Sri Lanka Newspapers Monday 23/04/2012

Sri Lanka debt risk premia increases, says IMF

Sri Lanka could see its risk premia on local and foreign currency debt increase on a widening current account deficit and loss of reserves while roll-over risk is also on the increase, the International Monetary Fund (IMF) said, as the country plans another international sovereign bond issue later this year.

The recent policy measures to contain a balance of payments crisis will also slow down growth this year and put pressure on inflation, but the IMF is confident economic growth would still be healthy this year with buoyant agriculture, infrastructure and tourism output and that export earnings would improve with time.

"Despite a higher deficit path and the depreciation of rupee, Sri Lanka’s medium-term debt outlook remains broadly unchanged from that presented in the last Debt Sustainability Analysis. Public debt is still projected to fall to around 65 percent of GDP by 2015 and external debt to just over 40 percent of GDP. Nevertheless, there has been an increase in roll-over risk over the past year. The ratio of reserves to short-term debt (by remaining maturity) has fallen to 70 percent, as a result of the decline in gross reserves in the second half of 2011, and the increase in the current account deficit has inevitably also increased the risk premium on Sri Lanka’s local and foreign currency debt. This increase in rollover risk underscored the need for a credible package of measures to stem the loss of reserves and place the current account on a more sustainable path," the latest IMF Staff Report on Sri Lanka, released last week, said.

The reissue of Sri Lanka Development Bonds in March saw yields increase marginally after having declined continuously since the end of the conflict. (See The Island Financial Review March 19, 2012 SLDB oversubscribed: Costs govt. more, sentiments erode).

"Growth is expected to moderate to around 7–7½ percent in 2012, as activity slows in response to the tightening of monetary and fiscal policy. Nevertheless, growth is expected to remain reasonably healthy, supported by the continued expansion of agriculture in the northern and eastern provinces, a boost to construction from major infrastructure projects, and the continued expansion of tourism. The depreciation of the rupee should also, over time, help boost exports," the IMF said.

"The rupee depreciation and the sizeable increases in petroleum and electricity prices will lead to an increase in consumer prices. Staff estimates the first-round effects to be of the order of 4–5 percent, however, the annual average inflation rate should still remain in single digits given that it has recently come down sharply (to 3½ percent in January), and food price inflation is expected to remain benign. Limited public sector wage increases so far should also help. Nevertheless, the central bank will need to stand ready to respond to rising inflation risks especially if higher international oil prices persist," the report said.

"Recent developments suggest that the pace of intervention, and associated loss of reserves, has moderated significantly, and that the authorities are on track to stabilize net international reserves by the end of the second quarter. Nevertheless, given that the current account will only respond with a lag, in the short-term, much will depend on how investor sentiment responds to the package of measures announced by the authorities in February. The authorities will need to continue to manage the exchange rate flexibly and maintain a tight monetary stance over the coming months to achieve the program’s external reserve objectives. Even then, Sri Lanka’s reserve buffers will remain relatively low at around 2.7 months of imports and 75 percent of short term debt.

"Sri Lanka has a revolving line of credit with Iran for oil imports, the outstanding balance of which currently stands at around $0.5 billion. It is possible that the embargo may disrupt Sri Lanka’s ability to continue to import oil from Iran (which currently covers over 90 percent of crude oil imports of Sri Lanka) causing the line of credit to wind down over a four month period. If Sri Lanka is unable to secure alternative funding, some adjustment of the reserve path through end June may be needed. The magnitude of such adjustment, if any, will be determined in the context of discussions for the Eighth review," the IMF said.

"The recent steps taken by the authorities will reduce the external current account deficit to a more sustainable level. A continued pick up in long term capital flows, including foreign direct investment, and a turnaround in short term capital flows should help bring the balance of payments for the year into broad balance. However, this outlook is subject to a number of risks. Higher oil prices and any weakening of external demand for Sri Lanka’s exports would put pressures on the balance of payments, as would any slippages in the authorities’ efforts to rein in credit growth and maintain two-way flexibility of the exchange rate," it said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=50146

Fitch Ratings Lanka has assigned Singer (Sri Lanka) PLC’s (Singer) proposed commercial paper (CP) issue of up to LKR1bn a National Short-Term rating of ‘F1(lka)’. Fitch has also assigned Singer’s senior unsecured notes of up to LKR500m a National Long-term rating of ‘A(lka)’ with Stable Outlook.

"The ratings reflect Singer’s market position as one of Sri Lanka’s largest consumer durables retailers, as well as its established franchise and extensive distribution network. The ratings also reflect the company’s multi-brand product portfolio that is diversified across price points and its well-managed financing operations. Also, Singer has had access to funding from banks, and has been regularly accessing local capital markets to raise debt," the ratings agency said.

"According to the company, proceeds from the proposed CP will be used to refinance its short-term debt, and the issue is likely to have a one-year tenor. The proposed issue of senior unsecured notes is to be used to replace maturing notes and is expected to have a three-year tenor.

"At end-2011, Singer had cash and cash equivalents of LKR365m and undrawn facilities of LKR2.1bn, against debt maturities of LKR4.3bn due within one year. Singer’s total debt amounted to LKR5.1bn at end-2011," Fitch said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=50149

By Ravi Ladduwahetty

Sri Lanka’s tea exports to Iran, the second largest market after the Russian Confederation, suffered a debilitating blow with the Government of Iran deciding to take Ceylon Teas off the essential list of imports last Thursday.

"This has caused us quite a bit of concern," Jayantha Keragala, Chairman of the 114 – year old Colombo Tea Traders Association (CTTA) told The Island Financial Review late Saturday night, quite euphemistically, obviously not wanting to trigger panic signals across industry stakeholders- exporters, brokers, small holders and the 21 Regional Companies numbering 4 million, a fifth of the national population whose livelihoods would be at stake.

The salient feature is that out of a total of 318 million kilos of Ceylon teas which have been exported last year, 45 million kilos (11.9 percent) has been to Iran and that is the significant aspect of this matter. Sri Lanka exports the FBOP teas, FBOPF1 teas (TIPI teas) and the OP teas and in addition to that, TIPI teas are imported to Iraq only from Sri Lanka which has been impacted by the decision of the Iranian government significantly, Keragala said.

The reason for the government of Iran lifting Ceylon Teas off the essential list is not known yet but the heart of the matter is that with this development, what would also happen is that the premium prices that the Ceylon Teas would fetch would be lower than what was in the existing market which was thriving, the CTTA Chief said.

In real terms, this would also mean that the Iranian importer who paid around 1200 Iranian Riyals to the United States Dollar, will now have to pay 2000 Riyals to the dollar to import Ceylon Teas to the Iranian market with the Dollars in the black market. What this effectively would mean is that the sector which will be most affected will be the small holder segment of the local plantation industry that grow and process the low growns which were thriving in that market.

Earlier, the Iranian market which had issues with US Dollar imports following sanctions imposed by the United States which impacted payments for the Sri Lankan tea exports, had some relief later with two private sector Iranian banks – the Saman Bank and the Persian being the only two unsanctioned banks and the Dollars for the tea exporters were arriving steadily.

A Sri Lanka private sector tea industry delegation led by Keragala was in Iran recently and they have been informed by the Iranian tea importers that they will somehow adopt a strategy and mechanism to pay Dollars to the Sri Lankan exporters in the same manner that pay the Indian exporters, but that was well before last Thursday’s bomb shell of the Iranian government knocking off Sri Lankan teas off the essential list which will impact the pricing of the local tea exporters to the Iranian market.

Meanwhile, Sri Lanka Tea Board Marketing Director Hasitha De Alwis told The Island Financial Review that a further debilitating blow was the inroads that Kenya was making into the Iranian market which was meant that that country too was deviating on the dependence on the five traditional markets that the African country was exporting its CTC teas to.

Kenya had made a phenomenal increase in its tea exports to Iran from the 83,000 kilos in January 2011 to 1 million kilos in January 2012 and it has exported 5 million kilos to Iran for 2011 which is also an indication that it is treating Iran as an alternative market to its five tradition markets of United Kingdom, Egypt, Sudan, Pakistan and Afghanistan, De Alwis said.

Kenya has indentified Iran as a key market which could also pose a threat to the export of Ceylon teas to that market, he said.

The latest statistics and data released on the tea industry is that the tea small holder sector has 400,000 people directly involved in a total stakeholder strength of 2 million, the 21 Regional Plantation Companies have 950,000 living in the estates where 237,000 are involved in plucking and other ancillary services and the remaining million of the industry stakeholders constitute the Colombo based exporters and brokers along with the packers and shippers.

Low growns recorded substantial gains since March – Past SLTFOA Chairman

Past Chairman of the Sri Lanka Tea Factory Owners’ Association Anil Perera said that the highest ever low grown average has been the 446 in September 2009 and that the overall demand for tea since the third auction in March, has recorded a positive trend with the Low Growns in particular, recorded substantial gains.

The Gross Sales Average for the tea market went over Rs. 400 for the first time in February while the National Sales Averages for the Low Growns was Rs. 350 in February, Rs. 371 in March and Rs. 412 In April. The corresponding statistics of the National Sales Averages for Low Grown Teas for February has been Rs. 364 in February, Rs. 390 in March and Rs. 439 in April.

The primary reason adduced for the increase was the devaluation of the Rupee against the US Dollar and the shortfall recorded in some of the producing countries – India and Kenya.

He said that it was indeed important that the producers focused on quality towards the sustained efforts to maintain prices without compromising on the raw material standards which was a prerequisite to the manufacture of quality teas.

He said that tea production for 2012 will be on par with that of 2011 with the good growing conditions and that the national production was likely to be at a healthy level.

Meanwhile, industry sources also highlighted the importance of the regulatory body- the Sri Lanka Tea Board exercising its authority and take action against producers who dispose their teas to local exporters through unauthorized channels. They said that this would entail the diversion of all teas produced to the Colombo tea auction which is the primary mode of sale and thereby concentrating on the demand at the auction centre.
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*Pathfinder Economic Alert

The Central Bank, in its latest Annual Report, has downgraded its growth forecast for 2012 from 8% to 7.2%. This is due to a combination of adverse global developments and the negative effects of domestic policy misalignments. The contractionary measures introduced to address the imbalance in the trade account (ie to encourage the country to live within its means) may well result in growth being less than the 7.2% forecast by the Central Bank. It is important, therefore, that reforms are introduced to accelerate recovery in order to achieve the government’s own growth target of 8% or more. The Pathfinder Foundation (PF) is putting forward some suggestions to begin a discussion/debate on how this can be achieved.

Sri Lanka has had three major waves of reforms since 1977 and incremental reforms in the intervening periods. The reform process has not been a straight line, with a number of slippages along the way.

These reforms infused momentum into the growth process. However, progress was constrained by the persistence of the unsustainable fiscal deficits and the violent conflict. The end of the conflict has created a favorable set of circumstances for Sri Lanka. Despite this, the stabilization measures undertaken recently, while necessary, will have a negative impact on the short-term growth prospects for the country.

The policy-makers are faced with the challenge of stabilizing the economy in the short-run, while strengthening the medium-term growth framework.

The issues related to macroeconomic stabilization were addressed in previous Economic Alerts. The recent measures (exchange rate, interest rates, administered prices and tariffs) introduced by the government will result in a slowdown of the economy. However, the depth and duration of the slowdown are still not clear. It is important that the government initiates a new round of structural reforms to strengthen the growth framework, if it is to facilitate early recovery.

Path to Re-invigorating Economic Growth.

A new package of growth-oriented measures should include, inter alia, the following:

* Continued implementation of the recommendations of the Tax Reform Commission to simplify and rationalize the tax system and strengthening of tax administration

* Rigorous public expenditure review, including the size of the public service as well as subsidies and transfer payments. As a lower-middle-income country, which is ineligible for ODA, Sri Lanka can no longer afford its current level of subsidies and transfer payments; nor such a level of unproductive public sector employment. However, greater dynamism has to be infused into private sector growth to facilitate restructuring of the public sector.

* Formulation of a consistent and coherent SME development strategy, focusing particularly on financing and access to technology. Past interventions have been fragmented and have had limited impact.

* Development of a transparent program for public/private partnerships (PPPs), particularly in infrastructure development and in improving the efficiency of public commercial enterprises. Fiscal constraints and more limited headroom for future public external commercial borrowing mean that there will have to be recourse to PPPs to meet the government’s infrastructure development targets.

* Capital market development, particularly the development of a long-term debt market. Financing for industrial development has been a persistent problem since Independence. An aggressive promotion of the insurance sector will assist in this regard.

* Labor market reform. The level of protection afforded to workers in the formal sector is constraining business expansion and is also incentivizing the growth of the informal sector where labor standards are very much lower. It is also leading to a rise in unprotected part-time and casual employment. A recent survey conducted by the Employers Federation indicated that 91% of the respondents believed that labor laws and regulations were constraining employment creation. In this regard the policy-makers should consider "buying-in" of certain labour rights by creating a safety-net for the unemployed and offering other benefits.

* Strengthening the operations of the land market and creating a land bank of state-owned properties available for development. Currently government institutions, such as the Postal Department and the Railways, own considerable extents of land which are unutilized or underutilized. A concerted effort should be made to develop a program that creates an inventory of land available for commercial use.

* The removal of barriers to trade and investment on an unilateral basis has helped many East Asian countries to generate economic growth and development. In this regard, finalization of the Comprehensive Economic Partnership Agreement (CEPA) and similar arrangements with India and other countries in East and South East Asia could be considered a step in the right direction.

* Development of a Science and Technology Policy and strengthening the capabilities for technology management as well as the capacity of the national innovation system. Effective technology management (adoption and adaption), has been a critical determinant of the success of East and South East Asian countries.

* Strengthening the operational capacity and governance of SOEs (the previous Economic Alert dealt with this subject at some length). There is a strong case for selling a part of the equity of commercial SOEs in the stock market. In other countries the increased disclosure that ensues has triggered greater transparency and accountability; improved management; and strengthened financial discipline. It would also constitute a means of mobilizing much needed non debt-creating financing for the budget. Most importantly, free or subsidized allocations of a portion of the shares to the employees of such institutions will immensely benefit them and guarantee their commitment towards the success of the entities.

* Strengthening the capacity of regulatory agencies, particularly the Public Utilities Commission and the Securities and Exchange Commission

* Strengthening Education, Training and Skills development, particularly mathematics and science education; as well as increasing private provision of education. It is important to ensure that education and skills development are well aligned with the labour market and the country’s opportunities for expanded economic opportunities (Dynamic Comparative Advantage)

* Mainstreaming climate change and other environmental issues into national policy-making. Climate change will impact on six areas: agriculture and irrigation; coastal areas; forests and natural eco-systems; human settlements and infrastructure; human health; and energy and industry.

In conclusion, there must be fiscal consolidation, flexible exchange rate management and prudent monetary policy to ensure strong macroeconomic fundamentals; as well as a more conducive investment climate based on improvements in the "ease of doing business" and competitiveness of the economy. In this connection, there is a real need to remove red tape (i.e reinvigorate the debureaucratisation agenda). Efforts to streamline processes for approvals, permits etc need to gain further momentum. Above all, there is a need for consistent and predictable policy–making.

Potential for Diversification & Growth

Accelerated growth in a country of 21 million people has to be driven by improved export performance. The potential exists to increase exports in all three sectors of the economy. The opportunities presented by economic geography, particularly Sri Lanka’s location in the dynamic Asian region in close proximity to the fast growing Indian market, should be given priority.

There is considerable scope for growth in the services sector, particularly through exploiting opportunities for horizontal integration, particularly in the SAARC region.

- Tourism: Sri Lanka has considerable potential as a destination with a product that offers diverse attractions in a small geographic space. The challenge is to compensate for the likely reduction in arrivals from recession-affected Europe by increasing the quality & number of tourists from Asia (particularly India and China) and the former Soviet Union. Another challenge is to increase the daily spend of the visitors by moving up-market and establishing activity based tourism facilities.

- Shipping: Sri Lanka is attaching high priority to port development and acquiring hub status in the South Asian region. The country’s strategic location, close to major shipping lanes, and the rapid expansion of Indian trade (transshipment from Sri Lanka) offer considerable growth potential.

- IT/BPO: The World Bank has indicated that this sub-sector has the potential to become a $1 billion industry for Sri Lanka. As costs in the region increase, Sri Lanka has the scope to expand this business. Continuing emphasis needs to be placed on strengthening the IT and English base of the human resources in the country.

- Professional Services: Sri Lanka has strong legal, and particularly accountancy professions. These can be exported as demand for such services grows in South Asia, the Middle East and East/Southern Africa. .

- Medical/Education: As incomes rise, the demand for these services will increase. There is a significant amount of unmet demand in the SAARC region.

- Financial Services: Sri Lanka has a strong and well developed financial services sector. The country can offer competitive services to the SAARC region.

Sri Lanka has the potential to be a niche player in the manufacturing sector. It has a world class apparel sector which has become very resilient and competitive through adjusting to the loss of the MFA and European GSP Plus status. The garments sector has been successful in moving up the value chain through tie-ups with reputed foreign brands.

Domestic value-added has been increased, including through strengthening domestic design capacity. This sector has positioned itself successfully to penetrate mid-market niches. The next phase of development could be the continued growth of domestic brands for sale.

The successful industrial exports have included activated carbon, rubber products, ceramics, soft toys, leather and wood products, paper and luxury yachts. At present, Sri Lanka has a negligible presence in intra-company trade in Asia (supply chains) which is the most dynamic element of the international trading system. As mentioned in the previous Economic Reports, Sri Lanka needs to explore opportunities for vertical integration into the Asian supply chains, particularly Indian ones.

The rise of first Japan, and then China, transformed the prospects and performance of East and South East Asia. The potential exists for Sri Lanka to benefit in a similar way from the rise of India, particularly the dynamic Southern sub-region (Andhra-Pradesh, Karnateka, Kerala and Tamil Nadu). The challenge is to identify niches where Sri Lanka is competitive in the supply chains of both Indian companies and multinationals operating there e.g. the automobile industry in Chennai offers prospects for rubber- and choir- based products. However, the volume and quality of supplies are constraints that need to be addressed through strengthening production processes in Sri Lanka.

Another avenue that needs to be explored is attracting small- and medium-scale suppliers of India-based multinationals to locate in Sri Lanka. For instance, some of the giant Japanese companies like Nissan and Toshiba have very large plants in Chennai. Sri Lanka does not have the capacity to offer the scale required by such companies. However, some of their Japanese suppliers have also moved with them. Sri Lanka can make a concerted effort to attract some of these these suppliers to locate in the country.

Prospects for the agricultural sector have improved with the end of the conflict and the opening up of the North and East. Growth in agriculture can be fuelled by increased productivity from a low base. This would require changes in land ownership/use patterns and the product mix; reduction in post-harvest losses, including through investment in storage, refrigeration and transport; and improved cultivation practices and technology. The potential exists to increase the export of tropical fruit and vegetables to West-Asia. Priority should be attached to increasing production of high value crops and achieving greater value addition through promotion of agro-processing.

There is scope for expanding the livestock and dairy sector. Domestic demand is increasing with rising incomes and there is scope for import substitution. The expanding middle-class in India and changing food consumption patterns towards higher value products would also open up new opportunities. Here again, the challenge is to increase supplies and strengthen storage/processing capacity.

Fisheries and ocean-based resources also offer scope for expanded economic activity. At present, Sri Lanka makes limited use of its Special Economic Zone. In the modern world, the largest producers and processors of fisheries products utilize technology and capital intensive vessels and equipment. Therefore, Sri Lanka should offer incentives and negotiate with prospective investors to set up joint ventures for exploitation of our fisheries resources in the Exclusive Economic Zone.

Conclusion

A strong macroeconomic policy response to the recent deterioration in the country’s balance of payments accompanied by a fourth wave of structural reforms can secure a prosperous future for the people of Sri Lanka, particularly as economic geography is so favourable. It is also important to shift from an ad-hoc deal-by-deal approach to a more strategic orientation. This applies both to the government and business.

(This is the Twenty – Seventh in the series of Economic Alert articles published by the Pathfinder Foundation. Readers’ comments are welcome at pm@pathfinderfoundation.org)
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Clarifies 2011 per capita GDP computation technically correct but given fall in Rupee’s value in 2012 Central Bank should have been honest with greater disclosure and putting data in context
* As per IMF staff report Net International Reserves in 2011 alarming low at $ 4 b; Net Open Position below $ 3 b; Short Term debt and amortisation $ 5.7 b

* Alleges lack of disclosure and transparency is an economic crime

* Urges public to demand for Right to Information Act after two attempts by Opposition thwarted by Govt.

deleted MP and Consultant Economist Dr. Harsha De Silva yesterday clarified that whilst GDP per capita calculation in 2011 was technically correct, the Central Bank has a moral and ethical responsibility to be more transparent.

“The per capita GDP computation based on average exchange rate is technically correct but it is morally and ethically inappropriate,” said Dr. De Silva exposing the fact that exchange rate had completely changed between end 2011 (the year for Central Bank’s Annual Report) and the presentation date (which was late March 2012).

Justifying his claims, the deleted MP said as per best practices of financial reporting, good governance and transparency, institutions are required to make a disclosure of non-adjusting events.

“Central Bank Governor who preaches good governance and best practices in accounting has a moral responsibility,” Dr. De Silva opined recalling that Cabraal was once the President of the Institute of Chartered Accountants of Sri Lanka as well.

The contentious issue which has sparked much discussion is that to compute the 2011 per capita GDP, the Census and Statistics Department had used the annual average exchange rate which was Rs. 110.57.

However before the Central Bank 2011 Annual Report was presented the exchange rate peaked to Rs. 130 whilst it was hovering around Rs. 127.

Dr. De Silva argued that since the 2011 report has referred to events as late as 12 March 2012 the Central Bank should have explained and put the per capita GDP data in proper context. What the deleted was expecting the Central Bank was to make a post-balance sheet disclosure.

He even suggested that since there was a likely decline in per capita GDP in 2012, the Central Bank should have been more transparent and made a proper disclosure. Dr. De Silva noted that the 2011 Annual Report refers only to the doubling of per capita income by 2015.

“It is the Central Bank which artificially propped up the Rupee’s value in 2011and following the efforts to find its correct value since February, the onus is on the Central Bank itself to be more transparent with disclosure,” Dr. De Silva added.

Noting that the jury was out there that as per good practices central banks have to be more transparent deleted MP charged that unfortunately the Central Bank in Sri Lanka hasn’t been so and this had been exposed by the Opposition several times. Dr. De Silva referred to previous warnings about crisis faced by Sri Lanka’s
reserves whereas Central Bank hadn’t told the truth to the people.

For example based on IMF’s recent release of staff report following discussions with the Government, Dr. De Silva said that Sri Lanka’s Net International Reserves (NIR) in end 2011 was $ 4 billion whilst Short Term debt and amortisation was $ 5.7 billion, which was 70% of total gross reserves. The Net Open Position was under $ 3 billion. “This exposes a serious crisis but the public at large were kept in the dark,” Dr. De Silva added.

These dangerous situation only makes it paramount that people should demand for the Right to Information Act, the deleted MP said adding that two previous attempts by the Opposition to bring this up in Parliament was thwarted by the President Mahinda Rajapaksa Government due to ulterior motives.

“Lack of disclosure and transparency is an economic crime,” charged the deleted MP.
Referring to Daily FT’s front page lead story of 19 April titled ‘CB statistics under fire,’ Central Bank Governor Nivard Cabraal stressed that the Department of Census and Statistics calculated the per capita GDP (per capita income) according to the UN System of National Accounts, which is the commonly used and widely accepted methodology by international organisations.

According to this methodology, per capita GDP is derived by dividing the annual GDP at market prices by the mid-year population. Per capita GDP in Sri Lanka Rupees is then converted to US Dollars by using the annual average exchange rate for the particular year. This is the methodology that has been used even in the past, he said.

The annual average exchange rate used in the computation of per capita GDP for 2011 was Rs. 110.57, which includes the depreciation in November 2011. The Central Bank wishes to emphasise that it is the international norm to use the annual average exchange rate in arriving at the per capita income and not the end-of-year exchange rate, Cabraal emphasised.

The Medium Term Macroeconomic Framework presented in Table 1.5 of the CBSL Annual Report 2011 is based on Central Bank’s forecasts of macroeconomic variables. The per capita GDP forecasts have been estimated based on the projected annual GDP, mid-year population and annual average exchange rate of the Sri Lanka Rupee against the US Dollar for the years 2012 to 2015, Cabraal added.
http://www.ft.lk/2012/04/23/harsha-says-cb-has-moral-responsibility-to-be-more-transparent/