economic capsule - january 2015

Economic CapsuleJanuary 2015

Research & Development Unit

217th Issue

C O N T E N T S

BANKING SECTOR NEWS

Banking Sector Expansion – 2014

Banking Sector Performance - 2014

ECONOMIC & BUSINESS NEWS

Fuel Price Reduction

Sri Lanka Eager to Begin VW Car Plant with Germany

New Appointments

New Governor’s Views on the Economy

External Sector Performance

Inflation – December 2014

International News

Analysis & Forecast

INTERIM BUDGET 2015 – HIGHLIGHTES

Condominium Industry in Sri Lanka

October, 2014


Banking News

< Research & Development Unit >

Banking Sector Expansion - 2014

Branch Density* by Province

*Bank Branches per 100,000 population

According to the Central Bank, the Northern Province’s bank branch density (bank branches per 100,000 inhabitants) was 21.66 while it was 21.18 for the Western Province.

In 2008, the Northern Province figure was 7.39 and it ranked ninth best.

In the Eastern Province too there has been rapid expansion with its figure being 16.82, placing it third as opposed to eighth in 2008 with a figure of 8.38.


Banking Sector Performance – 2014 (cont…)

Source: CBSL Road Map 2015


October, 2014


Interim Budget 2015HIGHLIGHTS

*Proposals that affect the banking sector


Public Sector Salary: All permanent public servants (over 1.3 mn) salaries will increase by Rs. 10,000 per month (by January – Rs. 3000, by February Rs. 5000 and the balance by June 2015)

Private Sector Salary: Government has urged the private sector to consider an increase of Rs. 2,500 per employee per month

Revision of Pensions: additional Rs. 1,000 in monthly pension from April 2015 (about 550,000 pensioners)

Samurdhi Payments: Samurdhi beneficiaries will be granted enhanced monthly payments with an increase of 200% with effect from April 2015

Senior Citizens Deposits: Senior citizens to receive a higher interest rate of 15% per annum for their savings up to a maximum level of Rs. 1 million for funds deposited in commercial banks

Reduction of Passenger Bus Fares and School Van Hiring Charges: Based on current negotiations, the Bus fares will be reduced by a minimum of 10% and the school van fares by a minimum of 5%

Concessions for Colombo City Dwellers Relocated Against their Will: An initial advance of Rs. 100,000 per family borne by relocation and the government will also bear a part of the rental up to Rs. 250 per month over a period of 240 months


Waiver of Advances Granted to Farmers: A 50% waiver will be provided for a maximum loan capital of Rs. 100,000 on the loans advanced to farmers by commercial banks and presently overdue.

Guaranteed Prices to Boost Agricultural Economy:

− The guaranteed purchase price of paddy will be increased to Rs.50 per Kg. commencing from the 2015 Maha season.

− The guaranteed purchase price of potatoes will be increased to Rs.80 per Kg commencing from the next harvest.

− The guaranteed purchase price of tea leaves will be increased to Rs.80 per Kg.

− The guaranteed purchase price of rubber to be Rs.350 per Kg. (The guaranteed price scheme for Tea leaves and Rubber will be implemented subject to a comprehensive evaluation of the industry within a short span of time)

Guaranteed Price for Milk: An increase of the guaranteed purchase price of fresh milk by Rs. 10 per litre from the existing Rs. 60 per litre. This will be implemented from 1st July 2015.


Decentralized Budgets: From this year, the amount of Rs. 5 million provided under the Decentralized Budget for each Member of Parliament will be doubled to Rs.10 million (increase by 100%)

Increasing Healthcare Expenditure : Government will be initiating steps to increase its spending on health care to around 3% of GDP over the years compared to 1.4% of GDP at 2013

Increasing Education Expenditure: The government will introduce initiatives to increase educational spending gradually to a more desirable level in order to reach the expected 6% of GDP

Special Relief for People who had Pawned Jewelry: The interest payments on pawned jewelry to a value not exceeding Rs. 200,000 held at state banks will be waived off


Reduction of Taxes on Essential Goods

− Sugar: The present Special Commodity Levy (SCL) of Rs. 28 will be reduced by Rs. 10 to Rs. 18 per Kg. Price reduced to Rs. 85 per kg

− Milk Powder: Reduce the MRP to Rs. 325 per 400 g milk powder packet. Price reduced by Rs. 61 per 400 g packet

− Sustagen: Waive the customs duty of 15% . Price reduced by Rs. 100 per 400 gram tin

− Wheat Flour: The import duty of wheat grain will be reduced by Rs. 10 per kg. Retail Price reduced by

Rs. 12.50 per kg

− Bread: Price reduced by at least Rs. 6 per loaf

− Green Gram: The current SCL on Green Gram of Rs. 40 will be reduced by Rs. 30 to Rs. 10 per kg.

Price reduced by about Rs. 40 per kg.

− Sprats: The current SCL on Sprats of Rs. 26 will be reduced by Rs. 15 to Rs. 11 per kg

− Canned Fish: The current SCL on canned fish of Rs. 102 will be reduced by Rs. 52 to Rs. 50 per kg.

Price reduced by at least Rs. 60 per kg

− Coriander: The current SCL on Coriander neither crushed nor ground is Rs. 46, which will be reduced by Rs. 20 to Rs. 26 per kg. The SCL on Coriander crushed or ground has been reduced by Rs. 150 to Rs. 52 per Kg from Rs. 202 per kg.


Reduction of Taxes on Essential Goods (cont…)

− Black Gram: The current SCL of Rs. 110 per kg will be reduced to Rs. 60, a decline of Rs. 50 per kg. The SCL on Black Gram flour will also be reduced to Rs. 200 with a decline of Rs. 100 from Rs. 300 per kg.

− Maldive Fish: The current SCL on Maldive fish is Rs. 302 per Kg. Reduced by Rs. 200 to Rs. 102 per Kg.

− Turmeric: The current SCL on Turmeric, not crushed, is Rs. 202 per kg. Reduced by Rs. 100 per Kg to Rs. 102 per Kg. Also, the SCL on the crushed Turmeric will be reduced by Rs. 150 to Rs. 360 per Kg.

− Chillies: The SCL on crushed Chillies is Rs. 150 per Kg. Reduced by Rs. 25 to Rs. 125 per Kg.

Reduction of Fuel Prices

− Diesel price reduced by 14.4% to Rs. 95 per litre. Petrol price reduced by 22% to Rs. 117 per litre and Kerosene price reduced by 20% to Rs. 65 per litre on 21.01.15. The Kerosene price was further reduced by another Rs. 6 per litre from 29.01.15 bringing down the price to Rs. 59 per litre.

Reduction of LP Gas Prices

− Gas prices to be reduced by Rs. 300 per 12.5 kg cylinder to Rs. 1,596 per 12.5 kg cylinder from the mid night 29.01.15


Mansion Tax: A tax termed as Mansion Tax of Rs.1 million will be levied on owners of all houses valued at Rs. 100 million or more or on houses above 5000 square feet whichever is higher on an annual basis. The relevant tax would be collected on an annual basis commencing 2015 through the local authorities.

Migrating Tax: Sri Lankans who desire to permanently leave Sri Lanka will be taxed 20% on all such foreign exchange released to be taken out of the country by them at the point of immigration.

Dual Citizenship: Dual citizenship option to be provided to all with a Sri Lankan origin and upon due evaluation to be granted the dual citizenship preceding the payment of Rs. 500,000 per individual request.

Further, provision will be made for foreigners seeking resident status in Sri Lanka who are in a position to invest US$ 10 million. All such resident status in Sri Lanka will be subjected to the approval of Defence Ministry, which will be renewed every 5 years. The visa fee will be Rs. 2.5 mn for such persons.

Super Gain Tax: Any company or individual who has earned profits over Rs. 2,000 mn in the tax year 2013/2014 will be liable to pay 25% of their profit. The expected revenue from this will be Rs. 50,000 mn in 2015. This will be a one off payment.

Raising the Exempted Amount in PAYE: Under the present tax regime, the first Rs. 600,000 from the employment income is exempted from the Pay-As-You-Earn (PAYE) tax. In order to provide a further relief to the PAYE taxpayers, this amount is proposed to increase to Rs. 750,000 with effect from 01 April 2015.


Construction Industry: Remove the customs duty applicable on cement and steel billets.

Revision of Vehicle Taxes

− Reduce the taxes applicable on the motor cars with engine capacity less than 1,000 cc by around 15%.

− Revision of the excise taxes applicable on hybrid vehicles. (These changes will be implemented from 30.01.15)

− Depreciation of the value of vehicles at the point of import to be removed

Encouraging Domestic Production of Motor Cycles and Three Wheelers: The taxes of imported spare parts will be fully removed for those who are engaged in the manufacturing/assembling of motor cycles and three wheelers

Increasing the Age Limit on the Importation of Passenger Buses: The existing 5 year age limit for the importation of Passenger buses will be extended to 10 years.

Special Levy on the Casino Industry: A Rs. 1,000 mn levy will be imposed immediately on all the Casino operators, which will have to be paid before 15 April 2015 as a one off special levy.

Betting and Gaming Levy: The annual levy payable under the Betting and Gaming Levy Act will be doubled

Imposing a Special Levy on Bars and Taverns: A special levy of Rs. 250,000 will be imposed per tavern or liquor sales outlet, which will be a one off payment.


Imposing an Annual Levy on Liquor and Beer Manufacturers: Reformulate the liquor licensing through a tendering process. Under this system, no one person can possess more than 3 licenses. Until the proposed scheme is implemented, the licensing fee will be doubled. All liquor manufacturing and beer manufacturing companies will be liable to pay a minimum of Rs. 200 million per month.

Extended Facilities to the Business Community at BOI: A business facilitation networking unit consisting of the following governmental institutions to be created to provide a better service to the business community. Department of Inland Revenue, Board of Investment, Department of Commerce, Import and Export Controller, Registrar of Motor Vehicles, Registrar of Companies and Ministry of Finance. This networking process, which will work as a one stop shop, will help an entrepreneur to seek relevant approvals within a period of 100 days from the date of submission of proposal.

Promoting public-private investment: Among the initiatives envisaged include commencing immediate construction of export processing zones on a large scale under the Board of Investment of Sri Lanka (BOI)

Reducing the Registration Fee of Marriage: The registration fee for marriage, will be reduced to Rs. 1,000 from Rs. 5000.

Rationalization of Taxes: The present 38 taxes and levies will be reduced to 20.


Levy on Licensed Mobile Telephone Operators: A one off levy of Rs. 250 million will be imposed on all licensed mobile telephone operators in Sri Lanka.

Levy on Direct-to-Home Services via Satellite: There are commercial operations of the Direct-to-Home via satellite operators having more than 50,000 subscribers in Sri Lanka. A levy of Rs. 1,000 million will be imposed on such companies.

Levy on Utilization Satellite Location: Satellite owners who utilize the location reserved for Sri Lankan satellite will be imposed with a special levy of Rs. 1 billion on a one off basis.

Dedicated Sports Channels: A levy of Rs. 1,000 million on dedicated sports channels operating island-wide using more than 5 transmitting locations.

Mobile Phones Reload Charges: To provide relief to the people of Sri Lanka, the mobile facility operators to desist from passing the tax of 25% payable on reloads to the government from the consumer. The company has to bear this cost on behalf of the client.

Profits, Dividends & Levies on State Owned Institutions: Telecommunications Regulatory Commission (TRC), National Lotteries Board (NLB), LITRO Gas Company, Sri Lanka Tea Board, Rakna Arakshaka Lanka Limited (RALL) etc. were in possession of huge amount of funds, which have not been properly transferred to the Treasury. It is proposed to collect Rs. 25,000 million from these public institutions as non tax revenues in 2015.


Sale of Dilapidated Vehicles in Government Institutions: Proposed to recall all the abandoned vehicles, and sell and dispose them at public auctions. This will generate estimated revenue of Rs. 1,000 million in 2015.

Import License for Motor Vehicle Importers: Proposed to introduce an annual license fee of Rs. 1.5 million irrespective of the fact whether importers are engaged in importing brand new or used vehicles.

Non Manipulation Certificates for Outgoing Containers: Sri Lanka Customs will implement a scheme to issue non manipulation certificates for outgoing cargo which will enhance the port activities. This certificate will be issued charging US$ 10 per container.

Special Facilities for Disabled Soldiers: A special loan scheme named as “Viru Diriya” will be introduced to disabled soldiers up to a maximum of Rs. 500,000. The scheme will be implemented by state banks.

Sarasavi Mahapola Scholarship Enhancement increase: Increase the Mahapola Scholarship grant to Rs 5,000 per month with effect from July 2015.

Allowance to Pre-School Teachers: A monthly allowance of Rs. 250 will be provided to pre-school teachers from June 2015.

Allowance to Dhamma School Teachers: An allowance of Rs. 200 will be provided to Dhamma School Teachers from June 2015

Pension Scheme for Self Employees: A pension scheme will be introduced for the benefit of farmers, fishermen, three wheeler operators, masons, private security guards, estate workers, pavement hawkers, carpenters etc. from July 2015.


Consolidating Sri Lankan Airlines and Mihin Lanka to be consolidated

Enhancing Access to Banking in Every Corner: Commercial banks are directed to open their branches in remote areas. At the same time, banks are also directed to open accounts to the new customers without making any initial charge.

Increasing the Inbound Foreign Exchange Allowance: Increase the maximum limit of foreign exchange that could be brought in to or remitted to the country to US$ 25,000.

Foreign Employment Bureau Charges: Reduce the Foreign Employment Bureau charges to Rs. 5,000 per worker with effect from 1st May 2015.

Issuing a Travel Card to Senior Citizens who Travel by Public Transport: The Lanka Private Bus Owners Association (LPBOA) has agreed to issue a special card to senior citizens who travel by bus and will charge 50% of the total bus fare from them.

Insurance Scheme for Fishermen

Providing an increased Interest Rate to NRFC Account Holders: Request to grant an interest rate of about 5% on NRFC accounts.

Failed Non Banking Financial Institutions with Deposit Liabilities: All efforts will be exercised to provide relief to depositors of defunct NBFIs through the intervention of the Central Bank and Finance Ministry.


Nation Development Bonds to Sri Lankan Expatriates: Propose to issue a special government bond for Sri Lankan Expatriates called “Nation Development Bonds (NDB)” which will carry a fixed interest rate of 4.5% with a minimum investment of US$ 25,000 and a maturity period of 5 years. The interest income from the investment in these bonds will be exempted from the income taxes.

Imposing a Cap on the Interest Rates on Lending through Credit Cards: Request to impose an interest rate cap on credit card lending, subject to a maximum of 8% over and above the normal lending rates.

Imposing a Cap on the Interest Rates on Micro Finance Lending: The micro finance industry lending rate, to be limited to a maximum of an effective rate of 40% per annum.

Assistance to SME sector industrialists and Credit card holders in difficulties listed under the Credit Information Bureau (CRIB): People who are having outstanding of Rs. 250,000 or less will be assisted with a repayment plan within 6 months.

Encouraging Local Construction Companies to Expand Globally: Profits earned from such activities will be exempted from income tax. Also foreign contractors who are engaged in construction activities in Sri Lanka will have to tie up with local partners.

Vegetable and Food Processing Industry: In order to encourage vegetable and food processing industry in the country, it is proposed to provide 50% tax reduction for the entrepreneurs who commence businesses in this sector.


Review of Contracts Awarded during the Last 6 Months Period: Actions will be initiated to review contracts awarded in relation to the major capital projects to evaluate whether the costs of those projects are reasonable and also as to whether appropriate procedures have been adopted in granting such contracts.

Withdrawing EPF Balances for Land Purchases or Building Houses: There was a long standing request from the trade unions and the employees that 30% of their EPF balances would be withdrawn to purchase land or build houses. It is proposed to accommodate this to fulfill the employees’ request.

Restricting Newspaper Advertisements by Government Institutions: All Ministries and departments to stop the publication of political advertisements in news papers, except in specific situations where they can publish with the approval of the Secretary to the relevant line Ministry.

Incentives for Intercropping Activities: In order to maximize the available land of the country, it is proposed to introduce tax incentives for entrepreneurs in the agriculture sector who are engaged in intercropping activities. The profit generating from these activities will be provided with a 50% reduction on their due income tax.

Summary


October, 2014


Economic & Business News


Fuel Price Reduction

Fuel prices were reduced by the new government with effect from midnight 21.01.2015

ProductNewPrice

(Rs./Ltr.)

Previous Price

(Rs./Ltr.)

Reduced by

(Rs./Ltr.)

92 octane petrol 117.00 150.00 33.00

95 octane petrol 128.00 158.00 30.00

Diesel 95.00 111.00 16.00

Super Diesel 110.00 133.00 23.00

Kerosene Oil 65.00 81.00 16.00

Sri Lanka's state will lose Rs. 65 bn in potential revenues a year from tax cuts made to slash fuel prices, according to Sri Lanka’s Energy Minister, Mr. Champika Ranawaka .

Mr. Ranawaka stated that in the future, fuel and electricity prices would be decided by formula and electricity prices will be revised in June.


Sri Lanka Eager to Begin VW Car Plant with Germany

German Ambassador for Sri Lanka Dr Jeurgen Morhardhad met Policy Planning and Economic Affairs Deputy Minister Dr. Harsha De Silva and stated that Germany looks forward to becoming a friendly partner in Sri Lanka’s economic development.

Volkswagen of Germany is the second largest car manufacturer in the world.


New Appointments

• Mr. Arjuna Mahendran - Governor of the Central Bank of Sri Lanka

− Newly appointed Governor of the Central Bank of Sri Lanka Mr Arjuna Mahendran assumed duties in his new post on Monday, the 26th of January 2015 at the Governor’s office in Colombo.

− Mr. Mahendran has more than 30 years of experience in wealth management, having worked in several financial services organisations across Hong Kong, Singapore and Sri Lanka, including holding senior positions with the Central Bank and Ministry of Finance in Sri Lanka, as well as working on World Bank-funded projects. He also served as the Chairman and Director-General of the Board of Investment of Sri Lanka from 2001 to 2004.A Singaporean national, Mahendran holds an M.A and B.A (Hons) in Philosophy, Politics and Economics, from Balliol College, Oxford University, England. He is also a regular commentator on international news networks like CNBC, CNN and BBC, in addition to sharing his market insights with Bloomberg, The Financial Times, Asian Wall Street Journal and Forbes Magazine.

• Dr. R.H.S. Samarathunga - Secretary to the Ministry of Finance

− Dr. R.H.S. Samarathunga, assumed duties as the Secretary to Ministry of Finance on 12th January 2015 .

− Mr. Samarathunga who has obtained the B.A. (Honors) Degree in Economics from the University of Peradeniya joined the Sri Lanka Administrative Service in 1984. He has obtained his first post graduate degree from the Institute of Public Administration ofIndraprasatha in New Delhi and the Masters in Business Administration (MBA) from the University of Sri Jayawardenepura and the Masters of Science (MSC) from the University of Wisconsin, USA. Further, Mr. Samarathunga possesses a doctorate in Economics from the La Trobe University, Melbourne, Australia


New Governor’s Views on the Economy

According to CBSL governor Mr. Arjuna Mahendran, interest rates can be reduced below current record lows once inflationary expectations flatten out, and called for an overhaul of the tax system to help businesses.

According to Mr. Mahendran, “the government this year will practice very strong austerity. Then the whole government sector becomes manageable. Then the private sector will automatically grow”. He further stated that he advocated reducing the number of taxes from more than 20 to around five, and would pursue policies that would encourage private sector investments and create jobs. "To me that is the main pillar,“ Mr. Mahendran stated. "You have to make taxes simple for the private sector, so that they can understand and pay easily and carry out their businesses. At the moment, they are trying spend more time to avoid taxes."

Extracts from interview Mr. Mahendran gave to Reuters…

Mr. Mahendran stated that he agrees with the International Monetary Fund that the rupee, which weakened about 1 % in the past year to 132 a dollar, is at an “appropriate” level. The government is looking to emulate China by eliminating corruption and steering the economy away from infrastructure investment toward domestic consumption.

New government will have to repay or rollover about USD 2 billion of debt in 2015, the most in data going back to 2005, prompting it to begin talks with the IMF on ways to lower interest costs.

Sri Lanka will start talks to seek arrangers for a dollar bond sale after the nation’s interim budget is announced Jan. 29, Mahendran has stated. “I am hopeful that by February we will have a mandate to tap the markets,” adding that “interest rates are very low in Western countries to fund our requirements.”

Extracts from interview Mr. Mahendran gave to Bloomberg…


External Sector Performance

During the period from January to November 2014, the BOP is estimated to have recorded a surplus of USD 1,628.3 mn compared to the surplus of USD 581.7 mn in the corresponding period of 2013.

BOP Position

Reserves

Notwithstanding outflows on account of foreign debt service payments amounting to USD 2,054.2 mn and IMF-SBA payments amounting to USD 704.4 mn, Sri Lanka’s gross official reserves continued to remain high at USD 8.3 bnas of end November 2014.

Source: CBSL


Inflation – December 2014

In December 2014, headline inflation on a year-on-year basis was at 2.1 % compared to 1.5 % in the previous month.

Core inflation, which directly measures underlying price pressures, continued to remain between 3-4 % while decelerating to 3.2 % in December 2014 from 3.6 % in November.

According to CBSL, low inflation is mainly attributable to contained demand pressure in the economy, it was also supported by favourable supply side developments, particularly the downward revisions in domestic energy prices in the last few months of 2014.

Subdued demand pressure and inflation expectations in the economy, the favourable impact of further reductions in fuel prices in January 2015, and the expected reduction of administered prices of other key commodities announced in the Government’s ‘100-Day Programme’ are expected to reduce inflation further in the months ahead.

Source: CBSL

International News


Global Growth Revised Down, Despite Cheaper Oil, Faster U.S. Growth

Cont…

Global growth forecast at 3.5 % for 2015, revised down by 0.3 %

Net benefit of plunge in oil prices more than offset by adverse factors

Risks to global growth more balanced thanks to upside risks of lower oil prices


Global Growth Revised Down, Despite Cheaper Oil, Faster U.S. Growth

Even with the sharp oil price decline a net positive for global growth, the world economic outlook is still subdued, weighed down by underlying weakness elsewhere, states the IMF’s latest WEO Update.

Global growth is forecast to rise moderately in 2015–16, from 3.3 % in 2014 to 3.5 % in 2015 and 3.7 % in 2016.

New factors supporting growth—lower oil prices, but also depreciation of euro and yen—are more than offset by persistent negative forces, including the lingering legacies of the crisis and weak investment as many countries adjust to lower potential growth.

“At the country level, the cross currents make for a complicated picture,” according to, IMF Economic Counsellor and Director of Research. “It means good news for oil importers, bad news for oil exporters. Good news for commodity importers, bad news for exporters. Continuing struggles for the countries which show scars of the crisis, and not so for others. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar.”

Source: IMF World Economic Outlook Update – January 2014


ECB launches 1 trillion euro rescue plan to revive euro economy…

The European Central Bank took the ultimate policy leap on launching a government bond-buying program which will pump hundreds of billions in new money into a sagging euro zone economy.

The ECB is to purchase sovereign debt from March 2014 until the end of September 2016.

According to ECB President Mario Draghi, the new quantitative easing program will release 60 bn euros ($ 68 bn) a month into the economy.

By September 2016, more than 1 trillion euros will have been created under quantitative easing, the ECB's last remaining major policy option for reviving economic growth and warding off deflation.

Russia credit rating is cut to junk by S&P for the first time in a decade…

Russia’s foreign-currency credit rating was cut to junk by Standard & Poor’s, putting it below investment grade for the first time in a decade as policy makers struggle to keep economic growth alive amid sanctions and falling oil prices.

S&P, which last downgraded Russia in April, cut the sovereign one step to BB+, the same level as countries including Bulgaria and Indonesia. The ratings firm said the outlook is “negative”.

The world’s biggest energy exporter is on the brink of a recession after oil prices fell to the lowest since 2009 and the U.S. and its allies imposed sanctions over President Vladimir Putin’s actions in Ukraine.

China's 2014 economic growth misses target, hits 24-year low

China's economy grew 7.4% in 2014 its slowest pace in 24 years as property prices cooled and companies and local governments struggled under heavy debt burdens, keeping pressure on Beijing to take aggressive steps to avoid a sharper downturn.

UK economy records fastest growth since 2007

The UK's economy grew by 2.6% in 2014, the fastest pace since 2007 and up from 1.7% in 2013, official figures have shown.


October, 2014


Analysis & Forecast


Economic Impact of the Regime Change

Deutsche Bank list down some of the key economic issues, which the new government will have to deal with …

The immediate focus would be on the implementation of the 100-day programme and an interim budget.

Fiscal policy. Given these developments, Deutsche Bank (DB) doubt whether the new administration will want to or manage to bring down fiscal deficit to 4.6% of GDP in 2015, as was projected by the budget in the last year. Even at that time, DB had expressed discomfort with the over-optimistic revenue targets and various populist measures, which had led us to forecast fiscal deficit for 2015 to be 5.0% of GDP (vs. the budget estimate of 4.6% of GDP). DB do not think that the authorities will want to give up on the fiscal consolidation agenda, especially given the progress that has been made since 2009. DB also doubt that the authorities will try to re-state the fiscal numbers of the previous years (by accounting for implicit & off balance sheet expenditure), to provide a more realistic picture, keeping in line with best practices. The new regime’s challenge would be to improve the tax revenue/GDP ratio, which has been on a secular decline for many years. DB see no easy solution, but for the authorities to persist with tax reforms to achieve this goal.

Cont…


Economic Impact of the Regime Change (cont…)

Monetary policy. DB do not expect immediate change to the policy stance, given benign inflation and improving but still-low private sector credit growth momentum. DB expect the CBSL to stay on the sideline for the time being and hope that the monetary authorities under the new regime prove to be more conservative and independent, which is critical in increasing CBSL’s credibility toward fighting inflation and maintaining macroeconomic stability.

FX. Despite a benign current account deficit outlook (1.8% of GDP likely in 2015), thanks to the precipitous fall in global crude oil prices, DB expect LKR/USD to have a depreciation bias, primarily due to the continuing USD strength. Also, a change of foreign policy stance could imply lesser FDI flow from China in the coming quarters, which will likely reduce the net BOP balance as compared to the previous year. While DB maintain the view that LKR will likely end this year around 132 levels against the Dollar, DB see chances of temporary overshooting of the rupee toward 133-134 levels, as and when negative news-flow (both domestic as well as external) hits the market.

Growth. Assuming political stability is sustained, the Sri Lankan economy will likely manage to grow by 7.5% in 2015 (down from a likely 7.7% outturn in 2014) and 7.0% in 2016. The risk to growth is clearly on the downside, as there is a possibility that investment momentum could suffer, as the government tries to bring in more transparency in awarding projects. In such a scenario, Sri Lanka’s growth could fall to 6-6.5% range in 2016, but even in the most difficult times, Sri Lanka has managed to record an average growth of at least 6.0%.

Source: Sri Lanka: A new chapter begins - Deutsche Bank Research

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC

The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information, it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence of using such information for whatever purpose.

economic capsule - january 2015

Economy & Finance

increase of rs

additional rs

productnew price rs

maximum level of rs

initial advance of rs

sri lankas state

sri lankas energy minister

private sector salary