drain weight of the can, the factory that it is produced so that there will be a quality product in the market.

While we are faced with non- refundable VAT, the importers do not have to pay any of these charges. The canning industry sources everything locally. From the spices to the labels to the can and to the fish. However the Chinese canned fish are generally about one year old when they are brought here and released to the market for consumption, as against our products that are a maximum of 2 month old he said.

Our industry purchases the 'Linna' for canning from directly from the fisherman paying cash. Last season we paid the price of Rs. 250.00 per kilo for their catch. If this price of the imported can fish is not checked we have to drop our purchase price. This will discourage fishermen going out to sea, he said.
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