The Trade Deficit Falls 24pct in January 2013. Fall in Export Earnings is a Worry

02nd April 2013, www.island.lk

The trade deficit fell 24 percent year-on-year to US$ 780.4 million in January 2013 from US$ 1,026.8 million a year earlier, but the worrisome trend in export earnings continue, with earnings falling 18.2 percent to US$ 726.7 million in January, down from US$ 888.2 million a year ago, data released by the Central Bank yesterday (02) showed.

The import bill fell 21.3 percent to US$ 1,507.2 million with petroleum imports falling 47.6 percent to US$ 269.7 million.

Tea export earnings fell 2.8 percent to US$ 101 million. Garment exports fell 8.9 percent to US$ 333.9 million.

The fall in export earnings is a worry, economists point out.

After growing nearly 100 percent in 2011, the country’s trade deficit declined by 4.1 percent in 2012 to US$ 9,313 million as at end December from US$ 9,710 million a year earlier. Imports fell 5.8 percent to US$ 19,086.5 million while export earnings fell 7.4 percent to US$ 9,773.5 million. Export earnings at 30.58 percent of GDP in 2001, declined gradually to 16.44 percent last year.

Releasing the ‘External Sector Performance review for January 2013 yesterday (02), the Central Bank said: "The trade deficit continued to narrow and recorded a 24 per cent year-on-year decline in January 2013. The policy measures implemented early in 2012 to discourage non-essential imports have continued to ease pressure on the trade deficit and therefore on the current account balance. The policy measures adopted have therefore helped withstand the adverse impact of the slowing down of global demand on exports. Inflows on account of exports of services remained favourable in January 2013, further supporting the current account, while total reserves were maintained at healthy levels, strengthening the overall balance of the BOP.

"Expenditure on imports declined by 21.3 per cent, year-on-year, to US dollars 1,507 million in January 2013, reflecting the effectiveness of the policies introduced early in 2012 to curb import expenditure. Imports of refined petroleum declined by 58.4 per cent, year-on-year, in January 2013, partly due to increased hydro power generation. Lower expenditure on imports of transport equipment, gold and vehicles also made a significant contribution toward the decline in import expenditure in January 2013. However, expenditure on imports of certain intermediate goods such as chemical products, agricultural inputs, plastic and articles thereof and wheat and maize which accounted for about 11 per cent of imports, increased on a year-on-year basis in January 2013.

"Import expenditure on investment goods also declined on a year-on-year basis in January 2013, as imports of transport equipment and machinery and equipment declined. Nevertheless, import expenditure on building materials, categorised under investment goods, increased in January 2013. With respect to consumer goods imports, expenditure on imports of food and beverages as well as non-food consumer goods declined. Vehicle imports, which declined by 51.7 per cent, year-on-year, made the largest contribution towards the
decline in expenditure on consumer goods imports.

"As demand for exports remained fettered by the slow recovery of major export destinations, namely, the EU and the USA, the decline in export earnings continued into 2013. Earnings from exports declined by 18.2 per cent to US dollars 727 million in January, as earnings from all major categories of exports declined, on a year-on-year basis.

"The decline was mainly driven by industrial exports which declined by 20.7 per cent. Earnings from exports of textiles and garments declined by 8.9 per cent. Exports of transport equipment, gems, diamonds and jewellary and rubber products were the other categories of export that contributed significantly to the decline in export earnings. Earnings from agricultural exports declined in January 2013, as a result of earnings from both traditional and non-traditional agricultural exports declining.

"Despite exports of tea continuing to fetch favourable prices, the drop in demand from main markets led to a decline in earnings from tea exports in January. However, export earnings from green tea, although its share remains low, recorded an year-on-year increase. While the price of natural rubber has decreased globally, the decline in volumes of rubber exports could be attributed partly to the demand from local manufacturers of rubber based products.

"Of non-traditional agricultural exports, earnings from the export of spices increased in January 2013, led mainly by the commendable performance of pepper and cloves exports. Further, earnings from the export of unmanufactured tobacco increased marginally in January 2013," the Central Bank said.

Sri Lanka 'Less Indebted' in 5 out of 6 Indicators - United Nations Economic Commission for Asia and the Pacific

25th March 2013, www.lankabusinessonline.com

Sri Lanka has been classed as 'less indebted' in five out of six debt indicators which assesses external debt vulnerability of a country, by the United Nations Economic Commission for Asia and the Pacific, the Central Bank said.

There have been concerns over Sri Lanka's rising commercial foreign debt, as well as sovereign guarantees.

Sri Lanka falls within to the less indebted category in when external debt is measured against exports of goods and non-factor services (122.6 percent compared to a threshold of 165 percent).

Sri Lanka's external debt service payments was 10.7 percent of exports of goods and non-factor service against a threshold of 18 percent, and external interest payments was 3.7 percent against a threshold of 12 percent.

The present value of external debt was 40 percent of gross national income against a threshold of 48 percent.

The present value of external debt to exports of goods and non-factor services was 130 percent, against a threshold of 132 percent.

But Sri Lanka fell in the moderately indebted category when external debt was measured against gross national income, which was 37 percent, higher than a threshold of 30 percent.

Sri Lanka's Central Bank Lowers 2012 Growth Forecast to No Lower than 7pct

10th March 2012, www.ft.lk

The Central Bank will soon lower its 2012 growth forecast of eight per cent to a figure no lower than seven per cent, owing to tighter monetary policy measures and the depreciation of the rupee, the Bank’s overnor told Reuters on Friday.

The bank had originally forecast this year’s growth at eight per cent, slowing from an estimated 8.3 per cent expansion in 2011.

The International Monetary Fund (IMF), which has given a $ 2.6 billion loan program to Sri Lanka, on Monday said the economic growth would be less than 7.5 per cent.

“We are getting ready to lower our growth forecast, around next week’s monetary policy announcement.It won’t be below seven per cent,” Central Bank Governor Ajith Nivard Cabraal told Reuters.

The bank meets on interest rates next Wednesday, when it should announce the changed forecast formally. Two other Central Bank officials confirmed the revision is under way.

“We will be looking at all the conditions. There are some areas going to be better and some areas not so good. So we are taking a calculated call,” Cabraal said. A record trade gap and a growing current account deficit forced the Central Bank to raise its policy rates for the first time since 2007.

The Central Bank last month halted its defence of the rupee at a specific price against the dollar, having spent more than $ 2.7 billion of its foreign exchange reserves last year to stave off depreciation.That removed a point of friction with the IMF and relieved pressure on its fast-dwindling reserves. Market interest rates have risen by 115-143 basis points since the bank raised its main policy rates by 50 basis points to 7.5 and 9.0 per cent respectively on 3 February. The rupee has also depreciated more than 5.7 per cent since the Central Bank stopped defending it on 9 February. The country is expected to have recorded a balance-of-payments deficit in 2011, although the official figures have not been released yet.

Related Info :

• Sri Lanka's Economy to Grow at 8pct in 2012 with a New Deal with IMF

• Standard Chartered Research Report Sees Slower Growth in 2012. "On the Ground: Sri Lanka – A Challenging Year Ahead"

There is No Capital Flight from Sri Lanka - Central Bank. IMF Deal to be Resumed

01st March 2012, www.lankabusinessonline.com

Sri Lanka is planning to resume a deal with the International Monetary Fund which can boost the island's forex reserves which had fallen to 5.7 billion US dollars and there is no capital flight, the Central Bank said.

There has been a net inflow of 216 million US dollars into government securities from foreign investors from February 09 when the rupee was partially floated, and corrective steps were taken to reign in credit growth which put pressure on a dollar peg, the Central Bank said.

According to Central Bank data foreign investors held 212 billion rupees of bonds up from 199 billion rupees on January 04. Treasury bills holdings rose to 84.5 billion rupees from 70.1 billion rupees in the same period there amid periodic changes.

The International Monetary Fund held back the last 800 million dollar tranche under a stand by arrangement reached in May 2009, at the end of the island's previous balance of payment crisis.

"Meanwhile, the IMF-SBA (stand by arrangement) programme is progressing with plans of completing the 7th review towards the end of March 2012," the Central Bank said in a statement.

The IMF suspended its disbursements in mid 2011 asking the Central Bank to loosen a peg with the US dollar which underlying monetary policy no longer supported.

The resumption of the program could infuse two 400 million dollar tranches into the Central Bank's forex reserves which was now down to 5.7 billion US dollars. Reserves peaked at 8.1 billion US dollars in July just as credit growth picked up.

The Central Bank said foreign direct investments are projected to top a billion US dollars in 2012, which can boost reserves.

However FDIs are usually spent, resulting in imports. To increase foreign reserves absolutely, the monetary authority has reign in credit growth and start mopping up rupees from the banking system and contract central bank credit.

Sri Lanka's rupee peg came under pressure due to high credit growth including from loans taken by state enterprises to run large losses from mid 2011.

But from September, Central Bank credit started to ratchet up as it offset (sterilize) the contractionary effect of forex market interventions with expansionary rupee injections into money markets.

A clean float can break a cycle of sterilized intervention end central bank credit expansion.

Related Info :

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Sri Lanka's Exports in December 2011 Went up 24pct to $ 906mn with Sharp Gains in Textiles & Rubber

24th February 2012, www.lankabusinessonline.com

Sri Lanka's exports in December 2011 went up 24 percent to 906 million US dollars from year ago with sharp gains in textiles and rubber products, the central bank said.

Imports during the month went up 34 percent to 1.9 billion dollars with spending on investment goods like transport equipment and building materials rising sharply, a statement said.

The trade gap during December 2011 widened 44 percent to just over a billion dollars.

"The expenditure on imports, although increased by 33.7 percent to 1,910 million US dollars in December 2011, decelerated from a year-on-year increase of 78 percent reported for November 2011," the central bank said.

"The expenditure on imports was driven by continuing demand for investment and intermediate goods.

"Government infrastructure projects financed mainly by foreign loans also raised the demand for investment goods."

The largest contribution to the export earnings in December 2011 came from industrial exports followed by agricultural exports.

Industrial exports increased by 28.9 percent to 703 million dollars in December 2011 compared to the same month of 2010.

"Among the industrial exports, textile and garments remained the major contributor and grew by 25.2 percent to 384 million US dollars followed by rubber products, food, beverages and tobacco and machinery and equipment."

The agricultural exports grew by 10.3 percent, year-on-year, in December 2011 mainly driven by tea and coconut exports.

"Earnings from tea exports grew by 10.5 percent and coconut exports recorded an impressive 97 percent growth in December 2011," the statement said.

"The rubber exports declined as the demand for rubber from domestic industries continued to remain elevated."

Total earnings from exports in the 2011 calendar year increased by 22.4 percent to 10,487 million US dollars compared with 2010.

The share of industrial exports in total exports stood at 76.4 percent in 2011.

Cumulative expenditure on imports during the 2011 year increased by 50.4 percent to 20,230 million US dollars.

The investment goods imports increased by 60.3 percent to 4,663 million US dollars with the bulk of the expenditure going on machinery and equipment, transport equipment and building materials.

Expenditure on petroleum imports increased by 53.4 percent to 4,630 million US dollars in 2011.

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• Sri Lanka Debt to GDP Ratio Falls to 78pct from 82pct in 2010

• Sri Lanka Exports Highest in December 2010. Remittances up 23.6pct in 2010 while Trade Deficit Expands 66.7pct on Import Growth

Sri Lanka Removes Currency Trading Band against Dollar. Central Bank Governor Says Intervention in Currency Market would be through supply and not based on Price

09th February 2012, www.bloomberg.com

Sri Lanka’s rupee fell the most since November and stocks plunged after the central bank said it was changing the way it manages the currency against the dollar.

Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said that effective from today a trading band against the dollar would be removed. The monetary authority would now “intervene” in the currency market through “supply and not based on price,” he said.

The Sri Lankan rupee dropped 1 percent to 115.40 per dollar as of 3.03 p.m. in Colombo, according to data compiled by Bloomberg. That was the biggest decline since the currency was devalued on Nov. 22. The benchmark Colombo All-Share Index of stocks fell 2.3 percent.

“Although foreign investors may make a currency loss, the almost floating of the rupee will give them more clarity on the exchange rate in future investment decisions,” said Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund.

The move comes after calls by the International Monetary Fund for a more flexible exchange rate. Sri Lanka devalued the rupee by 3 percent in November to boost exports. The central bank narrowed the currency’s trading band against the dollar on Feb. 3 and Feb. 6 and today, prior to announcing its removal. The monetary authority raised benchmark interest rates for the first time since 2007 on Feb. 3 to contain credit growth and inflation in the $50 billion economy.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Hari Govind at hgovind@bloomberg.net

Sri Lanka Allows Foreign Firms as Margin Providers to Provide credit to Investors in Colombo Stock Exchange

02nd February 2012, www.island.lk

The Central bank yesterday (Feb. 02) announced that it would permit foreign owned companies which are registered with the Securities and Exchange Commission of Sri Lanka as Margin Providers, to engage in the business of provision of credit to investors of the Colombo Stock Exchange.

"The Central Bank is of the view that this move would help develop the business of margin providing, and also increase market activity by improving the access to finance for investors," the Central Bank said.

Sri Lanka Increases Policy Rates by 50 Basis Points to Control Private Sector Credit Growth

03rd February 2012, www.dailymirror.lk

The Monetary Board of Sri Lanka has finally decided to increase the policy rates by 50 basis points owing to increased private sector credit growth that is resulting in a widening trade deficit.

Accordingly the Central Bank of Sri Lanka (CBSL) in a statement said the its new Repurchase rate and the Reverse Repurchase rate will be 7.50 and 9 percent, respectively.

The CBSL said credit granted by commercial banks to the private sector increased by 34.5 percent, year-on-year, in December 2011, substantially exceeding projections, driven by import related items such as motor vehicles.

At the same time, excess liquidity in the domestic money market declined from Rs.124 billion as at end 2010 to the current level of around Rs 15 to 20 billion, and such decline in liquidity in the domestic money market  led to  market interest rates  recording  an upward movement  in recent months.

The CBSL also said gross official reserves (excluding Asian Clearing Union balances)  declined to US dollars  5.9 billion by end December 2011, representing the equivalent of 3.6 months of imports.

Sri Lanka being an import oriented country, CBSL has been defending the LKR to keep inflation at single digit levels, while keeping the interest rates down to spur growth.

Related Info :

• Central Bank Unveils a Robust Roadmap for Sri Lanka for 2012 after Recording the 2nd Consecutive Year of over 8pct Growth

Market Rates Inch Upwards amidst Liquidity Tightening to Control Higher Credit Growth

11th January 2012, www.island.lk

The Monetary Board of the Central Bank has decided to hold key interest rates unchanged because it feels rising market interest rates would dampen demand and keep a check on growing credit, the bank announced. However, the sale of dollars to keep the exchange rate stable is drying up rupee liquidity in the system as well, and the Central Bank has made no mention of this aspect in its Monetary Policy Review for January which was released yesterday (Jan. 11).

The repurchase rate will remain unchanged at 7 percent and the reverse repurchase rate will stay steady at 8.50 percent. These rates apply to commercial bank overnight deposits of excess rupees with the Central Bank and for borrowings from the Monetary Authority as a last resort to maintain liquid positions.

Interest rates have come under pressure in recent months as liquidity tightened in the market due to high credit growth and dollar sales by the Central Bank to keep the rupee stable against the dollar despite severe import demand.

"Credit obtained by the private sector remained robust through 2011, and by November, recorded a year-on-year growth of 33.5 percent. Largely reflecting the robust expansion of credit, broad money growth also remained at a level higher than that projected for 2011. Year-on-year growth of broad money (M2b) was 20.6 percent by November. However, market interest rates moved upwards in recent months, in line with changing liquidity conditions in the domestic money market," the Central Bank said.

"As a result, the benchmark yield on one year Treasury bills recorded an increase of around 175 basis points in 2011, while the average weighted deposit rate (AWDR) recorded an increase of about 100 basis points. Meanwhile, the average weighted prime lending rate (AWPR) increased by around 120 basis points in 2011, although at the last auction, the weighted average yields on Treasury bills in the primary market remained unchanged, indicating some stabilisation in market conditions. These moderate upward movements in interest rates are likely to exert a restraining effect on monetary aggregates, which would, in turn, help to curb the build up of demand pressures," it said.

Dealers said pressure on yields was evident at this week’s auction of Treasury bills, but with state-names participating, the Central Bank could control rates to a certain degree. Interbank interest rates increased further yesterday.

The Sri Lanka Inter Bank Offered Rate increased to 9.12 percent yesterday from 8.84 percent the previous day.

Call money market rates for interbank borrowings without security edged up to 9.12 percent from 8.92 percent and market repo rates for borrowings backed by Treasury bills inched up to 8.30 percent from 8.11 percent.

The movement in these rates were kept in check by the Central Bank infusing Rs. 20 billion into the market through a cash auction, buying up Treasury bills at 8.17 percent.

Treasury bills stayed flat at yesterday’s auction.

The rupee closed at Rs. 113.89/90 against the dollar yesterday as the Central Bank continues to sell dollars to stabilise the rate at this level.

The bank has spent more than US$ 850 million on keeping the exchange rate steady since the rupee was devalued last November, Reuters reported yesterday. It spent a net US$ 1.79 billion in the first 10 months of last year to keep depreciation pressure at bay.

"Taking into consideration the above developments, the Monetary Board is of the view that the present policy framework does not require any adjustment and accordingly, at its meeting held on January 10, 2012, decided to maintain the Bank’s policy interest rates unchanged at their current levels, i.e., the Repurchase rate at 7.00 percent and the Reverse Repurchase rate at 8.50 percent, the Central Bank said.

With the country’s balance of payments under siege, as some dealers say, the Central Bank continued to be optimistic about the near term scenario on the external front. Notwithstanding the impact higher interest rates would have on finance costs, the Central Bank says inflation would remain at mid single digit levels throughout this year.

"In the third quarter of 2011, GDP grew by 8.4 per cent, with all three sectors, Agriculture, Industry and Services, contributing towards that growth performance. GDP growth in 2011 is estimated to be around 8.3 per cent. In the meantime, the significant structural changes that have taken place in the Sri Lankan economy over the last several years are expected to provide the momentum for the economy to grow by about 8 per cent in 2012, even in the midst of the slowdown in global economic activity," the Central Bank said.

"Continued development efforts aimed at improving economic and social infrastructure are expected to augment the productive capacity of the country and thereby enable the realisation of the country’s growth potential. Improvements in infrastructure would also help eliminate supply bottlenecks, thus helping to reduce price pressures. As inflation is expected to remain around mid-single digit levels in 2012, broad money (M2b) is expected to grow by around 15 per cent in 2012, as announced in the ‘Road Map for Monetary and Financial Sector Policies for 2012 and beyond’.

"The ongoing structural changes in the economy are also likely to be reflected in the external sector, with earnings from tourism projected to increase to US dollars 1.2 billion, migrant worker remittances expected to increase to US dollars 6.5 billion, foreign direct investment (FDI) projected to record US dollars 2.0 billion, and inflows of debt capital to the private sector also expected to increase significantly in 2012.

"On the fiscal front, preliminary estimates indicate that the government has contained the fiscal deficit to a level within the revised target of 7 per cent of the GDP in 2011. It is expected that the government would bring down the fiscal deficit to 6.2 per cent of the GDP in 2012, thereby augmenting the resource availability to the private sector further," the Central Bank said.

Dealers point out that increasing interest rates would make consolidation of the fiscal balance challenging.

Treasury Secretary Dr. P. B. Jayasundera recently called for a tightening of monetary policy (increasing rates) coupled with another devaluation of the rupee.

The release of the next regular statement on monetary policy will be on 9th February 2012.

Related Info :

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• Sri Lanka Vulnerable to External Shocks - Moody's

Sri Lanka Spent $ 600mn on Gold in 2011 up Seven Times the Year before

06th January 2012, www.lankabusinessonline.com

Sri Lankans have spent a record 600 million dollars of gold in 2011 up more than seven times from the 82 million US dollars a year, the central bank said, as demand and prices for the precious metal rose.

"Gold in the past was very marginal, but we have seen a rapid demand for gold in our country," Central Bank Governor Nivard Cabraal said.

"That phenomenon has been share in many Asian countries like India. So there has been a rapid increase in the gold holdings of the people of our country."

He said 'pawning' or loans against gold have also increased in the country. Loans against gold is popular in Sri Lanka where women in particular held gold jewellery as a store of value.

Some financial analysts say speculators who bought gold, borrowed against them to speculate in other areas such as stocks.

Gold rose to around 1,600 US dollars an ounce in 2011 as central bank's in developed nations continued to print money and weaken then paper currencies.

Before the creation of the Federal Reserve Bank gold was just 20 dollars an ounce from 1792. Under a gold standard there was no sustained inflation in the world.

Periods of inflation (such as during the gold rush or the printing of the Greenback paper dollars for the civil war) were followed by periods of deflation bringing commodity prices back to previous levels.

The US Fed 'devalued' the US currency from 20 dollars an ounce to 35 in 1933, after triggering the Great Depression by printing too much money, barely two decades after its creation.

Central Bank Unveils a Robust Roadmap for Sri Lanka for 2012 after Recording the 2nd Consecutive Year of over 8pct Growth

04th January 2012, www.ft.lk, By Uditha Jayasinghe

A highly confident Central Bank yesterday unveiled a robust roadmap for Sri Lanka for this year and beyond though with a rider that realisation was subject to absence of any major unforeseen supply side shocks.

Governor Nivard Cabraal proudly told the ceremony attended by business leaders and media that the country in 2011 is estimated to have achieved its highest GDP growth of 8.3% thereby recording the second consecutive year of over 8% growth.

“2011 was a challenging year but amidst tense global developments, the Sri Lanka’s economy was able to deliver the promised results,” Cabraal said in his roadmap presentation that covered key macroeconomic developments in 2011; developments in the financial system in 2011; Macroeconomic outlook and proposed monetary policy strategy for 2012 and beyond; proposed strategies for financial system stability for 2012 and beyond and policies to strengthen the economy in 2012 and beyond.

The 8.3% GDP growth was marginally below targeted 8.5% figure whilst among other achievements included 4.9% year on year inflation as opposed to 4 to 6% target and debt to GDP ratio contained at 78% as against target of 79% and 82% in 2010. “We had controlled debt to GDP ratio at a time when other countries couldn’t,” he added.

Among things which Central Bank couldn’t control was broad money growth 19.8% as of October high in comparison to the target of 14.5%.

Whilst this was on account of sharp rise in private sector borrowing in tandem with post-war rebound and low interest rate regime, Cabraal however pointed to single digit inflation as a cushion and a key achievement. He also said Government expenditure was reduced by an estimated Rs. 15.5 billion due to the decline in interest rates.

Gross Official Reserves amounted to $ 6.0 billion by end 2011 compared to $ 6.6 billion by end 2010 and a high $ 8.2 billion in August.

“We built up such high reserves so that they could be used when the need arose. When we entered into the International Monetary Fund (IMF) agreement the target was to have enough reserves for 3.5 months of imports,” the Governor added.

He said that engagement with international monetary institutions will continue even though the IMF programme is due to end in the first quarter and that all key economic sectors contributed to high growth and the same resilience will help the country to achieve its third year of over 8% growth. However due to external shocks the 2012 forecast of 8% growth is a downward revision from 9% previously projected.
“We have also posted the lowest unemployment rate of 4.3% and made a significant reduction on poverty,” he added.

A key highlight of his roadmap was estimating a whopping $ 25 billion in foreign inflows in 2012 inclusive of $ 12.5 billion via exports (up from $ 10.5 billion in 2011); $ 2 billion in FDI (up from $ 1 billion in 2011) and $ 6.5 billion via remittances as opposed to $ 5.2 billion last year and $ 1.2 billion from tourism up from $ 850 million in 2011. Included in the forecast was $ 500 million (Rs. 57.5 billion) net inflow to Colombo stock market notwithstanding the Rs. 19 billion outflow in 2011. With regard to the latter he said that it was offset by Rs. 25 billion increase in foreign inflows to Government securities in 2011.

Cabraal also touched on success of fiscal management noting that Budget deficit in 2011 is estimated at below 7% of GDP down from 8% in 2010. Forecast for 2012 is a 6.2% fiscal deficit.

According to the Governor during 2006-2011 the Central Bank was able to appropriate Rs. 64 billion to the Government from surpluses generated by the Bank mainly from its international operations. In real terms based on 2006 prices this amounted to over Rs. 46 billion.

Based on success achieved in the recent past, Cabraal said “Central Bank now has greater confidence in its ability to face new challenges and adopt new frameworks of monetary policy since it uses the new strengths.”

He said the Bank can with greater confident target inflation in a broader sense hence from 2012 onwards it would start doing so parallel to its existing framework. “We will also give recognition to the major structural changes that have taken place in the economy and display a policy shift,” he added.

He also said Sri Lanka’s macro economic conditions and policies would be fashioned to support high growth in 2012. “We will be keen to accommodate the higher growth of economic activity although priority would be to check inflationary pressures in the economy,” he added.

“Today, Sri Lanka is on the threshold of a new era, where its economy is undergoing fundamental structural changes that are expected to provide a new platform that will pave the way for a robust future direction in the economy,” Cabraal said adding a cohesive and integrated monetary policy framework will be fashion whilst taking into new emerging policy environment.

According to the Central Bank 2012 growth will be driven by agriculture sector (expected to expand at 7.3%, compared to 2.0% in 2011); Industry sector (expected to expand at 9.0%, compared to 10.1% in 2011); and services sector (expected to expand at 7.7%, compared to 8.6% in 2011).

Cabraal also assured that the Central Bank will assist the Government and the private sector with the interventions necessary to move towards higher growth targets.

 “The wide range of goals as we have set for ourselves are not easy to achieve. And if we are to succeed, we will need total focus and diligent implementation of our policies and plans. We will also need to motivate and energise our fellow countrymen to realise the ambitious goals that have been endorsed by our people through their mandate for the “Mahinda Chintana – Vision for the Future,” Central Bank chief emphasised.

Road Map : Monetary and Financial Sector Policies for 2012 and beyond

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Sri Lanka for Inflation Targeting from 2012 as Priority Shifts to Maintaining Prices over Growth

04th January 2012, www.lankabusinessonline.com

Sri Lanka is moving to a more explicit inflation targeting environment setting a level of 5 to 6 percent for 2012 and priority has been shifted to maintaining prices over growth, Central Bank Governor Nivard Cabraal said.

Sri Lanka is expecting 8.0 percent gross domestic product (GDP) growth in 2012 on the back of 8.3 percent growth in 2011 boosted by a lower budget deficit and the end of a war two years earlier.

"On our path the central bank will be keen to accommodate the higher growth but our priority will certainly be inflation," Governor Cabraal said.

"So based on that factor we will want to deliver single digit inflation between 5.0 and 6.0 percent in 2012."

Sri Lanka's budget deficit is expected to fall to 6.2 percent of GDP in 2012 for the third successive year and the authorities have revised an inflation index, Cabraal said.

Ten years ago when the Central Bank was first contemplating moving to an active inflation targeting framework, a commitment to lower inflation was also identified as a requirement, he said.

"Over the last five years we actively worked on those measures," Cabraal said. "We have been able to deliver price stability over the past three years.

"That now gives us the confidence to say that move to a new level, that we can use these new strengths and therefore from the year 2012 onwards we will with greater confidence target inflation as well."

So called fully fledged inflation targeting involves the commitment to target one anchor - an inflation index - and allowing the exchange rate to float.

As Sri Lanka has a dollar soft peg, the Central Bank will still be juggling with two anchors, a 'domestic anchor' in terms of the inflation index and an 'external anchor' in terms of the exchange rate.

"We will be looking at the exchange rate as a key stabilization factor," Cabraal said.

Such dual anchor monetary regimes are prone to balance of payments crises, but countries have been able to keep inflation down by consistently having interest rates higher than the anchor US currency and having a more interventionist exchange rate policy.

The International Monetary Fund has named such regimes inflation targeting lite (IT lite).

If the inflation is low enough such regimes can keep the exchange rate peg, as countries like China has proved as pressure on the exchange rate is also a signal to raise rates.

For inflation targeting to succeed the Central Bank has to prioritize it as an objective so that it is ready to raise interest rates whenever necessary, without regard to other factors such as 'growth'.

Sri Lanka is currently seeing balance of payments pressure which some analysts attribute to a delay in tightening policy in the early part of 2011, when credit growth and inflation picked up.

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Sri Lanka's Economy to Grow at 8pct in 2012 with a New Deal with IMF

03rd January 2012, www.lankabusinessonline.com

Sri Lanka's economy is projected to grow at 8.0 percent in 2012 with a new deal in the offing with the International Monetary Fund, Central Bank governor Nivard Cabraal said.

The island economy had grown at about 8.3 percent in 2011, he said.

In 2012 Sri Lanka is targeting an inflation rate of between 5-6 percent, Cabraal said.

Annual average inflation for 2011 was 6.7 percent compared with 6.2 percent the year before, according to a 12-month moving average.

Cabraal said the economy had earlier been forecast to grow at nine percent in 2012.

But the forecast was lowered as the global economic situation had changed with the debt crisis in Europe and recession or low growth looming in key Western markets.

Sri Lanka will also negotiate a follow up or surveillance programme with IMF for 2012, Cabraal said at the launch of the central bank's monetary policy road map for 2012.

The International Monetary Fund has so far given Sri Lanka 1.7 billion US dollars under its stand-by arrangement programme, Cabraal said.

The IMF came in with a 2.5 billion US dollar bailout after Sri Lanka ran down its foreign reserves in a period of peg defence from around September 2008 to April 2009 triggering currency and banking crisis after a period of earlier loose monetary policy.

Two tranches of about 400 million dollars remain to be given under a review in September 2011 that was put off and another in March 2012, and the program will formally end in May.

In 2011 Sri Lanka's gross domestic product was estimated at 59 billion US dollars and per capita income at 2,830 US dollars, Cabraal said.

Unemployment fell 4.3 percent in the first quarter of 2011 and labour productivity had improved, Cabraal said.

Poverty is estimated to have fallen below the level of 8.9 percent in 2009.

In 2011, the industry sector had grown the fastest, expanding by an estimated 10.1 percent and contributing 18 billion dollars or 30 percent of GDP.

The services sector followed with 8.6 percent growth and contributing 34 billion dollars or a 58 percent share of GDP while agriculture grew two percent in 2011 and contributing seven billion dollars or 12 percent of GDP.

The island's external sector was strong with imports at 51.6 percent of GDP in 2011, up from 44.4 percent in 2010.

The share of exports in GDP was 17.7 percent in 2011 while the contribution of remittances to GDP rose to 8.8 percent from 8.3 percent the previous year.

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Sri Lanka Debt to GDP Ratio Falls to 78pct from 82pct in 2010

03rd January 2012, www.lankabusinessonline.com

Sri Lanka's debt to GDP ratio had fallen to 78 percent by end-2011 from 82 percent in 2010, Central Bank governor Nivard Cabraal said.

The island's foreign exchange reserves had fallen to 6.0 billion US dollars by the end of 2011 enough to cover 4.0 months of imports and higher than the 3.5 months targeted in IMF programme, he said.

The International Monetary Fund has so far given Sri Lanka 1.7 billion US dollars under its programme, Cabraal said at the launch of the central bank's monetary policy road map for 2012.

Cabraal said foreign exchange reserves are built up by central banks to be used when needed.

The central bank in recent months has been selling dollars to maintain the rupee's peg with the US dollar.

However, the exchange rate remains under pressure despite a three percent devaluation of the rupee against the dollar in November 2011.

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Sri Lanka Raises $ 1bn 10yr Sovereign Bond Riding on the Country’s Recovery Story and Positive Reviews by Rating Agencies

22nd July 2011, www.financeasia.com, By Denise Wee

Markets have hardly been conducive to new debt issues recently, but Sri Lanka took advantage of a brief calm early yesterday morning to successfully price a $1 billion 10-year global bond.

Sri Lanka is used to dealing with bigger problems than volatile financial markets, and the once war-torn country’s ability to raise such a large amount of money at a competitive yield is testament to just how far it has come since the civil war ended in 2009 — and contrasts sharply with the experience of its embattled European peers.

Bank of America, Merrill Lynch, Barclays Capital, HSBC and Royal Bank of Scotland were joint bookrunners for the deal. Bank of Ceylon acted as a co-manager.

The leads kicked off roadshows on July 11 and decided to push ahead with pricing slightly ahead of schedule as they saw a window to launch a transaction amid relatively stable markets. They released initial guidance in the area of 6.5% on Wednesday morning ahead of officials wrapping up one-on-one meetings with investors in London later that day.

During midday London time, the leads revised guidance to 6.25% to 6.375%. Momentum for the transaction continued to build and the order book reached more than $5 billion before the US opened. The bonds eventually priced at the tight end of that final guidance, offering a spread of 332.2bp over US Treasuries.

While it was on the road, Sri Lanka also received a vote of confidence from the rating agencies. Fitch upgraded its rating on Sri Lanka to BB- from B+ on July 18, citing the country’s stabilisation and economic recovery under the IMF programme, as well as its efforts to address its budget deficit. Moody’s and S&P both revised their outlooks on Sri Lanka to positive but kept their ratings at B1 and B+ respectively.

“Sri Lanka has come a long way,” said one person familiar with the deal. “We are getting bad news out of Europe on an almost daily basis, so we were pleasantly surprised when the deal was done at a coupon of 6.25%,” he added.

The deal appealed to the US emerging market and global funds, which saw rarity value in the deal. Sri Lanka tapped the market just 10 months ago, but has fewer outstanding bonds than Indonesia and the Philippines.

The final book stood at $7.5 billion, with orders from 315 accounts. US investors were allocated 43%, Europe was allocated 30% and Asia 27%. Fund managers were allocated the biggest share with 86%, banks/private banks were allocated 8%, corporates 3% and insurers 3%.

The rush of fund flows from the US into emerging market sovereigns — which started in 2009 and accelerated last year — has tapered off slightly this year as investors have turned defensive. However, Sri Lanka has shown that there is still ample demand in the US for the right credit.

Malaysia’s $2 billion sukuk global bond, in contrast, attracted a more muted response from US investors, who were allocated just 4% of the five-year tranche and 15% of the 10-year tranche.

Sri Lanka’s bonds traded at 101.5 in the secondary market yesterday morning, rising 1.5 points from the par issue price.

The deal is Sri Lanka’s second 10-year issue. The sovereign priced its debut $1 billion 10-year global bond in September last year via arrangers Bank of America Merrill Lynch, HSBC and Royal Bank of Scotland. That deal paid a similar coupon of 6.25% but offered a higher spread of 373.1bp over Treasuries. As a spread over Treasuries, Sri Lanka paid roughly 40bp less in its latest deal.

According to one person familiar with the deal, the Sri Lanka bonds maturing October 2020 were trading at a yield of 6.1% while the new bonds were being marketed. Taking into account the US Treasury yield curve, the nine-month extension was worth about 14bp. This put the theoretical value of the new 10-year bond maturing July 21, 2021 at about 6.24%, which meant that the new bonds came with hardly any new issue premium. Following the pricing of the deal, the existing Sri Lanka October 2020s rallied and were quoted at 102.5 and a yield of 5.9%.
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Sri Lanka's North Shows Highest Growth in 2010 while All Provinces Report Double Digit Growth

13th July 2011, www.dailynews.lk

The Western Province, made the highest contribution to GDP in 2010. However its share in GDP reduced to 45.1 per cent from 45.8 per cent in 2009.

As in 2009, Southern province provided the second highest contribution which was 10.7 per cent, an increase compared to 10.5 per cent in 2009, the Central Bank said yesterday.

In 2010, the GDP at current prices grew by 15.9 per cent, and reached Rs 5,602 billion with a per capita income of Rs 271,259 equivalent to US$ 2,399.

The Central Province provided the third highest contribution maintaining its relative position compared to 2009 and managing to increase its GDP contribution to 10.0 per cent in 2010.

However, the contribution of the North Western province declined to 9.4 per cent in 2010 from 9.6 per cent in 2009.

The contributions to GDP from Northern, Eastern, North Central and Sabaragamuwa provinces increased in 2010 while that of the Uva province was unchanged.

In line with improvements in country's economic environment, all the provinces have reported a double digit growth rate in 2010. Reflecting the rapid expansion in income generating activities in the Northern province, GDP growth rate was highest in the province at 22.9 per cent.

It's contribution to GDP also increased from 3.2 per cent in 2009 to 3.4 per cent in 2010. The North Central province has reported a 20.3 per cent GDP growth rate which is the second highest among all the provinces. Sabaragamuwa and Eastern provinces also reported high GDP growth rates of 19.1 and 18.7 respectively.

As in the past, the Western province contributed significantly to GDP in the country, as most of the economic activities that relate to sea port, air ports, banking and financial institutions and business centers are still centralized in the province.

The per capita income in the Western province which stood at US$ 3,808 (Rs 430,488) was 1.6 times the national per capita income in 2010. Per capita income in all other provinces continued to fall below the national per capita income.

Also in all provinces, this ratio was unchanged except in the Sabaragamuwa province where the relevant ratio increased. There are considerable variations in the structure of GDP across the provinces.

Agriculture accounted for just three per cent of GDP in Western province in 2010, whereas it accounted for over 16 per cent of GDP in the other provinces.

In the Uva Province agriculture accounted for more than 30 per cent of GDP.

In all provinces industry accounted for between 14.2 per cent and 34.8 per cent of GDP in 2010. Services sector was the most dominant single-sector accounting for between 48.3 per cent and 69.8 per cent of the GDP in the different provinces.

The contribution from the industry sector declined in the Western, Eastern, Uva and Sabragamuwa provinces in 2010 but expanded in the other provinces.

The greatest contribution to GDP from this sector was observed in the Southern province. Despite the contribution from the industry sector to GDP being lowest in Northern province, the province experienced the greatest expansion in its contribution during the period 2009 and 2010.

Meanwhile the contribution from the service sector increased in the Western, Eastern and North Central provinces but declined in all other provinces during 2010.

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Sri Lanka Maintains Radio Silence ahead of US$ 1bn Sovereign Bond Issue to International Capital Markets

10th July 2011, www.island.lk

Public officials in the Central Bank and Treasury are observing radio silence ahead of the US$ 1 billion sovereign bond issue to international capital markets. This is so that Sri Lanka can observe laws as laid down by the US capital markets regulator governing such issues, preventing investors from being unduly influenced by the issuer.

According to newswire services, international banks managing the issue for Sri Lanka would hold investor meetings starting Monday, July 11, but The Island Financial Review could not confirm this with officials because of the radio silence imposed on them.

This radio silence has been observed before, and is a sign that the US$ 1 billion bond issue is at hand, but no official would comment.

As reported in these pages last week, Cabraal speaking to foreign media said Sri Lanka warranted a sovereign ratings review given the post conflict macroeconomic developments, which should give the latest bond issue a yield bordering 6 percent or lower. Fitch Ratings had recently said the ratings ‘could’ be upgraded.

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Sri Lanka Appoints Four Banks as Joint Lead Managers to Handle Sovereign Bond Issue

25th June 2011, www.island.lk

Sri Lanka’s Central Bank has appointed Bank of America Merrill Lynch, Barclays Capital, Hongkong and Shanghai Banking Corp, and Royal Bank of Scotland as joint lead managers to advise and handle a future international sovereign bond issue.

The appointments were made after evaluating proposals received from seven top international banks and investment houses, a statement said.

The central bank has said it intends to sell a billion US dollar sovereign bond this year with the money to be used to help pay off debt and build infrastructure.

Central bank governor Nivard Cabraal said the bond’s tenure was likely to be 10 years.

"We don’t want to go longer because then the situation will get tighter and tighter," he told LBO Wednesday.

"We don’t want to lock ourselves to a current credit number for a longer period. Interest rates – we cannot say for sure because it will depend on the world market conditions. We would certainly expect the rate to be lower than last year."

Cabraal said he expects the bond to be well received given the island’s accelerating economic growth after the end of its 30-year ethnic war.

"There is no doubt in anyone’s mind about Sri Lanka’s performance so we do not foresee any anxiety. So it will be a fairly well received credit."

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Sri Lanka Relaxes Forex Rules Further in June 2011. Fund Transfers between NRFC Accounts to be Allowed

29th May 2010, www.sundaytimes.lk

The Central Bank is further relaxing foreign exchange regulations next month under its current policy of liberalising foreign exchange, as reserves improve and the new rules will include allowing fund transfers between NRFC accounts.

Central Bank Governor Ajit Nivard Cabraal said guidelines for these new regulations to be announced in mid-June are in line with the CB reforms to facilitate foreign exchange transactions and make it easier to do business.

“There are about seven or eight new things happening,” he told the Business Times. Among them are in addition to opening out NRFC accounts to allow internal transfers, students to be permitted to open accounts overseas when on studies and a set of guidelines for local companies to list shares on foreign stock-exchanges.

The last-named proposal (listing shares overseas) was announced last year but no guidelines were issued. The Central Bank has been relaxing foreign exchange regulations over the past 18 months in a bid to prop up the economy in the post-war period.

The last time the Bank announced similar measures was in November where foreigners were permitted to invest in Rupee Denominated Debentures issued by local companies; expediting approvals for companies to borrow from foreign sources; permission for foreign companies to start businesses in Sri Lanka; foreigners on tour or business in Sri Lanka to open accounts in foreign currency; foreign diplomats and their families to transact in foreign currency and Sri Lanka rupees, and permission for insurance companies to invest a part of their assets abroad, among others benefits.

Asked about any forthcoming bond issues, the Governor said the Government has factored in foreign borrowings in the budget and there are many ways to resort to this. “Our options are fairly wide – we can raise Sri Lanka Development Bonds; we can enhance the limits we have in our treasury bonds or we can have international bonds in Dollars or treasury bonds in Euros. We have many options and we have to evaluate carefully which one is the best,” he said.

The Bank has invited proposals from some international investment banks for investment advice on bonds. “This is a highly complex market and needs advice. We will use this advice and also look at the best time, what is the best instrument, what is the best tenor, what is the best quantum,” he said adding the proposed bond issue would be for budget support and debt repayment. The Bank is expected to launch the issue before October.

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Upward Revision of Sovereign Ratings on Sri Lanka Expected with Favourable Recommendations from Three Major Rating Agencies

22nd May 2010, www.sundaytimes.lk

Sri Lanka expects an upward revision in sovereign ratings with favourable recommendations from officials from three major rating agencies who are expected to visit the island before the end of this month to review the current country rating.

They will hold meetings with Central Bank (CB) officials, politicians, financial experts, diplomats, foreign lending agencies, etc and report their findings to the rating committee, a senior CB official said.
CB Deputy Governor Dharma Dheerasinghe, who is also the head of the country’s high level Sovereign Rating Committee, told the Business Times that teams of analysts from Standard & Poor (S&P), Fitch and Moody would be visiting the island separately to prepare individual reports to review the ratings which will be forwarded to their top level committees to make the final decision.“The committee meetings will be held in London and New York in July and we are also visiting them to present our case,” he said.

The committee made up of top CB, Finance Ministry and private sector representatives had been appointed to develop a strategy to push Sri Lanka's sovereign rating to investment grade. It is charged with devising a strategy of taking Sri Lanka’s current speculative B+ (Fitch) and B (S&P) rating to an investment grade 'BBB-' or higher over the next four years. Dr. Dheerasinghe noted that "S&P may raise the ratings on Sri Lanka on evidence of more comprehensive fiscal or structural economic reforms”.

At the moment the country’s rating is B+ and “we hope that it will be upgraded by these committees based on the reports of these analysts,” he said adding that they expect an upgrade in the sovereign rating to minimum grade of BBB –or higher.

However an economic expert who wished to be anonymous told the Business Times that S&P may lower the rating if Sri Lanka deviates substantially from the IMF program’s framework, or if expectations on the recovery in growth prospects and revenue improvements disappoint."With inflation pressures mounting in Asia, Sri Lanka is ranked among countries that have lower risks of social unrest because of popular governments, higher growth and lower unemployment mitigating such risks caused by rising prices,” he revealed.

Last year Sri Lanka received a B1 sovereign rating from Moody’s with a stable outlook and officials are confident there would be an upgrade given the government’s improved fiscal performance for 2010, with the deficit reaching 7.9% of GDP, slightly lower than the 8 % target. S&P had given Sri Lanka a long term foreign currency rating of B+ and a long term local currency rating of BB-, both upward revisions from 2009. Fitch has affirmed Sri Lanka’s long term local and foreign currency issuer default rate at B+, revising the outlook from stable to positive.

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