Sri Lanka economy to grow 5.5-pct through end 2015; inflation 3-pct: IMF

(LBO) – Sri Lanka’s economic growth is likely to continue in the range of 5 to 5.5 percent through end 2015, driven by strong growth in services and a recovery in agricultural output, the IMF mission said.

IMF mission led by Todd Schneider who visited the island recently to conduct Post-Program Monitoring discussions said headline inflation which is currently near zero is expected to end the year around 3 percent.

The mission also projects a fiscal deficit in the range of 5.5 to 6 percent of GDP in 2015, higher than budgeted and financed mainly by domestic borrowing.

The mission has strongly recommended keeping the 2016 fiscal deficit to 5.5 percent of GDP and to base consolidation on a combination of expenditure restraint and durable revenue reforms.

The full text of the statement is reproduced below.

IMF Staff Concludes Visit to Sri Lanka
September 18, 2015


End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

A staff mission led by Todd Schneider visited Colombo from September 8 – 18 to conduct Post-Program Monitoring discussions. This enhanced surveillance is routine for countries that have had “exceptional access” to IMF resources, as is the case for Sri Lanka, which successfully completed a $2.6 billion IMF program in 2012. The mission met with the Prime Minister, Government, and Central Bank of Sri Lanka (CBSL) officials, as well as civil society and private sector representatives.

At the end of the visit, Mr. Schneider issued the following statement:

“First half GDP data indicate a pickup in growth—likely to continue in the range of 5 to 5.5 percent through end-2015—driven mainly by strong growth in services and a recovery in agricultural output. The increase in consumer spending created by the sharp rise in public wages and salaries has also contributed to a sizeable increase in imports of consumption and other goods—more than offsetting savings from lower oil prices. The resulting deterioration in the nonoil trade balance has contributed to persistent downward pressure on central bank foreign exchange reserves during the first eight months of the year. Headline inflation is currently near zero but is expected to end the year around 3 percent. Core inflation has risen steadily since the beginning of the year, consistent with higher demand for domestic non-tradables and a gradual reduction in economic slack. Risks to outlook are tilted to the downside with more volatile external financing conditions resulting from the expected monetary policy tightening in the U.S. and uncertainties over growth prospects in emerging markets.

“The mission welcomes the CBSL’s recent decision to cease setting daily spot prices for the rupee and let market forces play a greater role in determining the exchange rate. Moving ahead, the commitment to exchange rate flexibility should continue in order to maintain competitiveness and facilitate an increase in CBSL foreign exchange reserves. The mission encouraged CBSL to work toward deepening foreign exchange markets and to revitalize a review of foreign exchange controls to enable inward investment. Additionally, the mission found the overall financial system stable and current monetary stance appropriate – but recommended vigilance given rising core inflation, the resurgence of private credit, and signs of receding slack in the economy. In this context, a tightening bias appears prudent.

“The mission agreed with the authorities on the need to take immediate and credible steps to reestablish fiscal consolidation and reduce of public debt. The mission projects a fiscal deficit in the range of 5.5 to 6 percent of GDP in 2015—higher than budgeted and financed mainly by domestic borrowing. Looking ahead, the 2016 budget is an opportunity to shift decisively back to a durable medium-term path of fiscal consolidation and to set macroeconomic priorities for 2016 and beyond. The mission strongly recommended to keep the 2016 fiscal deficit to 5.5 percent of GDP—and to base consolidation on a combination of expenditure restraint and durable revenue reforms. The mission emphasized the need to eliminate tax expenditures (exemptions, tax holidays and reduced rates) as the most important component in a strategy to make the tax system simple, fair, and efficient.

“The mission welcomes the authorities’ attention to the need for market-based structural reforms and efforts to reinvigorate key initiatives. Fuel and electricity pricing, subsidies, trade policy, liberalization of factor markets (particularly land), and the investment environment are areas that could play an essential role in sustaining high rates of economic growth. Putting state firms on a commercial footing, allowing them to make market-based financial decisions (including pricing) and subjecting them to the greater financial discipline will also help to reduce risks to the budget and the financial system.

“A discussion on Post Program Monitoring by the IMF’s Executive Board is expected in mid-November, 2015.”

Dormant billions in pension and ETF funds stifle growth

By Steve A. Morrell

Fitch Ratings convened a forum last week on the subject ‘Sri Lanka Investment Fund & Asset Management’ in Colombo.

CEO & Country Head, Fitch Ratings Lanka Ltd., Maninda Wickramasinghe, in his opening remarks, said the potential for Sri Lanka to enter into the regimen of stable and sustainable growth was good. Particularly transfer of knowledge in relation to the funds industry was considered within the vortex of developing markets.

Although Sri Lanka’s potential was described to be good, speakers at the forum and panel discussion hinged on the aspect that there was much to be desired from implication of financial disciplines and management of substantial funds left dormant, yet available for development.

Wickramasinghe said private equity funds subservient to degrees of independence could be better positioned for growth.

Hypothetical aspects of the Forum were that funds management within commercial perspectives could be better utilized for progress.

Managing Director, JB, Murtaza Jafferjee, said, managing assets should be a clear process of knowing what to do, with the funds available yet, unused. He said pension funds amount to approximately Rs. 1.9 Billion and ETF funds were Rs. 1.9 billion. Although this substantial funds base was accessible, it remained inoperative.

Savings and bank interest were low. Generally people preferred to sustain these low interest rates rather than risk such savings in for instance the share markets. What happens was that the preferred investment was gold or real estate, he noted.

Associate Director, Fund and Asset Manager Ratings, Fitch Ratings, Li Huang, on the subject International Fund Markets concentrated her presentation on the Chinese aspect of the global economy.

Although China was not affected by the financial crisis of 2008, the Chinese economy is currently in lean times.

The US was now in a commanding position in comparative money markets with a 51 percent global share, comparatively, she said. "Sri Lanka’s share was miniscule. With assets described to be about 1 billon dollars , Sri Lanka’s position was 0.0001 percent".

It was described as a "low yield environment". However, growth potential of Sri Lanka was high subject to correct carefully assessed and implemented funds industry, she said.

Li also placed the Russian Ruble to be strong, and added Russia is in the global segment or stable money markets.

At the panel discussion the media disagreed with this view based on the factual position that the depreciated Russian Ruble caused ripples in the local tea market, because Russia was not able pay top rupee for the tea purchased. She did not dispute this view.

Taxes too were an aspect that emerged at the panel discussion. Here, too the view was that the question that taxes ‘would go’ did raise some disbelief. Again the media pointed out that according to the Inland Revenue Department, only about 150,000 people were paying taxes, the others were not and urged fresh thinking if taxes were to be done away with.

Wickramasinghe corrected this assumption, and reassured this was not so, and what he said was misunderstood.

Also at panel discussion, the strong, yet stultifying aspect of state control of at least 90 percent of the land mass and control of government finances which was substantial, subscribed to mediocre financial performances in the economical sphere.

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Taj commissions 60-room luxury floor, losses persist

Tal Lanka Hotels plc, owners of the Taj Samudra Hotel in Colombo, has commissioned a new luxury floor with 60 rooms in March this year and has also claimed that the renovated Golden Dragon Restaurant has established itself as the country’s leading Chinese Restaurant in its Annual Report ending March 31, 2015.

The year under review has seen the Company completing the USD 5 million second phase of renovation which included the luxury floor as well as upgrading the Samudra Ballroom to international standards "providing a new luxury experience for guests."

The Hotel had however posted a loss of Rs.180.8 million for the year, down from Rs. 530 million the previous year, although the Company’s Chairman has reported that revenues have returned to mere normal levels after completion of major renovation projects of the lobby, bar and three floors undertaken in 2013/14.

"However, room inventory of 60 keys, the Samudra Ballroom and Golden Dragon

remain closed for renovation for part of the current financial year which impacted revenue from these areas," Tal Lanka Chairman Rakesh Sarna said.

He reported that the USD 125 per room night minimum rate set in April 2011 remains unchanged. Several new hotels positioned as business travelers have opened in the three and four-star segments.

"With the increasing supply, hotel properties in the city have started positioning themselves across different value and price segments," Sarna said. "This will lead to increased arrivals in the long term and benefit the industry."

The owning Company with a stated capital of nearly Rs. 1.4 billion and a revaluation reserve of over Rs.1.5 billon carried accumulated losses of slightly over Rs. 1.31 billion in its books. Total assets ran at Rs. 4.79 billion and total liabilities at nearly Rs.3.2 billion.

The Company’s loss for the year under review translated to a loss per share of Rs. 129 down from Rs. 380 a year earlier. Net assets per share stood at Rs.11.44, down from Rs. 12.81 the previous year.

A Tal share rated at a high of Rs. 38 and a low of Rs. 25.40 during the year under review against a trading range of Rs. 32 to Rs. 24 the previous year.

Tal Hotels and Resorts Ltd with 58.14% and the Indian Hotels Company Ltd with 26.2% are the major shareholders of the owning company. The ETF with 5.33% is the third largest shareholder. Several local corporate entities and individuals are also among the top 20 shareholders of but owning less than 1% of the Company each.

The Directors of Tal Lanka Hotels plc are Messrs R.K. Sarna (Chairman), A.P Goel, D.K Chaudhary, Russel de Mel, R.K Chaudhary, Tilak de Zoysa, G. Sundaram, V. Govindasamy, S. Joshi, P. Verma and U. Narain.

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Sri Lanka’s Asiri Hospital sells stake to Actis Investment

ECONOMYNEXT – Sri Lanka’s Asiri Hospital Holdings said it will sell new shares to private equity firm Actis Investment Holdings for 845.7 million rupees part of which will be used to raise its stake in Central Hospital Ltd.

Asiri Hospital Holdings is to issue 38.4 million ordinary shares of the company by way of a private placement to Actis Investment Holdings at 22 rupees each which will constitute 3.38 percent of the company after the issue.

Proceeds of the share issue will be used to part fund the acquisition of almost 68 million ordinary shares of Central Hospital Ltd., raising Asiri’s direct stake to 99.7 percent from 68 percent, a stock exchange filing said.

The share issue is subject to shareholder and stock exchange approval.

Tokyo Cement profits down for first time since 2007/08

Demand for cement hurt by weather & re-evaluation of national projects

Tokyo Cement plc has seen its profit drop for the first time since 2007/08 in the year ended March 31, 2015, posting a group profit after tax of Rs.1.69 billion, down from Rs 2.17 billion a year earlier while the company’s profit was down to Rs. 711 million from Rs 1.09 billion the previous year.

The company’s chairman, Dr. Harsha Cabral, attributed the decline in performance to "the massive influx of imported cement, coupled with a retail price reduction" which he said was extremely counter-productive causing a direct negative impact on the Tokyo’s revenues.

"The sharp drop in demand due to the cessation of large scale development projects, added to revenue losses," he said.

Tokyo’s Japanese partner, Yoshichika Noshio, President of the Nippon Coke and Engineering Company Ltd attributed the decline in performance to several reasons, "but the impact of price control was undoubtedly critical."

The company’s managing director, Mr.S.R Gnanam, said that the year under review had been fairly turbulent due to a combination of external factors that curtailed the demand for cement while also injecting a sense of instability to the industry. Nevertheless, the company’s strong fundamentals provided the strength and resilience to sustain growth albeit at a lower pace than in the previous year.

Last year’s extreme weather patterns with a combination of drought and excessive rain disrupted the demand for cement interrupting construction projects and curtailing agricultural incomes. The drought hurt their renewable energy projects due to shortages of biomass fuel such as paddy husk and glyricidia stems.

With imported rice flooding the market, the domestic rice milling industry curtailed operations causing a shortage of paddy husks. This resulted in a significant lower contribution from the biomass plant causing energy costs to increase during the year.

Demand for cement saw a marked reduction towards the tail-end of the year due to many national projects being suspended for re-evaluation following the change of government. As the State is the single large driver of construction activity in the country, suspension of national development projects had a ripple effect across the economy impacting the purchasing power of a sizeable share of the population.

Also, the supply contract for ready-mixed concrete for the Outer Circular Road has concluded during the financial year causing a sizeable gap in the cement sales. However, Gnanam was confident that there will be a renewed demand for ready-mixed concrete in the new financial year when development projects re-commence.

The price reduction of cement to Rs. 870 per 50 kg bag from Rs. 925 had increased downward pressure on top-line growth, he said. Despite these developments, the company recorded commendable top-line growth.

Tokyo Cement has a stated capital of Rs. 2.89 billion and carried group retained earnings of Rs.7.09 billion in its books while the company had Rs. 4.23 billon retained earnings. Total group assets were Rs. 19.74 billion (Rs 14.76 billion for the company) and total liabilities were Rs. 9.75 billion for the group and Rs. 3.74 billion for the company.

St. Anthony’s Consolidated (Pvt) Ltd with 27.5%, Nippon

Coke and Engineering with 23.3% and South Asian Investments connected to the St. Anthony’s Group with 20.1% are the main voting shareholders.

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The directors of the company are Dr. Harsha Cabral (Chairman), Messrs S.R. Gnanam (Managing Director) A.S.G. Gnanam, E.J Gnanam, R. Seevaratnam, Dr. Indrajith Coomaraswamy, Ravi Dias and non-executive nominee directors from Nippon Coke and Engineering. Mr. W.C. Fernando, Executive Director and Group General Manager, was appointed to the Board in October last year while Mr. S.V. Wanigasekera, non-executive nominee director of Nippon Coke and Engineering was replaced in September 2014.

Sri Lanka should not cut rates, but look at tightening ahead: IMF

ECONOMYNEXT - Sri Lanka should not cut rate policy rate as core inflation is rising steadily and credit is expanding a high rates and authorities should look ahead at tightening policy, IMF mission chief to the country Todd Schneider said.

Sri Lanka's low rates may have been justified by low inflation and slow credit in the past and was not "necessarily inappropriate" he said.

"You are still in a very low inflation environment. At least headline inflation has been low," Schneider said in Colombo.

"We - looking at the balance of macro-economic factors - think that there is not necessarily further room for cutting," Schneider said.

"If anything the Central Bank should have a pro-tightening bias looking forward."

Underlying Factors

Rising core inflation and a pick up in credit, signalled the need for tightening, Schneider said.

Core inflation has been rising steadily from 0.8 percent in February before a budget raised state spending and consumption adding fuel to private credit which was already picking up, analysts say.

Core inflation does take into account food and energy, which were cut by the state.

"That (core inflation) has been rising very steadily from the beginning of the year," Schneider said. "Now that is about 3.9 percent, which for core inflation is - you are getting into the upper limit."

Core inflation strips out food and energy, most of which are internationally tradable and which some economists say are mostly influenced by Federal Reserve policy. When the dollar rises, traded commodities tend to fall.

Non-traded items can signify the domestic inflation generated by a central bank in a pegged exchange rate country though it does not encompass the total (imported and domestically created) inflation.

Credit Rise

Sri Lanka's private credit has also been rising.

Private credit rose 19.4 percent in June 2015 from a year earlier, from slow or negative levels up to the third quarter of 2014.

"Clearly it (private credit) is accelerating and that calls into question how much is too much," Schneider said.

"Credit needs to grow in line with the economy, so it is worth watching.

"For those reasons we are advising caution to the Central Bank. We are seeing pressure in terms of core inflation, pressure in terms of higher private sector credit."

Slow and negative credit helped build up excess liquidity on the liability side of the Central Bank's balance sheet and foreign reserves on the asset side.

When credit picks up, the cycle reverses unless rates rise to generate more (real) savings to finance the credit by delaying some consumption.

Other analysts have said the far bigger problem than the private credit, is the sudden rise in state credit after a revised budget in January 2015 with higher state salaries and subsidies, which created a consumption bombshell in the country as well as demand for state credit.

The private sector is a net saver but it has to generate financial savings to finance its own credit and that of a profligate state. Net credit to the government was up 21.5 percent to June 2015 from a year earlier.

Credit to state corporations rose 38.2 percent up to June from a year earlier.

Deadliest Credit

Analysts have said that even more deadlier to any country and particularly any country with a 'soft' or 'non-credible' dollar peg is central bank credit or printed money.

Due to a so-called managed float, where large inflows are bought by the Central Bank generating liquidity, analysts say the country's monetary system is fundamentally externally anchored to the US dollar via soft-dollar peg.

Any illusions that the monetary system is domestic anchored in terms to a price index is a pipe dream, they say.

When rates do not go up with loan demand, the credit system gets fouled up by contradictory polices involving attempts to target the dual anchors. When it persists for an extended period of time, a so-called 'balance of payments crisis' develops.

A central bank which purchases domestic assets (Treasury bills) inserts loanable reserves into the banking system, allowing banks to give private or state credit over and above the deposits they are generating, firing demand out of line with real economic developments.

This extra credit then slams into the balance of payments sucking up foreign reserves when the exchange rate is defended, or de-stabilizing the soft-peg with the US dollar and impoverishing the people in general (destroying real purchasing power), if interventions are not made.

The extra credit which is out of line with deposits, can come from money freshly minted to buy T-bills or releases of liquidity held through central bank's own securities or borrowed bills from a third party.

When forex interventions begin, and liquidity is sucked up, the Central Bank injects more liquidity to defend its policy rate (contradictory exchange and monetary policy), firing a vicious negative feedback loop, which can be ended with a float.

Central Bank credit to the economy rose 30.8 percent up to June according to official data, as net foreign assets of the monetary authority dropped 23.8 percent to 538 billion rupees during the same period.

Since June, central bank credit has ratcheted up further. The Treasury bill stock of the Central Bank rose to 171 billion rupees by September 18, from 5.0 billion in June 01.

Since the credibility of the peg has been undermined some of the injections have been made to facilitate fleeing foreign capital and not all of the credit is hitting the balance of payments as imports, analysts say.

To end Sri Lanka's soft-peg currency problems and inflation economists and analysts have called for an end to contradictory exchange and money policy by re-establishing a currency board or hard-peg.

Sri Lanka capital markets urged to break tax holiday dependency

ECONOMYNEXT - Sri Lanka's capital markets will have to grow out of the habit of being dependent on tax benefits with some instruments becoming tax shelters for the rich, a former revenue chief said.

Dayani de Silva, a former head of Sri Lanka's tax office said she was concerned to hear that the Colombo Stock Exchange was lobbying for tax holidays again this year.

"It was clear that you have kept up the momentum on what I would call a dependency syndrome," de Silva told a forum organized by Fitch Ratings.

"Why do we have to depend on a tax concession? After all tax concession is a mere push in the correct direction."

Colombo Stock Exchange Chairman Vajira Kulathilake said they required 'support' to develop the capital markets especially derivatives and the feed back for tax lobbying was "more positive than before."

De Silva said the country should move towards a low, uniform tax rate.

She said the case of unit trust or mutual funds she was involved when the tax holiday was originally offered in the 1990s.

"It was introduced for a mere 5-year period," she said. Every time the tax holiday is due to run out, lobbyist used to 'come running' to extend the holiday, she recalled.

"I cannot recall any other tax concession that has been continuously extended other than that for the unit trusts," De Silva said.

"Has it had the desired effect? It was more to motivate the small investors to come into the market via the unit trusts. But what really happened definitely is a tax sheltering device for the affluent tax payers."

There was something wrong if the market thought a tax holiday was needed for it to function, she said.

Mutual funds however invest money on behalf of ultimate beneficiaries and like real estate investment trusts they should only be taxed once, analysts say.

If a unit trust is taxed once the returns should not be taxed again after they are distributed to the beneficiaries.

There is also a complication where a 10 percent tax on interest is charged on government securities at source, which should also be taken into account.

Sri Lanka's capital markets has also lobbied and got tax holidays for listed bonds, which have also become a tax shelter for the rich analysts say.

Analysts say that move is also dangerous since it may incentivise investors to buy riskier debt than they would otherwise have done. Bond should ideally be bought on credit risk and not as a tax shelter.

Sri Lanka also does not have capital gains tax on stocks unlike so called 'capitalist' countries, but that also means capital losses are not deductible when money is lost.

High rates of income tax in particular can destroy capital and transfer money that would generate jobs for the poor to the hands of politicians to throw away it away in consumption spending like building a bloated state or giving deceptive subsidies to buy votes.

At the moment Sri Lanka is printing money heavily and the currency is falling, destroying salaries and bank deposits of all citizens, after a massive salary hike given to state workers and rulers are looking for new sources to tax private citizens and their activities.

A retrospective tax that damages the country's investment environment has also been slammed on the workplaces of Sri Lanka's citizens. The Middle East for example it generating millions of jobs for people in South Asia because income tax is largely absent and revenue is from fees.

"The proper direction in tax reform is to move clearly to a lower tax regime," de Silva. "A neutral low tax regime is what is needed."

Murtaza Jafferjee, head of JB Securities agreed that tax holiday dependency was not correct.

"As an industry we should not be a tax planning industry," he said. "Having said that I will have sleepless nights if they take it away."

Commercial Bank to commence fully-fledged banking operations in the Maldives

• Receives licence from Maldives Monetary Authority and approval from Central Bank of Sri Lanka

The Commercial Bank of Ceylon PLC has announced plans to extend its services to the Republic of Maldives following the receipt of regulatory approval for the establishment of a fully-fledged Tier I bank in the idyllic archipelago.

Sri Lanka’s largest private bank has received approval from both the Maldives Monetary 
Authority and the Central Bank of Sri Lanka to set up a banking subsidiary in the Maldives.

The Maldives will be the third overseas banking operation of Commercial Bank, after Bangladesh, which the bank entered in 2003, and Myanmar where the bank opened a Representative Office in June this year.

Commercial Bank said its new subsidiary is to be named ‘Commercial Bank of Maldives Ltd.’ and the bank will invest in a 55% stake in the entity subject to Exchange Control and other regulatory approvals. A leading Maldivian group of companies will own the remaining stake.

“We are delighted to receive a licence to operate a fully-fledged banking subsidiary in the Maldives,” Commercial Bank’s Managing Director and CEO Jegan Durairatnam said.

“Sri Lanka and the Maldives enjoy the closest possible bilateral relations and are linked by extremely strong economic ties. Sri Lankan companies operate hotels in the Maldives, large numbers of Sri Lankans are employed in the Maldivian hospitality industry, and Sri Lanka provides services to Maldivian visitors in many spheres including education and healthcare. It is therefore logical that a bank of the size and calibre of Commercial Bank has a presence in the Maldives.”

He also stated that Commercial Bank has already extended substantial offshore lending facilities from Colombo to businesses located in the Maldives.

“Our entry strategy is to establish a single branch initially in Malé and thereafter increase our presence to up to three branches by the fifth year,” Durairatnam said. “Mobile units and ATMs will also be set up in strategic locations and technology will be utilised at the highest level to tackle the vast geographic distribution.”

The new bank will offer individuals and corporate entities in the Maldives a variety of financial services such as savings and current accounts, fixed deposits, personal loans, housing loans, credit cards, overdrafts, commercial loans, trade financing services, internet banking, mobile banking, remittances and foreign exchange.

Commercial Bank’s first overseas operation was launched with the acquisition of the Bangladesh operations of Credit Agricole Indosuez (CAI). Today, the bank’s operations in Bangladesh have grown to 18 outlets, and have won numerous awards including the Financial Mirror – Robintex Business Award for outstanding performance, the Financial News Services (FNS) Business Award for the ‘Best Performing Foreign Bank’ in Bangladesh and the ICMAB, National Best Corporate Award.

The bank’s second overseas operation in Myanmar offers Banking and Advisory Services to Sri Lankan and Bangladeshi businesses wishing to enter that country. Commercial Bank was the first Sri Lankan bank to be granted a licence by the Central Bank of Myanmar to operate a Representative Office in that country.

The only Sri Lankan bank to be ranked among the Top 1000 banks of the world for five consecutive years, Commercial Bank operates a network of 244 branches and 616 ATMs in Sri Lanka. The Bank was ranked the most valuable private sector brand in the country in 2014, and was adjudged the Best Bank in Sri Lanka by FinanceAsia and Euromoney in 2015. 

Commercial Bank has also won multiple awards as Sri Lanka’s best bank from other international publications over several years.

The bank was adjudged one of Sri Lanka’s 10 best corporate citizens by the Ceylon Chamber of Commerce in 2013 and 2014, and has been rated the Most Respected Bank in Sri Lanka by LMD for the past 11 years. The bank has also been the second Most Respected Corporate entity in the country overall for the past five years in the LMD rankings, and has been rated No. 1 in Sri Lanka for Honesty in 2013, 2014, and 2015.
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