Sri Lanka Newspapers Sunday 15/04/2012

Power Losses
Apr 14, 2012 (LBO) - Sri Lanka's state-run power utility, the Ceylon Electricity Board has lost 25.5 billion rupees in 2011 and run up debts of 121 billion rupees with a petroleum distributor and independent power producers.

Data in the Central Bank's annual report said power generation rose 7.5 percent to 11,521 GigaWatt hours (millions of units), and sales rose 8.2 percent to 10,024 with system losses coming down from 13.5 percent to 13.0 percent.

But the utility lost 25.5 billion rupees as more thermal generation replaced hydro with a failure of rain.

Its short term debt with state-run Ceylon Petroleum Corporation and independent power producers was 121 billion rupees.

Credit taken by the Ceylon Electricity Board to manipulate energy prices, and manipulated interest rates which were not allowed to rise for credit and deposits in the banking system to reach equilibrium were key reasons for Sri Lanka's dollar peg to come under pressure.

The rupee fell from 109 to near 131 to the US dollar before recovering after interest rates were raised and energy prices increased.

The central bank said consumption by households rose 7.6 percent due to higher utilization of domestic appliances in rural areas with electricity and rising incomes.

Sales to general purposes and hotel categories increased by 9.7 percent and sales to industry increased 9.1 percent.

Rising energy sales indicates that the underlying economy was in good shape in 2011 and the economy ran into difficulties simply due to state intervention that undermined market forces that would have corrected the imbalance automatically.

Sri Lanka's power prices were to be revised under the island's regulatory system in mid year and the end of the year, but rulers have arbitrary power to over-ride the regulatory law, undermining rule of law in the island.

Sri Lanka's rulers also use the power sector as an off-budget income re-distribution tool, giving subsidized energy to places of religious worship and industry.

In another bizarre move the utility was also asked to subsidize power to state schools and hospitals, cost that should have been borne by the education and health budgets.

The Central Bank report said the share of hydro power fell to 40 percent in 2011 from 53 percent a year earlier and thermal generation increased 36 percent to 6,785GWh, leading to a loss of 25.5 billion rupees in 2011 from a 4.8 billion rupee profit a year earlier.

The average cost of production was 16.21 rupees while the selling price was 13.22 percent.

The CEB itself - which has cheap large hydros - could generate power at 6.77 rupees a unit but the average purchase price from independent producers was 17.24 rupees.
http://www.lbo.lk/fullstory.php?nid=299306085

April 14, 2012, 1:16 pm
By Steve A. Morrell

Over the past two weeks, there were comments on dwindling tea crop returns from the smallholder sector mainly concentrated in the low grown elevations.

It will be recalled that as far back as September last year, Rohantha Athukorale, serving with the Government’s Economical Council under the Presidential Secretariat cum with the Secretary to the Treasury, said at the Ceylon Planters’ Society Seminar, the projected US$ 2.5 Billion income from tea by 2016, would not be achievable. He pointed out that with the supply constraint at 300 to 325 million kilos annually not expanding, increasing the supply chain will be a daunting task.’

Six months later his prophesy is progressively and painfully getting to be alarmingly real.

According to the John Keells Holdings Tea report last week , the tea smallholder sector, hitherto the prop of the tea industry, producing about 65% of the industry’s production, had shown decline. This was confirmed by the Tea Board when they published this year’s February results.

Athukorale in his referred presentation further said, "One way out is by way of the Tea Hub concept’. What he said then was the establishment of Sri Lanka being a Tea hub, where import and re-exporting tea would be big business. Dubai is now a Tea hub, without even a single tea leaf being produced.

Subject to certain controls this should be actively considered for future planning to take the Industry to a higher plane, he said.

In complete contradiction to this suggestion we have had reports last week that a tea exporter down -graded the concept of import, blending, and re- exporting tea . This particular exporter had circularized most estates that the industry would be in reverse mode and the Ceylon Tea Brand would be in danger of extinction. He, however, did not suggest an alternative plan to revive the industry.

We discussed this aspect of the Ceylon Tea Brand being affected, with a shipper. He said ‘Ceylon Tea’, purportedly being the best in the world was now relegated to the realm of ancient mythology. What matters now to most buyers is the price they would pay for their tea. Traditional buyers have moved away from ‘Ceylon Tea’, notably Pakistan and Egypt, who have now turned to Kenya, which sells at half the price.

Irrespective of bilateral talks with Pakistan that they would increase their absorption of Ceylon Tea, there has not been any impact on imports ex Sri Lanka of the Ceylon Tea Brand. Pakistan continues to import just about 1.5% of their tea from Sri Lanka. Kenya accounts for about 58% tea imported to that country. Similarly, Egypt too buys their tea from Kenya.

Coupled with low productivity and a belligerent workforce there does not seem to be any new ideas that surfaced.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=49572

Colombo bourse slips into deep slumber
Stockmarket Review
By Elton Ebert
Only three days of trading –owing to the Sinhala and Hindu New Year holidays - and a turnover of just Rs. 490 million, far lower than that of last year about the same period. The consolation for many is that the All Share Index (ASI) managed to scrape just over the 5400 mark to end at 5418 on Wednesday.
Most brokers and fund managers say that the market sentiment was dull and they decided to avoid the uncomfortable climate and move out of Colombo.

Reports indicate 100% occupancy in the hotels in the hills of Kandy and Nuwara Eliya, which, translated into figures, may mean a dividend in some cases!

Many in the industry are paranaoid about the present state of the market despite the various workshops held throughout the country and the many roadshows abroad. Some brokers say that it is very difficult to enlist new investors, so they are making a concerted effort to encourage the existing clients who are now dormant for many reasons like the loss due to forced selling last year and the trap of the IPOs.

Trading for the three days was quiet as depicted by the turnover, with the major transactions being that of Asia Asset Finance, Citrus Leisure Swarnamahal Financial Services and Panasian Power. Access Engineering ended at Rs 24.10, while Citrus Leisure was marginally up to Rs. 29.50.

The latter, a group that is stamping its name in the hotels sector, has run into the difficult patch with its subsidiary Passikudah Beach Resorts Ltd owing to a dispute over its land with a case filed in District Court of Valachchenai by one claimant. Shares in the group suffered a minor dip in the prices but recovered later.

However in a positive move the group through another subsidiary Waskaduwa Beach Resorts Ltd entered into an agreement with the BOI for an investment of US$23,770,000 for the setting up of a 150-roomed, 4-star hotel in Waskaduwa, Kalutara. The share closed at Rs.9.10

Kotagala Plantations has adventured into Cambodia where it has got approval to plant 20,000 hectares of rubber, the value of this venture being $70 million. Rubber prices have cooled off but if the global economy takes off rubber prices will escalate.

Changes in directorates: Hemas Holdings – D. Bhatnagar resigned as a director and was replaced by R. Gopalakrishnan; Ceylon Tobacco - Vijaya Malalasekera, a long-standing director, retired from the Board of Directors on April 3; Richard Pieris Exports - Renton De Alwis resigned from the Board on March 31.

The ASI was virtually unchanged at 5418.95 while the Milanka was just 7 points or 0.01% higher at 4906.86.
http://sundaytimes.lk/120415/BusinessTimes/bt022.html

By Sunimalee Dias
Doomed with prospects of a challenging year ahead, the Central Bank on Monday released its 2011 Annual Report citing a slow down in Sri Lanka's rollercoaster ride for two consecutive years to projected GDP of 7.2%.

The first copy of the report was handed over to the President as is customary. The Central Bank notes that the country would experience a period of "moderation and consolidation" this year due to the raising of taxes and imposing credit ceilings among other key policy changes adopted in the early part of 2012. Harping on the impressive growth of last year at 8.3%, President Mahinda Rajapaksa, speaking on the occasion, said the country would continue to be sustainable and banked on prospects of gains made from the key infrastructure development projects initiated.

He noted that in this regard, gains from this growth must reach the people and the government must adopt measures towards this end. Speaking on the issue of terrorism, the President observed those supporting it was still existent not only within the country but also internationally.

He pointed out that this economic growth has contributed to the establishment of both large and small and medium enterprises and highlighted some of the government-sponsored projects Maga Neguma, Divi Neguma that connected the village and urban areas. Commenting on the price escalation in fuel, he lamented that while certain leaders insist they can do nothing it is only they that would be able to help in lifting sanctions imposed on certain countries and thereby assist smaller nations affected by this.

Criticizing international calls for a 24-hour solution to the process of reconciliation the President observed that it would be impossible to end 30-years of hatred in such a short time frame Considering any foreign advice as short-lived, Mr. Rajapaksa said they remained committed towards achieving reconciliation in the country. Central Bank Governor Ajith Nivard Cabraal dismissed recent reports in the media of the country's economy falling into a "huge deep trouble."

He pointed out that the reduction in the growth for this year was mainly due to measures taken to rein in the trade deficit. Reserves were currently at US$6.1 billion that was expected to rise to US$7.2 billion in 2012 with a BOP surplus targeted for this year at US$1.2 billion following recent interventions in the external sector, Mr. Cabraal said. He pointed out that this would be a challenging year mainly due to the global issues of sanctions imposed on oil importing nations affecting smaller states like Sri Lanka.

However, he noted that they had built spaces in the economy and observed that the macro fundamentals of the present day would provide strength to deal with unforeseen external and or internal risks. The country's growth has been recorded as the highest for two consecutive years due to improved consumer and investor confidence and opening up of economic activity in the North and East.

The Central Bank notes the debt to GDP ratio declined to 78.5% in 2011 from 81.9% in 2010. With more vulnerability expected in the external sector this year, the Bank imposed new regulations and increased taxes to offset these. In 2011 the external sector was under pressure due to adverse global developments and fast pace of growth in imports, the report states. It notes that high import expenditure reflecting oil prices and a surge in investment and intermediate good imports led to a rise in the trade deficit to an "unprecedented" high level.

Agriculture that rebounded in 2011 was noted to have made a moderate growth of 1.5%; with the industry sector recording an impressive growth of 10.3%; and services sector expanding at 8.6%. Total consumption expenditure increased significantly by 22.4%, the Bank states noting that domestic savings contracted thereby widening the savings - investments gap.

FDI inflows were expected to be healthy although the bank notes that it was below its potential at US$1.1 billion last year and expecting to double this figure in 2012. Import expenditure resulted in the widening of the trade deficit to US$9.7 billion from US$4.8 billion in 2010. In the services account, worker remittances continue to top earnings that grew by 25% to US$1.5 billion.

In the fiscal sector the deficit was reduced to 6.9% from 8% financed through domestic sources with the banking sector contributing a major portion of the required funds. The monetary policy stance was eased in January 2011 but was tightened towards the latter part of the year.
http://sundaytimes.lk/120415/BusinessTimes/bt014.html

By Elton P. Ebert
The Colombo Stock Exchange (CSE) on Tuesday announced changed in the brokerage fees and transaction costs, partly seen as a measure to restore confidence in retail investors.

Turnovers have collapsed and the market has slid in recent weeks with retail investors also avoiding IPO issues, having burnt their fingers in earlier cases.

The CSE has removed the minimum brokerage fee of Rs.10 and the minimum CDS fee of Rs 5 with brokerage fees being 0.64% and CDS at 0.024 % on transactions of upto Rs 50 million, with effect from April 10.

Brokers said these changes were the outcome of recent discussions with the authorities. They said that high net-worth investors and fund managers are reluctant to place orders due to the fear of being saddled with an odd number of shares which will increase their costs.

Other analysts said the retail sector would benefit from these changes, especially when they need to round up their portfolio with the purchase of a small quantity of say five or15 shares. Some investors believe this is a move to increase activity in the market by restoring interest in the retail sector. The impact of these changes will be clear only after the holidays, they said.
http://sundaytimes.lk/120415/BusinessTimes/bt03.html

Sri Lanka is to increase taxes on casinos and gambling centres targeting additional revenue from new casinos that are to be set up in exclusive zones in Colombo and other major towns to lure high-end tourism to the country, official sources said.

According to the sources, two Singaporean parties, Malaysia's Genting Casino Group, US-based FEE Group which entered Sri Lanka in 2009 with a partnership with Ceylon Continental Hotel and India's Delta casino firm have expressed interest in opening high class casinos in the island.

The Inland Revenue Department has collected over Rs. 1.5 billion in tax revenue from casinos in six years up to 2011, a senior official of the department said. The tax revenue earned by the government from 810 casinos, betting and gambling centres has been Rs 196.4 million in 2006, Rs 282 million in 2007, Rs 268 million in 2008, Rs 270 million in 2009 and Rs 295 million in 2010, and Rs.297 million in 2011.

The government is planning to swell its coffers, by imposing additional taxes on betting and gaming which is expected to become a money spinner with the country's plan of embarking on an ambitious tourist promotion programme targeting US$2 billion in tourism revenue with the expected 2.5 million tourists by 2016.

Sri Lanka opened its own first casinos in 1977, and bookies existed even before that. Today there are 10 casinos in Colombo and 800 gambling centres around the country. The casinos had functioned under the provisions of the Gaming and Betting Act of 1988 and thereafter the Casino and Gambling Act of 2010 which came into force with effect from January 2012.

The new law that legalises casino gaming and betting on sports and horse racing and allows the establishment of special zones for gaming will make all unlicensed gaming and betting illegal after this year.
http://sundaytimes.lk/120415/BusinessTimes/bt07.html

The government’s move to reduce the tariffs on car imports in 2010 was a miscalculation and now increasing these duties will not restrain the trade deficit as it was done way after the problem occurred, Dr deleted Sanderatne, eminent economist and the Sunday Times economic correspondent says.

Too late

"Reducing tariffs on motor vehicles by as much as they did was a mistake. Slapping high duties on them now is like closing the stable door after the horses have bolted," he told the Business Times. He also cautioned that this measure isn't likely to contain the trade deficit much. “The pent up demand for motor vehicles has already been satisfied and there are huge stocks of imported cars already in the country. The IMF says selective tax measures such as the recent hike in car tariffs is not an appropriate policy move even though they agree that the liberalisation of car imports was one factor that increased import expenditure,” he explained.

The IMF says that it is inappropriate to do selective tax increases to contain the deficit and that more generalized instruments that are less discriminatory and apply more across the board should be adopted. "There are needs for across the board measures but selective measures too have a place owing to the differences in priorities of imports,” Dr. Sanderatne noted.

He said the IMF agreeing to release another tranche of its standby loan facility is of significance not only because of the foreign exchange released, but also the international confidence it would generate. "As the IMF Resident Representative Dr Koshy Mathai observed the IMF is happy that the government is taking the balance of payments problem seriously. Recognising that we have a serious balance of payments problem is the first step towards remedying it,” he said.

He added that there were misconceived ideas about this loan such as the notion that Sri Lanka didn’t need it. “There was even a hint that the IMF money of the last tranches that had been withheld owing to government’s inaction would be unnecessary. It was argued, quite falsely, that if the remaining two tranches are taken that the interest rate for the entire IMF loan would increase. This was incorrect as the higher interest rate was applicable only to the remaining tranches,” he explained.

IMF loan vital

He also noted that the interest rate applicable to the IMF loan was much lower than what the government was paying for its commercial borrowing. “The IMF loan was vital for restoring international confidence, at least to some extent," he added.

When asked why is there a lack of seriousness about the ballooning trade deficit (by the authorities), Dr Sanderatne said that the Central Bank’s (CB) view is that the huge trade deficit would be offset by worker remittances, earnings from services, foreign direct investment and other capital inflows. “There was an impression created that it was a temporary turbulence that would soon pass away," he said, noting that this complacency was due to the CB continuously emphasising that exports were growing by a significant amount rather than pointing to the widening trade deficit.

He said that exports growth at 22% last year which was inadequate compared to the imports growth by 50% was underplayed. “The plain truth was that import expenditure was so large that services incomes, workers’ remittances and other capital inflows were woefully inadequate to meet import expenditure. Workers’ remittances that financed 97% of trade deficit in 2009 and 84% of the deficit in 2010 could finance only 53% of the deficit last year. Although workers’ remittances increased by as much as 25% the trade deficit had increased so much that it was ineffective in offsetting it by much," he explained.

Difference of opinion

Dr Sanderatne noted that there’s a slight difference of view between the government and IMF about the extent of the needed increases in interest rates. “The IMF says that the increase in interest rates is still inadequate to meet the problem of excessive demand that increases the propensity to import. This may be so, but market interest rates are rising much above policy interest rates, so demand may be contained. In fact the Central Bank has increased policy interest rates further.”

The balance of payments problem is so large that there are no easy ways of resolving this, according to Dr. Sanderatne. "There is a misconception that the problem can be solved by containing consumer imports. Last year consumer imports accounted for only 20% of total imports and food imports were only 10% of the import expenditure. There’s a limit to reducing such imports as most are essential imports. When increasing prices of wheat, sugar, milk powder and other essential food imports you increase their prices but reduce imports inadequately, since their elasticity of demand is low. The decrease in the amount demanded does not decrease by much,” he stressed.

He said it’s important to reduce intermediate and capital goods imports, noting that it’s a half truth that these imports are ‘essential’ for the country’s economic growth. “Intermediate imports constituted 56% of import expenditure. Petroleum imports were as much as nearly 25%. Unless some of these imports are curtailed significantly you can’t make a dent in the trade deficit.”

He said it is difficult to reduce oil import expenditure and that increase in oil import expenditure is due to both increased imports and increased prices. “We are not in a position to control international oil prices which are very volatile. We need to curtail our petroleum imports. Increased prices would reduce consumption, but not much. Other limitations may have to be imposed such as limits on travel days,” he explained, adding that reducing government expenditure on petrol should be rationed by reducing the allocation. Similarly lighting, air-conditioning and electrical usage in public buildings should be reduced, he said noting that there’s no point in asking households to reduce consumption of electricity when there is conspicuous consumption of electricity by the government.

He added that one of the reasons for the widening of the trade gap has been the substantial increase in investment goods imports by 60% last year. "Infrastructure investments don’t contribute to economic growth but they lead to a huge leakage into imports. Machinery, transport equipment and building materials constitute a high proportion of these imports. When investment expenditure does not increase export earnings or reduce import expenditure they create serious balance of payments difficulties.”
http://sundaytimes.lk/120415/BusinessTimes/bt08.html

By Bandula Sirimanna
Sri Lanka’s state-run Ceylon Petroleum Corporation (CPC) is to be re-organized aimed at making it a more profit-making and vibrant venture eliminating irregularities, waste and massive financial losses, Minister of Petroleum Resources Susil Premjayantha said. He told the Business Times that the management of the CPC will be spearheaded by a full-time Chief Executive Officer under the proposed re-organizing structure.

At the moment, the Chairman of the CPC acts the Managing Director making him responsible for almost all operations of the corporation. This was not a healthy situation, and thus action is being been taken to amend the Ceylon Petroleum Corporation Act (No. 28 of 1961).

Mr. Premajayantha said that necessary amendments have been prepared and is Legal Draftsmen. He noted that this was not connected in any way to IMF conditions to get the final tranche of US$426.8 million of the US$2.6 billion released to Sri Lanka. He revealed that the CPC could be operated as a viable, profit making institution, if the massive amount of debt amounting Rs.63.6 billion could be recovered from government institutions, private power plants and airlines. Minister Premjayantha added that all state institutions have been given one month to settle their dues

The government has promised the IMF that the CPC and the Ceylon Electricity Board would be re-structured soon, an assurance that was given earlier too. The letter sent to the IMF recently giving consent for this has been signed by the Deputy Minister of Finance Geethanjaya Gunawardene, according to officially, released documents.

According to financial regulations governing state corporations, the CPC has to contribute 30% of its profits or 15% of equity, whichever is higher, to the Consolidated Fund. But this was not done by the CPC as it was not making profits.

These losses are affecting the Consolidated Fund. From time to time the Treasury is compelled to re-capitalise the state banks (including through the issuing of bonds). In addition, the substantial guarantees, which have been issued to state-owned enterprises, are contingency liabilities which impact on the Government’s overall creditworthiness and therefore, on the assessments made by rating agencies which are becoming an increasingly important determinant of the country’s prospects, official sources said adding that under this set there was an urgent need to restructure CPC and Ceylon Electricity Board, which were major, loss-making state entities.
http://sundaytimes.lk/120415/BusinessTimes/bt01.html

By Sunimalee Dias
Sri Lanka's deficits in its trade and current accounts reached historical proportions in 2011, the Central Bank (CB) has said in its latest 2011 annual report. But a surplus is expected this year in its balance of payments.

CB Governor Ajith Nivard Cabraal said he believes there would be a positive turn in the balance of payments that is expected to recover from a negative of US$1061 million to a plus of US$1250 million in 2012.

The trade deficit widened to US$9.7 billion in 2011. Mr Cabraal told the Business Times said they would be looking at reducing it to US$9.1 billion this year. However, he observed that imports would remain relatively the same with the import expenditure expected to reach US$20.8 billion in 2012. Import expenditure in 2011 stood at US$20.2 billion.

In the future, the Bank would in the medium term look to tap on the services account, a major component of which is transportation, to positively impact on the current account balance, the report states.
Other areas expected to service the country's current account would be revenue from tourism and the IT/BPO in the services account, the report indicates.

This clearly indicates a significant reliance on the services account as opposed to the worker remittances that seeks to offset the trade deficit. In this respect, the Bank notes that its medium term strategy would be to improve the surplus in the services account, thereby reducing the current account deficit to a "sustainable level." The country's deficits in the trade account and current account were above the historical average, mainly due to the sharp growth of import expenditure (about 51% compared to 2010), the report stated.

Sri Lanka's trade deficit had averaged around 11% of GDP since 1977 while the current account deficit was around 5% of GDP on average during the same period. The country has been experiencing a deficit in both its trade account and external current accout during the last five decades.

These deficits widened substantially since 1977 and this phenomenon the report notes is common to most developing economies that are exporters of primary agricultural products and importers of essential commodit6ies. The Bank blamed the high deficit due to the sharp growth of import expenditure despite an impressive growth in exports by about 22% over the previous year.

The high import expenditure was caused due to the increased demand for intermediate and investment goods, owing to rapid infrastructure development activities and also sharp increases in price and volume of petroleum imports. It pointed out the need to reduce its current account balance through other measures without entirely depending on the reducing the trade deficit. The services account is expected to come down from US$8.6 billion to US$7.5 billion and the current account deficit is expected to drop from the present US$4.6 billion to US$2.3 billion.

By deleted Sanderatne
The release of another tranche of US$ 426.8 million of the IMF US$ 2.6 billion standby facility provides the country a breathing space to come out of the balance of payments crisis. It gives the country time to adjust policies to ensure a lesser trade deficit and thereby avoid balance of payments difficulties. Apart from the replenishment of the reserves by US$ 426.8 million, it restores international confidence in the Sri Lankan economy.

The grant of this tranche was preceded by several policy measures that were in the right direction. There was a depreciation of the currency, import duties on many items were increased; interest rates were raised; banks were asked to curtail lending for consumption purposes; and administered prices for imported items were increased. The increases in prices for gas, electricity, petrol, diesel and kerosene were the most noteworthy. Whether these increases in prices and credit controls would make an adequate dent in import expenditure will be seen during the course of the year.

IMF facility
Obtaining the IMF tranche of US$ 426.8 million was indeed a relief and support to the balance of payments. It would boost the depleted reserves, but much more than this, the international confidence that it creates would stabilise the exchange rate and encourage more capital inflows into the country.
There is also another important reason. The complacency that characterised policy responses was a serious problem. The government was not taking adequate measures to correct the trade imbalance. With the IMF intervention the government took the emerging balance of payments problem seriously and several measures have been taken towards the correction of the imbalance. In fact the IMF Resident Representative Koshy Mathai observed they were happy that the government was taking the balance of payments problem seriously.

Recognising the serious balance of payments problem is the first step towards remedying it. The country should be relieved that there is now a serious concern with the balance of payments. Even though many of the measures taken have heaped hardships, especially on the lower income groups, yet they were essential to stem a growing balance of payments problem.

Different view
The Central Bank was of the view that the trade deficit would be offset by worker remittances, earnings from services, foreign direct investment and other capital inflows and that the balance of payments problem was a temporary turbulence that would pass away during the year. In fact this was the case in 2009 when workers' remittances financed 97 percent of the trade deficit. In 2010, some 84 percent of the trade deficit was offset by remittances. However in 2011 the trade deficit had ballooned so much that it was able to offset only about half of the deficit. Although workers' remittances increased by as much as 25 percent in 2011, remittances could finance only 53 percent of the deficit. This is likely to be the pattern this year, too, unless imports are curtailed by the new measures. In January this year the trade gap had increased to nearly US$ 1 billion for the single month. However, the Central Bank is of the view that there would be a balance of payments surplus of US$ 1.2 billion this year.

Resolving the problem
The character and magnitude of the problem is such that there are no easy ways of resolving it. There is a misconception that the problem can be solved by containing consumer imports. Last year consumer imports accounted for only 20 percent of total imports and food imports were only 10 percent of import expenditure. There is a limit to reducing such imports, as most of these are essential imports. When you increase the price of wheat, sugar, milk powder and other essential food imports you may not reduce imports inadequately since the amount demanded of such essential commodities do not decrease by much.

It is important to reduce intermediate and capital goods imports. Intermediate imports constituted 56 percent of import expenditure. Petroleum imports were as much as nearly 25percent. Unless some of these imports are curtailed significantly one cannot make a dent in the trade deficit. Admittedly, as much as it is important to reduce oil import expenditure, it is difficult to do so. The increase in oil import expenditure is due to both increased imports and increased prices. We have no control of international prices and oil prices are very volatile. Therefore, we need to curtail petroleum imports.

No doubt the increase in duties for cars would reduce imports of vehicles, provided various concessions are not given to persons that would negate it. The effect of the increase in prices for petroleum products and electricity would reduce consumption but the extent of the reduction in consumption would matter. The interest rate hike would no doubt curtail expenditure on imports. All these measures it is hoped would bring down the trade deficit by about 25 percent to enable capital inflows to bridge the deficit.

Conservation
Price increases would reduce consumption but not by much. Other measures such as limits on travel days may have to be imposed. The reduction of government expenditure on petrol could have a big impact in reducing the oil bill. The government expenditure on petroleum should be rationed by reducing the allocation of funds for government transport. Similarly lighting, air-conditioning and electrical usage in public buildings should be reduced. The reduction of the conspicuous consumption of petrol and electricity by the government could make a significant contribution towards reducing oil imports.
Power and Energy Minister Champika Ranawaka made a plea for conservation of fuel and electricity. President Mahinda Rajapaksa set an excellent example on Earth Day when all lights at the President's House in Kandy were switched off for an hour by himself. Conservation measures should be more broad based and continuous.

Export growth
The long-term solution to the trade imbalance is increasing exports. Export earnings should be closer to import expenditure. The Central Bank has praised last year's export performance as exports grew by 22 percent. That this growth in exports was inadequate in comparison with the growth in imports by 50 percent was underplayed. The export to GDP ratio has declined and the country's share of exports in international trade has declined over the years. All these point to a need to enhance exports.
The depreciation of the currency is likely to have improved the country's competitiveness. To retain the country's competitiveness, it is essential to also keep inflation down so that costs of production do not rise above those of our competitors. Product and market diversification of exports are needed.

Concluding observations
The plain truth is that import expenditure is too large for services incomes, workers' remittances and other capital inflows to bridge the trade gap. One of the reasons for the widening of the trade gap has been the substantial increase in investment goods imports by 60 percent last year. Because these are capital imports it is argued that they are developmental expenditures. All infrastructure investments do not contribute to economic growth. Many of the large investment expenditures lead to a huge leakage into imports. Machinery, transport equipment and building materials constitute a high proportion of these imports.

When investment expenditure does not increase export earnings or reduce import expenditure they create serious balance of payments difficulties. So there is a need to seriously evaluate developmental expenditure taking into consideration their balance of payments implications. There is, therefore, a need to contain imports of large items of imports irrespective of whether they are consumption, intermediate or capital imports. In fact the government's public expenditure has to be reassessed in the light of the balance of payments crisis that we are facing.
http://www.sundaytimes.lk/120415/Columns/eco.html

Worrying Signals In Economy
By Paneetha Ameresekere

The chink in the armour of Sri Lanka’s economy is the decline in savings and a rise in pawning credit, a possible indication for this state of affairs to arise being that the masses are being buffeted by the high cost of living, resulting in a depreciation in their savings kitty and an increase in pawning to make ends meet.
Central Bank of Sri Lanka (CBSL) statistics showed that domestic savings as a percentage of GDP had declined by 3.9 percentage points year on year (YoY) to 15.4% (Rs. 1,007 billion)last year (2011).

Meanwhile pawning credit, from the total credit basket extended to the private sector by the banking sector increased from around 10% to 13% YoY last year, one of the tables/graphs in a note circulated by CBSL on Tuesday (April 10) in connection with a lecture on the economy delivered by CBSL’s Economic Research Director Mrs. Swarna Gunaratne showed.

According to CBSL, credit to the private sector grew by 34.5% YoY to Rs. two trillion last year.
However, Gunaratne in her lecture attributed the decline in savings due to high credit growth, supported by increased vehicle imports.

CBSL officials, including Gunaratne during question time after the lecture also attributed the high pawning number to agriculture related borrowing as opposed to consumption, though there were no immediate statistics available to desegmentalise the pawning market either provincial or districtwise.

However that may be, Gunaratne in her lecture said that the agriculture sector grew by a measly 1.5% YoY last year and contributed to a low 11.2% figure of the island’s total GDP as opposed to 11.9% in 2010.

A seemingly cogent point in relation to credit growth to the private sector is that credit to the tourism subsector comprised under 2% of the total private sector credit basket of last year, a marginal improvement over the 2010 figure, according to another table/graph provided to by Gunaratne, in her presentation notes circulated among the audience.

“Services exports need to improve so that we can reduce our current account deficit,” she said.
The deficit in the current account last year was 7.8% of GDP, up from 2.2% from the previous year. This deficit is attributed to a widening trade gap due to a higher import bill.

The national savings to investments gap also widened to 7.8% of GDP with Gunaratne emphasizing the need to improve foreign investments and domestic savings if Sri Lanka is to achieve the targeted 8% growth rate.

The economy grew by 8.3% last year according to CBSL, while the target for this year has been slashed down from 8% to 7.2% due to various reasons, not least due to rising oil prices.
http://www.thesundayleader.lk/2012/04/15/decline-in-savings-rise-in-pawning/

Apr 15, 2012 (LBO) - Sri Lanka has seen a steep drop in the use mail in 2011, while telecom services continued to expand, increasing losses of a state-run postal service, official data showed.

Central Bank data showed that letters per inhabitant dropped to 33.3 percent to 12 in 2011 from 18 a year earlier. Per capita letter use also dropped 10 percent in 2010 over 2009.

It was not clear whether per capita mail included business mail carried by courier services run by the people themselves.

The Department of Posts lost 4.6 billion rupees in 2011, up from 3.0 billion rupees a year earlier, with revenue dropping 27 percent to 3.2 billion rupees.

Meanwhile expenditure had increased 5.7 percent to 7.7 billion rupees.

"Hence, it is important for DOP to continue with the efforts taken to generate other sources of income and vigorously follow cost rationalization methods to transform itself to a self- financing venture," the Central Bank said.

"The initiatives taken by the DOP to provide additional revenue generating services such as banking facilities and pre-paid phone cards, International Emergency Mail Services and Western Union Money Transfer services continued in 2011."

Sri Lanka has 4,742 post offices, with 4,058 run by the state and 463 post office and 156 rural agency post offices run on an agency basis by citizens.

While mail use dropped, telephone density rose to 105.1 lines per 100 persons from 100.7 a year earlier. Mobile phones rose 6.1 percent to 18.319 million and fixed lines rose 2.9 percent to 942,000.

Sri Lanka's telecom use exploded from the mid 1990s after a state monopoly was broken and competition was allowed. Enterprises owned by citizens and non-citizens invested in the sector and started to provide telecom services.
http://lbo.lk/fullstory.php?nid=1586130744

Seven of Sri Lanka’s largest State Owned Enterprises (SOE) have incurred a combined loss of a staggering Rs.151.5 billion in 2011 with treasury bonds amounting to Rs. 55 billion issued by the government in January 2012 to settle accumulated outstanding dues to CPC from CEB and other SOEs, the 2011 Annual Report of the Central Bank reveal.

Accordingly, operating losses suffered by the Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB), SriLankan Airlines, Department of Posts, Sri Lanka Transport Board, Sri Lanka Railways and Mihin Air stood at Rs. 94 bn, Rs. 25.5bn, Rs. 19.1 bn, Rs. 4.6 bn, Rs. 3.8bn, Rs. 4.1 bn and Rs. 0.45 bn respectively.

However, on a more positive note, both the Sri Lanka Ports Authority (SLPA) and the National Water Supply and Drainage Board (NWS&DB) recorded operating profits of Rs. 8.3 bn and Rs. 1.9 bn respectively.

“The main contributory factors for the financial losses of CPC were the provision of heavy fuel at a highly subsidised rate to CEB and Independent Power Producers, and non-adjustment of prices in line with international oil prices during the year,” CBSL highlighted stating that CPC’s losses increased substantially from Rs. 27 billion in 2010 to Rs. 94 billion.

It stated that the outstanding trade receivables amounting to Rs. 115 billion by end 2011 from various government entities had placed a heavy burden on CPC’s financial position.

Meanwhile, the CEB recorded an operating loss of Rs. 25.5 billion in 2011 compared to a profit of Rs. 4.8 billion reported in 2010. According to CBSL, the higher dependence on thermal power due to dry weather conditions that prevailed during the second half of 2011 was the main reason for the deterioration in the financial position of CEB where the fuel bill of CEB increased sharply by 54 percent to Rs. 25 billion in 2011.

“High fuel prices and lower yields due to increased competition contributed to the increase in operating expenditure of SriLankan Airlines,” CBSL Annual Report outlined. Meanwhile, the operating profit of the SLPA increased by 89 percent to Rs. 8.3 billion compared to Rs. 4.4 billion in 2010 whilst compared to the revised financial data of 2010 excluding the revaluation deficit NWS&DB reported an operational profit of Rs. 1.9 billion in 2011.

Total losses at CPC, CEB and SriLankan Airlines stood at Rs.138.6 billion in 2011.
http://www.nation.lk/edition/todays-news/item/5022-state-firms-continue-to-pile-losses.html