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 :

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

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

• Sri Lanka Vulnerable to External Shocks - Moody's

Sri Lanka's UDA Launched 5yr Bond to Raise Rs 10bn. 30pct Open to Foreign Investors

10th September 2010, www.lankabusinessonline.com

Sri Lanka's Urban Development Authority (UDA), a state agency, has launched a 5-year bond to raise 10 billion rupees and 30 percent of the issue is open to foreign investors, officials said.

Gotabhaya Rajapaksa, secretary to Sri Lanka's defence ministry, under which the agency operates, said the money would be used to build alternative houses for unauthorized dwellers in 800 acres of high value state land in Colombo city.

Investors could chose between three interest options: 11.0 percent annual, 10 percent monthly or a floating rate of Treasury bill plus 75 basis points every six months, Gamini Wickremasinghe, chairman of state-run Bank of Ceylon which is managing the issue said.

The issue opens for subscriptions Monday. The UDA said it would be able to build around 20,000 houses if 5.0 billion rupees was raised and around 65,000 if 10,000 billion rupees was raised.

P A Lionel, head of investment banking at Bank of Ceylon said commitments for over 5.0 billion rupees had already been received and they were open to offers for 10 billion rupees.

The bonds come with a Treasury guarantee.

Once city property has been released by shifting unauthorized dwellers, the UDA will lease the land to commercial developers. The debt will be serviced with the lease proceeds.

Lionel said foreign investors were among those who have committed to buy bonds. Sri Lanka's central bank has given permission for foreign investors to buy up to 30 percent of the issue or 30 billion rupees.

Up to 10 percent of outstanding government securities are already open to foreign investors and buyers have piled into the high yielding debt.

Sri Lanka Vehicle Tax Slash Lauded by Motor Industry. SUVs to Come Down by Rs4mn. Car Prices too Come Down

02nd June 2010, www.thebottomline.lk, By Santhush Fernando

The local automobile industry, badly hit hitherto by the global financial crisis and exorbitantly high domestic tax regime, is expected to see a drastic drop in vehicle prices after Treasury slashed excise duty on vehicles yesterday.

Almost all vehicle importers whom The Bottom Line spoke to were very positive over the tariff revision, but majority opined that they were in the dark regarding the exact net duty levels applicable. (Pl see below JKSB Comment with item-wise chart of new duty/tax).

“It’s very difficult to tell precisely. However, this will give a badly needed boost to the automobile industry. At a glance, the price drop of cars may range from Rs.300,000 to Rs.1 million. Sports Utility Vehicles (SUVs) could anticipate a drastic decline up to Rs.4 million, while double cabs could come down by Rs.1.5 to 2 million, roughly,” President of Ceylon Motor Traders’ Association (CMTA), Zeeniya Rasheed said.

Unconfirmed sources say that the excise duty applicable to vehicles with an engine capacity below 1,000cc has come down to 7 from 34%. Vehicles with the capacity between 1,000 to 1,600cc would see excise duty drop from 44 to 17% while luxury vehicle categories would be subject to 64%, instead of the current 27%.

Fifteen percent surcharge, which is also applicable on electrical appliances imports, has also been scrapped.

“It’s really difficult to ascertain the exact formula as there’s cascading structure with one tax touching another tax. Nobody knows until we get confirmed through a ‘Cusdec’ (Customs declaration). It’s very complicated,” an automobile industry source said.

At present vehicle imports are subject to six ‘fixed’ taxes – Ports Authority Levy (PAL) of 5%, surcharge of 15%, Nation Building Tax (NBT) of 3%, Social Responsibility Levy (SRL) of 1.5%, Road and Infrastructure Development Levy (RIDL) of 2.5%, Value Added Tax (VAT) of 20% and three ‘varying’ taxes – Customs Import Duty (CID), Cess, and Excise Duty.

Speaking to The Bottom Line, Chairman United Motors PLC, Ranjith Fernando, said that the tariff revision would be a relief to both importers and buyers, alike.

“It’s certainly a welcoming move. The prices of cars will come down drastically. As many importers refrained from bringing large stocks and kept minimum stocks,” he said.

According Fernando, currently a Pajero was subject to between 300 to 400% total compound tax, depending on engine capacity and type of fuel.

The new tariff is likely to have an impact on locally-assembled vehicles.

“As it is there’s a huge price differential between imported and locally-assembled vehicles. However, with this tariff cut prices of the latter will also have to come down,” he added.

General Manager – Sales and Marketing, Associated Motorways (Pvt) Ltd., Shivantha de Zoysa said that they were yet to ascertain the full impact of the tariff revision.

“There are nine different types of sub-duties, while the government had introduced the tariff cut on excise duty. Currently, petrol vehicles with an engine capacity below 1,000cc are subject to a total net duty of 187%, on its CIF (Cost Insurance & Freight),” he pointed out.

According to de Zoysa, prior to the duty revision, a total net tariff of 217% was applicable for petrol vehicles with an engine capacity between 1,000 to 1,600cc, while vehicle categories from 1,600 to 2,000cc and above 2,000cc were subject to total net duty of 290 and 299%, respectively.

The number of brand new vehicles registered in 2009 was a mere 7,437 when compared with 25,325 registered in 2008, which was a massive drop of 70.63%. Government tax revenue, in contrast to Rs.17.4 billion earned in 2007, dropped to Rs.11.06 billion in 2008 and to Rs.3.25 billion in 2009.

Vehicles registrations expected to increase
In an Equity Research Report, releases by Bartleet Mallory Stockbrokers (Pvt) Ltd, says it expects vehicle registrations in 2010E and 2011E to increase.

“New vehicle registrations over the first four months of 2010 amounted 95,929, indicating an upward movement. Vehicle registrations could see an immediate improvement in 2010 with the economy gaining traction coupled with low interest rate,” it stated.

“In addition, tax reforms could further benefit vehicle imports, in our view,” the report noted.

Related Information:
A Comment by JKSB with Item-wise Chart of New Duty/Tax - Details of key tariff revisions pertaining to motor vehicles and consumer electronics

Download : Sri Lanka_Customs_Tariff_Calculator.xls

Sri Lanka Customs Tariff Calculator by HS Code

Sri Lanka to Keep Rates on Hold, No Plans to Sell any Bonds Immediately

18th May 2010, www.bloomberg.com, By Shamim Adam

Sri Lanka’s benchmark interest rates will likely remain unchanged this week as inflation remains “benign,” central bank Governor Nivard Cabraal said in an interview in Singapore today.

“We will see a similar situation being maintained because inflation figures have been moderate, it’s been quite benign,” he said after speaking at an investment seminar. “We still have a little slack, so most probably monetary policy will remain at the level that it is.”

Sri Lanka’s policy makers are seeking to stoke growth after the end of a civil war in 2009. The central bank, which will release a policy statement on May 20, left the reverse repurchase rate unchanged at 9.75 percent last month, its lowest level since August 2005, and maintained the repurchase rate at 7.5 percent.

Consumer prices in the capital, Colombo, rose 5.8 percent in April from a year earlier, according to the statistics department. Inflation averaged 12.6 percent in the five years through 2009.

Peace in the South Asian nation is attracting tourists and investment, helping companies such as John Keells Holdings Plc, which has port, supermarket, hotel, property development and brokerage arms. Sri Lanka’s stock index is one of the world’s best performers in the past year.

The economy may expand more than 6 percent this year, Cabraal told investors today, supporting the central bank’s forecast for growth of 6.5 percent in 2010, the fastest pace in three years.

The island doesn’t plan to sell any bonds immediately and will review its funding options after the budget is unveiled, he added. The governor said last month Sri Lanka may sell more dollar-denominated bonds this year to fund its budget deficit.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

Treasury Cuts OD by 20bn, SRi Lanka to Have Its Fastest Growth in 2010

14th November 2009, www.dailymirror.lk

Taking advantage of a more stable macroeconomic environment, the Government has decided to reduce the Treasury overdraft by Rs. 20 billion. This effectively brings the Treasury overdraft from Rs. 60 billion to Rs. 40 billion.

Deputy Finance Minister Ranjith Siyambalapitiya told Daily Mirror FT that the decision was taken given the positive economic climate and the positive outlook for 2010.

“The Treasury overdraft was reduced for two main reasons. One is the positive post-war climate, due to which we have seen a significant drop in defence expenditure; the other is the easing of the global recession,” he explained, adding that the Government would maintain the current level for the next few months.

Recalling that the Treasury overdraft increased markedly during the last months of 2008 to peak at Rs. 80 billion during the first three months of 2009, he noted that the Government’s expenditure reduction after the war coupled with increased economic performance had resulted in it being able to reduce the overdraft to Rs. 60 billion after May.

It was further decreased to Rs. 40 million given the positive foreign reserves and stable currency. He also maintained that the dependency on State banks to fund the overdraft would be extensively reduced with this measure freeing money for investment.

“When you compare the Government income for the first three months of this year it was 12% lower year-on-year. However, during the period from March to September, Government income grew by 12% year-on-year, so we have been able to stabilise our expenditure and focus on alternative avenues to reduce public expenditure,” he stated.

The Minister expressed a positive prognosis for 2010, terming it as “the year when our income will grow at its fastest” and insisted that promises of salary hikes among other Government expenditure would not spiral into another increase in the overdraft. A growth on exports and higher remissions are also expected to boost the economy, according to Siyambalapitiya.

Defence expenditure was also earmarked to be reduced, by the Minister. This would in turn be funnelled into capital and recurrent expenditure, particularly the payment of salary hikes promised at the beginning of the New Year.

However, the Vote on Account (VoA) allocated the largest expenditure for defence, with a whopping Rs. 71.4 billion for the first four months of 2010. In the previous Budget, the defence allocation was Rs. 166.5 billion.

Interest Rates in Treasury Bills Decline Further In Line with the Easing of the Monetary Policy by the Central Bank of Sri Lanka

6th November 2009, www.dailymirror.lk

The yield rates on Treasury Bills declined further at the primary auction held yesterday. The yield rate on Treasury bills with a maturity of 91 days declined by 36 basis points to 8.14 per cent, the lowest since May 2005. This trend was reflected in the yield rates of Treasury Bills with the maturities of 182 days and 364 days as well.

With this reduction, the primary market yield rates of Treasury Bills have declined by 906 - 938 basis points during the past 12 month period. The secondary market Treasury Bill yield rates also continued on its decelerating path during this period.

In the meantime the primary and secondary market yield rates for Treasury Bonds also followed the same trend and declined by 843 - 1088 basis points during the past 12 month period while the extension of the yield curve upto the 6 year horizon was also witnessed during this period with the prudent public debt management strategies.

The reduction in yield rates observed during the recent past is in line with the gradual easing of the monetary policy stance by the Central Bank of Sri Lanka, increased foreign investor participation in the Government securities market, prevailing liquidity position in the market and positive view of the market on the deceleration of inflation rate.