Listed Firms in CSE Issue Debentures to Raise Big Sums Following Budget 2013 Concessions on Corporate Debt

27th March 2013, www.dailymirror.lk

Many listed entities in the Colombo Stock Exchange were seen taking advantage of the concessions offered in the Budget 2013 with regard to corporate debt, as few companies have already raised big sums this year through debenture issues with a several more to follow.

On Monday, Fitch Ratings said Lion Brewery, a unit of Carson group and Softlogic Holdings were planning to Rs.3 billion and Rs.750 million respectively through debenture issues. The two issues have been assigned AA- and A-, respectively, by Fitch.

The Budget 2013 proposed to exempt withholding tax on interest income earned by investing in bonds and debentures listed in the Colombo Stock Exchange (CSE) with effect from this year in an attempt to create a more vibrant corporate debt market.

Being the first to take advantage of the new development, Seylan Bank PLC finished raising Rs.2 billion via a debenture issue in February that was oversubscribed in the opening day itself.

Merchant Bank of Sri Lanka, a unit of state owned banking giant, Bank of Ceylon also raised Rs.2 billion through a listed debenture.

According to analysts, companies seem to be using this window of opportunity to raise long-term capital, as the tax concessions offered in the Budget 2013 are applicable for the entire duration of the debt.

“So they can lock the moneys raised and keep it for future needs,” an analyst pointed out.

“It is encouraging to note that better managed companies are using the capital markets to raise debt on the strength of their own balance sheet.

This will reduce exposure to bank borrowings and raise medium to long-term capital, reducing interest rate risk. We hope more companies will take advantage of the tax break to issue rated longterm paper,” Fitch Rating Lanka said, responding to a Mirror Business inquiry.

According to market sources, a number of companies, including couple of big banks and several finance companies are also bracing to raise money via debenture issues in the near future.

Meanwhile Mirror Business learns that Colombo Stock Exchange is currently in the process of amending certain Listing Rules pertaining to the listing of debentures both in the main and the secondary boards.

Sri Lanka Budget Deficit Shrinks to 1.9pct of GDP for First TwoMonths of 2011 as Government Fscal Discipline Improves

16th May 2011, www.island.lk

Government fiscal discipline seems to improve with latest data showing that the budget deficit contracted nearly 3 percent during the first two months of 2011 to Rs. 106.5 billion from Rs. 109 billion a year earlier, as revenue growth out paced expenditure growth. Also encouraging is the increase in long term government investments.

As a percentage of GDP, the fiscal deficit for the first two months of 2011 is estimated at 1.9 percent, a steady improvement from 2.25 percent a year earlier.

After the budget deficit ballooned to 9.9 percent of GDP in 2009, resulting in a temporary halt of the US$ 2.6 billion IMF standby facility arrangement, government fiscal discipline showed much improvement recording a deficit of 7.9 percent in 2010, a little better than the 8 percent IMF target.

Poor fiscal discipline over the years has made it difficult to maintain low inflation. The Central Bank said it was in precarious position in 2009 long before the actual deficit numbers came out and think tank the Institute of Policy Studies said fiscal indiscipline was the bane of macroeconomic stability in Sri Lanka.

According to Central Bank data released a few days ago, government revenue growth during the first two months of 2011 has outpaced expenditure growth, resulting in a slight, but significant, contraction of the deficit.

Total revenue was up 24.74 percent to Rs. 135.4 billion from Rs. 108.6 billion a year earlier. Tax revenue increased by 23.16 percent to Rs. 126 billion, non-tax revenue was up 51.78 percent to Rs. 8.5 billion. Grants increased by 14.28 percent to Rs. 800 million from Rs. 700 million a year earlier.

Total government expenditure increased by 11.16 percent to Rs. 241.9 billion from Rs. 217.6 billion a year ago. Current expenditure grew 9.15 percent to Rs. 198 billion while capital expenditure or long term investments increased 20.99 percent to Rs. 43.8 billion.

Earlier this year the IMF said the Sri Lankan government was in a position to absorb the flood related expenditure within its budget. The government was also expected to increase domestic fuel prices, which it has already done, in order to breakeven the Ceylon Petroleum Corporation and Ceylon Electricity Board (CEB). This means inflation would spike but the government would be able to sustain better fiscal control and medium to long term macroeconomic stability.

"It is a tough choice. Will the government sacrifice medium to long term stability for short term relief, or sacrifice giving the people relief today for a more stable economy tomorrow? It is a very tough choice and requires a tight-rope kind of balancing act," an analyst told The Island Financial Review.

"This is where the government has to take good governance, accountability and transparency seriously, so that people can better understand the choices they face," he said.

Meanwhile, total outstanding government debt increased by 10.56 percent Rs. 4.71 trillion as at end February 2011, from Rs. 4.26 trillion a year ago. Total domestic debt grew 7.25 percent to Rs. 2.66 trillion while foreign debts increased 15.16 percent to Rs. 2.05 trillion.

Related Info :

• Sri Lanka Budget Deficit Falls to 7.9pct of GDP in 2010 - Annual Report of the Central Bank of Sri Lanka

• Sri Lanka’s January Exports Up 72.4pct. Garment Exports to Europe Up 143.5pct without EU GSP+ and Trade Deficit Contracts 10pct

• Sri Lanka Trade Deficit Doubles During First Nine Months of 2010

Sri Lanka Budget Deficit Target of 6.75pct of GDP to Remain Despite Floods

18th February 2011, www.lankabusinessonline.com

Sri Lankan authorities want to keep the budget deficit target of 6.75 percent of gross domestic product for 2011 despite the additional flood related expenditure, IMF mission chief Brian Aiken said.

"Addressing the impact of the floods may require some re-allocation of budget resources, but the authorities felt that it is premature at this stage to revise their budgeted deficit target of 2011 of 6.75 percent of GDP," he told a news conference.

The government had earlier said the Cabinet had approved additional expenses of 33 billion rupees.

Aitken said he was aware of the statement but authorities would try to meet expenses by re-allocating expenses.

Donors are also expected chip in, he said.

Aiken said Sri Lanka's growth for 2011 will not be reduced much despite crop damage.

"Recently flooding significantly damaged Sri Lanka's various crops including rice and vegetables, as well as rural infrastructure," Aiken said.

"(But) given the strength of Sri Lanka's economy the overall impact on output growth should be limited."

The IMF has forecast 7.0 percent growth for Sri Lanka in 2011, slightly lower than the 7.5 percent number estimated by the lender for 2010.

Aitken said demand-driven inflationary pressure was not evident and there was no evident pressure on land prices.

In this context the current interest rates policy seems appropriate, he said.

Sri Lanka Removes Duty on Electric & Hybrid Cars

23rd November 2010, www.lbo.lk

Sri Lanka has made electric and hybrid cars duty free, while value added tax and rates of depreciation allowed for used cars has also been increased, a budget for 2011 said.

Another tax, social responsibility levy has been removed and nation building tax reduced from 4.0 percent to 3.0 percent.

But a Treasury official said excise taxes have been raised to recoup revenue losses from other taxes.

Though the price of new cars may not come down, an official said the price of older car could come down.

Some commercial vehicles were already on a lower duty.

President Mahinda Rajapaksa said electric and hybrid vehicles will be completely freed from excise duties and value added tax to promote environmental friendly vehicles.

Motor homes will also be made duty free, according to the budget document.

Sri Lanka allows cars up to three and a half years old to be imported.

Now three year old cars will be depreciated to 60 percent compared to about 80 percent earlier. Cars three and half years old will be depreciated to 55 percent.

The budget speech said the depreciation tables will comply with World Trade Organization rules.

The government will also allow state workers and state corporation employees to import cars at a lower duty.

A provision that allowed people who paid taxes of more than 500,000 a year for three consecutive years to import cars at 25 percent duty has been removed in the budget.

Sri Lankan Firms Allowed to Borrow Abroad and Sell Debt to Foreigners

23rd November 2010, www.lbo.lk

Sri Lankan firms can sell corporate debt to foreign buyers provided the securities are rated and not priced over 200 basis points over the benchmark sovereign yields, Central Bank governor Nivard Cabraal said.

The bank had set no limit to the volume, or the percentage of a particular issue a company can sell to foreign investors.

"We have an ideal of an overall national limit internally," Cabraal said. "But no limits have been set for a particular issue."

Local firms would also be allowed to borrow abroad through loans.

"The applications can be sent to a special unit at the central bank, which will process it within two weeks," he said.

Cabraal said access to foreign capital will reduce the competition for funds within the country and help bring down interest rates in the country over the longer term.

Sri Lanka has a pegged exchange rate which could result in excess capital flows, if the country continues to have higher than world interest rates.

"Initially only a few top corporates' debt may be accepted by overseas buyers," says Ajith Fernando, head of Capital Alliance, an investment banking house.

"But Sri Lankan companies are likely to be very interested in borrowing from foreign banks.

"But when infrastructure projects for example start issuing, there will be more interest. Foreign investors are more familiar with their models and revenue patterns."

Related Info:
Sri Lanka Relaxes Foreign Exchange Regulations. Allowed Foreigners to Invest in Corporate Debt & Open Businesses, and Locals to Borrow & Invest Overseas

Sri Lanka Relaxes Foreign Exchange Regulations. Allows Foreigners to Invest in Corporate Debt & Open Businesses, Locals to Borrow & Invest Overseas

23rd November 2010, www.lankabusinessonline.com

Sri Lanka has allowed residents to buy stocks abroad and foreign investors have been allowed to buy into local corporate debt and insurers have been given permission to invest up to 20 percent of their reserves abroad.

The exchange control relaxations are in effect from November 22, the government said in a statement issued with the budget.

Central Bank Governor Nivard Cabraal promised to liberalize exchange controls in a road map in January.

Foreign tourists and business visitors will also be allowed to open bank accounts in Sri Lanka.

Sri Lanka imposed exchange controls within two years of establishing a money printing central bank after abolishing a currency board arrangement which had allowed free capital mobility.

Exchange controls are needed to prevent a fall in an exchange rate when a central bank prints money to finance a budget deficit and tries to maintain an exchange rate peg at the same time.

The phenomenon is known as the 'impossible trinity' of monetary policy or the 'open economy trilema'.

The central bank is now conducting fairly tight monetary policy and has built up a large stock of foreign reserves.

The full government statement is reproduced below.

1. Permission is granted for foreigners to invest in rupee denominated debentures issued by local companies. To give effect to this, relevant Gazette notification has been issued by the Controller of Exchange.

2. Permission is granted for Sri Lankan companies to borrow from foreign sources with effect from 22.11.2010. The procedures and documents required in order to complete the process have been prepared by the Central Bank of Sri Lanka.

3. Permission is granted for foreign companies to open places of business in Sri Lanka with effect from 22.11.2010.

To give effect to this, necessary gazette notification to establish the procedure to be followed for this purpose has been issued to all concerned, while the Controller of Exchange has also issued instruction to the authorized dealers covering the bank accounts to be opened for this purpose.

4. Permission is granted to foreigners on tour or businesses in Sri Lanka to open accounts in foreign currency with effect from 22.11.2010. To give effect to this, necessary instructions will be issued by Central Bank of Sri Lanka to all the banks operating in Sri Lanka.

5. Permission is granted to the staff of foreign embassies in Sri Lanka to open new foreign currency accounts with effect from 22.11.2010. To give effect to this, necessary instructions have been issued by the Controller of Exchange to all authorized dealers operating in Sri Lanka.

6. Permission is granted to increase the advanced payments for imports from US $ 10,000 to US $ 50,000 with effect from 22.11.2010. To give effect to this, necessary instructions have been issued by the Controller of Import and Export to all authorized dealers operating in Sri Lanka.

7. Permission has been granted to Sri Lankan residents to invest in equity of overseas companies and make payments in respect of setting up of places of business outside Sri Lanka. To give effect to this, relevant orders under the Exchange Control Act have been issued by the Hon Minister of Finance and Planning and the Controller of Exchange has issued the necessary instructions to the authorized dealers operating in Sri Lanka.

8. Permission has been granted to insurers to invest up to 20 percent of the long term fund and technical reserves aboard. To give effect to this, relevant Gazette notification has been issued under the Regulation of Insurance Industries Act and directions have been issued to authorized dealers.

9. Permission is granted to importers and indirect exports of gem and jewellery to open foreign currency accounts with effect from 22.11.2010. To give effect to this, necessary instructions will be issued by the Controller of Exchange. Already exporters of such items are enjoying this facility.

Related Info:
Central Bank of Sri Lanka - Further Relaxation of Foreign Exchange Regulations

Sri Lanka Government Gazette

Foreign Currency Accounts for Sri Lankan Overseas Service Providers and Their Employees

Sri Lanka's First Full Post-War Budget Cuts Corporate Tax

22nd November 2010, www.lbo.lk

Sri Lanka has cut a series of taxes on banks in a bid to increase banking activities, but raised a tax on stock trading, President Mahinda Rajapaksa said presenting the budget for 2011 in parliament.

A debit tax on withdrawals from banks would be lifted and a so-called financial value added tax would be cut from 20 to 12 percent, Rajapaksa said.

Rajapaksa said a 0.2 percent tax on stock trading will be raised to 0.3 percent because there were no capital gains taxes.

Withholding tax on earnings of mutual funds would be the same as Treasury bills, he said. Interest on T-bills are now at 10 percent.

Unit trusts would be freed from economic service charges and foreigners would be allowed to buy them.

Re-insurance would be freed from value added tax.

Sri Lanka will cut corporate income taxes from 35 to 28 percent except for tobacco, alcohol and casinos.

At present companies and non-governmental organizations are taxed at rates around 30 percent, 33.3 percent and 35 percent, the budget speech said.

But income taxes on tobacco, alcohol and casinos will be raised to 40 percent.

A manufacturer exporting under a Sri Lankan brand name will be taxed at 10 percent, down from an earlier 15 percent.

Corporate tax on financial institutions has been cut from 35 to 28 percent. Another income tax like tax of 20 percent (financial VAT) has been cut to 8.0 percent.

But the firms will have to put in the equivalent of 8.0 percent of financial value added tax to a an investment account with Sri Lanka's central bank for three years.

The money has to be used by the banks to give to "grant long term loans at a lower rate of interest" the budget speech said. The interest from such loans are to be free of income tax.

A tax exemption for charities engage in education has been removed, while charities engaged in environmental protection activities.
Firms in fisheries and making seed or planting material have been exempted from income tax for five years.

Start-up companies which invest between 5,000 to 10 million US dollars in sectors to be specified, will get a blanket five year tax holiday.

Unit trusts and mutual funds invested in listed debt or equity will be free from income tax.

Sri Lanka Ports Authority, Ceylon Electricity Board, National Water Supply and Drainage Board, Ceylon Petroleum Corporation have been exempted from income tax and two state firms Sri Lankan and Mihin Lanka have been exempted from income tax.

In many countries, state energy monopolies and ports authorities are sources of large volumes of income tax. Both the Sri Lanka Ports Authority and Ceylon Electricity Board was a large contributor to income taxes at one time.

The budget said the firm will have to pay a 25 percent dividend to the Treasury.

Many of these institutions now run losses, and are sustained with Treasury handouts charged from taxes on the people. Sri Lanka has high rates of taxes on basic foods.

Current tax incentives given under the Board of Investment laws would be revised.

Related Info:
BUDGET-WRAP -President presents development-oriented budget 2011 - TIMES Online (sundaytimes.lk)

Sri Lanka Budget Deficit Contracts by 9.25pct for the First Eight Months of 2010

31st October 2010, www.island.lk

According to data released by the Central Bank last Friday, the budget deficit for the first eight months of this year as contracted by 9.25 percent to Rs. 314.6 billion from a deficit of Rs. 346.7 recorded during the corresponding period of 2009.

Total revenue, including grants, increased 17.94 percent to Rs. 502.9 billion from Rs. 426.4 billion a year ago. Tax revenue increased 18.04 percent to Rs. 441 billion from Rs. 373.6 billion a year ago while non-tax revenue increased 52.95 percent to Rs. 54.3 billion. Grants declined by 56.81 percent from Rs. 17.6 billion a year ago to Rs. 7.6 billion.

Total expenditure increased by 5.74 percent during the first eight months of this year to Rs. 817.5 billion from Rs. 773.1 billion a year ago.

Recurrent expenditure increased 3.33 percent to Rs. 635.3 billion from Rs. 614.8 billion while capital expenditure, usually on infrastructure and long term public works, increased 15.09 percent to Rs. 182.2 billion from Rs. 158.3 billion a year ago.

Our calculations show that the budget deficit as a percentage of GDP is estimated at around 5.7 percent, a welcome improvement from 7.18 percent a year ago.

Economists point out that the rise in revenue is a result of natural growth spurred by post-conflict economic activity and this has contributed towards contracting the deficit from the previous year. For this favourable fiscal performance to be sustainable, hard reforms to revenue and expenditure management would have to be introduced sooner or later.

The much awaited reforms of the tax system would only be announced later this month when the budget for 2011 is presented in parliament. Here again, we would probably hear the recommendations of the Presidential Taxation Commission the government would choose to accept.

On the expenditure side, the government is committed to rationalise its expenditure. Recurrent expenditure growth has slowed down but needs to be better controlled over the next few years if the budget deficit, which ballooned to 9.9 percent last year, is to be brought down to 5.2 percent by 2012.

Related Info:
Fiscal Setor Statistics - Central Bank of Sri Lanka

Sri Lanka Trade Chambers Expect Business Friendly Budget 2011

17th October 2010, www.sundayobserver.lk, By Lalin Fernandopulle

Trade chambers in the country are anticipating a business and industry friendly budget for 2011 which is to be presented in parliament next month.

President, National Chamber of Commerce of Sri Lanka (NCCSL), Lal De Alwis said that the chamber has called upon the government to continue the tax holidays given to the agricultural sector.

“There is immense potential for agricultural development in the North and the East following the end of the conflict. Tax incentives will help increase investments in the agricultural sector which contributes a major share to the growth of the economy”, he said.

The government expenditure for 2011 is expected to increase to around Rs. 1.9 trillion from an estimated Rs.1.28 trillion this year following the need for more spending on post conflict development.

De Alwis said the tax system should be simplified and made people friendly to widen the tax base. The number of taxes should be reduced and those evading should be brought into the tax net.

The NCCSL has requested the government to introduce a special interest scheme for senior citizens who today do not get a reasonable return on their investments.

Bank interest rates have been slashed to a single digit tightening the belt on pensioners and low income earners who are already burdened with the staggering cost of living.

Chairman Ceylon National Chamber of Industries (CNCI), Sunil Liyanage said the CNCI has proposed that the duty rates for the footwear industry be maintained for the benefit of the industry which is fast developing.

A 30 percent duty or Rs. 1,000 per pair of imported shoes is levied.

The CNCI has requested that the import of raw material and machinery be made duty free. The chamber has called upon the government to abolish all levies to support the growth of the footwear industry.

“CNCI has requested the removal of cess on raw material used for the plastics industry. We have also requested a 25 percent depreciation on import of footwear industry machinery”, he said.

The chamber head said there should be a consistent national industrial policy for Sri Lanka and added that CNCI has requested the Ministry of Industries to set up a joint consultative body at the Ministry with the participation of chambers.

CNCI has proposed to set up a statistical unit to collect data on local industries.

President, Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL), Kosala Wickramanayake said the chamber expects a business friendly budget next year to expedite development in the country.

“FCCISL expects the recommendations of the Tax Commission to be implemented to create a people friendly tax culture in the country. The chamber hopes that there will be less taxes for the SME sector in the country”, Wickramanayake said.

The Finance Ministry is considering proposals to reduce tax rates on personal and corporate income and financial institutions to put an end to tax concessions that are not beneficial to the country.

Bridging the budget deficit, balance of trade, creating a people friendly tax system, increasing foreign direct investments and accelerating economic growth are some of the major challenges of the 2011 budget.

Chambers are expecting the 2011 budget to provide incentives for vocational training, SMEs, agriculture, industries, education and health.

Wickramanayake said bureaucracy and red tape in state institutions that delay approval of projects should be done away with to accelerate economic growth in the country.

“Land should be allocated for agriculture, tourism and industrial development”, he said.

President, Sri Lanka Chamber of Small Industry (SLCSI), Aloy Jayawardene said the chamber hopes that the next budget will focus on the SME sector which plays a pivotal role in the development of the country.

“The problems of the SME sector has not been properly addressed and as a result the sector is unable to compete and develop enterprises”, he said.

Jayawardene said the chamber expects a bail-out package for SMEs who are facing enormous difficulties due to the high bank interest rates. The Appropriation Bill for 2011 will be presented in parliament next week and the Budget on November 22 by the President.

Proposals from the National Chamber of Exporters (NCE), the premier chamber for exporters concentrate on the sectors of coconuts, rubber and payments on VAT.

In the sector of coconuts the NCE proposes reducing the duty on the import of vegetable oil by 15 percent or Rs. 20/= per Kg, whichever is higher, with all other levies in place or export rebates to be granted for all coconut kernel products.

* Proper utilisation of the rubber CESS fund, safeguards against unfair trade practices, removal of levies on synthetic rubber, removal of levies on natural rubber imports, needs of market information and marketing and distribution are proposed by the NCE to increase the contribution from rubber to the national economy.

NCE also proposes the payment of VAT for local service providers (sub contractors).

India's SpiceJet Ups Frequency to Colombo at Low Fares of Rs.999 from Chennai

10th October 2010, www.lankabusinessonline.com

Indian budget carrier SpiceJet, which has launched daily flights to Sri Lanka to exploit the island's post-war tourism prospects, intends to increase frequencies and add more destinations soon, officials said.

The airline, India's second largest budget carrier, is offering introductory fares as low 999 Indian rupees one way to the Sri Lankan capital Colombo from Chennai for some early bookings, with meals having to be bought on board.

"We're a 'no-frills' carrier and our fares are affordable," said Samyukth Sridharan, chief commercial officer of SpiceJet.

"Our cost structures are at a level where we can actually make profits by offering those fares."

The response to the airline's introductory fare to Colombo was "very encouraging" with the first flight last Friday being 80 percent full, a load factor they expect to maintain in October, he told a news conference.

"In the next six months we trying to get more flights to Colombo to connect two or three more Indian destinations," Sridharan said.

Sunil Peiris, director of Jetwing Travels, agents for SpiceJet, said the airline hopes to add New Delhi, Mumbai and Bangalore in future.

"We're also looking at starting a flight to Male connecting India and Male through Colombo," Sridharan said.

"It could be either from flights from Bombay or Delhi that goes forward to Male through Colombo. We could carry Indian passengers into Male over Sri Lanka."

Sridharan said the number of Indian tourists to Sri Lanka was growing rapidly following the end of the 30-year ethnic war in May 2009 and that more connecting flights between the two countries was needed.

"There's a lot more interest in travel especially in the last 12 months with stability in both countries and their economies looking up," he said.

"Lots of people would like to explore outside India. They are now going to the Middle East and south east Asia but we feel the south Asian region has far more potential for Indian tourists. That's why we would add more flights to Colombo, Nepal and Male."

Sridharan said SpiceJet has 22 aircraft now, mostly 189-seater Boeing 737-800 aircraft, and that the airline plans to have 45-50 planes in the next two and a half years.

About 20 percent of the seats on every flight are being offered at the introductory price, which is the equivalent of about three thousand Sri Lankan rupees for both ways.

Meals will cost about 250-300 Sri Lankan rupees.

"We like consumers to book early," Sridharan said. "Closer to the flight fares go up. The last few seats are more expensive obviously."

Sri Lanka Keeps Policy Rates & Treasury Yields Stable, Inflation Subdued

21st May 2010, www.island.lk, By Devan Daniel

The Monetary Board of the Central Bank has decided to keep rates at which commercial banks lend or borrow from the Central Bank stable as inflation remains subdued while benchmark Treasury bill rates remained relatively stable this week with the bank financing the payment of maturing bills amounting to a little more than Rs. 1.5 billion.

The point-to-point change in inflation fell to 5.8 percent in April after reaching above 6 percent in March but the annual change in the rate of inflation moved up to 3.4 percent, raising since 3.1 percent last February.

"Price pressures in the economy have been dampened by improvements on the supply side, particularly the noteworthy performance in paddy production. Prices of key commodities in the international markets also remain subdued," the Central Bank said.

For these reasons, price pressures are expected to be subdued in the short term, the bank said in its monetary policy review for May.

Therefore, the Monetary Board of the Central Bank ahs decided to keep policy interest rates unchanged at 7.5 percent and 9.25. These rates apply to overnight placement of excess funds of commercial banks (repurchase rate) with the Central Bank and borrowings (reverse repurchase rate) form the Central Bank respectively.

The Central Bank said credit to the private sector had improved with positive growth for March 2010 after making negative gains since April last year, but no figures were given. The latest Weekly Economic Indicators published by the bank indicates a 2.8 percent drop in private sector credit last February from the previous year.

However, the Central Bank said credit to the private sector is picking up.

"The gradual expansion in credit obtained by the private sector indicates the solidifying recovery in the economy," it said.

However, the Central Bank earlier this month said that it was constantly asking commercial banks to revise their lending rates to more reasonable levels and that credit to the private sector was too slow to recover despite loosening monetary policy throughout the latter part of 2009.

Dealers said excess liquidity in the rupee market continued to be high. Dealers said the surplus reached Rs. 33 billion as at Wednesday. With commercial banks still cautious in their lending to the private sector, government securities were the preferred option.

Meanwhile, broad money growth fell to 17.1 percent year-on-year this March from 18.6 percent as at end 2009. "Broad money growth remains compatible with the levels targeted in the monetary programme at the beginning of the year," the Central Bank said.

Broad money is defined as the sum of currency held by the public and all deposits held by the public with commercial banks. This is a popular variable that is used to analyse the relationship between the money supply and the general price level, or inflation.
Treasury yields stable
Treasury bill rates remained relatively stable at this week’s primary market auction of maturing bills amounting to Rs. 13 billion. The Central Bank accepted re-issued Rs. 11,443 million of these financing the settlement of the balance Rs. 1,557 million with access funds held in its position.

The six-month and 12-month Treasury bill rates remained unchanged at 8.88 percent and 9.23 percent respectively from a week ago but the yield on the three-month bill increased marginally to 8.13 percent from 8.18 percent a week ago.

The Rs. 13 billion maturing bills attracted bids amounting to Rs. 24.62 billion from primary dealers but only Rs. 11.4 billion was accepted with the balance bought by the Central Bank. Analysts said this was done by printing new money but a top Central Banker said the bank has a stock of excess funds for this purpose.

IMF and budget deficits
The biggest risk to maintaining low inflation and low interest rates is from the budget deficit and Central Bank warned that the government would have to contain high deficits.

The IMF is expected to announce the fate of the US$ 2.6 billion standby facility programme today after it deferred the payment of the third US$ 326 million tranche earlier this year when the government overshot the 7 percent of GDP deficit target for 2009, reaching 9.8 percent.

The government announced that it would target a deficit of 7.5 percent this year which would be brought down to 5 percent by 2012, but the IMF said it would want to see the proof when the next budget is announced.

The next budget is to be announced in November for the 2011 fiscal year. An interim budget for this year is to be announced by the end of June.

Although Sri Lanka has built comfortable levels of foreign exchange reserves, more than US$ 5 billion, economists point out that the continuance of the IMF programme would give long term investors confidence in Sri Lanka’s macroeconomic prospects.

An IMF mission is in the island and is expected to complete its review of the standby facility programme today.

Sri Lanka Plans to Cut Deficit by Half as Economic Expansion after War Boosts Revenue

07th April 2010, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka plans to nearly halve its fiscal deficit in three years as the end of the island’s 26-year civil war spurs economic growth and boosts revenue, Treasury Secretary P.B. Jayasundera said.

The budget shortfall is targeted to narrow to 5 percent of gross domestic product by 2012, from 9.7 percent last year and 7.5 percent in 2010, Jayasundera said in an interview at his Colombo office yesterday.

“We will not compromise on public investment but revenue will be raised,” he said. “As the deficit falls, borrowing from banking sources will disappear.”

The International Monetary Fund said Feb. 25 it may consider changing a $2.6 billion loan package to Sri Lanka after government spending to rebuild areas destroyed when ethnic Tamil rebels were routed last year caused the deficit to exceed the lender’s target. The Central Bank of Sri Lanka has forecast economic growth of 6.5 percent this year, 7.5 percent in 2011 and 8 percent in 2012.

President Mahinda Rajapaksa, whose government faces parliamentary elections tomorrow, has pledged to spend $1 billion a year to build new roads, ports and power plants.

Under the IMF loan approved in July, Sri Lanka is expected to cut its deficit to 6 percent of GDP in 2010, from 7 percent last year, and to reduce it to 5 percent by 2011. Fitch Ratings said last month that Sri Lanka’s credit rating may be lowered if the island nation fails to narrow its budget deficit.

2010 Budget

The IMF has said it will decide whether to grant Sri Lanka a third loan tranche of about $330 million after completing a review of the $42 billion economy once the government presents its 2010 budget.

Sri Lanka’s foreign-exchange reserves are at a record $6 billion, after dipping to $1.27 billion before the IMF bailout package.

“The IMF targets will have to be revised,” Jayasundera said. “Now that stabilization is over, the program needs to be more of a buffer to help create growth in the medium-term.”

The government’s delayed 2010 budget is likely to be presented in June, following consultations with the newly elected government, Jayasundera said.

“It will be a policy budget, with a new tax regime and growth momentum for the private sector while rationalizing public spending,” he said. “Defense and interest expenditure has stabilized.”

Central bank Governor Nivard Cabraal left interest rates unchanged in March for a fourth straight month, holding the reverse repurchase rate at 9.75 percent, its lowest level since November 2004.

Sri Lanka, which usually presents its budget for the calendar year the preceding November, tabled spending estimates for the first four months of 2010 due to the elections.

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

IMF - Sri Lanka Economy Strong, Expects Fiscal Commitment to Meet Its 2009 Budget Deficit Target

09th November 2009, www.bloomberg.com, By Anusha Ondaatjie

The International Monetary Fund said the release of a second payment in its $2.6 billion loan to Sri Lanka indicates a strong performance and fiscal commitment from the South Asian island economy.

The Washington-based lender expects the government to meet its 2009 budget deficit target of 7 percent of gross domestic product, Koshy Mathai, the IMF’s resident representative for Sri Lanka, said in a conference call today.

“We expect revenue to pick up and the deficit target to be reached,” Mathai said. “Sri Lanka’s reserve position has swelled to an extremely comfortable level.”

The IMF’s executive board on Nov. 6 agreed to disburse $329.4 million to Sri Lanka after a review of its policies implemented under the 20-month loan agreement approved in July. The Central Bank of Sri Lanka said Nov. 7 its foreign exchange reserves will surpass an unprecedented $5 billion with the IMF funds and grow further amid increased investor confidence.

Sri Lanka should boost reserves further through increased exports and remittances, Mathai said. The central bank’s policy of adding to reserves by accumulating foreign flows and preventing a sharp appreciation of the currency “has been a sensible policy,” he said.

The government’s sale of dollar bonds in overseas markets has also helped make borrowing costs cheaper and diversified the island’s fund raising options, Mathai said.

Growth Forecast

The government last month sold $500 million of five-year bonds in its first international offering in two years to raise funds for reconstruction after the end the island’s 26-year civil war in May.

Sri Lanka’s $41 billion economy may grow as much as 6 percent next year after expanding about 3.5 percent in 2009, Central Bank Governor Nivard Cabraal said Oct. 6. The IMF raised Sri Lanka’s 2009 growth forecast on Sept. 22 to 3.5 percent from a July estimate of 3 percent.

Cabraal has driven down interest rates to a three-year low, taking advantage of easing inflation to spur spending and make up for slowing exports.

“Recent economic developments have been stronger than expected and the near-term outlook has improved,” Takatoshi Kato, IMF’s deputy managing director and acting chairman, said in an e-mailed statement Nov. 6.

“While the fund-supported program had helped Sri Lanka avoid a balance of payments crisis, fundamental vulnerabilities remain to be addressed,” Kato said.

Budget Deficit

Sri Lanka agreed to reduce its budget deficit to 5 percent of gross domestic product by 2011, from 7 percent this year, as a condition for the IMF aid package.

The government in an Oct. 30 supplement to the so-called Letter of Intent signed in July said it was on track to meet the 2009 deficit target while expecting a faster accumulation of reserves by the end of this year and the first quarter of 2010.

Still, the government said there could be delays in fiscal reforms, including broadening the tax base, as the administration on Nov. 3 presented spending estimates for the first four months of 2010 in lieu of a full budget, ahead of elections expected to be held before April.

“Nevertheless, we remain committed to achieving our original target of reducing the underlying budget deficit - excluding reconstruction spending - to 6 percent of GDP in 2010,” the government said.

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