CSE on an innovative, cost saving marketing drive

By Duruthu Edirimuni Chandrasekera

The Colombo Stock Exchange (CSE) has embarked on a cost effective marketing drive with plans to rope in foreign governments and (local/foreign) firms to sponsor roadshows in those countries, a top official says. ”In a cost saving measure, the CSE is planning to get other countries/institutions to sponsor roadshows in different countries,” Vajira Kulatilleke, Chairman CSE told the Business Times. He added that with the change of government, perceptions/attitudes of certain nations towards Sri Lanka have changed (for the better) and they are trying to capitalise on this change in their stance. While acknowledging that bad times won’t last, he said now (the CSE is on a bearish momentum) they are gearing and preparing for the next cycle when there’ll be good times.

“We’re trying (till then) to develop institutions and stakeholders in the market,” he said. In this respect, the CSE is conducting training on various aspects – especially on research. “As these are times to improve ourselves, we thought of doing these things,” Mr. Kulatilleke said. According to him, an area that the CSE is deficient in is risk management. “The rest of the world has moved up in this respect. Now is the time to catch-up,” he said adding that by the first quarter of 2017 the Central Counterparty (CCP), which is an entity that will take up the risk of transaction in the market in the event of a clearing and settlement failure, will be ready. He added that when these systems are in place, new fund managers will come into the country. “Some fund managers are ‘sarcastic’ when they realise that Sri Lanka doesn’t have CCP.”

He added that currently sentiments aren’t good as people had expected much faster implementation after the government changed. Acceleration in construction sector alongside other such (visible) activity will do the trick of changing the sentiment, he added. He added this year will see some six initial public offers. The CSE is bringing in software this year to enable Repurchase Agreement (Repo) facility on corporate debt (i.e. debentures) which will assist more liquidity at the CSE. “This will be done in the third quarter,” Mr. Kulatilleke said. He added that the CSE is trying to forge ahead with the Small and Medium Enterprise (SME) Board and that the BOI Board which was proposed in 2014 has been scrapped as it isn’t viable. The dollar denominated board, enabling foreign firms to trade on CSE is also on track and the CSE aims to conduct a roadshow in Male soon to get some Maldivian firms to list on the CSE under this board, he added.

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High taxation, Rupee and Yen fluctuations hit the local vehicle market

By Bandula Sirimanna

The depreciating rupee, appreciating yen, high excise duties and other taxes have hit Sri Lanka’s automobile market hard raising import costs sharply in a sector which is already under pressure from a continuous slide in vehicle sales over the last four months, motor traders said.

A recent tax hike aimed at curbing car imports and the outflow of foreign exchange as well as the appreciation of yen has dropped vehicle sales by at least 75 per cent, Lanka Vehicle Importers’ Association Chairman Indika Sampath Merinchige told the Business Times.

The price of a Toyota Prius hybrid car has increased by Rs. 300,000 due to yen appreciation alone, he said adding that car dealers find it difficult to survive under the present circumstance. Mr. Merinchige noted that motor traders have already stopped the importation of vehicles due to high taxation and the current valuation system and they are selling the existing stocks of cars which have been imported before the tax revision. He added that he believes the government will continue the present tax policy aimed at curbing vehicle imports.

The leasing facility has been brought down to 70 per cent from 90 per cent with effect from December 2015 in a circular issued by the Central Bank. This has also affected the car sales in the country, he said adding that this may also signal finance firms and banks to re-adjust conditions for vehicle financing in a market where most of the people buy vehicles through leasing. Mahesh L. Ganwani, Director – Lekhraj Automobiles Pvt Ltd said motor traders will continue to monitor the market over the next few months or so as dealers adopt a wait and see approach towards vehicle buyer reactions. “We expect the market to return to normalcy over the coming months as needy buyers may adopt to existing conditions,” he said.

But the continuation of vehicle taxation policies could result in a lull situation in the car market where buyers will have to pay high prices to purchase vehicles, he cautioned. India continues to dominate the Sri Lankan market for vehicle imports accounting for 50 per cent of the import value. Japan has remained resilient maintaining 30 per cent of market value facing challenges from other countries, he said adding that Japanese car imports will also be lowered in the coming months due to Yen appreciation. Meanwhile farmer organisations complained that the price of tractors has also gone up by Rs.300,000 and it will hit the agriculture industry badly in the long run. Sri Lanka’s large truck and tractor new registrations have continued to fall in January this year amid weak economic conditions, Motor Traffic Department data revealed.

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SEC extends ban on Nation Lanka Equities

By Duruthu Edirimuni Chandrasekera

The Securities Exchange Commission (SEC) has extended the ban on Nation Lanka Equities (Pvt) Ltd from canvassing for new clients due to continuous non-compliance with the SEC Act and stockbroker rules of the Colombo Stock Exchange (CSE), sources said. The SEC had deliberated on the matter last month after Nation Lanka Equities had brought Rs. 60 million into the company and sent a letter to say that they will bring in the balance Rs. 40 million, but the regulator was dissatisfied with the explanations provided and decided to extend this ban, an SEC source told the Business Times.

Nation Lanka Equities was suspended for three months effective last November from canvassing any new business. The matter had come up at the Commission meeting on January 29 and the SEC decided to extend this ban. Nation Lanka Equities, owned by a consortium of investors, had brought in the Rs 60 million on a deposit by the Access Group. ”But it wasn’t capitalised (i.e. a fixed deposit) and the SEC wasn’t satisfied,” the source added. 

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Confusion again on special interest rates for senior citizens

Lack of clarity delays budget proposal implementation
Even after nearly three months of the approval of the 2016 budget, the Government is yet to enact revenue bills and issue necessary circulars, gazette notifications and guide lines to implement its proposals including the special interest rates for deposits from senior citizens. There is also a lot of confusion over some budget proposals. The Central Bank (CB) has sought guidance from the Finance Ministry to implement the 15 per cent rate of interest to be paid on fixed deposits of senior citizens proposed by Minister Ravi Karunanayake in the 2016 Budget presented last November.

The Business Times (BT) has received many letters and telephone calls asking why or when this proposal would be implemented. “Last year too it took many months to implement a similar proposal. Why are the authorities indifferent to senior citizens,” asked one elderly BT reader. At least two commercial banks said they are yet to receive the circular from the CB but such a response from banks also reflected the prevailing confusion as according to the budget proposal, the facility only applies to Licensed Finance Companies (LFCs). This is what Mr. Karunanayake said in the budget:

“Fixed Deposits of Senior Citizens: At present the 15 per cent interest rate offered to senior citizens is limited to Rs.1 million and only to citizens above 60 years. I propose to expand this benefit to citizens above 55 years of age and the 15 per cent interest rate to be applicable to deposits up to Rs.1.5 million. This facility will be granted through Licensed Finance Companies where an interest subsidy of 1.5 per cent will be granted by the Government. I propose to allocate Rs. 1,500 million for this purpose. I note that (the) Central Bank guarantee of deposits should increase the confidence of the depositors.

“Official sources said the lack of clarity in budget proposals and tax amendments (like the above) has caused delays in the Finance Ministry issuing circulars and necessary guidelines. As a result, they said Sri Lanka’s revenue targets for the year 2016 will go haywire owing to these delays. A senior tax consultant told the BT that finance bills necessary to implement tax proposals of the budget should normally be tabled in Parliament two weeks before votes are taken for them. It should be passed in parliament to make these new tax collections a law, he said adding that if it cannot be enacted during the current fiscal year, then it could be included in the next budget for the implementation with retrospective effect.

However, he noted that the targeted revenue for the current fiscal year cannot be collected without passing those finance bills in parliament. Last year too, the special interest rate for senior citizens became a muddle with circulars from the CB flying to and fro after the proposal was altered twice. It was some pressure from BT reports and letters from elderly depositors that finally the authorities to clear the ambiguities and launch the scheme in March after the January 2015 budget presentation. There was an earlier proposal on similar lines in the budget presented in late 2014 by then President cum Finance Minister Mahinda Rajapaksa.

According to a March 2015 circular to commercial banks, all senior citizens - irrespective of how much they have in fixed deposits – were eligible to open a fixed deposit at 15 per cent interest on an amount not exceeding Rs.1 million.However this year’s proposal applies only to finance companies though commercial banks, following calls made by the BT, have been led to believe that this scheme is applicable to banks too.
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Treasury moves ahead with board seats in listed cos.

The Treasury has asked the Securities and Exchange Commission (SEC) to implement a budget proposal allocating a board seat for any individual holding 10 per cent in a commercial bank or 15 per cent in a listed firm, a senior Treasury official said. ”We wrote to the SEC last month on this which is in line with the recent budget proposals, requesting them to implement it and we’re awaiting a reply,” he told the Business Times.

Currently there are no regulations governing board positions for those owning such stakes in listed companies. “It’s only by invitation by the board of directors that (such) shareholders can accommodate a board seat,” a corporate lawyer told the Business Times adding that this new law applies only to individuals and not companies/entities.

What the Treasury has requested for is targeted at board positions in listed firms, according to Treasury sources but they have also wanted it applied to licensed commercial banks (LCB) where stricter laws apply. Presently, under Section 12 of the Banking Act an individual, partnership or corporate body shall not either directly or indirectly or through a nominee or acting in concert with any other individual, partnership or corporate body acquire a material interest in LCB without the prior written approval of the Monetary Board (MB). The threshold limit in the Act is 10 per cent, but with MB’s permission they can go up to 15 per cent.
(Duruthu)
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Weak SL Rupee 68 years after independence reflects economic setbacks

Having celebrated Sri Lanka’s 68th anniversary of independence a few days ago with much political rhetoric, it would be appropriate to look back the journey of the Sri Lankan Rupee (SLR) during the post-independence period. The local currency had been known as Ceylon Rupee before the country became a Republic in 1972. A country’s currency is a point of pride, seen essential to the identity of the nation, though it may not be so sacred as the national flag or the national anthem. Old coins and notes collected in museums and in other places are parts of the national heritage. There are dedicated currency museums in a number of countries including Sri Lanka reflecting the historical significance given to the domestic currency.

The domestic currency can also be treated as the mirror image of the economy showing its ups and downs. The stronger the currency, in terms of its purchasing power to exchange for goods and services as well as foreign currencies, the stronger the economy. Going by these yardsticks, it is doubtful whether we can be proud of the destiny of our currency, our economy or our nation. In nominal terms, the rupee is down by as much as 4,367 per cent or by 44 times vis-à-vis US dollar since independence from Rs. 3.32 per US$ in 1948 to today’s rate of Rs. 145 per $. Inversely, 1 Ceylon rupee was equal to $ 0.30 in 1948. This means that US cents 30 could buy one Ceylon rupee at independence. Today, a meagre US cents 0.007 is sufficient to buy one SL rupee.

If the local currency is the mirror image of the economy, the weakening of the rupee by such magnitude is a reflection of the economic downfall of Sri Lanka. At the outset, I must thank Nissanka Dias, an expert in Balance of Payments and my former colleague in the Central Bank, for inspiring me to re-examine our exchange rate in this column. The SL Rupee is one of the lowest valued currencies in the region, says Nissanka. He questions, what have we gained by continuously depreciating our currency? Let us attempt to address these critical issues.

Rupee is weaker among Asian currencies
Sri Lanka rupee is much weaker than the other currencies in the South Asian region. In 1960, one unit of Ceylon rupee, Indian rupee and Pakistan rupee was equivalent to $4.76. In other words, one Ceylon rupee was equivalent to one Indian rupee and one Pakistan rupee. But today, 1 SLR is worth only Indian Rs. 0.47 and Pakistan Rs. 0.72. The SL rupee’s story is worse in comparison with the East Asian countries which strengthened their currencies through sound external finances supported by high GDP growth. The rupee exchange rate for the Japanese yen has come down from Yen 75.63 per rupee in 1960 to Yen 0.82 per rupee by today. Thai Baht was much weaker than the Ceylon rupee a few decades ago. In 1960, one Ceylon rupee would buy Baht 4.45, but today one SLR would buy only Baht 0.25. In 1960, one Ceylon rupee was worth Malaysian Ringgit 0.64, but today it is worth only Ringgit 0.03.

Rupee depreciated faster in terms of PPP too
The computation at the top is based on the nominal values of the currencies which do not capture the price variations in each country. A popular method used to incorporate price differences is the Purchasing Power Parity (PPP) conversion factor which tells us the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as a US dollar would buy in the United States.
In PPP terms, SL rupee depreciated against the US dollar by as much as 13 per cent annually during 1990-2014, in comparison with depreciation of the Indian rupee vis-à-vis US dollar by only 8 per cent and Pakistan rupee by 15 per cent. In the East Asian region, the PPP Japanese Yen appreciated annually against the US dollar by 4 per cent during the same period while the Thai Baht depreciated only by 2 per cent and Malaysian ringgit by 3 per cent. Thus, even in PPP terms, the Sri Lanka rupee weakened at a much faster pace.

Rupee depreciated speedily after liberalisation due to reform failuresThe rupee depreciation is much visible after 1977, as shown in the chart. The rupee fell down by 7.41 per cent per annum from Rs. 15.19/$ in 1976 to Rs. 145/$ by today, compared with a marginal depreciation of 0.55 per cent in the previous period of 1967-1976. When the flexible exchange rate system was introduced in November 1977 along with a broad package of economic liberalisation, replacing the fixed exchange rate operated hitherto, the then government rightly expected that market-determined exchange rates would eliminate the bias against exports, and facilitate export-led growth. But that did not happen due to two main reasons.

First, the envisaged economic transformation did not take place, and the export sector has continued to rely on low-tech, low-value added exports, mainly garments. In contrast, the East Asian countries accelerated their export-led economic growth to reach the high-income category globally by means of knowledge economy driven by science, technology and innovation. The Sri Lankan economy belonging to the lower-middle income category is still based on low-skilled, labour-intensive production structure. Sri Lanka has also missed the opportunity to engage in global product sharing, defined as the breakup of a production process into vertically separated stages that are carried out in different countries. These economic setbacks deterred export growth against rising imports, and thus, resulted in widening of the trade deficit which necessitated continuous depreciation of the rupee.

Second, the excessive budget deficits which persisted throughout the post-liberalisation period have contracted domestic savings, and the resultant savings-investment gap ended up as balance of payments deficits necessitating rupee depreciation further. The high budget deficits also led to increase market liquidity and to overheat the economy, thereby pushing import demand upward. Moreover, the budget deficits fueled demand-pull inflation causing price-wage spiral.

Brunt of economic misalignments falls on the rupeeAll these policy-related deterrents led to deplete foreign reserves and to appreciate the real exchange rate, defined as the nominal exchange rate adjusted for inflation differential vis-à-vis trading partners. Hence, continuous rupee depreciation was inevitable in the post-liberalisation period. The rupee would have depreciated at a much faster rate, had the Central Bank not defended the rupee by releasing its foreign reserves to the market from time to time. This helped to prevent abrupt increases in import prices and the government’s debt service burden. However, the Central Bank’s intervention led to overvalue the currency, and thereby to encourage imports and to depress export growth. The low interest rate policy adopted by the Central Bank in line with the global trends in recent years has provided a further boost to imports and to weaken the rupee.

The successive governments including the present one have been reluctant to implement the much needed structural reforms fearing the loss of political power. It is essential to cut down the government deficits which pressurised the exchange rate, as explained above. This called for reduction in current expenditure. In contrast, heavy dependence on populist measures such as consumer subsidies, handouts and public sector employment creation raised the current expenditure. The government revenue, however, did not expand to commensurate with the expenditure hike, and resulted in persistent budget deficits. The IMF staff mission, which visited early this month, too has advised the government to urgently make a stronger effort to narrow the fiscal deficit and put the public finances on a sustainable path.

The fiscal deficits had domino effects of external finance imbalances, weaker rupee, high inflation and wage-price spiral in a vicious circle.
Given the poor fiscal management, the Central Bank has had little space to manage the exchange rate and interest rates freely so as to achieve its core objective, i.e. price stability and more recently, inflation targeting. The vicious circle has been propelled by the unfinished reform agenda which calls for fiscal discipline, independent central banking, market-determined exchange and interest rates, public sector restructuring, labour market flexibility, tax reforms, and targeted poverty reduction. In the absence of such reforms, the brunt of the economic misalignments will have to be borne by the exchange rate even in the future thus, prolonging the downward path of the rupee without resuscitating the export sector, as in the past.
(The writer, an economist, academic and former central banker, can be reached at
sscolom@gmail.com)www.sundaytimes.lk

CB probe finds enough ‘meat’ to act against top Entrust officials

By Duruthu Edirimuni Chandrasekera

A due diligence study conducted by the Central Bank (CB) on the affairs of troubled Entrust Securities PLC has revealed that there’s enough evidence to prosecute the company’s senior management, CB officials said. CB Governor Arjuna Mahendran was tight lipped on it but confirmed that the due diligence was concluded. He said a forensic audit that’s underway will reveal the exact position in the company after which a restructuring plan will be set by the CB. “We will find out the exact position in a few months time,” he told the Business Times.

Entrust Securities was taken over by the CB early last month and its management handed over to the National Savings Bank after its liabilities fell below its assets putting depositors and investors at risk. In a related move, Entrust Group subsidiary Multi Finance PLC is in discussion with investors to unload some shares and bring in new owners, in a move that’ has been frowned on by the CB. “We need to analyse the intercompany transactions with Entrust and come to a conclusion,” Mr. Mahendran said. He said that there is interest for Multi Finance but the company’s relationships with Entrust Securities in terms of transactions and intercompany borrowings need to be analysed.
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