Overall BOP records surplus by end June

The trade deficit for June 2008 amounted to US$ 504.5 million, an increase of 206.9 percent from June 2007. In May 2008 the trade deficit amounted to US$ 512.2 million while in January 2008, it amounted to US$ 610.8 million. The cumulative trade deficit for the period January to June 2008 amounted to US$ 3.083 billion, an increase of 92.4 percent for the corresponding period of 2007. The Central Bank said last week that private remittances during this period together with capital and financial inflows helped off set the deficit. "Private remittances which amounted to US dollars 1,460 million, and the higher capital and financial flows more than offset the deficit in the current account, as a result of which, the overall balance of payments recorded a surplus of US dollars 390 million by end-June 2008," the Central Bank said. "Consequently, the gross official reserves increased to US dollars 3,433 million by end June, 2008, up from U.S. dollars 3,062.5 million in December 2007, which was sufficient to finance around 3.1 months of imports." Export earnings amounted to US$ 654.6 million, a 1.9 decrease from US$ 667.3 million in June 2007, (export earnings in January and May 2008 amounted to US$ 489.5 million and 745.9 million respectively). The textiles and garments sector brought in US$ 262.8 million in export earnings in June 2008 (US$ 307.2 million in May and US$ 230.2 million in January 2008) which corresponded to an 8.9 percent decline from June 2007. Export earnings from minerals declined by 27.9 percent from US$ 11.3 million in June 2007 to US$ 8.1 million in June 2008. However, the earnings from the agricultural sector increase by 34.6 percent from US$ 119.8 million in June 2007 to US$ 161.3 million in June 2008 riding on export earnings from Tea which grew by 41.7 percent year on year. "The growth in earnings from tea, coconut and minor agricultural products negated the impact of the decline in industrial export earnings to some extent. Agricultural exports are expected to continue to perform better, in terms of volumes as well as prices, and industrial exports are expected to rebound from the one-off decline in June," the Central Bank said. Tea exports fetched US$ 117.2 million in June 2008 (January and May 2008 tea export earnings amounted to US$ 90.8 million and US$ 96.4 million respectively. Imports in June 2008 amounted to about US$ 1.16 billion, a 39.4 percent increase from US$ 831.7 million in June 2007 (the import bill in January and May 2008 amounted to US$ 1.17 billion and US$ 1.25 billion respectively). "While intermediate goods accounted for about 73 per cent of the growth in expenditure on imports in June 2008, imports of petroleum products accounted for 87 per cent of the increase in this sector," the Central Bank said. The Petroleum bill amounted to US$ 339.9 million in June 2008, a 159.3 percent increase from US$ 131.1 million in June 2007 (US$ 301.2 million and US$ 337.2 million in January and May 2008 respectively). "Expenditure on imports is expected to be lower during the rest of the year, as the petroleum prices continue to dwindle," the Central Bank said. The Bank said that fertilizer and diamonds were among the other intermediate imports that increased in June, 2008. "Expenditure on imports of consumer goods grew by 29.6 per cent, largely due to higher expenditure on food imports," it said. The consumer imports bill amounted to US$ 210.9 million in June 2008 (US$ 201.2 and US$ 238.3 million in January and May 2008). "Imports of investment goods grew by 17.7 per cent, with imports of machinery and equipment and building materials expanding. Higher growth in investment goods reflect the implementation of large scale infrastructure development projects funded by capital flows to the Government and the private sector by way of foreign direct investment," the Central Bank said. Exporters say that the country’s exchange rate did not reflect the trade deficit. They say that workers remittances and other capital inflows appreciates the rupee more than what it should be and together with high inflation and interests rates the export sector continues to struggle for its existence and create meaningful employment. However, the Central Bank maintains that the free-float exchange rate is not determined by trade alone as the remittances and other inflows form an integral part of the foreign currency markets. The Central Bank however intervenes to prevent extreme fluctuations of the exchange rate. Interventions in the market for this year have resulted in a net buying of dollars amounting to about US$ 329 million as at the early days of August. "And this has gone a long way to prevent the rupee from appreciating to as low as 103 to a dollar," Dr. Nandalal Weerasinghe, Chief Economist, the Central Bank, told the Island Financial Review earlier this month.

More concessions from China following President’s visit Sri Lanka already submitted its offer list for the APTA round of negotiations

President Mahinda Rajapakse met with China’s President and Commerce Minister and sought further concessions for Sri Lanka under the Asia-Pacific Trade Agreement (APTA). Chinese President Hu Jintao agreed to consider favourably President Rajapaksa’s request for further reduction of tariffs for Sri Lankan exports under the APTA. While Sri Lankan exports to China had projected a growth rate of 27 percent Deming reportedly acknowledged that the total volume of exports from Sri Lanka had the potential to increase further. He said that this could reduce the huge trade imbalance tilted in favour of China. The Sri Lankan Embassy in China in a statement said that Deming agreed to assist Sri Lanka to enhance its production capabilities and competitiveness. Sri Lanka had already submitted its offer list for the APTA round of negotiations. "Deming assured his support for an early conclusion of the 4th round of APTA negotiations with further concessions and market access opportunities for Sri Lankan exports," the Sri Lankan Embassy in China added. About 23 percent of Sri Lanka’s exports to China comprised of tea and the Minister agreed to favorably consider President Rajapakse’s request to accord further tariff concessions. The Chinese side agreed to facilitate Sri Lanka’s participation at identified trade fairs on a subsidised package. The President apprised the Chinese Minister of the special investment zone allocated in the Mirigama Export Processing Zone for Chinese entrepreneurs which will be inaugurated today. Deming said that Sri Lanka would be a preferred destination for relocation of many of the Chinese enterprises, especially in the textile and the light industries sectors. The Chinese Commerce Minister assured President Rajapakse that China would ensure uninterrupted funding of development projects undertaken by China in Sri Lanka. The Minister also ensured funding for three new development projects; the Colombo Katunayake Expressway, Puttalam Coal Power plant (Phase II & III) and the Hambantota oil tank and bunkering project. President Rajapakse met Li Ruogu, the President of the EXIM Bank of China, and expressed his satisfaction over the speedy funding provided for the Hambantota Port Project. He discussed the need for further assistance for the next phase of the Puttalam Coal Power Project, the Colombo-Katunayake Expressway and also the Hambantota Bunkering. Ruogu said that the bank would expedite funding processes for these projects. President Rajapaksa also met with CEOs of a few leading construction companies that have undertaken development projects in Sri Lanka, the Sri Lankan Embassy in China said. Progress of the Hambantota Harbour project, the second phase of the Norochcholai project, the US$ 23 million Arts Theatre in Colombo and the Colombo-Katunayake Expressway were the topics of discussion. Finance Secretary Dr P B Jayasundera, Gamini Senerath Additional Secretary to the President and Sajin de Vas Gunawardena, Coordinating Secretary to the President were present at these meetings and bilateral discussions. An official of the Export Development Board told the Island Financial Review that total exports to China in 2007 amounted to US$ 36 million (0.5 percent of total exports to all countries) and imports amounted to US$ 921 million (8 percent of total imports from all countries).

CEPA with Pakistan at initial stage

Sri Lanka and Pakistan have had one round of negotiations for a Comprehensive Economic Partnership Agreement (CEPA) an official of the Department of Commerce said. "The two countries met once on discussions of the draft text of the CEPA document but the items on the agreement will be subsequently negotiated," Acting Director of Commerce Saman Udagedara told the Island Financial Review. Udagedara said the Free Trade Agreement currently in force between the two countries included trade in services. "When the FTA was finalized with Pakistan, only trade in goods had been negotiated. The FTA was signed with the intent of initiating negotiating the schedules for trade in services." Udagedara said the Department of Commerce had since then consulted the stakeholders of the private sector. "We have sought their views as to which areas they would like Pakistan to give them market access and the areas we could offer Pakistan," he said. "However the response from the private sector continues to be poor. Perhaps it is because they do not understand the process and we have had several meetings at the department and have tried to explain it to them." Udagedara said that it was a stakeholder driven approach the department was taking and said the private sector ought to get more involved. When the government tried to sign the CEPA with India on the sidelines of the SAARC summit it opened up issues with many in the private sector claiming that they were not adequately consulted. ILCEPA (Indo-Lanka Comprehensive Partnership Agreement) is still going through the negotiation process and PLCEPA (Pakistan-Lanka CEPA) has just begun and those concerned in the private sector can still voice their concerns and take part in the consultative process and an invitation to do so should not be required, Udagedara intimated.

ICT sector urged to contribute to CEPA with Pakistan

The ICT Agency of Sri Lanka (ICTA) said the preliminary stages of a Comprehensive Economic Partnership Agreement with Pakistan was underway and urged the ICT companies of the private sector to make its recommendations to the government. "The private sector is less engaged and there is little feedback. The government cannot make decisions for the private sector. The agreement can open up new markets and you don’t have to be trapped in the small market here," ICTA Programme Manager Fayaz Hudah told the private sector at the ICTA-Private Sector Forum last week. Hudah called on the private sector to get actively involved in the consultative process of the government on the CEPA with Pakistan. Presenting an update on ICTA’s Private Sector programme for the second quarter (March-July 2008) he said that the greatest difficulty that was faced by the industry was that few people could afford to pursue higher education in ICT. "Besides the exodus of our ICT professionals, less and less people take up higher education in ICT as it is too expensive," Hudah said. The New Age Academy Programme (NAAP) will be launched in September this year to address this issue. "This is an industry initiative which will bring together academia, financiers, and students to accelerate the growth of the IT and BPO talent pool." The industry is to partner academia in a bid to increase capacity and to produce more industry ready graduates. Hudah highlighted another pressing issue affecting the sustainability of the ICT industry. "There is a lack of awareness of ICT at the grass-roots," he said. A fund has been created to build awareness among rural youth and build form among them employable youth for the ICT sector. The US$ 150,000 is to be used to raise the profile of the ICT/BPO sectors as career destinations and to provide information on requisite skills needed to join the industry. The targeted locations have been identified. Ratnapura, Kurunagala, Anuradhapura, Galle, Ampara, Wellawaya and Badulla. 2Q results Hudah presented key highlights for the second quarter. US$ 762,540 has been committed through the ICT Capacity Building Programme for the private sector. Twenty two companies had been awarded grants amounting to US$ 211 thousand to pursue Quality Certifications enabling local companies to be on par with the global ICT industry. Forty four grants had been awarded to companies amounting to US$ 194 thousand to train their employees. Nine scholarships had been awarded to individuals to follow short-term overseas courses amounting to US$ 54 thousand. The programme had awarded 9 grants amounting to UD$ 215 thousand to companies for ICT research and development. US$ 13,500 was awarded to 60 SMEs to computerize their accounts. Hudah said that since November 2005 the ICBP programme had funded 147 companies, 130 individual scholarships and 120 training programmes. "Over 5 thousand people have benefited through the ICBP programme which has committed US$ 1.8 million since November 2005," Hudah said. On CEPA Speaking to the Island Financial Review on the Comprehensive Economic Partnership Agreement with India and the ICT sector Hudah said that ICTA had felicitated the government’s consultancy with the private sector of the ICT industry. "India’s ICT industry is mature so we have to make sure that India does not flood our market. But at the same time there is a lot we can gain from India in terms of capacity development and training," Hudah said. He said that after consulting the private sector the government put on the table those areas which the industry felt Sri Lanka could benefit from India’s inputs. Investments and technological transfers is one area Sri Lanka can no doubt benefit immensely from India. "However, there is more that can be done to improve on CEPA before it is signed. And the private sector of the ICT industry has a big role to play." "When it comes to consulting the private sector it is not always easy to get everybody involved at an individual level. "The doors are open and ICT companies can always approach us (ICTA) and join us in the consultative process," Hudah said.

CEPA a mechanism to resolve problems and issues More than just an agreement in trade, investments and services

The Comprehensive Economic Partnership Agreement (CEPA) with India is more than just opening up trade in goods, services and investments but is also the tool with which to sort out issues and problems that arise. The opponents of CEPA argue that the Free Trade Agreement with India brought no benefits because India imposed so many non-tariff barriers that hindered access of Sri Lankan enterprises into Indian markets. They fear that CEPA will do the same while allowing more access of Indian enterprises into Sri Lanka. But one function of CEPA is to identify and resolve constraints and issues that may arise. A research officer of the Institute of Policy Studies (IPS), Deshal De Mel, said that constraints to trade could be dealt with through CEPA, which is still under negotiations. "The private sector can identify their export interests and request for market access through CEPA. It can also identify constraints and resolve them through CEPA," he said. CEPA is to be reviewed every six months by the technical committee and annually at ministerial level. De Mel said that the services component of CEPA will be reviewed every three years. "If there are unresolved disputes in a particular sector, commitments can be cancelled by either country upon payment of compensation on investments made." He also said that considering the size of the two countries, less than full reciprocity was expected. This means that Sri Lanka does not have to open up its markets to the same extent as India and could take more time in liberalization of the areas committed. "In all such agreements there are opportunities and challenges. It is important for the private sector and government to work in tandem to identify and address the latter in order to take advantage of the former," De Mel said. De Mel was the Guest Speaker at the 12th Information and Communication Technology Agency (ICTA)—Private Sector Forum last week. India has offered to open up the following sectors to Sri Lankan IT professionals. Consultancy services related to the installation of computer hardware, Systems and software consulting services, Systems analysis services, Systems design service, Programming services, Systems maintenance services, Input preparation services, Data processing and tabulation services, Time sharing services, Other data processing services, Data base services, Maintenance and repair services of office machinery and equipment including computers, Data preparation services and Other computer services (e.g. training services for staff of clients, and other professional computer services). According to De Mel the movement of these professionals will be limited according to the classification given below. * Business Visitors (BV) - for sale or to secure agreements for trade in services or for employees of a Juridical Person (JP) to set up commercial presence – 180 days and the BV will not receive remuneration in India. • Intra-Corporate Transferee (ICT) - employee of a JP in SL who is transferred to a JP in India owned or controlled by the JP in SL, for temporary provision of services. – limited to managers, executives and specialists. Maximum 5 years. • Contractual Service Supplier (CSS)- employee of a JP owned or controlled by SL who travels to India to perform a service pursuant to a contract between the JP in SL and the client in India. CSS for periods up to 1 year. • Independent Professionals (IP) – natural persons traveling to India or short periods up to 1 year to perform a service pursuant to a contract between him and the client in India. Same sectors as above. As far as Sri Lanka’s offer list is concerned De Mel pointed out that technical staff can be hired from India in the ratio of 10 percent of total staff cadre for every US$ 100,000/- of investment, up to a maximum of 50 percent. Technical staff must have a minimum of a Masters degree in the relevant ICT field and work experience of no less than 5 years. Access is available for expert trainers with high-end technical professional qualifications (CCIE/MCAP or equivalent) who can benefit the development of Sri Lanka’s IT sector both in terms of human resource development and firm level performance. Consultancy services related to the installation of computer hardware, Software implementation services, Data processing services, Database Services and Data preparation services are the areas open to Indian ICT professionals.

Mediation Committee report on THC out, but dispute still on

A Mediation Committee set up to resolve a long standing dispute between shippers and shipping agents over terminal handling charges released a report last week. However the disputes seems to be far from settled. According to the report a consensus between the stake holders was reached where the THC for 20ft container would be reduced by US$ 4 and US$ 8 for a 40ft container, an official of the Ceylon Association of Shipping Agents (CASA) told the Island Financial Review. He said that the Chairman Captain Ajith Peiris had represented the interests of both CASA and the Sri Lanka Freight Forwarders Association (SLFFA) while the Sri Lanka Shippers’ Council (SLSC) was represented by its former Chairman Ananda Wijesuriya. "There was consensus between the stakeholders who took part in the deliberations of the Mediation Committee and we have circulated the report amongst the membership," the official form CASA said. However, the Island Financial Review learned that the SLSC had only heard about the report and not seen it as yet. "We are not happy with what we heard the report had to say about the THC and our members will meet this week and will take our case to the Chairman of the Mediation Committee Shantha Weerakoon," an official of the SLSC said. Weerakoon is also the Director General of the Merchant Shipping Division of the Ministry of Ports and Aviation. The dispute lasting for more than a decade was taken to courts where the Chief Justice requested that matter be resolved through the mediation framework. An official of the Merchant Shipping Division, who also did not want to be named, said: "Since we operate in an open economy there is no possibility of government trying to enforce price regulations on something such as the THC, which is practiced else where in the world. This is perhaps why the court ruled that the stakeholders should resolve the matter through mediation. They will have to come to a consensus." He went on to say that while exporters had some grievances over the THC charge, it was not very reasonable to expect the shipping lines to bear the costs of handling cargo on land. "There is no room in the harbour and containers have to be stored at a location outside the port so obviously there would be a cost component to transport the goods to the ship for loading and one cannot expect the shipping lines to bear this cost," he said. He says on the other hand that competition had greatly reduced shipping costs. An analyst of the industry said that freight forwarders are highly competitive and resort to under cutting tactics (reduced rates) to attract businesses.

Insurance Ombudsman’s report : Fire Insurance Pulling the wool over clients’ eyes

The Insurance Ombudsman said that insurance agents do not advice clients on special electrical equipment policies but instead sold fire insurance policies for which premiums are much lower. "According to fire insurance policies, there must be evidence of a fire by way of burn marks in order for a claim to be paid. But when electrical appliances are damaged due to a power surge caused by lightening, there are no burn marks," Dr. Wickrema Weerasooria, Insurance Ombudsman said. He told the Island Financial Review that because insurance agents sold fire insurance policies instead of the electrical equipment policies, claims are not paid by insurance companies when expensive electrical equipment are damaged by a power surge. "The insurance agents are only interested in selling a policy and claiming their commissions. They do not advice people on the difference between the two policies. It is important that the insurance companies take steps to ensure that the public is adequately informed about the appropriate insurance policies," he said. Dr. Weerasooria said that many households and business establishments use expensive electrical equipment from basic kitchen appliances to expensive computer and telecommunication systems. He advised the public to inquire about the cover for damages to electrical equipment caused by a power surge before signing up for an insurance policy. "If people want cover for damages to their electrical equipment, then they must go for the special electrical equipment policies even though the premium may be relatively high." Dr. Weerasooria recently released the Insurance Ombudsman’s Report for 2007/2008. Another problem he encountered during the year the report reviewed was that damages caused by rain water floods are not covered by a normal flood policy. "A lot of marsh land has been filled up and drains are clogged leaving no room for rain water to seep through. There have been instances where a factory was effected by rain water flash floods but the insurance company did not pay the claim as it was not a flood," Dr. Weerasooria. He stressed the need for the insurance industry to come out strongly with clearly defined terms and distinguish between ‘rain water’ and ‘floods’. During the year, from March 2007 to February 2008, the Insurance Ombudsman’s office received 378 complaints. The breakdown of the complaints are: third party motor insurance claims, 25 percent; comprehensive motor insurance cover, 10 percent; life insurance related complaints, 25 percent; fire and burglary, 20 percent; complaints from agents against agents, 10 percent and miscellaneous complaints, 10 percent. Dr. Weerasooria said that about 60 percent of the third party motor insurance policy complaints could not be resolved as three insurance companies, namely Ceylinco, Eagle and HNB, had opted to follow the Motor Traffic Act No 136. "According to this act, an insurance company will pay the claim to a third party only if the policy holder is convicted in court and the three insurance companies had rightly informed me that they would not submit to my inquiry," he said. Dr. Weerasooria said he had to advise the claimants to seek legal recourse. "But only a small fraction of them would ever do so. The purpose of having an Ombudsman scheme is to give people a chance to settle disputes outside the legal frame work which costs time and money," he said. The complaints received on non payment of claims on comprehensive cover on motor vehicle policies were related to penalties imposed on policy holders for undervaluing their vehicles to get away with paying smaller premiums. The issues relating to life policies were mainly due to non-disclosure of health conditions and the failure to pay in premiums. Dr. Weerasooria said that 90 percent of the fires and burglaries had been self induced.