CSE would remain a low risk stable destination

The Director General of the Securities and Exchange Commission says the current crisis faced by capital markets across the world could place Sri Lanka’s stock exchange as a low risk stable destination for foreign investors who bail out from falling exchanges. "Due to its small size the Colombo Stock Exchange (CSE) has performed relatively satisfactorily during the crisis which has seen exchanges in 10 countries in the region record more than 50 percent losses year-to-date as against an 18 percent fall the CSE has experienced," Channa De Silva told the Island Financial Review. De Silva says that the CSE’s relatively better run is attributed to the fact that foreign investments in the exchange are not very significant, resulting in the exchange being less susceptible to losses as a result of mass-scale selling to exit the market. While US exchanges recorded 31 percent losses, exchanges in countries such as China and India who had recorded phenomenal growth last year recorded year-to-date losses of 59 percent and 53 percent respectively. "This is because there is a strong correlation between the US markets and markets in these countries which resulted in bigger losses in response to the downturn in the US capital markets," De Silva says. Exchanges in Russia, Indonesia, Ukraine and Romania had recorded phenomenal growth last year and had to suspend trading last week to prevent market collapse after investors sought to bail out. The CSE’s lackluster performance last year had prevented investors making investments in the exchange riding on the credit bubble of the US and Europe and is thus shielded to a great extent from overselling induced losses. "Investors could now look at the CSE as a low risk, stable exchange to place an investment," De Silva said. Director Research, Lanka Orix Securities (Pvt) Ltd, Vajira Premawardhana, says that the CSE is experiencing a slight downturn because of selling pressure, but it was difficult to gauge at this stage what the full impact of the global financial crisis would have on the CSE. "We do not see a direct impact on the CSE, although a few foreign buyers may want to offload their shares," he said. Premawardhana believes, however, that some local investors were selling off shares in the face of the global crisis to be able to buy more shares when prices are down. "It’s a self fulfilling prophecy really, we see some investors selling shares because of global conditions but with the intension buying back more shares at the depressed prices," he said. He said that the CSE was now attractive place for those who are risk-takers. "They have the nerve to hold on hoping that things will improve and especially that peace will come soon to Sri Lanka," Premawardhana said.

Sri Lanka likely to feel some tremors of global financial crisis – IPS report

"Sri Lanka is bound to start feeling some of the impacts of a slowdown in the global economy—not only through trade flows but also through financial and investment links—while having to continuously grapple with international commodity prices," says a report released by the Institute of Policy Studies (IPS). The fall in US consumption, a result of the credit crunch which saw the US government raise US$ 700 billion in an attempt to bail out its financial system, is not entirely discouraging for Sri Lanka says the report, ‘Sri Lanka: State of the Economy 2008’. It says that asset price falls in the US will effect consumption of durable goods to a greater extent than non-durable goods. "The majority of Sri Lanka’s exports to the US are non-durable goods, particularly apparels (which accounts for 81 percent of Sri Lanka’s exports to the US)," the report says. About 25 percent of Sri Lanka’s exports in 2007 was to the US, and although declining the US remains the biggest market for apparels. The report says that according to the US Bureau of Economic Analysis statistics, consumption of durable goods fell by 1.5 percent between the fourth quarter of 2007 and first quarter of 2008, while consumption of non-durables fell by 0.3 percent. However, expenditure on clothes and shoes increased by 0.2 percent. But the report raised concerns that non-durable consumption growth in the US has slowed down significantly since 2007. When the report was prepared it was too early to predict the economic crisis the EU is in now. In 2007, about 37 percent of Sri Lanka’s exports were to the EU with a third of these to the UK. The slowdown of UK’s economy and its shaky financial system is a major concern for Sri Lanka as the report says that the country’s housing bubble had been larger than that in the US. "The financial sector (in the UK) has been adversely affected, reflected by declining equity prices on major financial institutions. "As the financial sector is the engine of the UK economy a decline will have ripple effects across its economy," the report says. Earlier this year, many multilateral institutions and economists believed that developing countries no longer relied on developed countries as a result of the emergence of China and India as economic powerhouses. However, the IPS report says that some countries, including Sri Lanka, continued to rely on developed countries for export markets. "Financial markets in Sri Lanka are largely unaffected by the sub-prime crisis," the report says. "The major impact of a downturn in advanced economies is likely to be transmitted through the trade channels," the report said. Boosting intraregional trade and enhancing links to ASEAN and China is viewed by many economists and analysts as a way of minimizing the impact of declining exports to the US and EU and to gain lost ground or even more. FDIs However, it says that foreign directed investments (FDI) could be constrained in the short term as access to capital has declined together with the risk appetite of investors tempering in the short run. "However, encouragingly for Sri Lanka, FDI in the recent past has been dominated by developing nations- particularly Malaysia and India," it says. The report goes on to say that the continued dominance of emerging economies and the down-turn in developed markets could shift investments from developed markets towards developing economies in the short term. Foreign commercial borrowings However, the government’s trend to resort to foreign commercial borrowings, in the face of dwindling aid as Sri Lanka is no longer classified a low-income country, has raised concerns that the country’s vulnerability to external shock has been increased. "With domestic rates high foreign borrowing may be cheaper for the government," the report says. It could also mitigate the upward movement of interest rates by not demanding for domestic credit. The report says, however, that the dominance of foreign debts will require that Sri Lanka repays a large sum of money in one payment at a fixed date. With the global financial crisis, raising foreign commercial loans to service these debts is going to be costly. Long term commercial borrowing increased from US$ 56 million in 2004 to US$ 630 million in 2007, the report says. "With further pressure on government finances, the government decided to further expand sources of external finance by allowing foreign purchases of up to 5 percent of the value of outstanding Treasury bonds in 2006," it says. In December 2007 the limit was expanded to 10 percent. "By the end of 2007, investment in Treasury bonds reached US$ 373 million (more than the total multilateral aid received by Sri Lanka in 2007). "The maturity of these bonds was between 2 to 11 years and the average yield was 14 percent," the report says. In 2006, the government raised US$ 680 million through dollar bonds maturing in 2 to 3 years and syndicate loan. The sovereign debt issue of US$ 500 million is to be repaid in 5 years at 8.25 percent. The government has raised about US$ 800 million from foreign sources this year and hopes to raise a further US$ 300 million syndicate loan. "The share of foreign financing of the budget deficit has increased from 2.5 percent of GDP in 2006 to 3.7 percent in 2007, where the bulk of the increase has come by way of loans rather than grants," the report says. The report says the government’s strategy is to push ahead with easing the infrastructure bottlenecks impeding growth while continuing to spend on security, education and agriculture. It says that balancing these expenditures with medium term debt exposure is not without its pitfalls. "The prudent course has to be to restructure spending in other areas in order to minimize Sri Lanka’s recourse to costly borrowing," the report suggests.

*International prices yet volatile, stability required Too early to reduce domestic fuel prices - Fowzie

Petroleum Minister A. H. M. Fowzie says it is too soon to reduce domestic petroleum prices until world market prices moderate to a stable range. "Prices are still volatile and we don’t want to reduce prices yet until we can be sure world prices will remain at the low levels they are today," he told the Island Financial Review. He said, however, that he hoped to revise prices within three weeks time if not the 2009 budget is expected to propose a downward revision when it comes up for debate in parliament in November. "At the moment we are making a profit of about Rs. 6 to a litre and this is not a significant benefit we can pass on to the people. We have to be able to make a significant downward revision if we are to demand reductions in transportation costs and other related prices that are affected by oil prices," Fowzie said. "If we reduce prices now we would lose what little profits we are making at the moment," he said. Chairman of the Ceylon Petroleum Corporation Ashantha De Mel said that prices can only be revised when the 2009 budget is passed. "The government subsidized fuel for the first eight months of the year and we made a Rs. 23 billion loss, so we cannot immediately reduce prices unless the government says so in the budget," de Mel told the Island Financial Review. He said that oil prices are expected to increase in coming months. The Asian Development Bank said last month that oil prices, peaking at US $ 148 a barrel earlier this year, currently below US$ 95, is expected to remain high and volatile. "The recent drop in oil prices will be short lived," the multilateral bank said. When the government decided to cut fuel subsidies Naoko Ishii, Country Manager, World Bank commended the decision to do so. "The decision was extremely difficult but if it was not done it could have lead to a widening of the fiscal deficit which would lead to an increase in public debt and taxation," she said at the Sri Lanka Economic Summit organised by the Ceylon Chamber of Commerce earlier this year. Economists believe that subsidies should be removed as it tended to benefit those who did not need it, while such benefits are better targeted to those who do. The fuel subsidy benefited the rich who could afford vehicles at the expense of the poor.p "The annual consumption of fuel is about 2,500 million litres and out of this public transport and freight accounts for only 800 million litres. The balance is consumed by private vehicles," Prof Kamal S. Kumarage, Chairman, National Transport Commission (NTC), told the Island Financial Review earlier this year. Targeting welfare and subsidies to those who need them is an issue in this country. Consider for example the Samurdhi programme, a welfare programme designed to take people out of poverty. The Central Bank Annual Report 2007 says that previously about 40 percent of the population received Samurdhi relief although the existing poverty level is around 15.2 percent. A new selection process was adopted in 2007, but the Central Bank says that an estimated 38 percent received welfare benefits. The total allocation for the Samurdhi programme in 2007 was about Rs. 9.6 billion. In 2006 it was about Rs. 12.1 billion and averaged around Rs. 10 billion a year since 2002. "Given the high budgetary cost of the programme, it is necessary to link the poor to properly designed safety ropes programmes to enable them to exit poverty. "It is time now to revisit the Samurdhi programme with improving it on the basis of the ultimate goal of eradicating poverty," the Central Bank said. Fertilizer subsidies to farmers are also criticized for not reaching the farmers directly. While the government spends on education, health, subsidies and welfare they are not sufficiently targeted to those who need them the most. Sixty percent of the population received some stipend from the budget allocations in the form of subsidies or welfare, Dr. R. M. K. Ratnayake, Secretary, Ministry of Trade and Marketing Development, Cooperative and Consumer services, said at the annual sessions of the Sri Lanka Economic Association last month. "This is wasteful and the public ought to debate these issues. They seem to be afraid to talk about these things," he said.

Trade success depends on bribing Customs officers?

A family owned company engaged in imports said that it tried to conduct its business activities without having to bribe Customs officials but had to quit as the company made more losses as a result. "For about eight months we tried to carry out our dealings with Customs without having to pay bribes to get our goods cleared. But we could not continue to do so any longer. "It became increasingly difficult for us to clear goods on time and we had to pay arbitrary duties which made our products more expensive than our competitors," a director of the company told the Island Financial Review on the sidelines of a seminar on Building Integrity and Transparency in Business Relationships organised by transparency international. It was done in such a way that it all seemed legal. "They would openly ask for a bribe for about Rs. 15,000 or Rs. 20,000 and when we refuse it they tell us that the consignment has to undergo a full inspection resulting in a delay which goes on for days. "Sometimes when our documents are submitted for clearing the goods along with the bank cashier’s order for the Customs duty, we are told that the calculations are incorrect or that some new rule or the other had been introduced. "If I had to pay Customs Rs. 500,000 they would tell me that it should be Rs. 900,000. But this problem can be taken care of with a bribe," he said. He also happened to be a member of the Sri Lanka Institute of Directors and we asked him what measures the institute was taking. "Giving bribes to Custom officials is nothing new and I have seen many big companies clear their goods without any hassle at the docks and since our company began to tow the line we have had no problems whatsoever. "The institute asked me to participate in this seminar and we need to work together to fight bribery because alone we will be ineffective and our businesses suffer," he said. During the eight months the company tried to go ‘bribe-free’ it saw its competitors release goods into the market before they did and at much cheaper prices. So clearly, the incentive to satisfy one’s conscience is not a luxury that many can afford. Custom Chief’s response Sri Lanka Customs Director General Sarath Jayatilake said that this is a big problem they encounter. "Bu the culprits are probably the wharf clerks and not the customs officials and we have come across incidents where they inform Customs that a consignment is not in order and that it should be held for inspection. "Many confuse the wharf clerks with customs officials. They are free-lance agents who facilitate the port clearance procedures on behalf of the importer. They may be soliciting bribes to speed up the process. But we have not received any complaints," Jayatilake said. Jayatilake said that no complaints had been made and that it was unclear as to what extent bribery was prevalent. "We have come across instances where importers had colluded with some Custom officials to clear goods unlawfully. "There are instances where big multinationals under-invoice their consignments through Royalty payments, dividends and transfer prices. "Some importers open up LC’s with one bank while the payment is made through another bank, and when they clear the goods they present the document with the lesser value so as to minimize the duty. "But we have computerized our processes, we can now track the whole process," he said.

Eastern China - a huge market for Sri Lankan exports

The National Chamber of Commerce of Sri Lanka (NCCSL) recens signed cooperation agreement with four provinces in China. The agreements were signed with the regional offices of the China Council for Promotion of International Trade (CCPIT) in the provinces of Jiangsu, Fujian, Hunan and Anhui in Eastern China, the Foreign Ministry said in a statement. The chamber was successful in negotiating with officials from Fujian to train Sri Lankan experts in producing green tea. A Chinese trade delegation from these provinces is expected to visit Sri Lanka later this year. According to the Foreign Ministry, trade between Sri Lanka and the Jiangsu province amounted to US$ 200 million in 2007 and US$ 47 million for the first quarter of this year. Textiles, chemicals, paper and vegetables are the provinces main exports to the island while Sri Lanka’s exports to the province are mainly fibre, rubber and transformers. The Fujian province has 34 counties that make up special economic development zones. The population of the four provinces combined is about 238 million, a huge market for Sri Lankan exporters to exploit. An official of the Export Development 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). About 23 percent of exports are in Tea. China is expected to consider granting more concessions to Sri Lanka under the Asia Pacific Trade Agreement. During the recently concluded First South Asia Economic Summit, the question was raised as to whether the region was ready to face China after quotas restricting its exports are lifted next year. While the South Asian Free Trade Agreement is virtually non-existent, the Summit realized that integration is the only way the region could survive the swarm of Chinese goods which will hit US and EU markets at cheaper prices. Trade statistics showed that India demonstrated a keenness to establish links with the ASEAN trade-block, which enjoyed closer links with China. The summit discussed that despite the fact that integration could give the region better bargaining powers, the seeming preference of India to grow ties with ASEAN rather than with SAARC, could, however, present an opportunity for other South Asian countries to provide supply chain services to India. In 2006, India’s trade with SAARC amounted to 2.8 percent while trade with East Asia amounted to 24.9 percent. Sri Lanka’s trade with SAARC amounted to 19 percent while trade with East Asia amounted to 22.1 percent in 2006. High tariffs, non-tariff barriers and high transportation costs resulting from political wrangling in the region has prevented the effectiveness of SAFTA and with exception of Nepal (no statistics were presented for Afghanistan and Bhutan) the rest of South Asia had more trade with ASEAN than with SAARC. Nepal, a landlocked country, along with Bhutan and Afghanistan (along with the lagging impoverished provinces of India, Pakistan and Bangladesh), depend on the rest of the region to open up borders through transportation and trade linkages so that their people too could benefit from the East Asian connections (if SAFTA fails).

Inflation down in August Interest and exchange rates cause concern

Inflation dipped further in August to 24.9 percent the Central Bank announced last week. In July the point-to-point change in the Colombo Consumers’ Price Index (CCPI) recorded 26.6 percent. In January 2008 the inflation rate was 20.8 percent and it peaked in May at 28.2 percent when world food prices and oil prices increased sharply. The Central Bank always maintained that these prices would ease after July, and as such a decrease in the inflation rate can be seen. An official of the Census and Statistics Department said that domestic food prices have remained static for the most part while vegetables and rice price increases had declined according to expected seasonal trends with the Yala season and the harvesting of other vegetable crops. The new index, introduced this year, is based on expenditure survey of the Greater Colombo area in 2002. The basket of goods that cost Rs.100 then, costs Rs. 206.3 in August 2008 (Rs. 206.4 in July, Rs. 205.9 in June, Rs.198.5 in May, 2008 and Rs. 183.5 in January 2008). In the new index, food items are given a weight of 46.71 percent, where as in the old index, food items consisted of 68.3 percent of total expenditure based on a survey in 1952 survey. The weights for the selected goods had been recommended by a technical committee appointed by the Treasury which prompted some analysts to call it a ‘cooked-up’ inflation index. While the Central Bank continued with its tight monetary policy to curb the expansion of domestic credit resulting in high interest rates, manufacturers are finding it extremely difficult to maintain their competitiveness as working capital costs are high. While both interest rates and inflation rates erode into margins, the exchange rate does not reflect the trade balance. The two rates have steadily increased over the past months, while the exchange rate has more or less stagnated. The export community has accused the Central Bank of controlling the rupee instead of allowing it to depreciate, like it should, according to the trade balance. Although the trade deficit keeps widening, the Central Bank maintains that other foreign currency inflows (FDIs, grants, worker remittances etc) threaten to appreciate the rupee and that the bank has so far recorded a net-buy of dollars to prevent the extreme appreciation of the rupee. The Central Bank last month began to use its own securities when it depleted it stock Treasury bills which is generally used to mop up excessive liquidity in the market. The bank had issued Rs. 8 billion in Central Bank Securities by mid August depending on the foreign exchange inflows will continue doing so. When foreign currency inflows increase, liquidity of the money market increases correspondingly. The Central Bank then auctions its Treasury bills to mop up the excessive liquidity of the market. But Sri Lanka is heavily dependent on imports, so while on the long run, a depreciated rupee could improve the country’s export sector, create employment and bring development, on the short run it may spike food prices even further and the poor could suffer immense hardships. According to Food and Agriculture Organisation (FAO) a record harvest is expected for grains this year, but the high prices will remain. Quoting the FAO, ADB Country Director Richard Vokes said that the production prospects for cereals was good after rice prices increased by almost 100 percent and wheat by 130 percent between the later stages of 2007 and May 2008. "The FAO predicts a bumper harvest and although cereals and other commodities have started to ease since April, the high prices will remain and we may not see the former price levels again," he said, addressing the session on Managing the Food Prices Crisis at the first South Asia Economic Summit. An estimated 40 percent of the world’s poor is homed South Asia and they are more vulnerable to increases in food prices. "Food constitutes 65 percent of the consumption basket of South Asian households and soaring food prices are pushing many of them into poverty and malnutrition. "An estimated half a million people are severely affected by the crisis. An ADB study shows that a 10 percent increase in food prices will push some 7 million into poverty in Pakistan," Vokes said. He called for the need for countries to invest in their agricultural sectors and formulate projects to increase production, develop technologies and manage climatic and disease related risks. The First South Asia Economic Summit issued a declaration at the end of the sessions and said that food price inflation is a major concern for the region. It said that countries should expand existing social assistance programmes that directly targeted the poor who most vulnerable to food price hikes. "These programmes could be expanded by increasing the amount of cash transfers and the number of people receiving low cost grains while still passing the price increase to other domestic consumers who can better afford it, and this is where targeting becomes crucial," the declaration said. The Summit resolved to monitor and pressurize the SAARC process in implementing strategies to improve regional cooperation, where technology transfers and resources can be shared to increase agrarian productivity, give lagging regions access to markets and where a seed bank could be established for the region, as against a food bank which was proposed in 1988 of which no country gained a grain of salt.

Sri Lanka envisioned as maritime hub for the region

A recent study, one among a galaxy of studies on the South Asian transportation, shows that if inland connectivity in the region is developed, Sri Lanka could play the role of the region’s maritime hub, and all countries stood to gain. This is according to a working paper published by the Research and Information System for Developing Countries (RIS) of India, titled ‘Restoring Afghanistan-Pakistan-India-Bangladesh-Myanmar (APIBM) Corridor: Towards a New Silk Route in Asia. Prabir De, Fellow, RIS, made this observation at the First South Asia Economic Summit in Colombo last week. He said that 74 percent of the SAARC region’s intra-regional trade potential is yet to be realized. "In 2006 intra-regional trade amounted to US$ 10.48 billion whereas the potential is estimated at US$ 40 billion," De said. This is attributed to high trade barriers, tariff and non-tariff, poor transportation links, inadequate trade facilitation links (measure that would reduce or eliminate non-tariff barriers) and the lack of supply capabilities of the least developed countries of the region. "In Asia, transport costs outweigh tariffs in the region. Fuel surcharges on sea freight increased from US$ 455 in January 2007 to US$ 1,130 in July 2008 and it continues to rise, hurting manufacturers in the developing world. "South Asian countries are paying more towards trade transportation costs compared to custom tariffs," he said. Transport Policy Advisor Bangladesh Planning Commission, said that according to the SAARC Regional Multimodal Transport Study (SRMTS), 10 sea ports had been indentified for priority attention, with Colombo identified as the hub port for the region. The First South Asia Summit identified the need to improve custom procedure in the region and reduce administrative barriers in ports and provide land locked countries and lagging regions with easy access to ports. However, developing a regional inland transportation network has to overcome the intelligence concerns of each country, which has led to the non-implementation of proposals in the SRMTS report, commissioned by the New Delhi SAARC Leaders’ Summit in 2004. However, the South Asia Economic Summit passed a declaration that a report will be prepared on the summits progress in terms of influencing policies with their academic findings by its next installment in India next year. Transport connectivity is vital to lift the least developed countries and lagging regions out of poverty. While South Asia is said to be one of the fastest growing regions in the world, the growth is not inclusive and 40 percent of the world’s poor call South Asia their home.