Mar 252014

Sri Lanka’s premier business chamber, the Ceylon Chamber of Commerce (CCC), yesterday endorsed the ongoing financial sector consolidation advocated by the Central Bank of Sri Lanka.

“We believe consolidation of the finance sector is the right way forward. With it, the businesses can look forward for a brighter 2014,” CCC Chairman Suresh Shah told a media briefing held to celebrate the CCC’s 175th anniversary.

Shah further said the CCC is ready to extend its support to the Central Bank in this process to make the transition as smooth as possible.

In line with one of its two main responsibilities—ensuring the financial system stability—the Central Bank has presented a master plan to consolidate the country’s over-expanded banking and finance sectors. Under this new plan presented by Central Bank Governor Ajith Nivard Cabraal, the Central Bank expects to significantly trim down the number of banks and nonbank financial institutions (NBFIs) operating in the country.

Though no exact figure is mentioned, the Central Bank expects to pool the existing banks to create five large banks with asset bases of Rs.1 trillion each along with a large development bank through the merging of two existing development banks.

However, t he Central Bank expects to shrink the NBFI sector to 20 large companies from the current 58 through mergers and business absorptions.

The plans for such acquisitions should be submitted by May 31, 2014 as the majority of Category small finance companies are expected to be absorbed by December 2014, while any remaining are expected to be completed by the first half of 2015.

However, some while agreeing on consolidation in principle, have raised concerns about the tight timelines set by the Central Bank for the process to be completed.

Meanwhile, CCC Vice Chairman Rajendra Theagarajah commended the government’s continued focus on infrastructure development.

“It boosts the growth potential of the economy and opens up opportunities for the private and public channels to link,” he noted.

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Nov 292013
CB Governor calls private sector to strengthen governance
Sri Lanka’s corporate sector must take more steps to strengthen its governance provisions and avoid lobbying for undue business advantages, CBSL Governor Ajith Nivard Cabraal said.

“I have been in the government for eight years and the private sector for 32 years, so, I have experience in both. To be frank, I don’t think there is much difference in terms of governance standards between the two.

“I may not be popular for saying so but we have seen on many occasions when the private sector requests many undue advantages. Sometimes after meetings one or two approach you and ask for an edge over other companies.

“These are common occurrences and we don’t talk about it usually but these are governance issues which our country faces. Therefore, it’s not only the government but the private sector also that needs to strengthen their governance provisions to be more honest and broad-based,” Cabraal told a full house of private sector giants at a recently held event at Ceylon Chamber of Commerce.

Commenting on risk management in business, Cabraal urged Sri Lanka’s private sector to take a more conservative approach to profits and reinvestment in order to ensure the sustainability of profits over the long term.

“Reinvestment is vital because you don’t know where the next shock will be. Global situations can be so volatile, so you will understand that there will be shocks. Whenever there is a shock, the private sector comes to the government and asks for help.

Where is the government going to give help from? They have to take it from someone else and give it to you.

My message therefore is that your economic performance and financial performance also have to have roots in the sustainability of your profit making. You have to make sure you have reserves to meet that rainy day when it comes,” Cabraal advised.

He went on to state that companies which are capable of successfully navigating bust cycles in a business through prudent risk management would be the ones which are also capable of effectively managing boom-cycles, thereby ensuring their long-term survival.

“In good times always put something back so that you don’t have to come to the government and ask for help when there are floods, droughts, or war in other countries.You are now strong enough and the country is moving into a new era of development. So, managing your risk is important. Profits aren’t only for that year but have to be sustained,” he added.

“By respecting the law and embracing these new conditions, we’re showing the world that we’re a different breed and that we’re sufficiently sensitive to all factors in making our transition to a middle-income country.

In doing so, we can proudly say that we made the transition while respecting the law, the country, the environment and maintaining our ethics, Cabraal concluded.

Nov 282013
Middle-income status may push private sector for pension schemes: Cabraal
Sri Lanka’s private sector may have to look at models for superannuation and pension schemes in order to cope with the changing macroeconomic fundamentals, as Sri Lanka moves towards the middle-income country status, according to Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal.

“It is now time for all companies to realize that they will have to move into superannuation schemes a lot more seriously than they have done in the past.

We are in an era in our country where you will see interest rates coming down as a result of inflation moderating. We are looking at macro conditions that will ensure that inflation will stay in single digits, so interest rates will be much lower than what we’re used to,” Cabraal stated.

Delivering an address at the recently held Best Corporate Citizen Awards, organised by the Ceylon Chamber of Commerce, Cabraal warned that the time of depositing funds in finance companies and banks alone would no longer be sufficient to maintain a viable pension fund for Sri Lanka’s retirees.

“In such a situation, we will now have to look very carefully at what our pension products and superannuation schemes are going to be because the time when you could just put money into finance companies and banks may not be as attractive as it once was in the past.

When looking at employee relations, companies should also reflect on the new trends that the economy is taking and prepare themselves for these new trends in Sri Lanka’s economy,” Cabraal cautioned.

He added that the Sri Lankan corporate sector must also extend a holistic approach in employee and customer relations, as part of the efforts towards becoming responsible corporate citizens.

“Companies must look at the inherent manner in which they deal with employees and customers. We brought a customer charter for the banks and many embraced it willingly and they embraced it as part of the transition to a new level of development and service.

Companies also must tell their employees, customers and the public what their benchmarks are. It’s always a good thing to talk about your values and make sure the employees abide by those values as well, while also being conscious of their responsibility to be sensitive to religious, ethnic and national practices,” Cabraal advised.

“Sri Lanka’s success in the economic field has largely been achieved without damaging the environment of our country. Today, we recognize companies for their contribution to the people, planet and profit. All three are equally important. All of you are in the field for profit but these are highly interconnected ideas. The more we realize this, the more we will respect the role of the three Ps,” he noted.

Nov 182013
Economy grows 7.8% in 3Q
The Census and Statistics Department data showed the Sri Lankan economy grew 7.8 percent in third quarter (3Q) this year, accelerating from 6 percent and 6.8 percent recorded in 1Q and 2Q respectively.

The 3Q is the first full quarter after the Central Bank cut its key policy rates in May by 50 basis points to show high growth rates.

The growth of the US $ 59 billion Sri Lankan economy slowed down to 6.8 percent in 2012 from 8 percent growth in two consecutive years.

After the surprise 50 basis point rate cut again in October, Central Bank Governor Ajith Nivard Cabraal said the economy was well on track to achieve its full year target of 7.5 percent.

The data showed the agricultural sector expanding by a healthy 7 percent, recovering from the 0.5 percent contraction in the corresponding quarter in 2012.

Meanwhile the industry sector grew by 8.1 percent as against the 7.3 percent growth in 3Q’12. The services sector grew by 7.9 percent compared to 4.6 percent growth in 3Q12.

The economists have often pointed out the irrational use of demand management policies such as interest rates and exchange rates to accelerate the economy as they have always proved futile in the past.

They have called for tough structural changes in export growth, reforms to SOEs, effective tax administration and tariff reform to increase government revenues, enhanced revenue mobilization to support capital expenditure and improvements in the general business climate to maintain 8 percent growth for a sustained period.

The structural composition of t he economy by and large remained unchanged. The agricultural sector contributed 11.1 percent to the overall GDP while the Industry and the Services’ sector shares remained 29.9 percent and 59.0 percent respectively.

The sub sectors under the agricultural sector; paddy, livestock, other food crops and minor export crops grew by 56.5 percent, 8.3 percent, 8.3 percent and 2.9 percent respectively.

Among the contracted sectors are tea (5.1 percent), rubber (28.1 percent), coconut (32.3 percent) and fishing (9.9 percent).

All the sub sectors under the industry showed growth. The manufacturing, mining & quarrying, electricity, gas & water and construction sub sectors grew by 6.8 percent, 12.5 percent, 11.2 percent, and 10 percent respectively.

The hotels and restaurants sector growth was the highest under services with 13.6 percent. This is followed by transport & communication (11.8 percent), export trade (9.1 percent), import trade (7.5 percent), domestic trade (6.3 percent), government services (3.6 percent), private services (7.0 percent) and banking, insurance & real estate (6.7 percent).

Nov 112013
CB leaves policy rates unchanged
The Central Bank (CB) yesterday kept the policy rates on hold for the month of November, providing a breather to the recent monetary easing to take effect during the next few months.

In October, the CB surprised the markets by cutting both the Repurchase rate and the Reverse Repurchase rate by 50 basis points to multi-year lows of 6.50 percent and 8.50 percent, respectively, amidst calls by the International Monetary Fund (IMF) to hold the rates over inflationary fears.

“We believe the time has come for the monetary policy measures that have already been taken to take effect and we also believe within the next few months these changes would hold the economy in the growth momentum. So, we don’t think of any further changes now,” Central Bank Governor Ajith Nivard Cabraal told Bloomberg TV.

However, Cabraal noted that despite the short-term interest rates have already started to come down significantly, easing of medium and longterm rates has been rather slow.

Despite the recent monetary easing, the private sector credit growth remained below 10 percent during the year so far. The private sector credit grew by 34.5 percent in 2011, followed by another 23 percent in 2012.

In September, domestic commercial banks have disbursed as much as Rs.20 billion worth of private sector credit. “September figures were rather encouraging, so have the October figures been,” Cabraal remarked.

The broad money supply (M2b) in September increased to 16.3 percent from last year, up from 15.3 percent in August. The projected M2b for 2013 is 15 percent. In 2012, it was 16.2 percent.

Cabraal said the macroeconomic fundamentals are strong and the inflation is under control. But October inflation proved otherwise with the headline inflation rising to 6.7 percent, picking up from 6.2 percent a month earlier.

However, sending some level of certainty into the financial markets Cabraal said, “Next three to four months we will probably see consolidation of policy we have been advocating because we are satisfied with the results we have seen.

I don’t see a major shift in the policies during this period because whatever required has already been done,” he emphasized.

Since last December, the CB has cut policy rates by 125 basis points, reduced the statutory reserves ratios of the commercial banks by 2 percent and also asked the financial sector to reduce the penal interests charged on the default loans, in order to oil the slow-moving economic wheels.

“We would be a little dovish than hawkish. But we will watch the December and January figures quite carefully whether they are in place with what we have in mind for 2014,” Cabraal said.

Oct 232013
Rupee under appreciation pressure at the moment: CB
The Sri Lankan rupee, which hit a record low at the end August, is under appreciation pressure and the Central Bank has been intervening to curb a sharp rise, the Central Bank Governor said yesterday.

The rupee has been trading at more than a threemonth high of 130.70/75 to the dollar, after having appreciated 3.42 percent since it hit a record low of 135.20 on August 28.

“There is actually more appreciation pressure than depreciation pressure at the moment,” Governor Ajith Nivard Cabraal told Reuters.

“The Central Bank is intervening when it thinks the rupee is appreciating too much.”

Currency dealers said inflows into the share market and government bonds amid weak importer dollar demand had helped boost the currency.

Some dealers had expected the currency to come under downward pressure after the Central Bank cut key policy interest rates to multi-year lows last week.


Oct 022013
Harnessing tourism potential through targeted strategies
By Ajith Nivard Cabraal
The dynamics of the Sri Lankan economy have changed enormously in the last decade. Particularly after ending the prolonged terrorism conflict, the growth outlook in Sri Lanka has been impressive with massive reconstruction and rehabilitation efforts being carried out.

Important milestones
In the post-conflict economy, we have been able to record many important milestones.  We doubled per capita income to over 2,900 US dollars in a relatively shorter period graduating to an emerging market economy status; we grew our economy to a robust 59 billion US dollars; we controlled inflation at single digits for more than four and a half years; we reduced poverty levels to around 6 percent; we brought down unemployment levels to less than 4 percent; we elevated the quality of infrastructure to a level comparable with many emerging market economies; we maintained our foreign reserves at over 6 billion US dollars; we managed our debt prudently so as to reduce our debt-to-GDP ratio from as high as 105 percent in 2003 to about 78 percent; and most importantly, we achieved an over 8 percent economic growth in successive years 2010 and 2011.  Today, Sri Lanka is ranked among the top five fastest growing economies in developing Asia.
The efforts that we have put together to improve and sustain the positive outlook for our nation, have ensured a conducive investment atmosphere. The low and stable interest rate regime serves as an important support to businesses by reducing the risk factor. Moreover, the country’s peaceful environment, complemented by political stability, has been able to ensure the continued safety of investments, while ensuring maximum yield. In this context, we have initiated a robust investment framework along the lines of the ‘5+1’ hub concept, which has now opened out new ventures in promoting knowledge, maritime, aviation, energy and commercial sectors, while tourism is emerging as a further thrust industry.

Becoming key tourist and transit hub
As far as the tourism industry is concerned, we are increasingly becoming one of the fastest growing tourist destinations in the world; and our efforts to gear up the port and airport development is expanding the potential for Sri Lanka to become a key tourist and transit hub for Asia. Anticipating this growing potential, some of the leading hotel chains in the world have chosen Sri Lanka for their expansion, and currently major hotel and entertainment projects, including Shangri-La, Sheraton, Mövenpick, Crown Resorts, and Marriott which are planning to open for business in the years 2014 and2015, are underway.  
It is noteworthy that most of these major developments in the tourism industry take place as foreign direct investments (FDI).  Such FDIs are due to create thousands of new jobs over the years for Sri Lanka, and these inflows will continue to be a key job creation source for our nation. For example, the US$4 billion FDI project spearheaded by Singapore’s Sri Lanka Gateway Industries (Pvt) Ltd is, expected to create 5,000 direct and 20,000 indirect jobs in the country. These and other additional jobs will lead to increased spending locally by the thousands of new entrants to the economic stakeholder groups. As is well known, many FDI projects also utilize other local non-human resources as well. For instance, manufacturing projects will use local material while hospitality ventures will consume large quantities of local produce. These economic inputs will also provide a strong stimulus for existing Sri Lankan businesses to grow, and what we would experience then, is an increase in our standard of living.
What is more, the development of our nation increases its allure to tourists, at a time when the country is forging ahead towards its target of 2.5 million tourists by 2016. Given the projected growth trends for international tourism over the next few years, this ambitious target will be well within reach. Nevertheless, it is important that we strategically target the key source markets and customize the tourism product to cater better to the needs of those markets. Furthermore, to successfully market the destination, it is essential that Sri Lanka is also able to attract international tourism brands that will provide high visibility for the country as well as their own brands, in the source markets.

Emerging trends in regional and global tourism
In developing Sri Lanka’s tourism strategy, more emphasis will also need to be placed on the prospects and emerging trends in regional and global tourism landscape, as well.  It is becoming increasingly clear that much of the rapid growth in global travel over the next few years is expected to be from China. China’s outbound travel market is one of the fastest growing in the world. In 2000, only about 10 million Chinese tourists travelled abroad.  However, this number exploded by 690 percent to 83 million in 2012, and it is now estimated to reach 150 million by 2016!  At the same time, the largely untapped Indian market is also expected to figure prominently in Sri Lanka’s tourism effort, and the Leisure sector must make a concerted effort to draw in more Indian tourists, by identifying and catering to the needs of India’s high net worth individuals and its affluent middle class.
As a destination which just 1 to 3 hours away from most Indian airports, Sri Lanka could be one of the more popular destinations for the burgeoning Indian middle class population with rising disposable incomes, seeking affordable holiday options.
The availability of direct flights, and high quality tourism facilities make Sri Lanka the perfect destination even for weekend travel. Furthermore, there is vast potential in India’s outbound MICE segment which was estimated to be worth nearly USD 600 million in 2011. Meanwhile, Sri Lanka will also be an attractive destination for Middle Eastern travelers, offering both the business and leisure tourists a host of options and a convenient location, along with sensitivity towards their cultural needs. Therefore, Sri Lanka must make the most of its central locations connecting the Eastern and Western worlds in order to attract tourist traffic from all these destinations.  
Investments in hospitality industry
To capture these lucrative markets, investment in the hospitality industry is critical. In this connection, it is heartening that Sri Lanka has embarked on various activities to provide the best entertainment experience for tourists, in parallel to the competitor destinations in the region. In this regard, a ‘tourism event calendar’ which facilitates international sporting events on an annual basis, will help to target niche tourist markets, particularly of youth tourism, which is involved in adventure sports, including beach volleyball, sailing, white water rafting, mountain biking, hot air balloon racing, scuba diving, water skiing etc. In addition, several areas of Sri Lanka are being given a modern look with ample recreational facilities, so that tourists can also enjoy the benefits of modern lifestyle within the country. Further, the progress that is being made to enhance the entertainment and gaming industry, would help to cater to a growing segment of leisure travelers across the world.
With Sri Lanka’s strong economic growth and positive policy initiatives, the country is now well positioned to take advantage of foreign investment. Our continued efforts to create a business friendly environment have been well recognized with Sri Lanka being the highest ranking country in the Doing Business Index (DBI) in South Asia and is the only country in the region to improve its ranking for 2013. Sri Lanka also moved to “High Human Development Category” from “Medium Human Development Category” in the Human Development Index (HDI).  In this backdrop, it is the responsibility of every citizen to foster a warm and welcoming environment for tourist development, in order that we will, collectively, secure prosperity for our nation in the years to come.

(Ajith Nivard Cabraal is the Governor of the Central Bank of Sri Lanka)

Sep 102013
Economy grows at 7% in 2Q
The Sri Lankan economy grew 7 percent in the second quarter (2Q) accelerating from the 6 percent growth reported in the first quarter of 2013, Central Bank Governor Ajith Nivard Cabraal said in an interview with Bloomberg in Hong Kong.

“Our second quarter figures have just come out and we had a 7 percent growth in the second quarter, which shows that we are well on target to achieve the 7.5 percent growth for this year,” Cabraal said.

The 2Q GDP growth however is in contrast to the view of many analysts who observed a slowdown in the Sri Lankan economy in the second quarter continuing to the balance part of the year as well.

The economy grew by 6.4 percent in the corresponding quarter in 2012.

Governor Cabraal confided that the current trend in the economic growth would provide a platform to achieve the 8 percent growth projected by the Central Bank for 2014.

Meanwhile, despite the current volatility due to the fears of Fed stimulus tapering, Cabraal said the Sri Lankan rupee should remain at the present levels against the dollar. “If the inflation behaves the way we wanted that to (and so far it has worked in that way), the rupee should also be at the levels we are presently seeing it,” Cabraal said.

Declining to give a projection on the rupee he said, “It’s very difficult for us to predict what could take place because our neighbouring countries as well as our trading partners are also undergoing serious changes.”

The Sri Lankan rupee had its worst fall on August 28 to Rs.135 to the US dollar. However, Cabraal attributed it to a temporary aberration.

Since June 7, the Sri Lankan rupee has fallen 5 percent, partly due to foreigners pulling out of the Sri Lankan treasury bonds. Sri Lanka’s spot rupee at yesterday’s open was Rs.132.91 to a dollar.

Last month the Central Bank intervened in the forex markets helping to strengthen the rupee.

Cabraal further said the currency volatility was much less in Sri Lanka relative to other countries because the country did not invite a lot of hot money during the past one year.

“Most of the investments to Sri Lanka came in the preQuantitative Easing era. As a result, we are pretty confident of maintaining those levels of investments without any major shift in the investments in the country,” he confided.

Aug 112013
IMF cautions on aggressive monetary easing
International Monetary Fund (IMF) said they were very concerned about the aggressive monetary policy easing pursued by the Lankan authorities to spur growth amid looming inflationary pressures.

The IMF also expressed concern over the possibility of repeating the credit cycle the country had to undergo during post war period which led to a credit bubble and a Balance of Payment crisis ultimately costing as much as US $ 2.0 billion in reserves.

“We would be very cautious about being too aggressive in relation to loosening monetary policy both in terms of its costly effects on exchange rates, interest rates and especially we worry about starting another credit cycle and perhaps boosting imports once again,” IMF Resident Representative, Dr.Koshy Mathai said.

The authorities had to bring in a very painful policy package and had to tighten monetary and fiscal fronts and adopt a flexible exchange rate regime to rein in the overheating economy during the first quarter of 2012.

 “Inflation is still far too high,” Mathai remarked at a panel discussion recently.

After two rounds of monetary easing since last December which cut the repurchase and the reverse repurchase rate by 75 basis points, the Central Bank governor, Ajith Nivard Cabraal last month expressed the possibility of further easing by September or October in an interview with Wall Street Journal. (DK)

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