Sri Lanka to remove gatekeepers in lubricants, ceramics, enhancing freedoms

ECONOMYNEXT - Sri Lanka is ending the practice of forcing companies to get 'permission' from near monopoly lubricant and ceramics sector players, before importing such items, enhancing investor freedoms and bringing the island closer to Singapore.

Companies such as Colombo Dockyard had to wait for long periods and go through administrative hassles to import specialist lubricant brands demanded by ship owners who bring vessels to be repaired and serviced in Colombo.

Ship repair firms in Singapore competing with Colombo had no such hassles.

"Presently the lubricant market is managed only by a few companies," Finance Minister Ravi Karunanayake said in a budget for 2016.

"Hence I propose to liberalize the lubricant market and I encourage the companies to venture into
more value added products with high investment.

"Further I propose to remove lubricants from BOI (Board of Investment) negative list."

The dominant player in lubricants is US-based Chevron Lubricants.

Though Sri Lanka got self-determination from British rule in 1948, a number of freedoms of poor citizens and even large investors were subsequently taken away through import duties to 'protect' domestic industries and licensing.

Karunanayake said a 'negative list' of goods which investors could not import ceramic items without permission from manufacturers who had to say that they did not have a such product available will also be removed.

"…I propose to remove tiles, ceramic, and sanitary ware, from the negative list of the BOI," he said.

Taxes on building several building material used by homeless to build their houses including ceramics and sanitary wear were removed.

During the Rajapaksa regime, the Sri Lanka Ceramics Council and industry body, lobbied and got the rulers to impose high taxes on toilets and other ceramic products, raising the cost of homeless people and forcing poorer people to buy imported and domestically produced factory rejects.

Sri Lanka has no reason to tighten money policy now: CB Governor

ECONOMYENXT - Sri Lanka has no reason to tighten monetary policy right now, though bank credit growth is strong, Central Bank Governor Arjuna Mahendran said.

"Right now there is no real reason to tighten monetary policy," Mahendran told a business forum organized by HSBC in Colombo.

He said bank credit has been strong but on a monthly basis credit it has not been high.

Mahendran said inflation would hopefully be under control because there are several measures in the budget to strengthen the 'supply side' and there was also a benign international situation.

Sri Lanka was a small trading country in the world and the international picture had to be taken into account and India has been cutting rates.

He said there was no credit bubble as some sections of the media has been saying.

Sri Lanka public to guarantee losses, fraud in finance companies

ECONOMYNEXT - Sri Lanka's central bank will guarantee all deposits at finance companies from January 2016, the most risky among deposit taking institutions, and fund will be set up to bailout troubled firms, the budget for 2016 said.

Money from tax payers had already been used in a controversial move by the current administration to bailout depositors and let the directors off the hook at Golden Key Credit Card Company, an illegal finance company

Several licensed finance companies are also in trouble because the Central Bank had not taken early action and there is no legal requirement or process to automaticallya and quickly force the liquidation of firms that fall below their capital requirements like in the US.

"To find a long standing solution for this issue, a Financial Institution Restructuring Agency (FIRA) on the lines of the Resolution Trust Corporation in the United States of America will be established shortly to help failing finance companies to be recapitalized and their troubled assets to be taken over by this agency for purposes of restructuring" Finance Minister Ravi Karunanayake said in the prepared text of a budget speech.

"The Central Bank will be entrusted to undertake strict supervision on this restructured finance companies.

"However, as a prelude to the above proposal in order to provide the depositors with a sense of comfort and security, the Central Bank of Sri Lanka will give a 100 percent guarantee on all deposits of all the registered finance companies by end January 2016."

Finance companies trade in the riskiest category of lenders and generally pay a higher rate of interest. Well managed finance companies also have a higher capital buffer of up to 15 percent of risk assets.

If the restructuring agency proposal is delayed by giving a guarantee for deposits, which is now available only to the National Savings Bank and Treasury Bills, the public may perceive finance companies to be safer than commercial banks.

Credit guarantees by the state encourages even more risk taking by finance companies.

Analysts also say the setting up Resolution Trust Corporation style fund is not a long term solution to finance company failure as claimed, but is a fire fighting reaction necessary to fix firms that are already in trouble.

In the US the Resolution Trust Corporation was set up to take over and liquidate over 700 entities in housing finance which collapsed after the Fed raised interest rates in 1980 ending a bubble fired during 1970s.

The long term solution was to give powers and skills the Federal Deposit Insurance Corporation to liquidate firms whose capital fell below the regulatory minimum without any discretion or 'regulatory forbearance' to delay liquidation like in Sri Lanka.

By forcing liquidation when capital falls below a regulatory minimum (such as 8 percent of risk weighted assets) and taking away the discretion to delay liquidation, early action is taken when a lender has bad loans and the cost to the public is minimised.

Most of Sri Lanka's finance companies got into trouble after 2004, when the then administration delayed rate hikes amid deficit spending and printed money firing a massive housing and inflation bubble.

The bubble collapsed around 2008, with a balance of payments crisis, leading to the collapse of several firms involved in property including the Ceylinco group.

Analysts have warned that the Central Bank, by engaging in a rate cut in April and printing money generally after that is also firing another credit bubble, which will have serious negative effects when it moves to property speculation.

Sri Lankan shares post over 2-wk closing high

Reuters: Sri Lankan shares ended at their highest in more than two weeks on Monday after the government proposed a slew of measures in its budget for next year to boost the capital market.

The government announced on Friday a raft of steps, including the removal of a 0.3 percent share transaction levy, to stimulate trading in the share market and increase liquidity.

"This will help address one of the major drawbacks of the Sri Lankan share market," Vajira Kulatilaka, the Colombo Stock Exchange chairman, said in a statement.

The main stock index ended 0.55 percent, or 38.40 points, firmer at 7,055.84, its highest close since Nov. 6.

"The market responded positively because the budget reduced corporate tax and readjusted the value added tax (VAT)," said Dimantha Mathew, research manager at First Capital Equities (Pvt) Ltd.

Turnover was 884.8 million rupees ($6.20 million) on Monday, less than this year's daily average of 1.1 billion rupees.

Shares in conglomerate John Keells Holdings Plc rose 1.67 percent, while Nestle Lanka Plc rose 3.56 percent.

Foreign investors were net sellers of 58.95 million rupees worth of equities on Monday, extending the year-to-date net foreign outflow to 3.65 billion rupees.

Rating agency Fitch said in a statement that it maintained a negative outlook on the telecom sector based on uncertainty over proposals to increase taxes, which are likely to lower profitability and increase leverage, if implemented. 

($1 = 142.6500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Subhranshu Sahu)

CSE approves Rs. 750 m IPO of People’s Insurance

People’s Insurance Ltd., a wholly owned subsidiary of People’s Leasing and Finance Plc, will be the latest entity to be listed on the Colombo Stock Exchange.

The CSE has in principle approved the application for its listing of 200 million ordinary shares shortly. Through the IPO, People’s Insurance will offer 50 million shares at Rs. 15 each with the total value being Rs. 750 million. 

The public can subscribe to the IPO from 7 December whilst its official opening is on 16 December. Joint financial advisors for the IPO are NDB Investment Bank Ltd., Acuity Partners Ltd. and People’s Bank’s Investment Banking Unit. 

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