2 0 1 4 & b e y o n d .…

Sri Lanka

Asia: Still in the Lead Asia continues to outpace other regions, buoyed by resilient exports and strong domestic demand - World Economic Outlook, April 2013 – IMF

Sri Lanka best place to invest in South Asia - Jim Rogers

Sri Lanka has what it takes to be the Wonder of Asia - Dr. Ngozi Okonjo - Iweala, Managing Director of the World Bank

USD 4,000 per capita income

GDP growth above 8.5% on average

2.5 million tourist arrivals per annum

Over 10 sectors contributing USD 1 billion each in export earnings

Private investment around 22-24% of GDP (now 18-20% of GDP)

FDI to be around 5% of GDP (2011-2% of GDP)

ICT literacy rate to increase to 75% from 35% at present

Sri Lanka : The Wonder of Asia

B y 2 0 1 6…

An undivided focus on growth and development

The biggest obstacle for attracting FDI to the country (internal war) has been removed

A surge in tourist arrivals and enhanced prospects for travel industry and related industries.

War risk premium on reinsurance removed – better prospects for trade and exports

A larger workforce (including military personnel) who can now be deployed for the development drive.

Opening up of serene coastlines and enhanced prospects for the natural harbour (Trincomalee)

More land to develop and cultivate

Unencumbered connectivity of people

Surge in capital market (ASPI = 8007.08), (S&P SL 20 = 4354.13, Base 2004 = 1000) (MPI has been discontinued from January 2013 and replaced by S&P SL 20)

What the end of the internal war offered to Sri Lanka?

"If you were smart in the 1800s’ you moved to London, if you were smart in the 1900s’ you moved to New York City, and if you are smart now

you move to Asia" - Jim Rogers

Political Stability

Rapid infrastructure development – Sea Ports, Air Port, Power Plants, Roads etc…

Sri Lanka’s social indicators are among the best in the South Asian region. The country has achieved near universal literacy (92%) & perhaps more remarkably, the gender gap is narrow, and Sri Lanka is among the top 20 countries, ranked on gender equality by the World Economic Forum.

Excellent health facilities with ample availability of UK qualified specialist doctors.

Per capita GDP reached USD 2,923 in 2012 & the IMF recognized Sri Lanka as a middle income emerging country (2011 - USD 2,836 & 2010 – USD 2,400).

Easily trainable and versatile workforce. Sri Lanka has the second largest pool of UK qualified accountants which helps to compete in the financial and accounting BPO market

English is widely spoken and understood

Greater emphasis on education with particular emphasis on ICT, technical education and English language proficiency

Why invest in Sri Lanka

It is important to note that even during its darkest moments Sri Lanka’s GDP growth fluctuated between 4%-5% over a period of 20 years, signaling the economy’s substantial resilience to shocks & adverse conditions.

Free Trade Agreement (FTA) with India clearly demonstrates the goodwill & commitment between the two nations. The agreement creates investment opportunities for local & multinational firms based in Sri Lanka seeking business opportunities in India.

Sri Lanka has climbed eight positions from 2009 to be ranked 60th among 142 nations, in the World Prosperity Index – 2013, by the Legatum Institute, a UK based independent research institute. Sri Lanka is also the highest ranked country among South Asian nations. In the overall rankings Sri Lanka is just behind Mexico, ranked 59. Among other South Asian nations India has been ranked at 106, Nepal 102, Bangladesh 103 and Pakistan 132.

Why invest in Sri Lanka

Sri Lanka Poised for Rapid Growth:

S&P India BBB- Bangladesh BB- Pakistan B-

Standard & Poor’s B + Stable

HSBC BB- Stable

Fitch Ratings BB - Stable

Moody’s B 1 Stable

Fitch Ratings India BBB-

Moody’s India Baa3 Bangladesh Ba3 Pakistan Caa1

Fitch & S&P Grading AAA, AA, A BBB, BB, B CCC, CC, C D (+)/(-)

Moody’s Grading Aaa, Aa, A, Baa, Ba, B Caa, Ca, C (1)/(2)/(3)

Outlook on Sri Lanka

GDP Growth Rate (%)

2010 4Q 8

2010 8

2011 8.2

2012 6.4

2013 7.3

2014(e) 7.2

Per Capita GDP (USD)

2009 2057

2010 2400

2011 2836

2012 2923

2013 3280

2014(e) 4190

0

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2

3

4

5

6

7

8

9

06 07 08 09 10 11 12 e 13

GDP (YOY - %)

0

500

1000

1500

2000

2500

3000

3500

08 09 10 11 12 e 13

Per Capita GDP (USD)

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

08 09 10 11 12 e 13

Share Market

ASPI

MPI

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2008 2009 2010 2011 2012 2013

Market Cap % of GDP

Sri Lanka – Key Indicators

Sri Lanka – Key Indicators (contd.)

Sri Lanka – Key Indicators (contd.)

0

5,000

10,000

15,000

20,000

25,000

2008 2009 2010 2011 2012 2013

External Trade (USD Mn)

exportsimportsinvest goods imports

95

100

105

110

115

120

125

130

135

2008 2009 2010 2011 2012 2013

LKR/USD

0

100

200

300

400

500

600

700

800

900

1000

2008 2009 2010 2011 2012 2013

FDI (USD Mn)

(a) Revised, (b) Total debt service payments as a percentage of earnings from exports of goods and services

Sources: Ministry of Finance and Planning, Department of Census and Statistics, Central Bank of Sri Lanka

Medium Term Macroeconomic Framework 2010-2014

Projections

Indicators Units 2012 2013 (a) 2014 2015 2016

Real Sector

Real GDP Growth % 6.3 7.3 8.0 8.3 8.5

GDP Deflator % 8.9 6.7 6.0 5.0 5.0

Per Capita GDP US $ Mn 2,922 3,280 4,470

Total Investment % of GDP 30.6 29.6 32.0 32.5 33.0

National Savings % of GDP 24.0 25.7

External Sector

Current Account Balance % of GDP -6.7 -3.9 -1.8 -0.5 1.3

Overall Balance US $ Mn 151 985 2,063 3,235 6,110

Debt Service Ratio (b) % 19.7 25.3

Fiscal Sector

Current Account Balance % of GDP -1.4 -0.9 0.8 1.4 1.7

Overall Budget Deficit % of GDP -6.5 -5.9 -5.2 -4.7 -4.6

Financial Sector

Reserve Money Growth % 10.2 0.9

Broad Money Growth (M2b) % 17.6 16.7 15.0 14.0 14.0

Growth in Credit to Private Sector % 17.6 7.5 16.0 17.0 17.0

Towards enhanced macroeconomic stability

Lower tax regime

Lower interest rates

Relaxation of strict foreign exchange controls and BOI Reforms

Fiscal prudence

Infrastructure development

Overall, taxes have been cut and a complicated system smoothed out. Tax incentives for large investments and tax concessions on profits from listed debentures and equity for foreign investors

Higher liquidity from reduced taxes is expected to keep interest rates in check and encourage more economic growth. This will also soften the impact of government domestic borrowing

The new measures are expected to boost dollar liquidity while the rising trend of the rupee may also attract off shore interest, as has happened in the treasury securities market. Restrictions on inflows to open up new business offices also have been eased. Reforms at the Board of Investment of Sri Lanka are expected to further reduce red tape

A clear focus on cutting the budget deficit and other prudent public finance measures in the budget should boost state revenue and hopefully curb the budget deficit to 5.9 % in 2013

Infrastructure projects worth over USD 6 Bn have been given priority with a public investment figure of Rs.594.4 Bn (USD 4.6 Bn) budgeted for 2014

Above all, implementing policies that promote the inclusion of all segments of society in the growth process, as envisaged in the ‘Mahinda Chintana’, will be crucial.

Dr. Ngozi Okonjo-Iweala also announced Sri Lanka’s eligibility for IBRD financing – funding from the Bank’s non-concessional window.

IDA resources will continue as it is important that Sri Lanka benefit from these highly concessional resources to support its post conflict reconstruction and rehabilitation needs. Together, these financing sources have the potential to significantly increase the amount of resources available on an annual basis.

This is an important recognition of the middle income country status of Sri Lanka and signals a different sort of relationship going forward – a relationship that is founded on knowledge sharing that complements the available financing.

“Wonder of Asia”

Dr. Ngozi Okonjo-Iweala, Managing Director of the World Bank, during

her two day official visit to Sri Lanka had stated that Sri Lanka has what it takes to be the Wonder of Asia through inclusive

growth acceleration

To get there, raising investments, improving productivity of those investments through innovation policies, skills development and macroeconomic stability will be important.

According to the World Bank’s ‘Doing Business 2014’ report, Sri Lanka’s Ease of Doing Business ranking is 85 out of 189 other economies.

Central Bank of Sri Lanka (CBSL) together with the Ministry of Economic Development is coordinating the strategy to achieve the goal articulated by the President. The Budget for 2014 has already made significant strides to simplify taxation, and thereby improve the ranking in the area of “Paying Taxes.”

There is also ample scope for eliminating a large number of “procedures” involved in various areas by establishing “one stop shops” where an entrepreneur needs to submit required documents at one point only and all the necessary formalities and clearances are undertaken by the agency concerned. This could be effectively done in the area of Dealing with Construction Permits and Trading Across Borders.

In the area of land registration, introduction of title registration could reduce time involved substantially. Court procedure also has to be closely studied in order to devise a method to reduce the delay and improve the ranking in Enforcement of Contracts.

CBSL will be looking at other aspects also to facilitate business. In particular, to reduce the time and effort spent on searching for information, CBSL has already produced a booklet “A Step by Step Guide to Doing Business”, which contains necessary information needed by an entrepreneur during each stage of operating a business. (For more info - web: www.cbsl.gov.lk , Tel: +94 11 2477377)

Ease of doing business in Sri Lanka

Doing business 2014 Rank

Doing business 2013 Rank

India 134 131

Bangladesh 130 132

Maldives 95 81

Pakistan 110 106

Singapore 1 1

Sri Lanka has moved up considerably in the “2014 Index of Economic Freedom” released by The World Heritage Foundation and the Wall Street Journal. Sri Lanka has been ranked as the world’s 90th (from 183 economies) freest economy in 2014.

The country’s overall economic freedom score was 60 which is an improvement of 1.7 from the 2012 figure of 58.3, reflecting major gains in trade, monetary, and investment freedom.

Sri Lanka is ranked 16th out of 41 countries in the Asia–Pacific region.

Hong Kong and Singapore finished first and second in the rankings for the 20th straight year.

Australia, despite a drop in its score, held on to third place, while Switzerland improved enough to leap-frog fifth-place New Zealand and nab the number-four slot.

Canada finished sixth again, with nearly full-point gain in its score that put it just behind New Zealand.

Sri Lanka moves up in the Economic Freedom Index

Areas for further improvement and some concerns…

The Sri Lankan economy continues to make progress under the fund-supported program and overall macroeconomic developments remain favorable. Growth is strong, inflation remains in single digits, and reserves are at a comfortable level. Recent heavy rains and flooding have negatively affected various crops, as well as rural infrastructure. However, given the size and strength of the economy, the overall impact on output growth is expected to be limited.

Budget Deficit declined significantly to 5.9 per cent of GDP in 2013 from 6.5 per cent in 2012, although marginally higher than the budget estimate. The governments’ plan to handle the flood-related expenses by reallocating and reprioritizing expenditure within the existing budget will help maintain the IMF-SBA program’s deficit target for 2013.

CEB revised the tariffs resulted in the overall average tariff increasing by around 20% to mitigate the substantial losses incurred by the institution in 2013. To this end, it will be important to allow adjustment of domestic prices to reflect fluctuations in international fuel prices.

Steps to expand the liquidity management tools at the CBSL’s disposal will help maintain its control over monetary conditions. Going forward, monetary policy will need to be vigilant about the possible second-round effects from higher prices on core inflation and strike the right balance between supporting economic growth and preventing excess liquidity from fueling inflationary pressures.

Allowing sufficient two-way flexibility of the exchange rate will help support the external position and meet the reserves target.

Financial sector reforms will continue to focus on strengthening the resilience of this sector, and expand the scope of financing options available to the private sector by increasing the depth of the corporate bond market and improving the functioning of the stock market.

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Knowledge Hub

The Knowledge Hub initiative will help to develop Sri Lanka as a destination for

investments in higher education and position the nation as a centre of excellence and

regional hub for learning and innovation.

IT sector delegation led by the Board of Investment recently took several important steps in strengthening coordination and facilitating investments to develop Jaffna as a knowledge hub. The objective was to encourage IT companies to start operations in Jaffna by tapping into the peninsula's educated workforce

Telecommunications and Information Technology ministry is aiming to increase the IT literacy rate to 75% while optimising IT as a foreign exchange earner by 2016.

Sri Lanka is becoming an attractive location that could provide higher education for the growing middle class in Asia. Therefore, the Ministry of Higher Education is planning to establish about 10-15 private international universities in Sri Lanka.

Knowledge Hub

Jaffna to develop as a knowledge hub

75% ICT literacy by 2016 and IT sector as a great export earner

Plans afoot for 15 International Universities

Over 110 infrastructure development projects are being implemented in state universities at a total cost of over Rs. 10 billion to provide necessary facilities such as lecture halls, hostels, health facilities, administrative infrastructure etc.

The government will designate a specific area for the proposed knowledge city and provide improved facilities for international research and education institutions to setup their affiliated institutions. (e.g. Gampaha, Jaffna, etc…)

Providing Necessary Infrastructure and Cutting-edge Technology

Designate and establish a Knowledge City

Knowledge Hub (contd.)

Telecommunications Industry

Sri Lanka’s mobile industry is one of the most competitive markets in the region with five operators competing for a total addressable

population of 22 million .

Telecommunications Industry

Competition among the five operators, Dialog, Mobitel, Etisalat, Airtel and Hutch is expected to remain high in years ahead

Dialog Axiata PLC is Sri Lanka’s largest telecommunications provider with the country’s largest mobile phone network of 8.7 million subscribers. Dialog is a subsidiary of Axiata Group Berhad a leading telecommunications company in Malaysia.

Etisalat, a UAE based telecommunications service provider, entered the Sri Lankan market in 2010 and has over 4.2 million subscribers currently. Etisalat is ranked as the 12th largest mobile network operator in the world.

The newest entrant to the market is Airtel, India’s largest cellular provider.

Telecommunications Industry

Priority Area

The government’s Public Investment Strategy for 2016 has highlighted the telecommunications and ICT sectors as priority areas of development. The plan includes facilitating the private sector to upgrade ICT and telecommunications infrastructure facilities

Telecom Sector Targets for 2016

Telecommunication Indicator 2014 2015 2016

Fixed phones penetration (No. millions) 3.79 3.86 3.93

Mobile phones penetration (No. millions) 22.63 24.02 25.36

Teledensity (Fixed phones per 100 inhabitants) 18.5 18.8 19.1

Teledensity (Mobile per 100 inhabitants) 117.3 131.2 141.2

IT/BPO Industry

The industry prides itself for providing companies access to a high quality talent pool and focuses on servicing niche areas which is

becoming an increasing challenge is destinations such as India and China

IT/BPO Industry

High Export Income Earner

The IT/BPO industry became the 5th largest foreign exchange earner in the country in 2012. As of 2013, export revenues from IT/BPO services over USD 500m, growing at approximately 22% per annum

Employment Opportunities

Direct employment in the ICT workforce exceeded 75,000 high paying jobs IT/BPO sector, with indirect employment at 180,000

Offshoring Destination of the Year 2013

Sri Lanka bagged the prestigious ‘Offshoring Destination of the Year 2013” award at the National Outsourcing Association Awards (NOAA) in UK

Promoting the IT/BPO Industry

The government to provide attractive tax incentives and tax holidays for investors to boost export revenue target of USD 1 billion 2016

IT/BPO Industry

Sri Lanka is emerging as a global IT/BPO destination in several key areas and is now ranked among the Top 50 Global Outsourcing destinations by AT Kearney and ranked among Top 20 Emerging Cities by Global Services Magazine

The software services sector focuses on telecommunication, banking financial services and insurance and software testing. The BPO sector focuses on financial and accounting services, investment research, engineering services and legal services

As of now, there are over 300 IT and BPO companies that operate in Sri Lanka, mostly small and medium companies and a few large global players

Low attrition rate, low-cost and highly adaptable workforce and the Sri Lankan government to fast-track the industry provides fiscal incentives and concessions

SOURCES • www.treasury.gov.lk

• www.cbsl.gov.lk

• www.boi.lk

• www.neweast.lk

• www.treasury.gov.lk

• www.news.lk

• www.englishandit.lk

• www.nenasala.lk

• www.srilankatourism.org

• www.sltda.gov.lk

• Road Development Authority

• www.worldbank.lk

• www.imf.org

• www.lankabusinessonline.lk

• Bloomberg

• Reuters

• Daily News

• Sunday Observer

• Daily Mirror

• Sunday Times

• The Island

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 BPO Connect 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.