11th – 17th april 2011 alerts/en/2011/april 17, 2011.pdf · though the public was strongly...

11th – 17th April 2011

FCCISL News Alert Weekly Business Highlight


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Content Page

1. DEVELOPMENT ECONOMICS

• Economic upturn and cricketing lessons 05 • Govt. marginally exceeds expectations; deficit 7.9% to GDP 09 • Sri Lankan Labour Market Outlook 2011 13 • Inflation is not a matter of concern in the immediate future: IMF 15 • Sobering thought: Crude oil at $100 per barrel! 18 • Economic fallout from Japanese earthquake, tsunami 21

2. MANAGEMENT

• Management philosophies from the game of golf 24 • Positive emotions broadens thinking 28 • Talent Vs Attitude - Which is the best? 30

3. TRADE & MARKETING

• Rules for creating retail innovation 33 • WTO: Trade growth to ease in 2011 but despite

2010 record surge, crisis hangover persists 35 4. MONEY & BANKING

• VAT input claim 44 • Remarkable 2010 for Sri Lankan banking industry 45 • Review of financial statements 48 • Official economic report for first full year of peace 49 • Summary of the 2010 Annual Report of the Central Bank of Sri Lanka 52 • Synopsis of CB annual report - 2010 59 • Emerging Health Challenges in Sri Lanka: More Money for

Health and More Health for the Money 67 • Creeping Nationalization of Banks 71 • Rupee devaluation: Is it to save the country, exporters or the opposition? 73

5. EXPORTS & IMPORTS

• John Keells Tea Market Report 78 • Eco-friendly rural craftsmen to benefit 80



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6. STOCK MARKET • Unit Trust industry stable and secure 83 • CSE has dreary week 86 • How to buy/sell shares in Primary, Secondary markets 88 • Carsons, Bukit & ComBank boosts market - CSE

surges unexpectedly on three mega deals 91 • Mother of all Stock Exchanges 93

7. ICT

• ICT-BPO industry: Lanka developing the right skills 96 8. FCCISL PRINT IN MEDIA

• FCCISL/CCPIT to promote trade 100



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Development Economics



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Daily News – April 12, 2011

Economic upturn and cricketing lessons Rohantha N.A. Athukorala Last Saturday when I was watching the World Cup final my mind went back to the last championship way back in 2007 when some of us were grouped together in the lawn of Airport Garden hotel watching the finals between Sri Lanka and Australia staged in Barbados. We were just into the eighth over and Sanath Jayasuiya was batting when the night sky lit up with fire all around Katunayake. I remember running into the hotel corridor and then made it to the vehicle in the park to pull out from the hotel and so were all my friends following suit but there was firing all over just above us and we were yelled back into the hotel compound by the security guards. But the scenario was so different this time and in fact the setting was unique in my view as the country was free from terrorism and game of cricket was uniting the country be it if one of us is a Muslim, Tamil, Sinhalese, ex LTTE cadre, government official or a private sector executive we all wanted only one thing victory for Sri Lanka and we were celebrating freedom at the best. Even though we lost the finals we as a nation became united in the last six weeks and that was something that no one can take away. In my view, it’s a bigger victory for Sri Lanka than actually lifting the World Cup at cricket. I drove around the city on April 2 and be it in the plush bars in the five star hotels or in every Singer outlet in a town, Sri Lankans were on their feet shouting for a victory and to me it was not about cricket but celebrating freedom. However, it must be mentioned that it is very sad that Sri Lanka did not take advantage of this great opportunity and market to the world that we as a nation was celebrating peace and we welcomed the world to Sri Lanka’. On the other hand we saw how well India orchestrated this event to re-build the lost pride of the people of India that has been dogged in the recent past by alleged corruption scandals from the Commonwealth Games to the Air bus deal and then the 2G scam. The celebrations are yet continuing even as at Sunday night right across India which is led by Sonia Gandhi and Amithab Bachchan that gives us the power of brand India.

GDP upturn While many were focusing on the game of cricket, my pick last week was the report by the Census and Statistics Department on the economy of Sri Lanka in 2010. The country had achieved a 8.6 percent GDP growth in the last quarter of 2010 and ended the year at 8.1 percent tell a performance that every Sri Lankan can be proud of. The hotel and restaurant segment had grown by 41 percent in Q4, which is reflective of the private sector performance reports of the hotel sector of Sri Lanka. Which means that the macro data mirrors the private sector performance. This means that fundamentals of the country’s growth agenda is surely but slowly settling in. The transport sector has grown by 11.9 percent which once again demonstrates the upturn in logistics of the country given the overall drive on business and trade. It is fair to state that Sri Lanka is definitely on a growth trajectory to reach a nine percent GDP growth. Hence the challenge is how each of us can latch on to this cycle of growth so that we can achieve inclusive growth rather than a lop sided performance like today, when the western province carves out almost 53 percent share of GDP which is not very healthy.



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Export growth In the backdrop of this strong economic performance, January 2011 exports have unleashed to a commanding 74 percent growth which demonstrates the resiliency of the Sri Lankan exporter who has adjusted to remain competitive even though there has been a fall out of GSP+ and GSP to the EU and US which account for almost sixty percent of export proceeds. Apparel and earnings have grown by 21.9 percent to $ 385 million with cutting edge innovation and marketing initiatives whilst the overall industrial sector performance in January has continued to grow which means that overall business strength is positive and is not only the apparel sector that doing well. Rubber sector has grown by 18.7 percent with solid tyres and tyres and tubes leading this growth but we need to watch the implications are post the Japanese Tsunami that has impacted the out put vehicles from Japan. Agricultural products have continued to perform with a 28.9 percent growth agenda which means that Sri Lanka for sure within the $9.5 billion dollar export earnings mark for 2011.

Some issues But a worrying indicator is that Sri Lanka’s share of global exports has declined to 0.6 percent from the 0.8 percent which is alarming. This means that we as a nation is falling behind the global trend of exports. One way out to arrest this situation is by focusing on the South Asian apatite for consumption where Sri Lanka just accounts for just 4 percent of the overall export performance. Another key issue is the probable impact of the La Nina phenomenon on the agricultural economy of the North East and well as the tea industry. The reason why I am highlighting this sector is because food security can be a burning issue not only globally but in Sri Lanka and we need to address this as a nation. The one million economic units branded as ‘Divi Negauma’ can support this cause but a more fully fledged agricultural sector drive can benefit Sri Lanka provided new technology can be introduced is my view. Aparently the FDI performance in 2010 is one of the biggest issues the country is up against given the FDI performance of neighbouring countries like Cambodia and Vietnam are on high gear. The only solution being that on the attribute of ‘Doing Business’ in Sri Lanka we have improve our performance from the current rank of 105 to be within the targeted top 50 countries of the world. For this to be achieved a careful orchestration of these variables will have to be done as a matter of urgency. So far Sri Lanka is struggling on this front sadly.

Cricketing lessons Coming from a sports background, my view is that Sri Lanka performed extremely well at World Cup 2011. It’s just that India was a better side. Now it’s a matter of picking up the lessons and focusing on the 2015 championship. Let me highlight some of them and link them to a business situation. 1) Electronic ICC CEO Haroon Lorgat said that the accuracy of decision making had improved in WC 2011 due to use of technology. I guess the pick to us is the increased use of the PC and mobile phone in our daily lives. Current research reveals that only 30 percent of the featured are on average used by a modern day business executive. If we can increase our productivity by just 5 percent as a nation the aggregate can be considerable. 2) 28 years If we examine the Indian victory it has taken the country 28 years to bring the WC back to the country. Sri Lanka’s attempt was to bring it in 14 years. Meaning half that duration. For this to happen a strategic development of the game must happen as district level so that talent can be identified. If we analyze the age



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of the Sri Lankan cricket team it is the oldest in the tournament 2011. I guess this needs to be changed in the next four years. This same ethos hold ground in business. Young blood has to be introduced. 3) Next captain If we really examine Team India we can see that Tendulkar held the team together but it was Yuaraj that had won man of the match four times in the tournament. Meaning that a new leader has been identified and nurtured to take over India after, Dhoni. Even at the final once the two stalwarts were out it was the youngsters that guided India to victory. This once again highlights the importance of having youngsters in the corporate hierarchy. 4) Risk Pepsi Cola took a calculated risk and bought media right across the WC 2011 to announce the ‘Change the Game’ campaign. It worked as from the semi final onwards the ratings improved to 20+ and media was 350% more expensive as India was into the last four and then in the finals. Latest research reveal that sixty percent of the homes watch the match at 10.22 pm when Dhoni lifted the cup. Life is all about calculated risks I guess. 5) A wild card After the victory when Dhoni was interviewed a comment made was that he had to prove that his decision to bring in Sreesanth into the final had to be justified. I guess as a leader you must be courageous to pickup a wild card which are some times shunned by the rest of the team members. 6) Take opportunity While India and Pakistan has been waging war for ages, internally the fight on poverty and home soil terrorism was at its peak in both countries. The two leaders used the opportunity for public diplomacy even though the public was strongly against the ‘Cricketing Diplomacy’ that was planned. The leadership pursued the bold strategy and the result was that brand India and Pakistan was a top of the mind brand mentioned across all news bulletins of the world. Even though Pakistan was not ready India used the WC 2011 to build the flagging global imagery that has been highlighted for corruption in the recent past. I guess Sri Lanka needs to take a que from such brand building decisions.

What next for SL Lets accept it. Sri Lanka lost a golden opportunity to market to the world the new economic order that is setting into the country. The lesson is that we must not let this happen again for Brand Sri Lanka given that we are poised to be the tiger cup economy of Asia. The challenge is to make strategize the next steps. 1) Sector specific brand strategies Given that we have re-created the lost pride of a nation with our team coming into the finals, we must now roll out some strong media in key markets sectorally. Ceylon Tea brand campaign is set to roll out globally with some very focused work done by the industry on a successful private-public partnership. We must launch a IT and BPO similar campaign which in fact is one of the most organized sectors in my view with very strong private sector engagement with key state officials. Ceylon Cinnamon brand strategy is shaping up too and some seed capital must be infused. Apparel industry image building campaign is already working out well.



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2) SL Premier league The stage is set for Sri Lanka to launch an IPL version on home soil. What’s unique is that Pakistanis can also be part of the tournament. But the key is that every facets of the IPL agenda must be mirrored and bettered so that we ensure that the Sri Lankan version brings in the vibrancy to Brand Sri Lanka. This should include the after parties, the use of viral media across the world and getting Brand Finance to value the championships. IPL is today worth a $4.2 billion with each team valued at 40 to 45 million dollars. We must develop a similar model. 3) Export Bazzar For the first time Sri Lanka will get exposed to almost all export products that we market to the world from April 8 onwards at Green Path. Whilst viewing will be interesting I would strongly recommend that new middle men can be created to find new markets just like the Oriflame or the Triumph model of network marketing. 4) New business model It’s time that Sri Lanka develops a new business model for corporate Sri Lanka by venturing out to sports. The Ambani’s did the same with Mumbai Indians and so did many other corporate in Sri Lanka. Sports is one of the most thriving business globally and I feel Sri Lanka is now ready for this wave. 5) Competitive ranking Starting business is a key challenge that needs to be addressed by improving the competitive rankings. There is an internal plan that from the current 105 rank we can achieve No 65 without taking any hit on the revenue model of the country. But this needs to be implemented as a matter of urgency so that we can attract the FDI’s into the country. 6) Why not Mannar Just like brand Hambantota I can see that there is a lot of potential for Mannar to be developed on a pure demand model. Be it the Industrial zone or the access to India via the new ferry service the growth potential is very strong. The challenge is focused investment. Though Sri Lanka lost at cricket, we as a nation became very united in the last eight weeks and that’s the biggest victory for the country.



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The Island – April 12, 2011

Govt. marginally exceeds expectations; deficit 7.9% to GDP Public debt to GDP down to 81.9% in 2010 Debt service payments decline by Rs. 5.2bn

Miles to go before I sleep… President Mahinda Rajapaksa closes his eyes in exhaustion at the launch of the 61st Annual Report of the Monetary Board of the Central Bank of Sri Lanka yesterday (11). Central Bank Governor Ajith Nivard Cabraal (left) and Economic Development Minister Basil Rajapaksa are also in the picture. Sri Lanka’s economy grew 8 percent in 2010 and both Rajapaksa and Cabraal said a lot more needs to be done to make growth inclusive. See page 3 for summary of the Central Bank Annual Report 2010. Pic by Jude Denzil Pathiraja The government stayed within its 8 percent to GDP budget deficit target for 2010, reaching 7.9 percent, and showed signs of much improved fiscal discipline, the Central Bank Annual Report 2010 showed. In 2009, the deficit ballooned to 9.9 percent of GDP from an original target of 7 percent resulting in the temporary delay of an IMF disbursement. Governments have almost always overestimated revenue and underestimated expenditure in its budget resulting in widening budget deficits. This increases the borrowing requirement while capital expenditure, or public investments, have always been sacrificed to soften the deficit while recurrent expenditure increases.

Called the bane of macroeconomic stability in Sri Lanka, fiscal indiscipline leads to higher inflation, also making it difficult for the Central Bank to stabilize interest and exchange rates.

The government has greatly improved its fiscal performance in 2010, although the trends of the past still remain, although subdued.

The fiscal deficit increased 1.42 percent from the original estimate to Rs. 445 billion. With higher growth in 2010, as a percentage of GDP, this deficit amounted to 7.9 percent. The original budget deficit estimate for the year was 8 percent, which was also a target under the US$ 2.6 billion standby facility arrangement with the International Monetary Fund (IMF), thus the government has stayed marginally lower. This is in stark contrast to the deficit ballooning to 9.9 percent of GDP in 2009, from an original estimate of 7 percent of GDP.



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Continuing the trend of overestimating revenue, total revenue and grants decreased by 6.64 percent from the budgeted estimate, reaching Rs. 835.2 billion in 2010. Tax revenue almost made it, declining 0.42 percent from the estimated target to reach Rs. 818.2 billion.

Expenditure continued to be underestimated but at a much more subdued level. Total expenditure grew a marginal 0.05 percent from the original target, reaching Rs. 1,280.2 billion. Capital expenditure grew nearly 1 percent to Rs. 937 billion. Capital expenditure was again cut, but only by a marginal 1.3 percent to Rs. 356.5 billion.

The IMF recently said it was happy with the government’s fiscal performance, especially with measures to enhance tax revenue. However, according to the Asian Development Bank, fiscal concerns would remain until measures are adopted to effectively contain recurrent expenditure.

Salaries and wages, subsidies and transfers and interest payments are the big ticket items on the recurrent expenditure side.

Salaries and wages... "Expenditure on salaries and wages for public servants including those attached to the provincial councils increased by 10.88 percent to Rs. 300.6 billion in 2010. However, as a percentage of GDP it declined to 5.4 percent in 2010 from 5.6 percent in 2009," the Central Bank Annual Report 2010 said.

"The share of salaries and wages in total recurrent expenditure was 32 percent in 2010, marginally higher than 31 percent in 2009. The increase in the monthly cost of living allowance (COLA) of public sector employees by Rs.750 to Rs. 5,250 with effect from January 2010, the special payment of Rs. 1,000 per month for security personnel and the extension of the operational risk allowance to all security personnel with effect from November 2009, contributed to the nominal increase in salaries and wages in 2010."

Interest expenses… "Although in nominal terms interest expenditure increased by 13.99 percent to Rs. 352.6 billion in 2010, this was significantly lower than the increase of 45.77 per cent recorded in 2009. Consequently, interest expenditure as a percentage of GDP declined to 6.3 percent in 2010 from 6.4 percent in the previous year. The declining yield rates on government securities coupled with initiatives taken by the government to restructure its debt stock by shifting from high cost domestic debt to low cost foreign debt helped contain interest expenditure during the year," the Central Bank said.

"Interest payments on domestic debt increased 8.4 percent to Rs. 297.1 billion in 2010 due to the increase in the outstanding domestic debt stock by 12 percent in 2009, although the average interest rate on domestic debt declined to 12.44 percent in 2010 from 12.8 percent in the previous year.

"Interest payments on domestic debt accounted for 84 percent of total interest payments. Meanwhile, interest payments on foreign debt increased by 55.44 per cent to Rs. 55.55 billion in 2010. This was due to the increase in the foreign debt stock by 22 per cent in 2009 and the increase in the average interest rate on foreign debt to 3.2 percent in 2010 from 2.5 percent in the previous year, on account of the higher share of foreign commercial debt in the total foreign debt tock n 2009."

Transfers and subsidies… "Current transfers and subsidies increased by 3.2 percent to Rs. 196.2 billion in 2010 due to an increase in transfers to households and public institutions, although transfers to public corporations declined.



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"As a percentage of GDP, current transfers and subsidies declined to 3.5 percent in 2010 from 3.9 percent in 2009. Current transfers to households, which accounted for 80 percent of total current transfers in 2010, increased 4.8 percent to Rs. 156.2 billion. Pension payments, which accounted for 58 percent of the transfers to households increased by 7 percent to Rs. 91 billion in 2010 due to the increase in the monthly COLA to pensioners by Rs. 375 to Rs. 2,375 with effect from January 2010 and the addition of about 16,366 new pensioners during the year.

"The fertilizer subsidy (Rs. 26 billion), the Samurdhi programme (Rs. 9 billion), welfare programmes for disabled soldiers (Rs.10 billion) as well as programmes targeting school children such as providing free school text books and uniforms as well as the school nutritional food programme were the other major transfers to households by the government during the year.

"Current transfers to public institutions increased by 2.3 percent to Rs. 27.77 billion in 2010, accounting for 14 percent of total current transfers in 2010. Transfers to public institutions engaged in economic services and social services, especially in the areas of education, health and community services, increased, while transfers to public institutions engaged in civil administration declined marginally. Current transfers to public corporations declined by 12.55 percent to Rs. 12.4 billion in 2010 and accounted for 6 percent of the total current transfers in 2010. The reduction in the operating loss of the Department of Sri Lanka Railways as a result of the rationalization of maintenance costs, mainly contributed to the decline in transfers to public corporations," the Central Bank said.

Government debt… Government debt as a percentage of GDP declined to 81.99 percent in 2010 from 86.22 percent in the previous year due to improvements in fiscal operations.

"The share of domestic debt in total government debt declined further in 2010 to 56 percent from 58 percent in 2009. Repayment f high cost domestic borrowings with the proceeds of the international sovereign bond and the increase in availability of foreign funds reduced the share of domestic debt in the total debt stock.

"The share of medium to long term debt to total domestic debt stock declined marginally to 76 percent in 2010 from 77 percent in the previous year, while 84 percent of medium to long term domestic debt comprised Treasury bonds. The share of Treasury bills in short term debt, increased to 83 percent in 2010 from 79 per cent in the previous year. The outstanding stock of rupee loans continued to decline to Rs. 88 billion in 2010 from Rs. 112 billion in 2009, due to the repayment and non issuance of rupee loans during the year, as the debt management strategy has been to move towards more market oriented debt instruments.

"The outstanding debt obligations of the government to the domestic banking system declined by 2 per cent to Rs. 691.7 billion in 2010. The outstanding debt held by the Central Bank declined by Rs. 31.22 billion to Rs. 78.4 4 billion.

"Total outstanding foreign debt increased by 15 percent to Rs. 2,024.6 billion in 2010, although as a percentage of GDP it declined to 36.11 percent in 2010 from 36.55 percent in 2009."

"The share of concessional debt in the total foreign debt stock declined further to 63 percent in 2010 from 72 percent in 2009 as a result of a marginal decline in concessional borrowing together with an increase in non concessional financing in 2010.



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"Non concessional debt increased by 55 per cent to Rs. 758 billion, raising the share of non concessional debt in the total foreign debt stock to 37 percent at end 2010 from 28 percent at end 2009. The increase in non concessional debt was mainly due higher foreign commercial borrowing, which increased by 49 percent to Rs.610 billion in 2010," the Central Bank said.

The government is planning to reduce the public debt stock to 60 percent of GDP by 2016.

"Total debt service payments declined by Rs. 5.2 billion to Rs.8820.4 billion in 2010 due lower amortization payments, as interest payments increased during the year. Total amortization payments, which accounts for 57 percent of total debt service payments, declined 9.3 percent to Rs. 467.9 billion. of the total amortization payments, Rs. 389.7 billion was made to domestic sources and Rs. 78.22 billion to foreign sources, including deferred repayments defence loans. A decline in the maturing debt stock in 2010 and the appreciation of the rupee, which reduced the rupee value of foreign debt repayments, mainly contributed to the decline in amortization payments to external sources. Total interest payments increased by 13.99 percent to Rs. 352.6 billion in 2010. Although domestic interest payments increased by 8.4 percent over the last year, this was well below the 50.44 percent increase interest payments recorded in the previous year," the Central Bank said.



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A scramble on for Skilled Talent, says HR consultancy Sri Lankan Labour Market Outlook 2011:

* Economy to grow 6.3% in 2011 * Wage inflation 8% to 11%

Cornucopia Lanka an Indian based HR consultancy firm in their Sri Lanka compensation outlook report says that a GDP growth of 6.5% expected in 2011 followed by 6.3% 2012. That would help to broaden the consumption base and help employment level rise.

The upbeat consumer sentiments bolstered by post-conflict investor confidence and re-building momentum could create the next scramble for skilled talent in 2011 and beyond.

"Moving forward, if the government is able to put a lid on commodity Inflation, 2011 could be a year of significantly improved business opportunity. The Financial Services Sector, the BPOs and the IT sector will continue to grow and compete for top talent resulting in salaries rising for middle management executives. Executive Compensation has generally remained stable in 2010. However, there has been a spurt in Salaries at the top for functional specialists in areas like Risk Management, Waste Management, Supply Chain and Compliance. To find the right people companies are paying top compensation to lure the best and the brightest," the Cornucopia report said.

"Wage inflation in 2011, is expected to be around 08% to 11%. The greatest challenge for business will be in attracting and

retaining experienced staff capable of delivering the revenue growth potential. As discussed the critical challenges are likely to be felt in the Banking, Services and the IT Sectors.

"In terms of compensation levels the Financial Services, the Garment Sector, IT Services and the Telecoms continue to lead in terms of attractive packages. At all management levels, the search is on for young and creative talent. The demand continues to outstrip supply. If the country overall outlook improves we may well see the welcome inflow of Sri Lankans returnees to fill top roles. What would be unfortunate would be if we need to turn to foreign expatriates to supply the need when we do have a large supply of our own nationals who could help out and also be comfortable with good terms in a stable environment."



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The traditional manufacturing sector continues to lag in terms of the level of compensation provided to management, compared to other sectors.

According to Cornucopia, on the benefits side most companies provide the basic mandatory EPF 12%, ETF 3% and leave, benefits like Medical (OPD and hospitalization), holiday leave, Life/Accident Insurance and. Perks such as Motor Vehicles (companies are moving away from company owned vehicles), land and mobile phones, professional subscription, exam reimbursement and Club Membership are now quite common across all management staff. Housing Benefits/loans are mostly limited to the financial services sector and most often to corporate management. Long term incentives like share options, phantom options and differed bonuses schemes and also performance based short term variable incentives (bonuses) once limited to the MNCs and some of the big blue chip companies are now becoming very popular among many of the high performing companies and start ups. Pension benefits are increasingly becoming rare.

According to Dinesh Weerakkody CEO HR Cornucopia says, there is today a conscious effort/commitment to align executive compensation to the success of the company and as a result companies are setting around 50% of total target pay as variable compensation (risk pay) to improve overall market positioning across levels for the Company and to make up for expectations

in relation to compensation. In addition, some companies have linked a further 20% of the variable rewards directly to customer satisfaction, and more importantly to creative development and operational excellence initiatives.

Cornucopia said that companies in 2011 would have to be more focused on building proper management infrastructures and frameworks and to develop creative compensation structures for employees. Therefore because of the increasing mobility of the Sri Lankan workforce, in addition to creative compensation structures, there is also the need to develop better people management strategies to nurture, develop, and retain the existing skilled talent and improve productivity. The need for processes that are transparent and show a ‘win-win’ desire on the part of management are equally necessary to achieve good results.



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Sunday Island – April 17, 2011

Inflation is not a matter of concern in the immediate future: IMF By R.M.B Senanayake

Last week the IMF Representative addressed a press conference where he said that the IMF was so confident that the country is on a correct path that it released the first quarter installment of the Standby Credit waiving the performance targets. The statistics were not yet available but the IMF said it was satisfied that targets would be met. They are the net International Reserve target, the Reserve Money target and the net domestic financing of the central government (this reflects the likely budget deficit). The IMF also decided that in the future there would be half yearly reviews of the performance targets instead of the current quarterly reviews.

It praised the growth attained saying "the Sri Lankan economy continues to make progress under the Fund supported program and overall macro-economic developments remain favorable. Growth is strong, inflation remains in single digits and reserves are at a comfortable level ——-The budget deficit target has been met and budget developments so far in 2011 are broadly in line with expectations. The authorities plan to handle the flood related expenses by reallocating and reprioritizing expenditure within the existing budget which will help to maintain the program’s deficit target for 2011"

Will the government follow the lessons taught by the IMF? If the government goes all the way with the IMF until the end of the program it would be the first time that any Sri Lankan government would have done so. In the past the budget rigor and fiscal responsibility has never gone beyond the duration of the IMF programs. Would it be different this time? Have our leaders realized the need for fiscal responsibility? Economists hope so since large budget deficits adversely affect economic growth which then turns out to be ‘flash in the pan’ type of growth which will be cut short by current account deficits in the balance of payments. This brings us to the brink of foreign debt default as happened in March 2009 when the government was forced to go to the IMF. The blame for the high budget deficits is not entirely with the politicians who naturally like to spend other people’s money and fail to see the connection between high budget deficits, high inflation and larger current account deficits in the balance of payments. But they see to it that they themselves are protected from inflation. The Opposition makes common cause with the Government politicians in such exercises like raising the salaries of the MPs or exempting them from taxes.

Where the blame must lie But it is the people who must take a large share of the blame. They are economically illiterate and believe in free lunches, free rides and getting goodies from the government without having to pay for them. But no government has resources except what they take from the people. They either tax or borrow from the banks which cause inflation when they spend such funds. Then the prices go up and reduces the real incomes of the people which they don’t notice because their money incomes are intact. So when politicians promise them the sun and the moon the people must ask them how they propose to find the money to do so. They don’t ask and the politicians don’t care to tell them. But when they are in office they run budget deficits and fund them partly from borrowing from the banking system which economists call "printing money" which leads to inflation.



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Whither inflation? The IMF says there is no immediate threat of inflation. The IMF Representative said inflation would increase in the coming months but that it would come down later on and that inflation will remain at single digits. But he noted the large amount of liquidity in the banking system caused by the central bank’s intervention in the foreign exchange market to prevent the appreciation of the rupee ( a necessary evil?) The central bank buys dollars for rupees and these rupees are newly created money adding to Reserve Money (high powered money on which the commercial banks can give loans to the private sector up to a multiple of twelve or so). This extra money is presently locked up in the banks since they, instead of lending such funds to the private sector, invest in the short term money market where they get low returns of 7-8%.

As inflation climbs to say 8% the real rate of interest would be zero for such surplus funds. Would they then think of lending to the private sector, or will they await an increase in the rates of interest to do so? But the banks take into account not only the nominal rates of interest but the real rates of interest (nominal rate minus the rate of inflation). The aggregate volume of their loans diminishes as real interest rates increase and increase when real rates fall. So inflation in a situation where nominal interest rates are held down as we are now doing is not conducive to growth by the private sector.

The central bank can keep the nominal rates of interest low but if inflation rises too much to render real interest rates negative, then the policy will not conduce to private sector growth. This situation has not yet arisen since with 7%, inflation the real interest rate earned by the banks is still a positive 5% when the prime rate of lending is at 12%. Banks profits are determined by the net interest income since they also pay interest on their deposits. With higher inflation this margin may be squeezed since depositors will take their money elsewhere for a better interest rate. To hold such funds, the banks may have to pay higher interest as well. If the authorities go easy on inflation they may achieve a temporary boost to growth but it will not be sustainable.

On the demand side the private sector will need more credit as their working capital needs rise with the prices of goods in stock increasing owing to inflation. So the IMF has cautioned thus: "Monetary policy will need to be vigilant about the possible second-round effects from higher prices on core inflation and strike the right balance between supporting economic growth and preventing excess liquidity from fueling inflationary pressures."

For the present the Central bank and the IMF are satisfied that there is no danger of continuous inflation and that the rate of inflation would decline after some months. What does this mean to the consumers and to local businessmen? A clear distinction must be drawn between inflation and the increase in price levels. Inflation measures the rate of change in the price level. So if inflation is positive at say 1% then it means that prices will rise by 1%. So even single digit inflation raises the price level permanently (apart from seasonal decreases in individual goods). The prices that went up due to inflation are unlikely to come down because inflation has declined. Inflation must be negative for the price level to come down. If the price level goes up an up the peoples’ real incomes are reduced and they will be poorer unless their wages are increased to catch up with the inflation.

What if the central bank raises interest rates as expected by the market? Then it would be an incentive for foreigners to invest here in government bonds; but what about the appreciation of the rupee that will bring about? If the Central Bank doesn’t intervene and the appreciation is allowed to take place, then imported inflation will be checked. This would be a relief to the consumers but exporters will of course suffer. Fortunately the world prices for our commodities like tea and rubber are high.



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Money Supply and Inflation Milton Friedman referred to the helicopter drop of a large volume of currency notes in a small area. The supply of goods in that area cannot increase immediately and the prices of all the goods bought and sold there would rise. But goods will come in from outside (imports) and the prices may decline although the old price level cannot be regained. Similarly, if there is a large expansion of money in a situation where aggregate supply (the total sum of all goods & services) cannot increase then the price level will increase. This is the quantity theory of money.

Keynesians don’t go along fully and they cast their theory in terms of Aggregate Demand and Aggregate Supply. An increase in money supply will cause an increase in price level only if the economy’s capacity for production has been reached and there is full employment. So whether increases in the quantity of money will cause inflation will depend on the capacity of the economy to produce. This is called the "potential capacity" of the economy. The difficulty is that there is no way to estimate the potential capacity of the economy. It is true that if there is unemployment, supply can be increased if the jobless are put to work. But how can that be done? Labor alone is not enough to produce output. There must be other factors of production like land, capital and entrepreneurship. Emerging countries are short of capital. They lack technology and entrepreneurship. There are also institutional obstacles to the full utilization of resources to achieve the potential output.



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Sunday Times – April 17, 2011

Sobering thought: Crude oil at $100 per barrel! By Upul Arunajith With high oil prices, as a developing nation where do we go from here seems to be the timely question? As we started to smell the sweet success associated with the post-war economic development and as we were getting ready to bring back the glory days, there seems to be a dark cloud zooming in. Energy, being the front runner of the economy, we see yet another oil price increase during the last week. The turn of the century when global crude oil spot price was around $20 a barrel, $100 a barrel for oil seemed a ludicrous thought. But here we are faced with the new reality. Whether we like it or not, let’s face it. High oil prices are here to stay and will not be going away. Lo and behold, oil will reach $200 a barrel. As a nation let us be prepared to welcome the era of high oil prices and even higher spot price volatility associated with crude oil. Geo-politics of oil and the conspiracy theory All wars are fought for oil. Oil, is the driving force of the global economy and those who got access to oil call the shots while those who need access to these untapped resources manipulate the system so that they will one day be able to be at the controls of the oil well-head. There are multiple theories around the concept of peak oil. Whatever said and done the peak oil theory has come and gone. It was said 2006 was the year of peak oil. Supporting this theory we saw the oil price reaching record levels. Some recent reviews suggest that in the Gulf of Mexico alone about 2/3 of the oil reserves are untapped. The accent is on a very frightening thought that the world oil reserves are depleting at an alarming rate and faster than the original projection. Many books have been written and many a discussion taken place. But as they say, Stone Age did not end because of lack of stone and end of an oil era will not be caused by the lack of oil. Unfortunately though what is happening is the peak oil theory is being used as a tool to manipulate the spot price of oil. The dilemma is, low spot prices will discourage new oil reserves being discovered while high oil price encourages such initiatives. Oil thus far discovered can support the base consumption demand but to support a demographical shift and population growth of estimated nine billion there certainly needs to be new oil reserves being brought into the market. Hence, to support new discoveries, a spot price tag of $200 will be attached to the crude oil barrel. Counter measures for high prices We can pass on the price movements to the consumer in the hope that consumption will be curtailed. But oil as a commodity is inelastic to such price increases. Or, we can look into alternatives. But that is an undertaking that needs infrastructure development necessitating vast capital infusions. For alternatives to be made available commercially will need years of product refinements. Viable and cost effective alternative that is at our disposal is effectively managing the commodity price risk exposure: Introduction of Hedging. The entire global energy industry has successfully got into dynamic hedging programmes to mitigate the volatility of the commodity spot price. In response to record high commodity prices the energy industry has seen in the recent years, there are numerous tools that are developed to effectively counter the price spikes. The world’s largest commodity / derivatives exchange the Chicago Mercantile Exchange (CME), is the hub for Energy Derivatives. Provided above(see table) is an



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analysis of the exponential growth in the daily trading volumes of the most liquid commodity futures contract (WTI) West Texas Intermediate - Sweet Light crude oil. These numbers validates the concept of hedging. Recently, an analyst concluded that hedging is bad as it’s a double edge sword and discarded the validity of the hedging programme of the CPC. Hedging is not a double edge sword. If the right derivatives instrument and the proper hedge strategy is used, the hedge has to serve its intended purpose of mitigating the adverse effects of high spot market prices. CPC hedge Controversial as it is, the entire concept of a universally valid mechanism cannot be discarded because of one bad experience. What really happened in the CPC hedge was, besides the banks giving a one sided leveraged structure to the CPC, all parties failed to understand the product and its inherent risk. This is recipe for disaster and it will not do any justice to point fingers at the concept of hedging. Hedging though a valid mechanism widely used by the energy industry, in Sri Lanka it’s implementation was flawed. Based on past performance if we continue to make decisions on wrong information i.e hedging a double edge sword we will compound the problem. If the banks acted with diligence and provided the CPC the proper hedge today collectively the entire economy would have been benefited. Sri Lanka would have still bought oil at a much lower price under $100 a barrel with a hedge programme in place. Few individual’s hidden self interest unfortunately has impacted the entire national economy. On a more serious note, the recent price increases will have a direct bearing on our tourism, bunkering, and exports. Tourism is competitive and a price sensitive sector in the economy. The modern traveler, wants the ‘bang on the buck’. Effects of high oil prices cascading down to every sector of the tourism product, we will fail to serve the demands of the discerning traveler. As other destinations are pervious to changing dynamics of the energy sector and swift to positively adopt accordingly we in Sri Lanka take a lackadaisical approach. It was the same thinking that failed to market our unique tourism product to billions of cricket fans during the recent world cricket encounter. Sri Lanka had a reputation as a bunkering hub in the region. From a strategic thrust, our position would have been re-enforced with the Hambantota port being developed. Unfortunately though, with India and other regional competing ports having proper exposure management mechanisms in place our comparative advantage will be lost. All good intentions to develop the Hambantota port as a shipping hub will be lost if we fail to manage the energy prices properly. As an export dependant economy, Sri Lanka cannot afford such haphazard oil price increases. High oil prices will increase the base cost and we’ll out-price our export products. Last but not least, the most significant element is that as we borrow foreign exchange for our oil imports that in turn will strain our exchange rates and this will make other essentials that much more expensive driving inflation. Forward thinking Whether we like it or not we have to recognize one basic fact: The era of cheap oil is a thing in the past. It will not be a prudent approach to await price reductions. Sri Lanka as a fast developing economy must not resist this basic fact and the sooner it is identified the better it is for then we can develop proper counter measures. The incumbent petroleum minister was a strong advocate of introducing the concept of hedging to protect the CPC from adverse price movement. I conclude that the only counter measure around high oil prices is



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having a properly structured hedging programme. I am a strong advocate of a national hedge policy being developed and introduced to insulate us from adverse price movement of essential commodities - crude oil, liquid petroleum, fertilizer and other imports i.e sugar, milk powder, and flour. This will be yet another trailblazer initiative that must be given serious thought if we are to remain competitive and be a regional economic power, to reckon with. (The writer is a derivatives specialist based in Canada. He can be reached at [email protected]).



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Daily Mirror – April 13, 2011

Economic fallout from Japanese earthquake, tsunami The earthquake and tsunami of March 11, 2011 in Japan was without doubt the greatest human tragedy of unimaginable proportions to this nation, the third largest economy in the world. However, economists feel that this tragedy is unlikely to be an economic disaster. The gravity of the task of rebuilding the devastated part of Japan rests on the Prime Minister Naoto Kan and the ruling Democratic Party of Japan (DPJ) with the active participation of the political parties in the opposition. The three tragedies namely the earthquake, tsunami and the nuclear meltdown have sent shock waves among the Japanese people who are now slowly recovering from the worst disaster in living memory. As far as the economic fall out in Japan is concerned, the government estimates the material damage alone could top US$ 300 billion, making it by far the world’s costliest natural disaster. These costs will be much higher with power supply shortages as an outcome of the nuclear plant crisis, and supply chain interruptions affecting factory outputs and business sentiment. Japan carries a public debt of US $ 10 trillion which is twice the size of its US$ 5 trillion economy, the worst among industrialized nations. It has been reported that Japan will not issue new debt to fund a first supplementary budget of US $ 35 billion for disaster relief as a move not to alarm bond investors by adding too much to already huge debt. However analysts are of the views that after the first supplementary budget to meet clean up and repair work, there will be a need for more supplementary emergency budgets that will necessitate issue of fresh bonds. The initial US $ 35 billion supplementary budget will cover costs for repairing roads, ports and schools, as well as helping those in quake- hit regions in Japan’s northeast to find jobs. Some analysts believe that the total reconstruction and rehabilitation bill will exceed US$ 250 billion given the extent of the disaster as Japan is still struggling with the nuclear safety crisis and a potential power supply crunch while about 160, 000 people remain homeless. Japan faces a reduction in its power generation due to failure of all the four nuclear plants in the devastated area causing a sudden shortage of 2.8 GWe. The four reactors generated 22 billion KWhr which is 2.5 per cent of Japan’s energy demand. Japan could look at meeting this shortfall from geothermal energy. The Japanese Prime Minister has stated that he hopes to submit the first supplementary budget to Parliament by the end of this month. Analysts say that that the government will need two more extra budgets which will then exceed US $ 150 billion. Global economic fallout The Japanese catastrophe not only destabilized the world’s third –largest economy, but deepened the slump and financial uncertainties afflicting global capitalism as a whole. Widespread production slow downs, rising sovereign debt, disruption to investment flows and soaring energy prices are delivering shocks to the Japanese economy with profound international implications. Fitch has cut global economic growth forecasts for this year due to the earthquake and tsunami in Japan and rising oil prices. The ratings company lowered the projections for growth in US, Japan and Euro areas and stated that global expansion will slow to 3.2 per cent this year from 3.8 per cent in 2010.



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The Bank of Japan increased its purchase of riskier financial assets such as corporate debt exchange traded funds and real estate investment trusts by a total of US $ 42 billion. It will also buy an additional US $ 18 billion of government debt. The Financial Times reported: “Economists generally welcomed the central bank’s move as a measure to quell potential panic over access to funds in the wake of a major disaster. But some said the liquidity injection was not likely to be enough to counter the negative impact of the quake and tsunami on the Japanese economy already weakened by a strong yen and deflationary pressures.” Until the March 11, disaster, Japan has been laboring under debt, deflation and an aging population .Ken Courtis of Goldman Sachs is of the view that unless Japan can produce a definitive program for economic reform its slow debility will hasten under the added burden of reconstruction. Further he has not been able to put together a credible scenario for Japan to solve its debt problem. Globally as noted by the Wall Street Journal, the Japanese disaster intensified “the triple effects of the weekend euro-zone debt accord and the continuing crisis in Libya.” Credit Suisse strategist Shun Maruyama in Tokyo told the Journal: “we possibly cannot ignore the impact that this quake will have in terms of geographical span and scale –as well as the psychological impact” Because of the closely integrated character of global production, the shutdowns in Japan will have knock- on effects throughout Asia and the world. Japan remains a critical component of the Asian and global economy despite losing its place as the world’s second largest economy after to US to China. Japan is the biggest source of foreign direct investment (FDI) for some parts of Asia and a major purchaser of iron ore, coal, natural gas and other commodities produced in Indonesia, Australia and else ware. Financial and energy markets Global financial and energy markets have been badly affected. In 2010, Japan invested US$ 166 billion in other countries, the IMF estimated. Japan was also one of the largest buyers of US Treasury bonds. The Wall Street Journal warned “As Japan’s government and companies bring home the resources needed to rebuilt, those capital forces can wane, pushing down the dollar and increasing US borrowing costs at a time when that country’s government debt level is also a matter of global concern.” Japan is also the world’s No.3 oil importer, after US and China. Disruptions in production may limit Japan’s short –term demand for energy, but in the long run the shut down nuclear plants could lead to increased imports of oil, natural gas and coal. Analysts’ estimate that replacing all of Japan’s nuclear capacity with oil would mean importing 375, 000 more barrels of oil a day on top of the current demand of about 4.2 billion barrels a day. The economic fallout of the Japanese natural disaster on Sri Lanka has not been studied as yet. It is suggested that the Central Bank of Sri Lanka should initiate such a study and arrive at a long term forecast so as to sustain the present economic growth. Japan is a major trading partner of Sri Lanka specially for automobiles and other products and Sri Lanka should strive to sustain the present trade balance although it will be somewhat deflated for some time until Japan recovers from this economic downturn after experiencing the worst natural disaster in recorded history. (The writer is a retired Economic Affairs Officer United Nations ESCAP and can be reached at [email protected] e-mail address is being protected from spambots. You need JavaScript enabled to view it )



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Management



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Management philosophies from the game of golf Lewie Diasz Chartered Marketeer, Senior tutor at Strategy Business School

Golf is a game I love. Whether you play it or not, business managers can derive an array of vital lessons from the game which can be applied in management and in most instances cannot be learnt in management books. Moreover, it can fundamentally teach you many things about life within four hours of walking almost five to seven kilometers. You can celebrate the best stroke you've ever played (a hole in one) and be on top of the world and at the same time be at your lowest, disappointing stage by missing a simple one foot putt (The easiest shot) in the same game. We have all been victims on many occasions where you smell the fragrance of victory and alas humbled at the final 18th hole of the game with a triple Bogey (three strokes above the normal allotted strokes for the hole). No matter how disappointing it may get, you will always keep coming

back for more the next day! There's something spiritual about the game of Golf, which has transformed me and made me a better person. Here are a few unforgettable lessons from the game of Golf, which I apply in business and life. Forget your opponents and always play against on par Golf is a competitive game and when you turn pro you play at the highest level of the game. Upon receiving some basic lessons in the practice range a golfer embarks on the golf course with a handy cap usually from 1 to 28. Michael Porter's theories on competitive rivalry and competitive advantage, Davidson's theories on competitor response profiling and Kotler and Singh's competitive attack and defence strategies articulate how an organization must attempt to beat or crush its competitors and orient themselves to this cause. Instead, Golf is a game where you would attempt to constantly improve your stand (Handy cap) and you are your biggest opponent or benchmark. Golf is probably the only game in the world where you would play better than your competitor and still loose to yourself! In business this is equally true. You need to develop your strategy to serve your selected customer segments, and do it in a way that is different and better than the competitor rather than focus exclusively on your competitor because the true driver of value is your customer. Mental and Psychological competence This is to be in control of your emotions and deal with any cognitive dissonance. This is to have the mental strength and learn how to deal with uncomfortable feelings caused by holding conflicting ideas simultaneously.

Lewie Diasz

Chartered Marketeer, Senior tutor at Strategy

Business School



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A golfer will need the psychological competence to recover fast from a very bad shot rather than to let any dissatisfying thoughts sediment and affect the stroke in the next hole. This is to master the virtue of patience! Every hole in the game of Golf is a new beginning with new resolutions and a brand new outlook. It's a game that will teach you to control your nerves and use your emotions effectively. A friend of mine compared it to free anger management therapy. The development of the cognitive emotional quotient is apparent in the game of Golf and the skill of assertiveness where one learns how to strike a balance between a continuum of aggression and submission. This is a paramount skill for senior managers leading project teams. We need to manage the ups and downs and a rollercoaster of emotions over 18 holes and learn the art of putting that bad hole behind and concentrate on the ones ahead. Although it is meant to be a social game, I have met a few serious golfers

who would not want to talk during the game of golf (four long hours) and be distracted. However, a seasoned golfer will learn from any mistakes and attempt to apply the lessons learnt in the holes ahead. A "never say never" attitude and the will to keep on requires mental agility. A positive attitude is a key attribute for a manager and no one expects you to have a smile permanently glued on to your face, but it helps neither the project nor your team if you are visibly and chronically weighed down by the burden of issues and risks. Consistency and razor sharp focus Anyone can hit a good shot once, but getting low scores is about being consistent from tee to green and every inch is about meticulous, flawless execution with razor sharp focus! Even the most chaotic manager can successfully manage a project on occasion, but managers that follow a consistent procedural routine will experience a higher percentage of successful projects. To be a golfer of sorts, you need certain competencies and skills. You need to know how to hit a draw or a fade. You need to know how to swing the club, whether it is an iron of a driver or a fairway wood. And all of us need to visit a coach to teach us these technical skills. Business is no different. You need to have certain competencies, such as management and leadership, strategy, finance, marketing, and HR skills. You also need to visit a business school to develop and or refresh these skills of yours. As in golf, you need to develop and update these skills continuously. Ernie Els needs to do it, as does the CEO's of our top companies in Sri Lanka. In golf, you need to have a firm footing when you play the shot. You need to be as level as possible. You cannot have both feet (or even just one) in the air when you play the shot. The power you generate when playing the shot, requires both feet on the ground, and your body in a condition of balance! Without this, forget about a shot going in the required direction and the required distance! Even the top ranked

Tiger woods

Camilo Villegas



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natural golfers use swing coaches and will switch coaches to "shake up" their games. The older we get, the easier it is to believe that there is nothing new to be learned in our profession. Improving soft skills is a life long pursuit. Both business and golf require hard work, constant practicing and meticulous focus! Learn to balance risk versus reward Pulling out your driver to cut across a hazard on a dogleg might be needed on the PGA tour, but an average golfer may be better served by playing the hole conservatively with a comfortable seven Iron club. Business is about taking calculated risks and mitigating any controllable threats whilst using your unique resources and core competencies to exploit opportunities. There are fourteen different clubs in a bag and all have their purpose. The first step is to master the art of picking the right club for each shot and play to your strengths whilst protecting your flanks. Power and strength cannot win you a game of golf and it is sometimes the same in business. A strategic business manager may need to know his business strengths that can be leveraged effectively and weaknesses that make the firm vulnerable just in the selection of the choice of club in Golf! Play like a gentleman Integrity and character are core values of the game of Golf. The nature of golf is such that honesty is non-negotiable. You score yourself. You are frequently the only person that will know whether the ball moved before you hit it or not. If integrity is not part of your make-up, the game of golf will degenerate into chaos before long. Already I see signs of people playing to win above all else and as the saying goes: "To lie to others is immoral and to lie to yourself is pathetic!" This is equally true in business. Business ethics have become very important. The Enron's and Worldcom's of the world were once fortune 500 companies and the lack of integrity, greed and dishonesty have become drivers in business. To win at all costs a credo that has the potential to destroy society and ones self! Respect in the game of golf, this is a very important aspect. You need to show up, on time, dressed appropriately. When the other player is playing, you stand still, out of his line of sight. You do not chat while he is addressing the ball. You do not keep the players behind you waiting. You repair your pitch mark and your divot holes. No arrogant person will have long-term sustainable success in Golf because it will constantly show you up if you are arrogant. The truly successful people in the game are people that are humble and they make the best business leaders. Master the course or terrain A golfer must master terrain by gauging wind and rain, as well as factors such as the slopes and shapes of the fairway, and the shapes, slopes, and speed of the greens. Sometimes the shape in which the grass has been cut can lead you to play an extra stroke if not gauged effectively. This is equally true for business. Events and changes in the Macro and Micro environments have an impact on the industry and eventually on your strategy. You need to take notice of events here on a continuous basis in order to develop and implement a strategy that will allow you to better serve the needs of your customers. Celebrate a private victory Enjoy the Game! In the professional version of the game, it is important to win. But if you are only doing it for the money, you are not a lot different from a prostitute! This is valid for both business and golf! Private victories are personal and relate to you as an individual person. The most gratifying shots I have played on the course are around 6 a m in the morning when I am all by my self on the ninth hole. Building your confidence and optimism in a private setting will teach you to deal with your ego and may arise when you need it most! Sometimes all we need to get something done in business is



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to know we can do it and take away any doubt and it is not enough to be the best when you have the ability to be great! You are the creative force of your own life! The art of thriving in chaos Tiger Woods and Sergio Garcia sometimes shape shots off the rough that seem virtually unplayable. They were faced with a certain set of conditions and knowing the course and having trust in their skills enabled them to come up with a shot that had the whole golfing world in awe! I played six bunker shots recently and have had seven balls in the water the next hole and played two birdies (one shot below par) subsequently. I love the most challenging shots and attempt to carry this same enthusiasm when managing business.



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Positive emotions broadens thinking There is another more important reason to value positive emotions. Barbara Fredrickson, a psychologist at the University of Michigan, USA, states that positive emotions do not just give immediate results but build lasting resources for the person experiencing such emotions. She contends that while negative emotions adapted in human beings to help them face and survive immediate life threatening situations, the role of positive emotions is to help us build up our resources in the present period for use in future contingencies. Known as the ‘Broaden and Build Theory of Positive Emotions’ this theory states that experiencing positive emotions expands a person’s momentary mind set and thereby helps to build lasting personal resources. Negative emotions on the other hand narrow down a person’s list of momentary thoughts and actions and the effects of negative emotions do not extend to the future in the form of personal growth. For example research has discovered that experiencing the positive emotion of happiness makes the person experiencing the emotion think of a greater number of actions to engage in thereby ‘broadening’ his or her thought-action repertoire. Due to this broadening effect, a person experiencing happiness will also think and want to explore his/her surrounding, engage with his/her surrounding, create, share, play, be curious and socialize. Similarly other positive emotions too will give rise to broadened thinking and hence a greater number of ideas and actions on the part of the individual experiencing those positive emotions. Narrowing down thinking, behaviour A negative emotion such as fear on the other hand will cause a person to narrow down one’s thinking and behaviour to just one specific action such as escape and nothing else. Similarly anger motives the individual to strike back, disgust to reject, sadness to withdraw and so on. Therefore negative emotions momentarily ‘narrow’ down a person’s set of ideas and actions. This narrowing down effect is useful in life-and-death situations which require quick and precise thinking and action to survive. Therefore negative emotions aid the handling of genuine emergencies in our lives but are generally maladaptive in the absence of such emergencies. The Broaden and Build Theory also states that positive emotions do not just broaden a person’s mindset but also builds lasting resources for him/her. Therefore the effects of experiencing a positive emotion doesn’t just last at the moment of experiencing that emotion but is extended to the longer term as well. The broadened mindset and the associated behaviour experienced in the short run through positive emotions builds up intellectual, physical, social and psychological resources for the individual in the long run. For example, frequent experiences of positive emotions have been linked to the development of problem solving skills and intellectual skills, the discovery of new ideas and information (intellectual resources), physical strength and cardiovascular health (physical resources), new friendship networks, solidify existing friendship networks (social resources) and develop resilience, a sense of identity and goal orientation (psychological resources). These personal resources are enduring and prepare a person to meet life’s future demands. This lasting effect has not been found for repeated negative or neutral states of emotions.



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Therefore the greatest value of frequent positive emotions lie in the fact that positive emotions help an individual to solve not the immediate problems at hand but the longer term problems by preparing the individual for the future through personal growth and development. Undoing effect Positive emotions have also been found to have an ‘undoing effect’ which negates the lingering damaging effects of negative emotions. Negative emotions cause the body to physically prepare itself to take action in accordance with that emotion (e.g., the fight or flight response). Studies have shown that recurrent experiences of negative emotions can in fact have a damaging effect on the inner walls of the arteries, reduce immune functioning and promote heart disease. However, experiencing positive emotions immediately after a negative emotion helps to ‘undo’ the hold the negative emotion has on the body and helps the body to reach the baseline state it was in before the occurrence of the negative emotion. This has been evident in research conducted in laboratory settings where groups of participants were given a very stressful task to complete which raised their anxiety levels and then immediately induced with negative, positive and neutral states of emotions through the viewing of short films. The results showed that those who were induced with the positive emotions returned to baseline levels of functioning more quickly than those who were induced with negative and neutral states of emotions following the stressful task. Similar results have been found in research conducted on individuals who lost their loved ones. Those individuals who experienced more positive emotions amidst their sadness and grief were better able to develop long term plans and goals and had greater well-being one year after their bereavement. Studies done on people affected by the 2001, September 11 attacks on the US found that people who experienced positive emotions such as gratitude for life and love for one’s family following the attacks had lesser incidences of depression. Therefore positive emotions also act as effective antidotes to the effects of negative emotions by helping individuals to recover from the negative after effects of negative emotions. (Nilupama Wijewardena is a doctoral student at Monash University, Australia and she could be reached on [email protected] e-mail address is being protected from spambots. You need JavaScript enabled to view it )



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Talent Vs Attitude - Which is the best? By Tharindu Weerasinghe More often we are used to think about developing our talents; perhaps it is correct to state that we are compelled to enhance our talents. In the future, we will tend to totally depend on our learned talent. What we forget, which is more important is what to do with the talent that we have acquired over the years. How many times, up to date, in your life, your parents or teachers or life partner have asked you, “think of a way by which you can use your talent in an efficient way”? I wonder how many of you have a bigger number as the answer. So, that lesser number implies the lack of improving attitudes! Most important: Knowing your talents and what to do with your talents! Talents can be improved; talents can be gained; but if you don’t possess the appropriate attitude then your talents are in vain. As we believe” Muttiah Muralitharan “is the greatest bowler in the history of cricket. Is talent that made him to climb to such heights? Yes, he had immense talent; yet if he did not have the correct attitude to perform, attitude to perform well, attitude to be competitive, attitude to sustain sorrow and stand on his feet with power, then Murali could not have achieved the greatest heights in Cricket. When Murali is born, the mid-wife or the lady who came to help the delivery and who picked up the little Murali, did not say, “Mrs. Muttiah, here is a package of 1000 international wickets for you”. Well, talents are in-born as well as gained as life progresses; but if you are not having a positive attitude then you won’t be successful! Developing talents and not making them useful is like buying your favourite suit but not knowing on which occasion to wear it . Talent alone is not enough for you to succeed in your life and in your career, and you definitely need something to back you up. Well, I would love to carry a right attitude, a positive attitude along with my talent, because talent and attitude when mixed together gives you an edge over your failures and helps you jump back and get on track without having much to bother about the failure part. Know your talents and know how to use them You must have seen hundreds of reality shows these days (so called star shows), which broadly ranges from singing talent, dancing talent, compeering talent, acrobatic, stand-up comedy and several more. You must have observed the way the performers carry themselves while they are on the stage standing in front of thousands of people who have no clue about how this person is going to perform. The homogenous curiosity among people increases, the moment the person starts his performance. The crowd maybe pleased and in return give the performer a loud applause or may even possibly boo the person. Now the point to emphasize is why would the person be applauded and not booed? What exactly did the person do in order to get applauded? How did he manage to win so many hearts? What would be the possibility of his favoritism? And the questions may keep piling up. One of the main answers would be his/her attitude, his/her confidence in delivering his/her talent and his/her timeliness and knowing what he can do within himself/herself. If you can see talent alone will not be responsible to win the stage but a mixture of right attitude in which others skills follow gets you to a winning position.



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Learning to bounce back In job interviews, the interviewers might ask whether you have come across any failure in your life. (Academically, economically, socially or in any aspect). If you confidently say “NO”, you might not be offered the job. Why? The reason that they mention is, “if someone has not faced a failure in his career then he does not know how to overcome failures.” Even if you don’t feel that you have not come across any failure in your life; you might have overcome those unknowingly. But one of the most significant features of your life should be, “knowing that you have failed once and never let that failure to let you down in future!” It is a great example of having the right attitude of bouncing back, learning through mistakes and failures. It does not mean you are good if you do mistakes; it means you will not do the same mistake again as you have gained experience of the same thing in the past and you have learned how to overcome it. Sometimes, people tend to misunderstand attitude. Some people say that attitude is everything. But we know that isn’t true. Talent matters. If attitude were everything, then I could have been a cricketer or professional singer just because I believed it myself. It would never happen. On the other hand, some people dismiss attitude as inconsequential. But studies show that people with a positive attitude achieve more than those with a negative attitude. In addition, people with good attitudes attract other people and they enjoy life more. That’s why we must call attitude the difference maker. So, when the interviewers interview candidates for jobs, they always look for people that have an attitude to work over talent and this decision helped me survive with a reasonable amount of success. Thus it is clearly obvious that, talented people with the correct attitude are almost perfect.



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Trade & Marketing



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Marketing and selling in favourable economic conditions: Rules for creating retail innovation Prasanna Perera, Marketing and Management Consultant, Chartered Marketeer, CIM U.K. In a previous article, I highlighted the fact that Retail is the world’s largest industry. In this brief article, my endeavour is to highlight inputs for creating innovation in the retail industry.

Look for consumer trends There are several key demographic and behavioural changes that are happening among consumers. Putting the customer first, is the foundation for success in retailing. It is important to keep in mind, that it is easier to launch a new idea that is in tune with future consumer demand, than one that fights its. In a Sri Lankan context, we have observed trends such as an ageing population, a hybrid of values (modern and traditional) and western lifestyles. There is also a larger percentage of women in the workforce. Sri Lankan retailers would do well to understand these trends and formulate future strategies accordingly.

Understand the competitive environment It almost goes without saying that retailers and suppliers must pay very close attention to their direct competitors. But it is amazing to note how many direct competitors are missed or not considered seriously. My advice to retailers is also to monitor indirect competitors. For example, supermarkets can be indirect competitors for clothing chains, since they both compete for the disposable income of the consumer. Retailers should also keep their eyes and ears open for potential competitors. In a Sri Lankan context, this is now very important, given the opportunities that exist in the market. There are powerful retail players in India, Thailand and Vietnam eyeing Sri Lanka.

Location, location, location I cannot keep out the importance of location, for retail success. Countless retail concepts have failed because they are put in the wrong place. Spend a lot of time and energy in researching retail locations, before setting up shop. Demographics, infrastructure, accessibility, neighbourhood characteristics etc., are very important factors to consider. It is better to pay a higher rent for the right location, than trying to save some rent money and ending up in the wrong location. (Penny wise pound foolish).

The concept of “Store Positioning” Positioning makes you declare who you want to serve, against what set of competitors, and what unique benefits you will deliver. As much as product brands need to be positioned, retailer brands (store brands) needs to be positioned as well. By positioning a store cleverly, significant competitive advantages can be achieved. Take the example of Walmart and the position of “Everyday low prices.” Since customers perceive Walmart as offering the best prices, the store too is under pressure to live up to the positioning theme. In Sri Lanka, Cargills Food City came up with the positioning theme - “on your way home.” This has worked for them, as people remember Food City when they think of returning home. You cannot simply succeed in retailing without positioning. My advice to retailers is to be creative and innovative in positioning and have the courage to reposition if the market situation demands it.



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Understand your key competencies Every retailer possesses certain competencies, some which are equal to others and others unique and significant. To create an innovation in retail, focus on the unique competencies you have as a retailer. This may be in supply chain efficiencies, in-store merchandising, marketing and selling skills or in customer service, to name a few. My advice to retailers is to understand their strengths and weaknesses. Do not focus too much on weaknesses and trying to correct them. Instead, focus on your strengths and capitalize on them and reinforce them. Take the example of Walmart. Walmart has several key competencies. A key competence would be world class supply efficiencies, which they have leveraged to live up to their motto of “Everyday low prices.”

Expand the store network “rationally” Retailing is a capital intensive industry. Expansion should be done with caution and based on objectivity and not subjectivity. (Competitors have 20 outlets, so we must have 20!). As each location comes in, a new skill set and new resources come into play. The dynamics of running an urban outlet versus a suburban outlet are quite different. In my view, getting the business right is always more important than going fast (and crashing!) All retail outlets should be continuously evaluated for profitability, revenue growth and operational efficiencies. Loss making locations should be rectified or closed down. You cannot be sentimental in this regard.

Conclusion Retailing is a dynamic and evolving industry. To remain healthy and relevant, retailers have to keep innovating but also keep the basics in mind. Retail is also detail. Do not forget to go into the operational details at all times.



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WTO: Trade growth to ease in 2011 but despite 2010 record surge, crisis hangover persists *World Trade 2010, Prospects for 2011

Following the record-breaking 14.5% surge in the volume of exports in 2010 world trade growth should settle to a more modest 6.5% expansion in 2011. The sharp rise in trade volumes last year enabled world trade to recover to its pre-crisis level but not its long-term trend and WTO economists believe the recent series of important events around the world lend a greater degree of uncertainty to any forecast.

"The figures show how trade has helped the world escape recession in 2010," WTO Director-General Pascal Lamy said. "However, the hangover from the financial crisis is still with us. High unemployment in developed economies and sharp belt-tightening in Europe will keep fuelling protectionist pressures. WTO Members must continue to be vigilant and resist these pressures and to work toward opening markets rather than closing them. "Stability" should be the name of the game for 2011".

The 14.5% rise was the largest annual figure in the present data series which began in 1950 and was buoyed by a 3.6% recovery in global output. It was a rebound from the 12% slump in 2009, returning trade to the 2008 peak level and to more normal rates of expansion. Nevertheless, the financial crisis and global recession continue to have an impact, they said.

For 2011, the economists are forecasting a more modest 6.5% increase, but with uncertainty about the impact of a number of recent events, including the earthquake and tsunami in Japan. If achieved, this would be higher than the 6.0% average yearly increase between 1990 and 2008 (Chart 1).

These figures refer to growth in the volume of world trade, i.e., trade in real terms, adjusted for changes in prices and exchange rates. The projection is based on a consensus estimate of global output growth by economic forecasters, who predict a GDP growth rate of 3.1% in 2011 at market exchange rates.

The factors that contributed to the unusually large drop in world trade in 2009 may have also helped boost the size of the rebound in 2010. These include the spread of global supply chains and the product composition of trade compared to output. Global supply chains cause goods to cross national boundaries several times during the production process, which raises measured world trade flows compared to earlier decades. The quantification of this effect would require data on trade in value added that are not currently available. The goods that were most affected by the downturn (consumer durables, industrial machinery,



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etc.) have a larger share in world trade than in world GDP, which increased the magnitude of the trade slump relative to GDP in 2009, and which had a similar positive effect during the recovery of 2010.

The short-term outlook is clouded by a number of significant risks factors in addition to the catastrophes in Japan. These include rising prices for food and other primary products, and unrest in major oil exporting countries. Adverse developments in any of these areas could potentially set back the economic recovery and limit the expansion of trade in the coming year.

The full impact of the Japanese disaster is particularly difficult to gauge since it is complicated by a simultaneous nuclear incident, which is hampering relief and rebuilding efforts. The limited amount of research on the economic consequences of natural disasters suggests, however, that the trade impact should be relatively small, especially in the in the medium-to-long term.

Higher prices for primary commodities and the extraordinary growth of trade in developing Asia helped boost the combined share of developing economies and the Commonwealth of Independent States (CIS) in world exports to 45% in 2010, its highest ever.

Developed economies recorded export growth of nearly 13% in 2010, compared to a 16.5% average increase in the rest of the world. China’s exports increased in 2010 by a massive 28% in volume terms.

Putting the trade recovery into perspective Although the growth of world exports in 2010 was the fastest on record in a data series going back to 1950, it might have been even faster if trade had quickly reverted to its pre-crisis trend. This did not happen. The rebound was strong enough for world exports to recover their peak level of 2008, but it was not strong enough to bring about a return to the previous growth path (Chart 2).

The 3.6% growth rate of world GDP for 2010 is also less robust than it might appear at first glance. It was above its average rate of 3.1% between 1990 and 2008, but it was far from a record. In fact, world GDP growth equalled or exceeded 4% several times in recent years, including 1997, 2000, 2004 and 2006. Considering the depressed level of world output in 2009, growth in this range or higher would not have been surprising in 2010.

A number of factors combined to make trade and output grow more slowly than they might otherwise have done. First, curtailment of fiscal stimulus measures in many countries dampened economic activity in the second half of the year. European governments in particular moved toward fiscal consolidation in an attempt to reduce their budget deficits through a combination of spending cuts and revenue measures, with negative consequences for short-term growth.

Second, although oil prices stabilized at around $78/barrel in 2010, they were still high by recent historical standards (e.g. oil prices averaged $31/barrel between 2000 and 2005). Prices were below the $96/barrel average seen in 2008, but they were also up 30% from 2009, raising energy costs for households and businesses.

Finally, persistent unemployment prevented domestic consumption from rebounding more strongly in developed countries and limited income growth and import demand. The OECD average unemployment rate was 8.6% in 2010 (up from 6.1% in 2008), and unemployment remained at or near 9% in the United States throughout the year.



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The record expansion of trade and the revival of economic activity in 2010 were certainly welcome developments, but their importance should not be overstated. Despite the rebound, the negative impact of the financial crisis and global recession are likely to persist for some time.

The state of the world economy and trade in 2010 Economic growth World GDP at market exchange rates expanded 3.6% in 2010, one year after an unprecedented contraction of 2.4% that accompanied the financial crisis in 2009. Output of developed economies rose 2.6% in the latest year after falling 3.7% in 2009, while the rest of the world (including developing economies and the CIS) grew 7.0%, up from 2.1% in 2009 (Table 1).

Growth was stronger in the first half of the year, but weakened in the second half as the sovereign debt crisis affecting smaller Euro area economies restrained economic growth, especially in Europe.

Although developing economies collectively avoided an outright decline in 2009, many individual economies saw their GDP contract, for example South Africa, Chile, Singapore, and Chinese Taipei. However, all of these economies returned to positive growth in 2010, and the only large developing country that remained mired in recession was Venezuela.

GDP grew faster in developing Asia (8.8%) than in other developing regions last year, with China and India registering strong increases of 10.3% and 9.7%, respectively. South and Central America also saw vigorous growth of 5.8%, driven by Brazil’s strong 7.5% upturn. However, Africa had the fastest average rate of GDP growth of any region over the last 5 years (4.7% between 2005 and 2010).

Developed economies grew more slowly than developing economies, but some performed better than others. Concerns about the possibility of sovereign defaults in Greece, Ireland, Portugal and Spain brought renewed financial market instability and fiscal austerity in the second half of 2010, which held Europe’s growth rate down to 1.9%, the slowest of any region. The economies of Greece, Ireland and Spain all contracted in 2010, as did Iceland’s, which was hit by a banking crisis in 2008.

The major exception to the below average GDP growth in Europe was Germany, whose 3.6% growth rate outpaced all euro area economies and all European Union (27) members except for Sweden and Poland. According to OECD National Accounts Statistics, Germany’s net exports of goods contributed 1.4% to its 3.6% GDP growth, or 40% of the total increase. By comparison, domestic final consumption expenditure only contributed 0.7% to GDP, or 19% of the total increase.

GDP growth in the United States was more subdued, at 2.8% in 2010, while Japan’s was up 3.9%. However, the Japanese recovery should be seen in the context of the 6.3% drop in output that the country experienced in 2009, the most severe decline among leading industrialized economies. Japan also ceded the position of the world’s second largest economy to China, measured in dollar terms. In terms of income per head, however, it may be noted that Japan’s per capita GDP was $44,800 dollars in 2010, compared to a figure of $4,800 for China.

Merchandise trade in volume (i.e., real) terms The uneven recovery in output produced an equally uneven recovery in global trade flows in 2010. While world merchandise exports rose 14.5% in volume terms, those of developed economies increased by 12.9%, and combined shipments from developing economies and the CIS jumped 16.7% (Table 1). Imports of developed economies grew more slowly than exports last year (10.7% compared to 12.9%) while developing economies plus the CIS saw the opposite happen (17.9% growth in imports compared to 16.7% for exports).



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Asia exhibited the fastest real export growth of any region in 2010 with a jump of 23.1%, led by China and Japan, whose shipments to the rest of the world each rose roughly 28%. China’s trade performance is more impressive when one considers that the decline in the country’s exports in 2009 was less than half that of Japan (11% compared to 25%). Meanwhile, the United States and the European Union saw their exports growing more slowly at 15.4% and 11.4%, respectively. Imports were up 22.1% in real terms in China, 14.8% in the United States, 10.0% in Japan, and 9.2% in the European Union.

Regions that export significant quantities of natural resources (Africa, the Commonwealth of Independent States, the Middle East and South America) all experienced relatively low export volume growth in 2010, but very strong increases in the dollar value of their exports. For example, Africa’s exports were up 6% in volume terms, and 28% in dollar terms.

An explanation for this can be seen in rising primary commodity prices, which resumed their upward trajectory in 2010, after plunging in 2009. Table 2 illustrates commodity price developments in the last few years. Despite recent volatility, the overall trend toward higher prices is clear. Prices fell sharply in 2009 as the global recession took hold, but then shot up again when growth resumed in 2010. The increases were driven to a large extent by rising import demand on the part of fast-growing developing economies like China and India. Between 2000 and 2010, prices for metals rose faster than any other primary commodity group, with average annual increases of 12%, followed closely by energy with 11% growth per annum. Only agricultural raw material prices stagnated, with increases of just 2% per year on average over the last 10 years.

In contrast to primary products, prices of manufactured goods rose very little in 2010. Export and import price indices may differ substantially across countries, but as an example, US non-fuel import prices in 2010 were nearly unchanged from 2009 (up 2.7% in 2010 after falling 3% in 2009), and prices of imports from China (predominated by manufactures) declined by 0.1%. This means that nominal trade figures for natural resource exporters would be strongly deflated when calculating volume estimates, whereas real trade growth for countries that mostly export manufactured goods would be relatively close to their nominal growth rates.

Higher commodity prices lifted foreign exchange earnings in regions that export a lot of primary products and helped boost imports, especially in South and Central America, where the volume of imports jumped 22.7% in 2010, and in the CIS, where imports were up 20.6%. Africa’s import volume growth was actually the lowest of any region last year, at 7.0%, despite the continent’s large share of fuels and mining products in its total exports (64% in 2009 and 71% in 2008, when commodity prices were higher).

This relatively small increase may be partly explained by the fact that African imports did not fall very far in 2009 (Africa had the smallest decline of any region at -5.0%), leaving less pent-up demand for imports in the following year. Also, not all African countries are important exporters of the fuels and mining products, which saw the biggest price rises. Net importers of these products include Ethiopia, Kenya, Morocco and Tanzania, among others. These countries did not experience the same windfall in export earnings enjoyed by natural resource exporters.

Although South Africa is a net exporter of mining products, it is a net importer of fuels, which represented just over 21% of the country’s total imports of goods in 2009 (the share is the same for Kenya and Morocco, while Tanzania’s share is 23%).



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Merchandise and commercial services trade in value (i.e. dollar) terms As a result of rising commodity prices and a depreciating US currency (down 3.5% on average against major currencies in 2010 according to US Federal Reserve nominal effective exchange rate statistics), growth in the dollar value of world trade in 2010 was greater than the increase in volume terms. World merchandise exports were up 22%, rising from $12.5 trillion to $15.2 trillion in a single year, while world exports of commercial services rose 8%, from $3.4 trillion to $3.7 trillion (Table 3). 1

Nominal merchandise exports of developed economies jumped 16% in 2010 to $8.2 trillion, up from $7.0 trillion in 2009. However, because this rate of increase was slower than the world average of 22%, the share of developed countries in world merchandise exports fell to 55%, its lowest level ever.

This falling share cannot be explained mainly as a result of higher prices for primary products exported predominantly by developing countries. This is because the latter prices were even higher in 2008 but the share of developed countries in world trade at that time was also higher, at nearly 58%.

The story is similar on the import side, where developed economy imports increased 16% to $8.9 trillion, but their share in world imports dropped to 59% from 61% in 2009 and 63% in 2008.

The faster growth of merchandise trade compared to services can be partly explained by the smaller decline in services in 2009 (just 12% compared to 22% for merchandise), which implies less need for faster-than-average growth to catch up to earlier trends. The average annual growth in the value of merchandise trade and commercial services trade between 2005 and 2010 was the same, at 8%.

Transportation was the fastest growing component of commercial services exports in 2010, with an increase of 14% to $782.8 billion. That transport services grew faster than other types of services is not surprising since they are closely linked to trade in goods, which saw record growth last year. Travel grew in line with commercial services overall, whereas other commercial services (including financial services) advanced more slowly.

World exports of goods and commercial services in current US dollars rebounded more quickly than world GDP last year, and as a result the ratio of world trade to GDP rose sharply after falling even more sharply in 2009 (Chart 3). At 124 in 2010, it remained below its 2008 peak of 132, but the 2010 value was still high by historical standards.

Exchange rates and trade balances Trade imbalances of leading economies widened in 2010, as exports and imports bounced back from their depressed levels of 2009. However, for most countries the gap between exports and imports was smaller after the crisis than before.

The monthly trade deficit of the United States widened from a low of $32 billion in February 2009 to around $62 billion per month on average in the second half of 2010, and the deficit for the year increased 26% compared to 2009. However, the 2010 deficit of roughly $690 billion was 22% less than the corresponding deficit of $882 billion in 2008.

China’s merchandise trade surplus for 2010 totalled $183 billion, roughly 7% less than the $196 billion it recorded in 2009, and 39% less than the nearly $300 billion surplus of 2008. The European Union’s had a trade deficit with the rest of the world of $190 billion in 2010, which was up 26% from 2009 but down 49% from the $375 billion it recorded in 2008.



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Japan was an exception to the trend towards smaller trade deficits/surpluses after the crisis. In 2008 the country recorded a $19 billion surplus of exports over imports, but this nearly quadrupled to $77 billion in 2010.

In terms of exchange rates, by February 2011 the Yuan had appreciated against the US dollar in nominal terms by around 3.8% from its previous level. However, real appreciation against the dollar is happening at a faster rate due to higher inflation in China. China’s real (i.e., inflation adjusted) effective exchange rate against a broad basket of currencies rose 1.3% in 2010 according to indices supplied by J.P. Morgan.

By comparison, the US dollar registered a 5% real effective depreciation against trading partners’ currencies during the same period.

The yen appreciated by nearly 7% in nominal terms against the dollar in 2010, but its real effective rate was only up by less than 1% on account of a falling price level (i.e. deflation) in Japan. This suggests that the higher value of the yen did not hurt the competitiveness of Japanese goods on world markets.

On the other hand, the strong nominal appreciations of the Brazilian real (12%) and the Korean won (10%) against the dollar were matched by large real effective rises (15% and 9%, respectively) that would have raised the cost of goods from these countries relative to other countries’ exports.

Prospects for 2011 World trade flows are continuing their recovery, building on the large gains of 2010, with slower but still slightly above average growth in 2011. However, recent events in the Middle East and Japan have raised the level of global economic uncertainty and tilted the balance of risk towards the downside.

WTO economists’ baseline projections for world merchandise trade in 2011 would see exports grow by 6.5%, with shipments from developed countries increasing by around 4.5% and those from developing economies and the CIS advancing 9.5% (Table 5). These projections include the likely impact of Japan’s earthquake, but if the repercussions turn out to be worse than expected we would have to revisit the forecast in the coming months.

In recognition of the uncertainty surrounding any forecast, the fan chart shown in Chart 6 represents the probabilities associated with this year’s trade growth prediction of 6.5 per cent, based on the experience of past forecasts and taking into account current economic and political conditions. The area covered by the darkest band in the centre of Chart 6 contains the most likely development of trade volumes. The area covered by each pair of identically shaded bands represents another 5 per cent probability of future trade volumes lying within that range. In light of the downside risks mentioned above, the fan chart is slightly skewed towards its lower range. It can be seen, for instance, that even under the worst case scenario portrayed in the chart, trade growth in 2011 would still be positive overall, despite the possibility of a more pronounced dent in the second quarter.

The 14.5% rise in exports in 2010 was quite close to the WTO’s most recent projection of 13.5% released in September. That forecast correctly predicted the growth of developing economies (16.5%) but underestimated the extent of the rebound in developed economies (11.5% compared to the realized figure of 12.9%)

The trade forecast assumes world GDP growth of 3.1% at market exchange rates for 2011, with developed economies gaining 2.2% and the rest of the world (including developing economies and the Commonwealth of Independent States) advancing 5.8%. The GDP projection refers to real GDP at market exchange rates based on consensus estimates of economic forecasters. 2



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Even though the risks are mostly on the downside, there is also some upside potential if the uncertainly in the Middle East resolves itself soon and if unemployment rates start to come down more quickly in the United States. The latter would release a considerable amount of pent up demand for goods, which would stimulate imports and drive world trade higher.

The limited amount of existing research on the consequences of natural disasters for economic growth suggests that even very large disasters generally do not have noticeable effects on output as measured by GDP, especially in the long run. 3

Studies dealing specifically with the trade effects of natural disasters are even rarer. A recent paper by Gassebner, Keck and Teh (2010) 4 examines data on disasters in 170 countries between 1962 and 2004. Using the methodology of this paper, we find that the expected impact of the Japanese earthquake is to:

* reduce the volume of Japanese exports by between 0.5% and 1.6%; and * increase the volume of Japanese imports by between 0.4% and 1.3%.

The reduction in exports is easily explained. Export declines occur because of the human losses and injuries (affecting companies’ human resources) and the destruction and damage to physical capital and equipment in the export sector. Furthermore, damage to public infrastructure, such as roads, bridges, railways, and telecommunication systems, can cause disruptions to the export supply chain.

What may be less clear is why imports are estimated to increase as a result of a disaster. This is because any major reconstruction or rebuilding of damaged infrastructure will likely increase imports, since the required materials, technology or skills may need to come from abroad. This should outweigh any drop in import demand stemming from lost output and income.

Some of the economic impact of the earthquake could be transmitted to other countries through global supply chains. Anecdotal evidence is already being reported on shortages of Japanese auto parts and electronic components in other countries, and on ships being unable to unload perishable food in Japan because of a lack of refrigeration due to reduced electricity supplies.

However, less output and trade in one quarter will probably be followed by increased activity in subsequent quarters, so the cumulative effect over the course of the year may not be large.

The prospect of sharply higher oil prices probably poses a greater threat to the world economy and trade than the Japanese earthquake. Fears of a prolonged conflict in Libya and spreading unrest in the Middle East have lifted oil prices above $100/barrel. An interruption of supplies from any other major producer would raise prices higher still, with potentially significant implications for the global economy. In such an event, the WTO would have to revisit its trade projections.

The above estimates of export growth are supported by the results of the WTO Secretariat’s time series forecasting model,5 which predicts a 4.5 per cent increase in demand for imported goods and services in 2011 on the part of developed economies (or more precisely, the members of the Organization for Economic Cooperation and Development, or OECD).



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Notes: 1. World exports of goods measured on a balance of payments basis like services were also up 22% in 2010.

2. The IMF World Economic Outlook, the OECD Economic Outlook, the UN DESA World Economic Situation and Prospects and other national sources.

3. Cavallo, Edward, Galiani, Sebastian, Noy, Han and Pantano, Juan (2010), "Catastrophic Natural Disasters and Growth," Inter-American Development Bank Working Paper IDB-WP-183.

4. Gassebner, Martin, Keck, Alexander and Teh, Robert (2010) ‘Shaken, not Stirred: The Impact of Disasters on International Trade’, Review of International Economics, 18(2): 351-368.

5. Keck, Alexander, Raubold, Alexander and Truppia, Alessandro (2009) "Forecasting international trade: A time series approach’, OECD Journal: Journal of Business Cycle Measurement and Analysis, vol. 2: 157-176. The model has been extended and further improved since publication and also includes estimations for emerging economies, such as China.



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Money & Banking



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VAT input claim We refer to the press notification dated 11.02.2011 and wish to quote “Any unabsorbed VAT inputs outstanding as at 31.12.2010 calculated under the respective provisions of the VAT Act will be deductible from any output VAT in every month of each taxable period commencing on or after 01.01.2011 subject to:- - A limit of 10 percent of the total undeducted inputs outstanding as at 31.12.2010: and - Total input credits (including inputs after 31.12.2010) not exceeding 100 percent of the output VAT Originally it was agreed to permit 10 percent input claim per taxable period of three months and now it has been increased to 10 percent per month. Tax payers were relieved to observe that corrective action had been taken to recoup the VAT input claim outstanding as at 31.12.2010 in 10 monthly installments (minimum) instead of 30 months as announced earlier on 28.12.2010. We are surprised and shocked to hear the actual position taken by the Inland Revenue Department now is to set off unabsorbed input credit against VAT from 01.01.2011 subject to the maximum of 10 percent of the unabsorbed or the 5 percent of the VAT payable if any (after deducting the input tax) whichever is lower. This requirement has serious adverse effects on tax payers. It should be noted that if VAT output liability per month since 01.01.2011 is equal to even 10 percent of the VAT input Claim outstanding as at 31.12.2010; it could be recouped in 10 monthly installments (minimum) according to the original agreement. Now this will increase to 200 months according to the new 5 percent limit. Further if the tax output liability is equal to 1 percent of the input claim outstanding the recoupment period which increase from 100 to 2,000 months as per new requirement. This massive build up of VAT input claim outstanding as at 31.12.2010 was made due to the restriction imposed by the Dept. of Inland Revenue to limit the VAT input claim to 85 percent of the VAT output liability since 01.01.2007. Therefore it was rather frustrating to note that even after four years of accumulation recoupment is taking more than 200 months. (16 1/2 years) and not 10 months as agreed before. It is not correct for the Government to grant tax relief and concession to taxpayers and cancel same later with retrospective effect. This results in frustration in the minds of tax payers. It is very important to secure satisfaction of taxpayers which will maximize revenue collection. It could be considered to permit 5 percent of VAT output liability (gross) per month instead of 5 percent on VAT payable after deducting the input tax as recommended now. I presume the President looks into this matter and grant suitable relief to tax payers i.e. either deletion of this 5 percent clause or permitting 5 percent on VAT output liability without deducting input tax. S R Balachandran B.Sc., FCA, FCMA (Sri Lanka) Council Member..The national Chamber of Commerce of Sri Lanka



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Remarkable 2010 for Sri Lankan banking industry Prasad Polwatte and Asanka Liyanage As the effects of the financial crisis permeated into the Sri Lankan economy, a noticeable indolence in the financial services sector was evident throughout 2009. This was further aggravated as repercussions of financial fall-outs in the local industry were disclosed in the early part of 2009. Domestic financial markers that were somewhat volatile at the commencement of 2009 became more liquid and steady in the second half of 2009 and first half of 2010. The Government’s post war economic development policies were lenient on the monetary system and led to a declining inflationary pressures situation in financial market. Resumption of capital inflows due to reduced risk and improved investor sentiment has given a positive shock to the banking industry. This article compares and contrasts the performance of licensed Commercial Banks (LCBs) for 2009 and 2010. Both public and private LCBs overall performance was comparatively higher in 2010 compared to the 2009. All of the key performance indicators showed positive growths in 2010. Summary of Key Performance Indicators of 2010 and 2009 of Leading LCBs are presented in Table 1. Financial markets were more stable with improved liquidity and declines in interest rates from the beginning of 2010. The exchange rates remained more stable. Equity prices have surged upwards during the year.

The banking sector sustained its earnings via an increase in investment income from government

securities and equities



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The banking sector sustained its earnings via an increase in investment income from government securities and equities. Almost all banks moved to long-term investments rather than short-term investments. On the other hand they encourage short-term borrowings as it was less costly than the long-term borrowings. Overall drop apart from DFCC bank can be seen in total revenue compared to 2009 in 2010. The main reason was the average drop in interest income by 10 percent to 15 percent in almost all LCBs. In the case of DFCC bank the results of 2010 included profit relating to the sale of Bank’s shareholding in Commercial Bank of Ceylon PLC (CBC). Sale of Commercial Bank shares have contributed Rs 5,282 million to DFCC Bank’s profit. The main reason for the drop in interest income of all LCBs

was the drop in lending rates from 15 percent 18 percent to 9.29 percent - 9.76 percent range in 2010 Even though an increasing trend was visible in the growth in Advance portfolio of the banks (Approximately 20 percent - 30 percent) but the interest income had dropped mainly due to the decrease in Average Weighted Prime Lending Rates (AWPLR). On the other hand LCBs concentrated on Government securities specially Treasury bills, of which interest rates were decreased by considerable percentage. Details are as follows: A material decrease in interest expense was shown in 2010 to 2009. (Averagely 20% to 30% drop in all banks). The decrease in the Average Weighted Deposit Rates (AWDR) was the main factor for this interest cost reduction. It is clearly evident in the following table.



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The deposit growth in 2010 (nearly 10 percent- 20 percent) has not proportionately increased the interest cost in LCBs due to the drop in AWDR. On the other hand banks were unable to attract more deposits since short-term deposit interest rates were less attractive and customers tend to switch for more attractive investments such as Capital/Money markets. 2010 can be considered as a remarkable year to increase LCBs profits. Apart from NDB and PABC all other banks have recorded an increase in their profit after tax in 2010 compared to 2009 (Nearly 50 percent to 100 percent). The same increase can also be notified in Net Asset Per Share, EPS, ROE and ROA. Further, two State banks were able to sustain their market share on deposits and advances with slight increase. This year is also a blooming year for all banks since the government has given several encouragements in its budget proposal. They are: * Reduction of Corporate Tax from 35 percent to 28 percent and reduction of Nation Building Tax (NBT) will improve profitability of most listed companies * Reduction of Financial Services VAT (FS VAT) from 20 percent to 12 percent. However such institutions are expected to create an investment fund that can be utilized to grant attractive credit facilities including long-term loans at a lower rate of interest. * Removal of debit tax will also have a positive impact on LCBs deposit growth. The ban king sector is continuously seeking opportunities in the North and East for market exposure. On the other hand the CBSL is of the view that further decrease in interest rates in the future is possible and the banking sector should take into account the amount of customer deposits that can be overlooked due to further decrease in the interest rates. LCBS will face great challenges in 2011 to sustain it level of performance of 2010.



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Review of financial statements Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) obtained undertakings from Specified Business Enterprises (SBEs) to make corrections in financial statements which required changes in net profit and equity amounting to Rs 1.2 billion during the year 2010. Types of items for which undertakings were obtained are given below. - Failure to recognize impairment of investments in equity - Not making allowance in respect of doubtful debts - Failure to recognize part of the surplus arising from a revaluation - Failure to carry out revaluations with sufficient regularity - Recognition of a gain expected from a contingent asset in the form of a capital reserve - Failure to prepare and present consolidated financial statements, where control over a subsidiary was acquired during the financial period.

Letters of Assistance The identified departures from Sri Lanka Accounting Standards detected, which were material, but not significant as to require the use of procedure using statutory provisions, were informed to the enterprises, by letter, without extensive inquiries, so that enterprises could, where necessary, take corrective action on their own. Such letters not being directions issued by the Board, are intended to be letters of assistance. The main findings on which the letters of assistance were issued are set out below. * Not computing the present value of the liability in respect of gratuity by using the projected unit credit method as required by the Standard. * Not adopting a systematic basis of depreciating property, plant and equipment * Not recognizing deferred tax liability for taxable temporary differences * Revaluation of property plant and equipment not made regularly, where revaluation model has been selected * Not revaluing the entire class of property, plan and equipment to which the revalued asset belongs. * Not using uniform accounting policies for like transactions and other similar events when preparing consolidated financial statements. * Recording a foreign currency transaction at an exchange rate which prevailed two years before the date of the Balance Sheet. * When computing earnings per share, not adjusting the weighted average number of ordinary shares outstanding during the period and of all periods presented for events that change the number of shares without a corresponding change in resources. * Not recognizing property held to earn rentals or for capital appreciation as investment property. (SLAASMB)



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Official economic report for first full year of peace Central Bank releases 2010 Annual Report today (11); not always a rosy picture to please political masters

A comprehensive economic report for the first full year of peace will be released today when the Central Bank’s Annual Report for 2010 is launched at the bank’s auditorium. President Mahinda Rajapaksa is expected to grace the occasion.

Sri Lanka’s economy grew at 8 percent in 2010 after a sluggish year in 2009, where growth was 3.5 percent due to the global financial crisis and the last stages of the thirty-year conflict being waged with intensity.

Unemployment was down to 4.5 percent in the fourth quarter of 2010, the lowest in years.

The bane of Sri Lanka’s macro-economy, fiscal discipline, also showed encouraging signs of improving with the deficit expected to reach 8 percent of GDP in 2010, from 9.9 percent the previous year.

Inflation picked up during the latter stages of the year but remained in single digit levels, closing at 6.9 percent.

Exports earnings grew by 17.3 percent while import expenditure was up 32.4 percent. The trade deficit expanded 66.7 percent during the year, to US$ 5,204.7 million. Workers’ remittances amounted to US$ 4,116 million, up 23.6 percent from the previous year.

According to the Central Bank the rupee appreciated 3.2 percent in 2010. The ADB says the real affective exchange rate appreciated 5 percent.

Total foreign direct investments (FDI) were estimated at US$ 500 million in 2010, less than what was achieved in 2009.

Gross official reserves stood at US$ 6.6 billion as at end December 2010.

The country’s equities market grew 96 percent during the year and saw 10 companies go public through IPOs, raising about Rs. 5.3 billion in total in the process.



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The Central Bank’s annual reports are regarded as the most comprehensive account of Sri Lanka’s economic performance each year.

No central bank in any part of the world is ever independent of the political rulers. Our Central Bank has stood by the government in recent years and can be credited for its role in the economic turnaround the country is experiencing.

However, there are criticisms that the Central Bank is too politicized. EPF investments in the county’s private banking sector has also raised concerns that the regulator was getting too involved in the management of these banks, as the recent controversy behind the Commercial Bank board highlighted.

There are many who believe that the Central Bank would serve the political interests of the government and thus data is suspect.

However, there is a considerable, salutary even, level of credibility. This we judge by the warning and soft criticisms of the government, although soft, criticisms are criticisms nonetheless.

In its 2008 annual report it made the following comments.

"2009 will be a challenging one in terms of fiscal operations in the midst of the continuing global financial crisis and economic slowdown coupled with the need for accelerating the humanitarian and development activities in the newly liberated areas."

"It has been observed that more often, the government borrowing from the banking system has far exceeded its original targets by a substantial amount posing major challenges to the monetary authority in the conduct of monetary policy (to control inflation).

"In addition, the higher domestic borrowings, especially to meet recurrent expenditures, pre-empts the available resources for public investment, thereby seriously affecting the future growth potential of the country, which is a huge opportunity cost compared to the benefits that can accrue to the country from capital investments in the future."

Economists have for long said that the government should give up the practice of cutting capital expenditure (long term investments) for the sake of bridging fiscal deficits on runaway recurrent expenditure.

The Central Bank took this up in its 2009 annual report and called for better fiscal discipline, it would not have done so if it were merely a political animal.

"Significant changes would have to be introduced to enhance revenue, rationalize recurrent expenditure and reduce the reliance of certain public enterprises on the budget without compressing public investment to maintain budgetary targets," it said in the 2009 annual report.

In January 2010, when Central Bank Governor Ajith Nivard Cabraal presented the roadmap for monetary and financial policy we expected nothing but praise for the government, which he did but he went a step further.

Cabraal warned the government against reckless spending, saying it would derail the low inflation and low interest rates environment and curtail private sector credit growth which was necessary for the economy to



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take off. He need not have made this statement if his sole purpose was to please the government. But it showed that the Central Bank is still there for the people, unlike the politicians.

In 2009, the Central Bank in a separate report warned the fiscal position was ‘precarious’.

When the 2009 annual report was launched in April 2010, Cabraal said: "Now that the war is over, the economy has tremendous potential to grow but for this to become a reality we now need economic stability. There is no point having exotic dishes on the menu if a restaurant lacks ambience. No one would want to dine there. Likewise macroeconomic stability is crucial. It is crucial that the government identifies priority sectors and deep commitment would also be needed."

He went on to tell President Rajapaksa, who was chief guest when the annual report was launched, what was needed to be done: "Now you have the responsibility to ensure the people that your vision of the doubling the per capita income of all Sri Lankans would be realized. For this we urge you to appoint suitable ministers to the next Cabinet and also ensure that they are given targets to achieve. This would ensure that growth is well targeted and your vision can become a reality."

The Central Bank most definitely does not paint a rosy picture all of the time. And when it does decide to call a spade a spade in a tough environment, it must be appreciated and applauded, and as far as the government is concerned, taken in the right spirit, for the Central Bank primarily serves the people and always remains though governments come and go.

Treasury Secretary Dr. P. B. Jayasundera, delivering the 60 Anniversary Oration last year, accused the Central Bank of being bogged-down by theories.



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Summary of the 2010 Annual Report of the Central Bank of Sri Lanka Real Sector Developments In 2010, the Sri Lankan economy recorded an impressive growth of 8.0 per cent, the highest annual rate of growth reported in the last three decades. This far exceeds the average annual growth of 4.9 per cent recorded since the liberalization of the economy in 1977. This remarkable performance was supported by the restoration of permanent peace, which created an environment conducive for the expansion in economic activity, the strong macroeconomic environment, increased domestic demand, the development of infrastructure facilities, improved external demand with the gradual recovery in the global economy and favourable domestic weather conditions.

The improved performance in all key sectors of the economy contributed towards the high economic growth in 2010. The Agriculture sector, which contributed around 11.9 per cent of the GDP in 2010, grew by 7.0 per cent, compared to 3.2 per cent in 2009, mainly driven by the increased production of paddy, tea, rubber and minor export crops along with significant improvements in the fisheries sector output. Benefiting from favourable weather conditions, the tea sub sector registered the highest ever annual production of 329 million kg compared to the distressed output in 2009, while rubber production also continued to increase.

Export agricultural crops such as cloves, pepper and cinnamon contributed positively to the improved performance in the Agriculture sector. Within domestic agriculture, paddy production recorded an impressive growth in 2010 due to increased extent of cultivation particularly in the Northern

and Eastern provinces, favourable weather conditions and the continuation of agriculture support schemes. Coconut production declined significantly by 19 per cent in 2010, and sugar production also recorded a marginal decline. The significant expansion in fishery activities in the Northern and Eastern provinces largely contributed to the increase in fish production by 12 per cent in 2010, while domestic milk production increased notably with the committed efforts to enhance domestic milk production.

The Industry sector grew by 8.4 per cent supported by increased domestic and external demand with enhanced investor and consumer confidence. Improved performance in industries, such as food and beverages, rubber based products, textiles and garments coupled with increased performance in the construction sector and increased hydropower generation contributed to this growth. The share of the Industry sector in total GDP increased marginally to 28.7 per cent in 2010. Factory industry, which contributed approximately 54.6 per cent to the total industry output, recorded a 7.5 per cent growth during 2010.

The textile, wearing apparel and leather products category, which was adversely affected by the global economic crisis, showed signs of recovery during the last quarter of the year despite the withdrawal of GSP+ concessions effective from August 2010. The apparel industry remained competitive through increased productivity, improved quality, diversification and gradual recovery in external demand.

The high growth in food, beverages and tobacco products category, which accounts for nearly 48.0 per cent of the total factory industry output, was driven by the expansion in domestic demand particularly from the Northern and Eastern provinces and increased tourism-related activity during the year. The major contributors to the increased output in export market oriented industries were ship building and repairing and transport equipment and machinery. The non-metallic mineral products category also performed well during the year with high demand for cement and building materials.



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The substantial improvement in hydropower generation raised value addition from the electricity sector, while the construction sector expanded by 9.3 per cent with the continuation of major infrastructure development projects as well as increased construction activity in the private sector.

The Services sector grew by 8.0 per cent in 2010. The wholesale and retail sub sector, which accounts for the largest share in the Services sector, grew by 7.5 per cent with increased external trade with the gradual recovery of the global economy and domestic trade with the restoration of peace. The hotels and restaurants sub sector grew sharply by about 39.8 per cent underpinned by the strong performance in tourism. Other major sub sectors such as transport and communications, and banking, insurance and real estate also recorded significantly higher growth rates compared to 2009. The transport and telecommunications sector grew with the improved performance in transport, cargo handling, aviation and telecommunications sectors.

The banking, insurance and real estate sub sector expanded with increased income from investments and lending activities, foreign exchange operations and widened financial services through the expansion of bank branches and other service outlets.

Reflecting the recovery in economic activity, consumption expenditure increased by 14.9 per cent in 2010, while savings and investment of the country also recovered. As a percentage of GDP, private consumption increased from 64.4 per cent in 2009 to 65.8 per cent in 2010, while government consumption declined from a high level of 17.6 per cent to 15.6 per cent. Both domestic savings and national savings increased, from 17.9 per cent of GDP and 23.7 per cent of GDP, respectively, in 2009, to 18.7 per cent and 24.7 per cent, respectively. Private investment recovered from 17.9 per cent of GDP in 2009 to 21.6 per cent in 2010, while public investment declined marginally from 6.6 per cent of GDP in 2009 to 6.2 per cent in 2010, and as a result, total investment as a percentage of GDP in 2010 increased to 27.8 per cent. The recovery in total investment resulted in widening the national savings and investment gap to 3.1 per cent of GDP, which was reflected in a higher deficit in the external current account.

Fiscal Sector Developments Significant improvements in fiscal operations in 2010 helped contain the overall fiscal deficit at 7.9 per cent of GDP from 9.9 per cent in the previous year. For the first seven months of the year, fiscal operations were conducted initially under a Vote on Account framework and then under the provisions of paragraph 3 of Article 150 of the Constitution by a Presidential Decree.

The budget for 2010 was approved by the Parliament in July 2010. Despite the delay in presenting the budget and the limited scope for introducing new revenue and expenditure measures, the overall fiscal deficit was maintained within the original target of 8 per cent of GDP.

The pickup in domestic economic activity and the strong recovery in imports Increased government revenue in nominal terms above the original target set in the budget for 2010.Revenue as a percentage of GDP increased to 14.6 per cent in 2010 from 14.5 per cent in the previous year.

The rationalization of the tariff structure to four bands and the removal of the import duty surcharge as well as the reduction of effective taxes on various major imports, including motor vehicles, caused a surge in import demand and a resultant increase in revenue collection from import related taxes. However, to mitigate the impact of rising international commodity prices on the domestic market, the government revised taxes on several key commodities, including petrol and diesel.



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In addition, the government provided various tax concessions to assist industries affected by the global economic and financial crisis and to support certain identified industries. Government expenditure was maintained within the original budgetary targets for2010 with the strict monitoring of recurrent expenditure, while maintaining capital expenditure for the accelerated implementation of planned infrastructure projects. Total expenditure and net lending declined from 24.9 per cent of GDP in 2009 to 22.9 per cent of GDP in 2010.

The reduction of total expenditure and net lending by 2 percentage points was the combined outcome of a reduction in recurrent expenditure by 1.5 percentage points and capital and net lending by 0.5 percentage points. Concerted efforts taken to rationalize recurrent expenditure enabled

government expenditure to be contained within the original budgetary allocations, while the public investment programme was carried out largely unhindered.

The government relied more on external sources to finance the fiscal deficit, thus reducing pressure on the domestic market and interest rates. Improved investor confidence and the favourable borrowing conditions that prevailed in international financial markets enabled the government to issue a 10-year international sovereign bond at a lower rate of interest of 6.25per cent, attracting an order book of six times the value of the bond and to issue Sri Lanka Development Bonds (SLDBs) with extended tenor at lower interest rates. In financing the deficit through domestic sources, the government reduced its reliance on bank financing, thus releasing resources to the private sector and easing pressure on domestic interest rates. Total net domestic financing in 2010 amounted to 3.6 per cent of GDP, while net foreign financing was 4.4 per cent of GDP, which consisted of foreign loans (3.5 per cent of GDP) and foreign investments in government securities (0.9 per cent of GDP).

Meanwhile, the outstanding government debt to GDP ratio declined from 86.2 per cent in 2009 to 81.9 per cent in 2010 mainly due to a lower budget deficit and higher growth in nominal GDP.

Financial Sector Performance and System Stability The performance of the overall financial sector improved in 2010, leading to a strengthening of the stability of the country’s financial system. In addition to the continued supervisory measures relating to examination and problem resolution, several regulatory measures were introduced to further strengthen the stability of the financial sector, thereby enhancing public confidence. The improved performance, which was reflected in all leading indicators of financial institutions, markets, payment systems and safety nets, was recorded amidst the resolution of concerns and stresses that, had arisen in 2008 and 2009 due to certain domestic and external shocks adversely impacting on the public and investor confidence and business operations.

Both bank and non bank financial institutions displayed improved performance in 2010, reflecting the increase in financial transactions to facilitate the growing economy. The banking sector, which is the most dominant and systemically important sector in the financial system, grew at a high rate, while recording a significantly high level of profitability. Capital adequacy ratios and liquidity ratios in the banking sector remained well above the statutory limits.

The expansion of the branch network of financial institutions continued during 2010. The banking network further expanded with the establishment of 85 branches, 97 extension offices and 130 automated teller machines (ATMs).With regard to non bank financial institutions, the registered finance companies (RFC) sector gradually recovered in 2010 after experiencing liquidity problems in 2009. Timely measures



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implemented by the Central Bank restored depositor confidence in RFCs. Specialized leasing companies (SLCs) continued to grow in 2010 with an improvement in credit quality and favourable provisioning for bad and doubtful accommodations. Key financial indicators of the primary dealers in government securities improved during 2010, while risk management indicators were maintained within prudent levels.

The insurance sector also reported improved performance in 2010. The Central Bank further strengthened its supervisory and regulatory framework to improve the soundness and risk management systems of banks. The new regulatory measures introduced included the increase in the minimum capital that is required to be maintained by licensed commercial banks (LCBs) and licensed specialized banks (LSBs), on an annually staggered basis from 2010 to 2015; the implementation of a mandatory deposit insurance scheme, the reduction of the required level of general loan loss provisions; the application of the assessment of the fitness and propriety to officers performing executive functions; the requirement for unlisted locally incorporated private banks to obtain a listing on the Colombo Stock Exchange (CSE) by 31 December 2011; and the issuing of Directions on outsourcing of activities.

External Sector Developments The external sector of the country further improved in 2010 with favourable developments on both domestic and external fronts. Sri Lanka’s graduation to the status of a "middle – income economy "by the International Monetary Fund (IMF) in January 2010, enabled the country to project itself strongly in international financial markets. Upgrading of the sovereign credit rating of the country by international rating agencies, the successful continuation of the Stand-by Arrangement (SBA) with the IMF, increased long term capital flows to the government including the successful issuance of the third international sovereign bond in October 2010 as well as increased inflows to the private sector helped strengthen the performance of the external sector. Further relaxation of restrictions on foreign exchange transactions also helped improve investor confidence and the external sector.

External trade rebounded strongly in 2010, reversing the sharp contraction observed during the global recession of 2009. Earnings from exports increased by 17.3 per cent, reflecting higher earnings from the industrial and agricultural sectors. Expenditure on imports grew by 32.8 per cent, led by intermediate goods imports. As a result, the trade deficit expanded to US dollars 5,205 million in 2010. Although export earnings were volatile in the early part of the year amidst uncertainties regarding the global recovery, they improved towards the latter part of the year, indicating a new growth path, despite the withdrawal of GSP+ concessions. This reflected the peace dividend and the dynamism of local exporters. Meanwhile, international commodity prices rose due to the global economic recovery, higher demand for commodities from emerging economies, and global supply constraints. Consequently, agricultural exports continued to fetch high prices in the international market. Higher commodity prices, particularly crude oil prices, caused expenditure on imports to increase in 2010. Imports of consumer durables, such as personal motor vehicles and electronic goods also increased following the tariff reductions and the increase in domestic economic activity. Similarly, imports of investment goods also increased in 2010, led by higher expenditure on imports of machinery and transport equipment.

External trade in services improved significantly generating a higher surplus during 2010, while the income account continued to record a deficit. All sub sectors of the services account, mainly transportation,



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travel, computer and information, construction and insurance services, performed well during the year. A substantial increase in inward workers remittances to US dollars 4.1

billion helped offset the trade deficit to a great extent in 2010.As a result, the external current account recorded a deficit of US dollars 1,498 million or 2.9 percent of GDP in 2010. The current account deficit widened due to a large trade deficit, as a result of an increase in import demand supported by the recovery of domestic demand and expansion of economic activity.

Inflows to the capital and financial account exceeded the current account deficit. In 2010, the BOP recorded a surplus of US dollars 921 million, following a significantly higher surplus of US dollars 2,725 million in 2009. Higher inflows to the capital and financial account, which exceeded the current account deficit generated the surplus in the overall balance of the

BOP. The financial inflows to the government as well as to the private sector for long term investment contributed to the surplus in the BOP. The external reserves of the country further improved to record its highest level in 2010.By end 2010, gross official reserves (excluding ACU receipts) increased to a record high level of US dollars 6,610 million (equivalent to 5.9 months of imports) compared to US dollars 5,097 million at end 2009. Higher disbursements of project financing, continuation of the IMF-SBA facility, the proceeds from the third international sovereign bond issue, and the absorption of foreign exchange from the domestic foreign exchange market contributed to the buildup of reserves. Meanwhile, total external assets

(Excluding ACU receipts) increased by 19 per cent to US dollars 8,035 million by end 2010 (equivalent to 7.1 months of imports), compared to US dollars 6,770 million at end 2009.

Monetary Sector Developments The Central Bank eased its monetary policy stance further in 2010 by reducing the policy interest rates in the second half of 2010 with a view to stimulate credit growth to support economic activity. The continuous deceleration in money supply growth during the first three quarters of 2010 reflected subdued demand pressures, while the benign outlook for domestic consumer prices prompted the Central Bank to continue its accommodative monetary policy stance during the year. With the reduction in both the Repurchase rate and the Reverse Repurchase rate by 25 basis points in July, and a further reduction of the latter by 50 basis points in August, the policy rate corridor was narrowed, and by end 2010, the Repurchase rate was 7.25 per cent, while the Reverse Repurchase rate was 9.00 per cent. Policy rates were reduced again in January 2011, narrowing the corridor further, which has since remained bounded by the Repurchase rate of 7.00 per cent and the Reverse Repurchase rate of 8.50 per cent.

Following the turnaround in rupee liquidity in the domestic money market from mid 2009, the money market liquidity continued to be in excess in 2010. The build-up of excess liquidity was largely due to the absorption of foreign exchange inflows to the country by the Central Bank with a view to preventing an undue appreciation of the rupee. The issue of the sovereign bond in October to international investors, net foreign investments in Treasury bonds and Treasury bills, and other inflows of foreign funds to both the government and the private sector, resulted in the excess of foreign exchange in the domestic foreign exchange market during the first three



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Quarters of the year. The Central Bank continued its efforts to manage liquidity, thereby stabilizing interest rates and guiding reserve money along the targeted path. As the stock of government securities held by the Central Bank depleted, the Bank issued its own securities to absorb liquidity on overnight and term bases. Foreign exchange swap agreements, adopted under open market operations (OMO) in 2009, were also utilized to absorb a portion of the excess liquidity. In October 2010, the Central Bank implemented a bond-borrowing programme and the borrowed bonds were used for OMO in the latter part of the year to absorb the excess liquidity in the market.

Meanwhile, from 20 October 2010, the overnight and term auctions under OMO were discontinued as the primary market yield rate on three-month Treasury bills declined to levels below the Bank’s Repurchase rate, an outcome of intense competition among banks, who had a large volume of excess liquidity, to acquire short term government securities to manage their portfolios. Accordingly, market participants continued to place their excess liquidity with the Central Bank through the standing facility. By end 2010, the overall excess liquidity in the money market amounted to Rs.

124.3 billion compared to Rs. 159.6 billion at end 2009. The monetary operations of the Central Bank continued within a monetary targeting framework and were guided by its monetary programme, which is prepared taking into account the projected key macroeconomic developments. Accordingly, broad money (M2b) continued to be the intermediate target for monetary policy, while reserve money, which is linked to broad money through a multiplier, remained the Bank’s operating target for monetary policy. The Central Bank’s monetary programme was initially prepared stipulating the targets for annual average growth of broad money and reserve money at 14.5 per cent each.

Subsequently however, the Bank revised the monetary programme for the year as it became evident by mid-year that the domestic economy was expanding at a higher rate in 2010 than originally projected, and it was necessary to include information from the government’s budget for 2010, which was presented to the Parliament in June 2010. Accordingly, the targeted growth of broad money in 2010 was revised upward to 15 per cent in July 2010.

Meanwhile, a notable increase in the „currency held by the public. component within the money supply, particularly in view of

The restoration of economic activity in the Northern and Eastern provinces, led to an increase in the currency to deposit ratio, in turn leading to a decline in the money multiplier. Taking into account these developments, the target for year-on-year growth of annual average reserve money was raised to 21.2 per cent in July 2010, consistent with the upward revision to the broad money target.

Following the reduction of the Central Bank’s policy interest rates, market interest rates adjusted further downwards in 2010, providing additional impetus to economic activity. During the year, the average weighted call money rate (AWCMR) continued to hover around the middle of the policy interest rate corridor, thus contributing to the effective transmission of monetary policy.

Also, yields on government securities declined during the year. Meanwhile, the secondary market yield curve for government securities, which shifted downward, extended to longer maturities in 2010. This downward shift in the rate structure can also be attributed to the continued excess liquidity in the money market as well as the benign outlook for inflation that prevailed. Commercial banks reduced their deposits and lending rates gradually during 2010 in response to the easing of the monetary policy stance by the Central Bank. The declining trend in interest rates continued into 2011, as the Central Bank reduced its policy interest rates further in January 2011.



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Outlook In 2010, the first full year of operation subsequent to the ending of the three-decade long conflict, the economy of Sri Lanka has displayed its true potential, with impressive macroeconomic achievements. The challenge for policymakers today is to sustain these achievements with macroeconomic stability in the face of more frequent internal and external shocks. While appropriate demand management policies are required to maintain low and stable inflation, effective addressing of supply-side impediments is also needed. The continuous advancement of productivity, the adoption of new technology and human capital development would reduce the pressure on the labour market, while improvements to physical infrastructure and appropriate changes to the regulatory framework need to be pursued to facilitate greater labour mobility as well as greater labour availability to maintain the expected high growth. The diversification of exports, in terms of products and markets, is needed to increase the resilience of the economy to external disturbances, and to this end, the effective utilization of existing

bilateral and multilateral treaties and actively pursuing the establishment of further trade relations with emerging regional markets as well as promoting private sector investment and strengthening the "Doing Business" environment are necessary. The impact of disturbances arising from adverse external developments including price movements of commodities such as crude oil could also be lessened through the implementation of necessary reforms to the institutional framework of key public enterprises to operate them more efficiently and in a commercially sustainable way to reflect market conditions. These changes will support the ongoing fiscal consolidation process, which would in turn strengthen demand management policies.



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Synopsis of CB annual report - 2010

CB Governor Cabraal presenting copies of the Annual Report to Pesident Rajapaksa Section 35 of the Monetary Law Act requires the Monetary Board of the Central Bank of Sri Lanka (CBSL) to submit a report giving details of the state of the economy, the condition of the Central Bank and the policies and measures adopted by the Monetary Board during the year, to the Minister in-charge of the subject of Finance within four months of the commencement of the following year. The 61st annual report of the Monetary Board was submitted to the President of Sri Lanka and the Minister of Finance and Planning yesterday (April 11, 2011). Following are some of the highlights of the report. Sri Lanka’s economy grew by an impressive 8.0 per cent in 2010, reflecting a fast recovery from the setback suffered in 2009 and moved to a high and sustainable growth path. All key sectors of the economy demonstrated a commendable performance in 2010, underpinned by the peaceful domestic environment, improved investor confidence, favourable macroeconomic conditions and gradual recovery of the global economy from one of the deepest recessions in history. Inflation continued to remain low at around mid-single digit levels and the benign outlook for inflation enabled the Central Bank to ease its monetary policy stance further in 2010. While significant demand pressures were absent, improved domestic supply conditions, downward adjustments of certain administered prices and the reduction of import duties on several consumer items had a favourable impact on prices. The Central Bank reduced its policy interest rates; the Repurchase rate and the Reverse Repurchase rate, with a view to supporting economic activity further. Market interest rates continued to adjust downwards in line with the policy rate reductions and the overall growth of monetary aggregates remained consistent with the envisaged path. The growth of broad money was driven by the increase in commercial banks’ credit to the private sector reflecting the broad-based demand for credit with the recovery in domestic economic activity as well as increased post-conflict capacity expansion. However, monetary management could be challenging in the period ahead owing to possible continued high growth in domestic credit as well as a possible increase in capital inflows, thus requiring close monitoring of macroeconomic developments and formulating appropriate demand management policies to prevent the build-up of excessive demand pressures. Encouraging improvement An encouraging improvement in the overall fiscal situation was witnessed in 2010 with the recovery in government revenue supported by the expansion of economic activity, the addressing of certain persistent structural issues in the tax system, as well as the containment of recurrent expenditure. The overall deficit was reduced to 7.9 per cent of GDP in 2010 from 9.9 per cent in 2009. The government has affirmed its ongoing commitment to fiscal consolidation by reducing the budget deficit to 6.8 per cent in 2011 and to below 5 per cent in the medium term. In line with the recommendations of the Presidential Commission on



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Taxation, several vital revisions were introduced to the tax structure focusing on the simplification of the tax system, rationalizing exemptions, improving tax compliance and strengthening tax administration. In addition, steps were taken to streamline the tax concessions granted under the Board of Investment (BOI) Act focusing on larger and strategic investments. The continued fiscal consolidation efforts would reinforce the conduct of monetary policy in achieving economic and price stability.

The external sector, which made a remarkable turnaround since the second quarter of 2009, continued to improve in 2010. Both exports and imports recovered strongly, while increased earnings from the tourism industry and higher inward remittances offset the widening trade deficit to a great extent, reducing the external current account deficit. Increased capital and financial flows resulted in the balance of payments (BOP) recording a surplus in 2010, further strengthening external reserves of the country.

With favourable macroeconomic conditions and the recovery in economic activity and also with the supportive regulatory and supervisory framework, the performance and stability of the financial sector strengthened in 2010. This improved performance was reflected in all prudential indicators. Credit flows significantly recovered, profitability improved, capital adequacy further increased above the threshold and the ratio of non performing loans declined, while provisions for loan losses increased. The performance of finance companies in distress also improved rapidly, while financial markets continued to remain liquid. The branch network of banks and other financial institutions expanded, particularly with the measures taken by the Central Bank to promote financial service delivery to the Northern and Eastern provinces. Improvements to the payments system continued. A mandatory deposit insurance scheme was introduced in 2010 for licensed banks and finance companies to protect small depositors. However, intermediation costs that still remain high, as reflected by high interest rate margins, and the sluggish development in the corporate debt securities market continue to remain areas of major concern. Real sector developments In 2010, the Sri Lankan economy recorded an impressive growth of 8.0 per cent, the highest annual rate of growth reported in the last three decades. This far exceeds the average annual growth of 4.9 per cent recorded since the liberalization of the economy in 1977. This remarkable performance was supported by the restoration of permanent peace, which created an environment conducive for the expansion in economic activity, the strong macroeconomic environment, increased domestic demand, the development of infrastructure facilities, improved external demand with the gradual recovery in the global economy and favourable domestic weather conditions. The improved performance in all key sectors of the economy contributed towards the high economic growth in 2010. The Agriculture sector, which contributed around 11.9 per cent of the GDP in 2010, grew by 7.0 per cent, compared to 3.2 per cent in 2009, mainly driven by the increased production of paddy, tea, rubber and minor export crops along with significant improvements in the fisheries sector output. Benefiting from favourable weather conditions, the tea sub sector registered the highest ever annual production of 329 million kg compared to the distressed output in 2009, while rubber production also continued to increase. Export agricultural crops such as cloves, pepper and cinnamon contributed positively to the improved performance in the Agriculture sector. Within domestic agriculture, paddy production recorded an impressive growth in 2010 due to increased extent of cultivation particularly in the Northern and Eastern provinces, favourable weather conditions and the continuation of agriculture support schemes. Coconut production declined significantly by 19 per cent in 2010, and sugar production also recorded a marginal



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decline. The significant expansion in fishery activities in the Northern and Eastern provinces largely contributed to the increase in fish production by 12 per cent in 2010, while domestic milk production increased notably with the committed efforts to enhance domestic milk production. Industry sector growth The Industry sector grew by 8.4 per cent supported by increased domestic and external demand with enhanced investor and consumer confidence. Improved performance in industries, such as food and beverages, rubber based products, textiles and garments coupled with increased performance in the construction sector and increased hydropower generation contributed to this growth. The share of the Industry sector in total GDP increased marginally to 28.7 per cent in 2010. Factory industry, which contributed approximately 54.6 per cent to the total industry output, recorded a 7.5 per cent growth during 2010. The textile, wearing apparel and leather products category, which was adversely affected by the global economic crisis, showed signs of recovery during the last quarter of the year despite the withdrawal of GSP+ concessions effective from August 2010. The apparel industry remained competitive through increased productivity, improved quality, diversification and gradual recovery in external demand. The high growth in food, beverages and tobacco products category, which accounts for nearly 48.0 per cent of the total factory industry output, was driven by the expansion in domestic demand particularly from the Northern and Eastern provinces and increased tourism-related activity during the year. The major contributors to the increased output in export market oriented industries were ship building and repairing and transport equipment and machinery. The non-metallic mineral products category also performed well during the year with high demand for cement and building materials. The substantial improvement in hydropower generation raised value addition from the electricity sector, while the construction sector expanded by 9.3 per cent with the continuation of major infrastructure development projects as well as increased construction activity in the private sector. Services sector The Services sector grew by 8.0 per cent in 2010. The wholesale and retail sub sector, which accounts for the largest share in the Services sector, grew by 7.5 per cent with increased external trade with the gradual recovery of the global economy and domestic trade with the restoration of peace. The hotels and restaurants sub sector grew sharply by about 39.8 per cent underpinned by the strong performance in tourism. Other major sub sectors such as transport and communications, and banking, insurance and real estate also recorded significantly higher growth rates compared to 2009. The transport and telecommunications sector grew with the improved performance in transport, cargo handling, aviation and telecommunications sectors. The banking, insurance and real estate sub sector expanded with increased income from investments and lending activities, foreign exchange operations and widened financial services through the expansion of bank branches and other service outlets. Reflecting the recovery in economic activity, consumption expenditure increased by l4.9per cent in 2010, while savings and investment of the country also recovered. As a percentage of GDP, private consumption increased from 64.4 per cent in 2009 to 65.8 per cent in 2010, while government consumption declined from a high level of 17.6 per cent to 15.6 per cent. Both domestic savings and national savings increased, from 17.9 per cent of GDP and 23.7 per cent of GDP, respectively, in 2009, to 18.7 per cent and 24.7 per cent, respectively. Private investment recovered from 17.9 per cent of GDP in 2009 to 21.6 per cent in 2010, while public investment declined marginally from 6.6 per cent of GDP in 2009 to 6.2 per cent in 2010, and as a result, total investment as a percentage of GDP in



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2010 increased to 27.8 per cent. The recovery in total investment resulted in widening the national savings and investment gap to 3.1 per cent of GDP, which was reflected in a higher deficit in the external current account. External sector developments The external sector of the country further improved in 2010 with favourable developments on both domestic and external fronts. Sri Lanka’s graduation to the status of a “middle-income economy” by the International Monetary Fund (IMF) in January 2010, enabled the country to project itself strongly in international financial markets. Upgrading of the sovereign credit rating of the country by international rating agencies, the successful continuation of the Stand-by Arrangement (SBA) with the IMF, increased long term capital flows to the government including the successful issuance of the third international sovereign bond in October 2010 as well as increased inflows to the private sector helped strengthen the performance of the external sector. Further relaxation of restrictions on foreign exchange transactions also helped improve investor confidence and the external sector. External trade rebounded strongly in 2010, reversing the sharp contraction observed during the global recession of 2009. Earnings from exports increased by 17.3 per cent, reflecting higher earnings from the industrial and agricultural sectors. Expenditure on imports grew by 32.8 per cent, led by intermediate goods imports. As a result, the trade deficit expanded to US dollars 5,205 million in 2010. Although export earnings were volatile in the early part of the year amidst uncertainties regarding the global recovery, they improved towards the latter part of the year, indicating a new growth path, despite the withdrawal of GSP+ concessions. This reflected the peace dividend and the dynamism of local exporters. Meanwhile, international commodity prices rose due to the global economic recovery, higher demand for commodities from emerging economies, and global supply constraints. Consequently, agricultural exports continued to fetch high prices in the international market. Higher commodity prices, particularly crude oil prices, caused expenditure on imports to increase in 2010. Imports of consumer durables, such as personal motor vehicles and electronic goods also increased following the tariff reductions and the increase in domestic economic activity. Similarly, imports of investment goods also increased in 2010, led by higher expenditure on imports of machinery and transport equipment. Inward worker remittances External trade in services improved significantly generating a higher surplus during 2010, while the income account continued to record a deficit. All sub sectors of the services account, mainly transportation, travel, computer and information, construction and insurance services, performed well during the year. A substantial increase in inward workers’ remittances to US dollars 4.1 billion helped offset the trade deficit to a great extent in 201 0.As a result, the external current account recorded a deficit of US dollars 1,498 million or 2.9 percent of GDP in 2010. The current account deficit widened due to a large trade deficit, as a result of an increase in import demand supported by the recovery of domestic demand and expansion of economic activity. Inflows to the capital and financial account exceeded the current account deficit. In 2010, the BOP recorded a surplus of US dollars 921 million, following a significantly higher surplus of US dollars 2,725 million in 2009. Higher inflows to the capital and financial account, which exceeded the current account deficit, generated the surplus in the overall balance of the BOP. The financial inflows to the government as well as to the private sector for long term investment contributed to the surplus in the BOP. The external reserves of the country further improved to record its highest level in 2010.By end 2010, gross official reserves (excluding ACU receipts) increased to a record



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high level of US dollars 6,610 million (equivalent to 5.9 months of imports) compared to US dollars 5,097 million at end 2009. Higher disbursements of project financing, continuation of the IMF-SBA facility, the proceeds from the third international sovereign bond issue, and the absorption of foreign exchange from the domestic foreign exchange market contributed to the buildup of reserves. Synopsis of CB Meanwhile, total external assets (excluding ACU receipts) increased by 19 per cent to US dollars 8,035 million by end 2010 (equivalent to 7.1 months of imports), compared to US dollars 6,770 million at end 2009. Fiscal sector developments Significant improvements in fiscal operations in 2010 helped contain the overall fiscal deficit at 7.9 per cent of GDP from 9.9 per cent in the previous year. For the first seven months of the year, fiscal operations were conducted initially under a Vote on Account framework and then under the provisions of paragraph 3 of Article 150 of the Constitution by a Presidential Decree. The budget for 2010 was approved by the Parliament in July 2010. Despite the delay in presenting the budget and the limited scope for introducing new revenue and expenditure measures, the overall fiscal deficit was maintained within the original target of 8 per cent of GDP. The pickup in domestic economic activity and the strong recovery in imports increased government revenue in nominal terms above the original target set in the budget for 2010.Revenue as a percentage of GDP increased to 14.6 per cent in 2010 from 14.5 per cent in the previous year. The rationalization of the tariff structure to four bands and the removal of the import duty surcharge as well as the reduction of effective taxes on various major imports, including motor vehicles, caused a surge in import demand and a resultant increase in revenue collection from import related taxes. However, to mitigate the impact of rising international commodity prices on the domestic market, the government revised taxes on several key commodities, including petrol and diesel. In addition, the government provided various tax concessions to assist industries affected by the global economic and financial crisis and to support certain identified industries. Government expenditure Government expenditure was maintained within the original budgetary targets for 20 10 with the strict monitoring of recurrent expenditure, while maintaining capital expenditure for the accelerated implementation of planned infrastructure projects. Total expenditure and net lending declined from 24.9 per cent of GDP in 2009 to 22.9 per cent of GDP in 2010. The reduction of total expenditure and net lending by 2 percentage points was the combined outcome of a reduction in recurrent expenditure by 1.5 percentage points and capital and net lending by 0.5 percentage points. Concerted efforts taken to rationalize recurrent expenditure enabled government expenditure to be contained within the original budgetary allocations, while the public investment programme was carried out largely unhindered. The government relied more on external sources to finance the fiscal deficit, thus reducing pressure on the domestic market and interest rates. Improved investor confidence and the favourable borrowing conditions that prevailed in international financial markets enabled the government to issue a 10-year international sovereign bond at a lower rate of interest of 6.25per cent, attracting an order book of six times the value of the bond and to issue Sri Lanka Development Bonds (SLDB5) with extended tenor at lower interest rates.



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In financing the deficit through domestic sources, the government reduced its reliance on bank financing, thus releasing resources to the private sector and easing pressure on domestic interest rates. Total net domestic financing in 2010 amounted to 3.6 per cent of GDP, while net foreign financing was 4.4 per cent of GDP, which consisted of foreign loans (3.5 per cent of GDP) and foreign investments in government securities (0.9 per cent of GDP). Meanwhile, the outstanding government debt to GDP ratio declined from 86.2 per cent in 2009 to 81.9 per cent in 2010 mainly due to a lower budget deficit and higher growth in nominal GDP. Monetary sector developments The Central Bank eased its monetary policy stance further in 2010 by reducing the policy interest rates in the second half of 2010 with a view to stimulate credit growth to support economic activity. The continuous deceleration in money supply growth during the first three quarters of 2010 reflected subdued demand pressures, while the benign outlook for domestic consumer prices prompted the Central Bank to continue its accommodative monetary policy stance during the year. With the reduction in both the Repurchase rate and the Reverse Repurchase rate by 25 basis points in July, and a further reduction of the latter by 50 basis points in August, the policy rate corridor was narrowed, and by end 2010, the Repurchase rate was 7.25 per cent, while the Reverse Repurchase rate was 9.00 per cent. Policy rates were reduced again in January 2011, narrowing the corridor further, which has since remained bounded by the Repurchase rate of 7.00 per cent and the Reverse Repurchase rate of 8.50 per cent. Following the turnaround in rupee liquidity in the domestic money market from mid 2009,the money market liquidity continued to be in excess in 2010. The build-up of excess liquidity was largely due to the absorption of foreign exchange inflows to the country by the Central Bank with a view to preventing an undue appreciation of the rupee. The issue of the sovereign bond in October to international investors, net foreign investments in Treasury bonds and Treasury bills, and other inflows of foreign funds to both the government and the private sector, resulted in the excess of foreign exchange in the domestic foreign exchange market during the first three quarters of the year. Liquidity The Central Bank continued its efforts to manage liquidity, thereby stabilizing interest rates and guiding reserve money along the targeted path. As the stock government securities held by the Central Bank depleted, the Bank issued its own securities to absorb liquidity on overnight and term bases. Foreign exchange swap agreements, adopted under open market operations (OMO) in 2009, were also utilized to absorb a portion of the excess liquidity. In October 2010, the Central Bank implemented a bond-borrowing programme and the borrowed bonds were used for OMO in the latter part of the year to absorb the excess liquidity in the market. Meanwhile, from 20 October 2010, the overnight and term auctions under OMO were discontinued as the primary market yield rate on three-month Treasury bills declined to levels below the Bank’s Repurchase rate, an outcome of intense competition among banks, who had a large volume of excess liquidity, to acquire short term government securities to manage their portfolios. Accordingly, market participants continued to place their excess liquidity with the Central Bank through the standing facility. By end 2010, the overall excess liquidity in the money market amounted to Rs. 124.3 billion compared to Rs. 159.6 billion at end 2009. The monetary operations of the Central Bank continued within a monetary targeting framework and were guided by its monetary programme, which is prepared taking into account the projected key macroeconomic developments. Accordingly, broad money (M2b) continued to be the intermediate target for monetary policy, while reserve money, which is linked to broad money through a multiplier, remained the Bank’s operating target for monetary policy.



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The Central Bank’s monetary programme was initially prepared stipulating the targets for annual average growth of broad money and reserve money at 14.5 per cent each. Subsequently however, the Bank revised the monetary programme for the year as it became evident by mid year that the domestic economy was expanding at a higher rate in 2010 than originally projected, and it was necessary to include information from the government’s budget for 2010, which was presented to the Parliament in June 2010. Accordingly, the targeted growth of broad money in 2010 was revised upward to 15 per cent in July 2010. Meanwhile, a notable increase in the ‘currency held by the public’ component within the money supply, particularly in view of the restoration of economic activity in the Northern and Eastern provinces, led to an increase in the currency to deposit ratio, in turn leading to a decline in the money multiplier. Taking into account these developments, the target for year-on-year growth of annual average reserve money was raised to 21.2 per cent in July 2010, consistent with the upward revision to the broad money target. Following the reduction of the Central Bank’s policy interest rates, market interest rates adjusted further downwards in 2010, providing additional impetus to economic activity. During the year, the average weighted call money rate (AWCMR) continued to hover around the middle of the policy interest rate corridor, thus contributing to the effective transmission of monetary policy. Also, yields on government securities declined during the year. Meanwhile, the second market yield curve for government securities, which shifted downward, extended to longer maturities in 2010. This downward shift in the rate structure can also be attributed to the continued excess liquidity in the money market as well as the benign outlook for inflation that prevailed. Commercial banks reduced their deposits and lending rates gradually during 2010 in response to the easing of the monetary policy stance by the Central Bank. The declining trend in interest rates continued into 2011, as the Central Bank reduced its policy interest rates further in January2011. Financial sector performance and system stability The performance of the overall financial sector improved in 2010, leading to a strengthening of the stability of the country’s financial system. In addition to the continued supervisory measures relating to examination and problem resolution, several regulatory measures were introduced to further strengthen the stability of the financial sector, thereby enhancing public confidence. The improved performance, which was reflected in all leading indicators of financial institutions, markets, payment systems and safety nets, was recorded amidst the resolution of concerns and stresses that had arisen in 2008 and 2009 due to certain domestic and external shocks adversely impacting on the public and investor confidence and business operations. Both bank and non bank financial institutions displayed improved performance in 201 0,reflecting the increase in financial transactions to facilitate the growing economy. The banking sector, which is the most dominant and systemically important sector in the financial system, grew at a high rate, while recording a significantly high level of profitability. Capital adequacy ratios and liquidity ratios in the banking sector remained well above the statutory limits. The expansion of the branch network of financial institutions continued during 2010. The banking network further expanded with the establishment of 85 branches, 97 extension offices and 130 automated teller machines (ATMs).With regard to non bank financial institutions, the registered finance companies (RFC) sector gradually recovered in 2010 after experiencing liquidity problems in 2009. Timely measures implemented by the Central Bank restored depositor confidence in RFCs. Specialisedleasing companies (SLCs) continued to grow in 2010 with an improvement in credit quality and favourable provisioning for bad and doubtful accommodations. Key financial indicators of the primary dealers in government securities improved during 2010, while risk management indicators were maintained within prudent levels. The insurance sector also reported improved performance in 2010. The Central Bank further strengthened its supervisory and regulatory framework to improve the soundness and risk management systems of banks. The new regulatory measures introduced included the increase in



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the minimum capital that is required to be maintained by licensed commercial banks (LCBs) and licensed specialized banks (LSBs), on an annually staggered basis from 2010 to 2015; the implementation of a mandatory deposit insurance scheme, the reduction of the required level of general loan loss provisions; the application of the assessment of the fitness and propriety to officers performing executive functions; the requirement for unlisted locally incorporated private banks to obtain a listing on the Colombo Stock Exchange (CSE) by 31 December 2011; and the issuing of Directions on outsourcing of activities. Outlook In 2010, the first full year of operation subsequent to the ending of the three-decade long conflict, the economy of Sri Lanka has displayed its true potential, with impressive macroeconomic achievements. The challenge for policymakers today is to sustain these achievements with macroeconomic stability in the face of more frequent internal and external shocks. While appropriate demand management policies are required to maintain low and stable inflation, effective addressing of supply-side impediments is also needed. The continuous advancement of productivity, the adoption of new technology and human capital development would reduce the pressure on the labour market, while improvements to physical infrastructure and appropriate changes to the regulatory framework need to be pursued to facilitate greater labour mobility as well as greater labour availability to maintain the expected high growth. The diversification of exports, in terms of products and markets, is needed to increase the resilience of the economy to external disturbances, and to this end, the effective utilization of existing bilateral and multilateral treaties and actively perusing the establishment of further trade relations with emerging regional markets as well as promoting private sector investment and strengthening the “Doing Business” environment are necessary. The impact of disturbances arising from adverse external developments including price movements of commodities such as crude oil, could also be lessened through the implementation of necessary reforms to the institutional framework of key public enterprises to operate them more efficiently and in a commercially sustainable way to reflect market conditions. These changes will support the ongoing fiscal consolidation process, which would in turn strengthen demand management policies. Pix by: Pradeep Dilrukshana



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Emerging Health Challenges in Sri Lanka: More Money for Health and More Health for the Money By Samanthi Bandara, Research Officer - IPS

In this second article marking World Health Day (7th April), Samantha Bandara of the Health Economic Policy Unit of the IPS argues that as Sri Lanka grapples with emerging health challenges, like changing lifestyles with income growth, the rise of non-communicable diseases and an ageing population, health care financing policy needs a thorough rethink. While allocating more money is a definite need, better allocation of existing resources, by focusing more on primary level health care, is also essential.

Sri Lanka has an impressive record of health care provision, with model accomplishments in health outcomes compared to similar developing countries. Over the decades, since independence, the Government of Sri Lanka (GoSL) has played a remarkable role in the health system; provision, financing, and regulation of health care across the country. Successes of these initiatives have been reflected in the impressive health outcomes associated with good maternal and child health, low levels of communicable diseases and long life-expectancy. Nevertheless, the growing and shifting health needs of the country, consequent to the transformation of the economy to a lower middle income level, and changes in social-demography and epidemiology, require more resources. The health system framework of the World Health Organization (WHO) identified six health system ‘building blocks’ towards achieving universal coverage (UC) with social health protection (SHP), of which health financing is a critical element.

Health Care Financing: Recent Trends Health care in Sri Lanka is financed mainly by the government, with some private sector participation as well as limited donor financing. Public sector financing comes from the General Treasury, generated through taxation. Public sector services are totally free at the point of delivery for all citizens through the public health institutions distributed island-wide, while private sector services are mainly through ‘out-of-pocket expenditure’ (OOPE), private insurance and non- profit contribution.

Total health expenditure (THE) has fluctuated between 3.7% and 4% of GDP over the past few decades. Within this, the contribution from the Government was 45.8% in 2009, while the contribution from the private sector was 54.2%. The government health expenditure as a percentage of total government expenditure was 4.9% in 2007, which is a decrease of over half from the 7.2% recorded in 2006. It is increasingly evident that private sector financing has become more prominent over time.

A large proportion of the private sector financing comes from OOPE, i.e., individual cost borne by the patient, which is around 85% of total private expenditure on health and 51% of THE, again which is significant. Increasing OOPE is clearly linked to the continuing demand for outpatient care at private sector institutions - nearly 65% of outpatient care services in 2006 were provided by private health facilities. When it comes to inpatient care services, however, public health institutions are the leading provider. The proportion of publicly financed inpatient services was 72% in 2006, but it is a decrease from 80% in 1990. Private financing is certainly a good complement, as it provides additional resources, but the associated increase in OOPE for health by the patient, which is inherently regressive, creates inequity and social exclusion in availing of health care services.



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Challenge 1: Problems due to Prosperity? Sri Lanka is now transforming into middle income country status. Improving economic status and urbanization generates both positive and negative outcomes. On the positive side, it increases educational status and peoples’ expectations, which in turn results in greater demand for quality health care. Concurrently, on the negative side, changing lifestyles, consuming more fast food and unhealthy diets, the tendency for consumption of more alcohol and tobacco, living in polluted environments, and trauma due to occupational exposure, are drivers of enhanced health risks. Consequently, more financial resources will be required to meet this rising demand for easily accessible, and affordable quality health care.

Challenge 2: Ageing Population Sri Lanka is also experiencing a demographic transition, reflected in the increased population of those aged 60-plus. Population forecasts predict a doubling of the country’s ageing population by 2040 (24.4%) compared to 2010 (12.1%) as life expectancy increases (due to improved island-wide preventive and curative health services) and fertility rates decline rapidly. Accordingly, the heightened fiscal cost for long-term care of this ageing population is an emerging challenge, along with the heightened burden of old-age pension provision.

Challenge 3: Rise of Non-Communicable Diseases The epidemiological transition referred to earlier is the emerging shift from communicable diseases, which have largely been well contained, to a rise of non-communicable diseases (NCDs), for example, cardiovascular disease, diabetes, cancer, asthma/chronic obstructive disease, and mental illness. Currently, treatment for NCDs accounts for nearly 90% of the total ‘disease burden’, while curative treatment for infectious diseases and preventive treatment for maternal and child health account for only around 10%. Furthermore, diabetes and asthma are also on the rise: 10% and 15%-20% respectively, per 10,000 people. Whilst mortality rates due to infectious diseases have been declining, from 42% in 1945 to 20% in 2003, mortality rates attributable to NCDs are rising. Death due to diseases of the circulatory system was 23.8% of all deaths in 2003, a dramatic increase from 2.8% in 1945. International comparisons show that such deaths in Sri Lanka are as much as 20-50% higher vis-a-vis developed countries.

Increasing Health Financing: Three Dimensions The universally accepted notion is that publicly financed health systems are optimal. In this context, the key question is how can additional funds be found for expanding Sri Lanka’s health care provision? There are different views expressed on how to increase ‘room’ for public health financing in the country. These are summarized in Figure 1.

The WHO Regional Health Financing Strategy for the Asia Pacific Region (2010-2015) and the World Health Report (2010) have highlighted the three dimensions which need to be considered in moving towards universal coverage and social protection, i.e., when all people have access to care – promotion, prevention, curative and rehabilitative – at suitable quality, without financial hardship.

The breadth of the box in Figure 1 shows the proportion of the population covered from public health services. In Sri Lanka, people who are in under-served areas are not able to even access private care because they are located in rural areas. This is where the ‘depth of coverage’ comes in useful, by treating a broader extent by scaling up the primary care system.

Dimension 2: Depth of Coverage Sri Lanka has a large health service network through primary, secondary and tertiary care institutions for promotion, prevention, curative and rehabilitative care services. Yet, most of the primary care institutions across the country are idle. Given the difficulty in allocating new financial resources, there is a growing recognition of the need to re-orient the current public health service structure to enhance the efficiency of



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resource use. Already, the Ministry of Health has begun strengthening the primary level care service structure with a proposed package of services of curative care including prevention and promotion. These services are provided through the Family Practice approach to address the rapid rise of the disease burden caused by NCDs and elderly care. The importance of this approach has also been recognized by policy makers, following strong advocacy by the officials of the Ministry of Health, resulting in an allocation of Rs. 908 million for strengthening primary level health care to address NCD care needs. While the country needs more money to spend for health care, increasing efficiency of resource allocation through re-orienting the primary level care services in the sector is an essential complement to bridge the funding gap, i.e., more health for the money spent.

Dimension 3: The Height of Coverage The height of coverage shows the ‘cost sharing’ element. Insufficient public health expenditure results in higher individual out-of-pocket expenditure (OOPE) and lower population coverage. This can be tackled to some extent by making available essential medicines, especially for NCDs, at primary care facilities (Divisional Hospitals). When examining the provision of services, the public sector health system finances less for NCDs than the private sector. In the case of diabetes, for instance, the private sector spent 81.2% of total diabetes prevention and control care while the public sector invested only 18.8% for the year 2005. On one hand, expenditure for NCDs care by the patients themselves (particularly the poor) creates an extra burden on them, as their ‘financial risk’ (i.e., the amount a household pays for health care relative to its income/capacity to pay) increases. On the other hand, the gap in service provision is often a criticism of public health facilities, due to the continuous resource gap. This results in frequent unavailability of essential drugs and other diagnostic testing. In addition, care for NCDs in the public health system is provided at tertiary and secondary facilities, not at primary level facilities. As a result, patients (especially those in areas under-served by secondary and tertiary facilities) have to bear additional costs in seeking health care such as transport and foregone work. Interestingly, the treatment cost per patient at primary level facilities is in fact lower than at tertiary and secondary level facilities. This needs to be borne in mind when evaluating how best to allocate resources, and in attempting to ease the financial burden on patients. In middle income countries, prevention and promotion care for NCDs is mainly provided through primary care facilities because it has been recognized as more cost-effective than delivering them at secondary or tertiary care facilities.

Prospects Sri Lanka has enjoyed exceptional health outcomes, with strong maternal and child health and low prevalence of infectious diseases, at low cost, in the past two decades. However, as this article has shown, there are visible gaps/disparities in health outcomes with regard to NCDs and elderly care. Empirical data shows that the country needs sufficient investment in health, especially given the emerging burden due to NCDs and ageing population (i.e., elderly care needs). These needs have to be addressed soon to avoid the resultant socio-economic consequences, such as a withdrawal from the workforce early due to ill health in the case of NCDs, and the rising fiscal costs for pensions and long-term care in the case of the ageing population.

The Health Master Plan (2007-2016) for Sri Lanka estimated that the total health expenditure as percentage of GDP by 2015 would be 4.5 - 5% (medium) and 6.7% (high). This is based on various assumptions and projections but it appears that the emerging NCD burden and the ageing population were not adequately taken into account and if factored in more robustly, the requirement is likely to be much higher.

It is hard to find more money for health due to the limited fiscal space of the government. However, if existing resources can be allocated and utilized more efficiently, and health needs prioritized, the government would be able to extract more health for the same amount of money. This re-orienting process



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of improving service provision at lower level facilities would help to address the gaps in service of the poor and under-served. Improving accessibility and availability of health service delivery, especially for vulnerable groups, at an affordable cost will be a strong driver towards attaining universal coverage and social health protection, which the WHO framework has emphasized. It is evident that there are a myriad of policy options developed following careful analysis and evaluation by health experts. But what is most important now is for the government to provide the political leadership to implement the much needed reforms, with due consideration also to pilot-testing and impact assessments.

(This article is open for discussion at www.ipslk.blogspot.com)



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Sunday Island – April 17, 2011

Creeping Nationalization of Banks

By Eran Wickramaratne

Nearly two years after the end of a bloody military conflict the government is getting exposed on its stewardship of the economy. Daily we hear conflicting messages and encounter economic and financial signals that are contradictory. Government Members of Parliament from suave business personalities to ancient socialist ideologues speak in Parliament on financial matters little realizing the policy contradiction and consequent damage to the progress of the economy. The economy is stuck between socialist idealism and the pragmatism of the market.

The creeping nationalization of the banking industry is a case in point. Thirty to forty years ago the socialist would unashamedly nationalize any industry it deemed to be in the national interest. But today fearful of the consequences that followed those dark days they resort to gradual ownership and control. The Bank of Ceylon, Peoples’ Bank and the National Savings Bank have more than 1,665 billion rupees in assets, which is about 50% of the total banking assets of the country. Then why is the government resorting to purchase and control the remaining banking assets? What does it hope to achieve? Does it require to takeover the whole banking sector to achieve that end? Or has the decision to purchase shares of well run banking institutions been presented by some policy makers to their political masters without much thought and weighing the drastic long term consequences.

Government institutions have invested more than rupees 60 billion in recent months to end up as the largest group of investors in almost every stock market quoted bank.

The EPF investment is about 25% of total government investments. In addition to the EPF, the ETF, BOC, Insurance Corporation of Sri Lanka and the National Savings Bank have contributed to the creeping takeover; while officials would have the public believe that the decision to purchase and vote at Annual General Meetings has been made independently by each institution. Government Members of Parliament defended the move on the basis of Temasek Holdings role in purchasing shares on behalf of the Singapore government. It is instrumental to quote from the Governance framework of Temasek Holdings that "Neither the President of Singapore nor the Singapore Government is involved in our investment, divestment or other business decisions." Temasek Holdings is a commercial investment fund operating independent of the Monetary Authority and Singapore Government.

Conflict : The Central Bank’s role as Manager & Regulator The government purchase of shares has also been justified on the basis of giving EPF holders better returns on their retirement funds. While EPF holders could justifiably demand better returns on their investment funds through investments in the stock market the problem arises because the Central Bank manages the funds of the EPF. The Monetary Board has access to all data of commercial banks because of



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its regulating role under provision of the Monetary Law Act, and Banking Act No 30 of 1988. Many including the IMF and multilateral agencies have pointed out the conflicts that arise out of the Central Bank being regulator with access to non-publicly disclosed information and also as ‘player’ in the market. According to the Securities and Exchange Commission Act No. 36 of 1987 the Central Bank is exposed to the charge of potential insider trading. While legal arguments will be made and defended, the moral and ethical conflicts will continue to remain.

Government entities acting in concert Apart from the EPF, the National Savings Bank, the Insurance Corporation of Sri Lanka and the Bank of Ceylon are all owned and controlled by the government. According to the Banking Act a single shareholder can own only 10% of a bank while 15% could be purchased with the approval of the Monetary Board. To overcome these ownership limitations parties may act in concert. While it is often difficult to prove that parties are acting together, the fact that there is common government ownership is undeniable. Either the government is in breach of single owner limits or it has been assumed that the relevant law does not apply to government.

Independent Directors being replaced by major shareholders It is widely known that government institutions have withdrawn their support of independent directors serving on the Boards of some stock market quoted banks. Government nominees have subsequently been appointed to the Board of the banks. How can the major shareholder replace an independent director by its own nominee? This makes a mockery of the concept of an independent director. The ouster of Ranjith Fernando from the Commercial Bank Board is the most recent example of such a manoeuvre. The press release by the Commercial Bank was factual but not completely truthful. According to the latest disclosures in the press the recent appointment to the Board of Commercial Bank though claimed to be in conformity with banking regulation appears to be in violation of such regulations. Unfortunately the Board of Directors are falling victims to pressure against their better judgment and professionalism.

A distinction must be drawn between the government investment for returns on the stock market and its desire to control banks. It is in its desire to control that it is replacing independent directors. The government’s role as ‘player’ and regulator is leading to conflicts of interest. The Regulators responsibility is to approve or disapprove a director nominee on the basis of whether he is fit and proper. Sadly it looks like the process and behaviour of the regulator is neither fit nor proper.

Conclusion The government is riddled with internal contradictions. It is suspicious and disparaging of foreigners but wants foreign investors. It has largely alienated the international community but wants to cultivate relationships behind closed doors. It wants economic growth and prosperity but is constantly interfering with market mechanism and depending on the judgment of a few bureaucrats. It has undermined the private distribution of goods and services with increasing government distribution. Now, the creeping nationalization of banks will eventually lead to directed lending and politicized management. It will drive away desirable private investment. The role of the non-state sector is dangerously shrinking.

(The writer was Director/CEO of the National Development Bank until he became a Member of Parliament in April 2010.)



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Sunday Times – April 17, 2011

Rupee devaluation: Is it to save the country, exporters or the opposition? By Luxman Siriwardena and Chanuka Wattegama The main opposition party has recently demanded a devaluation of the Sri Lankan Rupee (LKR) to ‘increase exports’ and ‘boost the economy’. This process, claims our ‘government-in-waiting’, is the assured remedy to increase the share of exports in the Gross Domestic Product (GDP), which, according to them has fallen to ‘miserable levels’. As almost all policy decisions, a currency devaluation too has a positive and a negative impact. This is an attempt to present a balanced view. To begin with, there is nothing new in this call. For many decades local currency devaluation has been prescribed as a panacea to most economic ills of developing nations by the IMF and neo classical text book economic pundits. Of course, exporters love a weaker LKR. It improves their short term competitiveness as well rupee gains. Just like a peasant in hard times anticipates the government to subside his fertilizer costs, which will in turn lower his vegetable prices in a competitive market, the exporters too eternally look for a helping hand from the government. The opposition becomes their typical messenger. The advantage of sitting across the floor is that one can take the credit for a policy intervention by the beneficiaries without risking the wrath of the losers. That could well be the raison d'être behind this proposition. It would be too naïve to assume sincerity. After all, oppositions love to see governments losing popularity, not gaining. LKR devaluation was not a high priority of the short-lived government of the current opposition from 2001-2004. For this period LKR only fell from not more than one tenth of a US cent, which can hardly be called devaluing. Regaining Sri Lanka, the policy document of the times (still downloadable from multiple sites including that of the External Resources Department) neither mentions the terms ‘devaluation’ or even ‘Rupee’ if it were not to denote a figure, though it emphasizes the importance of increasing exports and expanding access to overseas markets to reach the planned 10 percent growth rate. Why preach policy changes one does not practice oneself? The opposition, like anyone with the basic commonsense, knows the government has no compulsion to devalue LKR at this juncture. The probability of a major devaluation of 25% is almost nil. The immediate focus of the government is growth. Sri Lanka is enjoying a healthy and consistent growth in its economy. Per Capita GDP (real) of $1,000 in 2005 has more than doubled to $2,400 in 2010, with an unprecedented growth rate in the post-independence period. The aim is $4,000 by the year 2016. This is no reason for complacence; we will still be below Thailand and Tunisia, but fourfold increase within a mere 10 years will be no small achievement. Sri Lanka, except the micro state Maldives, will be the first South Asian nation to reach this milestone. Every cog, nut and bolt in the system is tuned to achieve this growth. The government certainly will not welcome any deviation from its blueprint. What can devaluation possibly achieve? What were our past experiences? First, a word about the choice of terms. Though incorrectly used synonymously to denote a drop in currency value with respect to other currencies, ‘devaluation’ and ‘depreciation’ have different implications. ‘Devaluation’ means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference



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currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system. Under the second system central banks maintain the rates up or down by buying or selling foreign currency, usually USD. Under its previous fixed value system, LKR has undergone two major devaluations. First was in 1965, under the Dudley Senanayake government. The immediate reaction of the then opposition was to coin a new term ‘rupiyala baaldu karanavaa’ underlining the negative bearing of the move. It was further devalued in 1977, when the newly elected, market oriented government under the leadership of President J. R. Jayawardena found no other way to bridge the huge gap between the nominal and real exchange rates. India’s experience is not too different. India had first devalued the Indian Rupee (INR) in 1966. The continued trade deficits of increasing effects, since 1950s, have made foreign borrowings impossible. The situation was further deteriorated by the massive defence spending of the Indo-Pak war of 1965. India has also lost some of its financially important foreign allies who backed Pakistan. The nationwide drought was the last straw that forced the devaluation. In 1991, on the second time, it wasn’t a war but the balance of payment issues that forced the INR devaluation. The exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. Dr. Manmohan Singh, as the finance minister in Narasimha Rao’s government saw no other alternative than a significant devaluation of INR. None of these devaluations was pre-planned. They were extreme measures forced by the conditions. The objectives too were not to improve the exports, but to ease the immediate tensions in the economy. They wouldn’t have simply happened under normal circumstances. Pro-devaluation economists are correct in saying a lower LKR improves our competitiveness in the short run. We fully agree. It is basic economics. That is why China pegs Yuan (CNY) to USD, despite the pressure not to. The problem is devaluation is no free lunch; it comes with a massive price tag. To take the most straightforward example, devaluation will immediately skyrocket all loans in foreign currency, further burdening a debt ridden nation. So the question is not whether devaluation improves exports, but whether it does so to a level that justifies the price tag. Let us take this simple illustration. The on-going market price of a lunch packet near Sethsiripaya, Battaramulla is LKR 100. At LKR 110, one will sell a less number of packets, and at LKR 200, may be none. Anything below LKR 100 makes the product competitive and increases the sales. This does not mean a vendor can price tag a lunch packet at LKR 50. It will be below the production costs and irrespective of the sales, there will be no gain. The more he sells the more he loses. This is the age of policy based on evidence, not just on theory. Does the past evidence support the hypothesis of LKR devaluation improves the exports? The top half of Figure 1 shows the annual effective LKR devaluation rates since 1950. The bottom half shows the variation in imports, exports and current account balance, taken as percentages of GDP of the respective year, to maintain uniformity. Please see the highlighted five years periods after three significant devaluations. Do we see an improvement in exports or current account balances? Then to gradual devaluation. In 1990 one USD was LKR 40. This rate has nearly trebled to 115 by 2010. Do we see a related growth either in exports or balance of payments during this period? There can be multiple explanations why previous LKR devaluations didn’t work. We give four below. There can be others.



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• For some export commodities the local value addition is limited to labour. When we import raw material just to be processed here, the devaluation of LKR is of little use as the competitive gain gets partially offset by the increase in the cost of raw materials.

• The price elasticity of the demand of some of our export products is low. Two good examples are cinnamon for which we have a significant global market share and high-end apparel products. Price variations will have little impact on the sales of these products.

The positive outcome of devaluation depends largely on the significant reduction in budget deficit, maintaining prudent macroeconomic policies and stabilized wages. These are killer assumptions to make, not just in a developing country, but sometimes developed as well.

• The devaluation of LKR naturally increases the cost of living. Any devaluation is associated with an immediate rise in imported food, fuel and other input prices. As we know by experience this puts immediate pressures not only on households but even local industries. It eventually forces the government, goods and services producers for both local and export markets to increase wages of labour, offsetting the gains.

• The last one can mean far reaching negative impact. The inflation that will certainly follow the

devaluation will lead to the increase of prices, wages and inflation. This is what the economists call a ‘devaluation/inflation spiral’. This ‘wages chase prices and prices chase wages’ situation will have the opposite impact on the industry to the intended.

Going back to the previous example, we hope exporters and neo classical economists come out of the mentality of dry zone peasants who expect the government to subsidize their fertilizer. The exports are important, no doubt, in the economic growth of a country but we reach nowhere by perennially waiting for a weaker LKR. A more rational approach is to increase productivity and product quality. Unless we improve product quality and introduce product diversification devaluation will not help exporters in the long run. It might perhaps help the opposition in the next elections, though. (Mr. Siriwardena, holds an MA in Economics from Vanderbilt University and Mr. Wattegama an MBA from the University of Colombo. They are independent policy researchers and can be contacted at [email protected]).



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Source: Author calculations based on data from Central Bank of Sri Lanka



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Exports & Imports



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John Keells Tea Market Report: Positive variance in tea averages Sri Lankan Tea averages for March 2011 at Rs 393.77, once again registers a positive variance of Rs 14.35 compared to the average of Rs 379.42 for the corresponding month of 2010.

All three elevations, High, Medium and Low have recorded increases of Rs 27.00, Rs 20.45 and Rs 7.28 respectively. Interestingly the higher averages recorded for the Western High Grown Sector of Rs 25.10 above the corresponding period of last year comes in the wake of a poor season where seasonal character if any was confined just to a hand full of invoices due to un-seasonal weather experienced in February and March. The intermittent showers that we have seen in the first quarter have on the other hand boosted crop intakes in the month of March from all elevations. On the Kenyan front Mombasa auction quantity as well as averages at USC 281

for the first quarter of 2011 is lower by USC 3 compared to 2010 which includes some of the East African countries that sell their produce at the Mombasa auction. As for Kenya at the conclusion of their Sale No: 13 quantities show a significant negative variance of 12.8 mkgs with only a marginal increase on averages of 1 USC. Once again last week's Ex Estate sale comprising 1.28 mkgs. met with lower demand with prices declining Rs 10 to Rs 15 on average. Except for a few bright invoices from the Western sector, the quality on offer was average. A few BOPs and BOPFs sold well on special inquiry and airmail bids received from UK, Japan and the Continent. The CTC market too showed some improvement particularly with the Low Grown types that appreciated Rs 5 to Rs 10, whilst High and Medium types too were firm to selectively dearer following quality. Russia and the tea bag sector lent fair support. The 3.5 mkg of Low Growns that were on offer last week, met with lower demand. The turmoil in Libya, Syria and some other parts in the Middle East have disrupted free movement of teas and also the delays in the exporters receiving payment has precipitated the lower prices at the Colombo Auctions. Libyan buying at the Colombo Auctions is almost non existent. The Iranian buyers too were rather selective due to their new year break. Some Russian buyers too are adopting a wait and see policy. Another disappointing sale considering that no auction will be held next week due to the customary New Year holidays.

All three elevations, High, Medium and

Low have recorded increase



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Western Teas A few bright BOPs advanced sharply following special inquiry, other good invoices declined Rs 15 to Rs 20, Below Best sorts shed Rs 10, plainer varieties eased Rs 5. A few Select Best BOPFs advanced Rs 15 to Rs 20 following special inquiry, other good invoices declined Rs 10 to Rs 15, Below Best sorts eased Rs 10 but gained as the sale progressed, plainer varieties were firm to irregular. Select Best Medium BOPs advanced substantially, others were irregularly lower. BOPFs gained Rs 5 to Rs 10 and more. Nuwara Eliya Teas BOPs declined Rs 20 to Rs 30 and more. BOPFs shed Rs 15 to Rs 20 and more at times. Uva Teas BOPs declined Rs 10. BOPFs shed Rs 10 to Rs 15 on average. Uda Pussellawa BOPs declined Rs 5 to Rs 10, whilst the BOPFs eased Rs 5 to Rs 10 and more. CTC Teas Select Best Low Grown CTC PF1s were firm to dearer, others gained Rs 10. BP1s maintained last levels. High and Medium PF1s advanced Rs 10. BP1s were firm. Low Growns Select Best OP1s appreciated Rs 15 to Rs 20 as the sale progressed, whilst the Best and the Below Best types gained Rs 5 to Rs 10 following quality. Select Best BOP1s were firm, Best types appreciated Rs 10 to Rs 15 and more at times, whilst the balance were irregularly lower by a similar margin. Select Best OPs were firm, whilst others declined Rs 5 to Rs 10 and more at times. Select Best OPAs were irregularly dearer by Rs 5 to Rs 10, whilst others declined Rs 5 to Rs 10 and more at times. Select Best Pekoes appreciated Rs 5 to Rs 10, whilst others were irregularly lower by Rs 5 to Rs 10. Select Best Pekoes appreciated Rs 5 to Rs 10, whilst others were irregularly lower by Rs 5 to Rs 10. Select Best BOP/SP were lower by Rs 5 to Rs 10, Below Best were lower by Rs 10 to Rs 20, poorer sorts were firm. Select Best FBOPs were firm, Best and Below Best types were lower by Rs 5 to Rs 10, poorer sorts were firm. Select Best FBOPF1s were firm, Best and Below Best types were lower by Rs 5 to Rs 10 poorer sorts were firm. Select Best Tippy varieties gained a few rupees but all others were lower to last. Off Grades Select Best and Best liquoring Fngs 1 depreciated Rs 10 to Rs 15, whilst Below Best and poorer sorts were lower by Rs 5 to Rs 10. Select Best and Best BMs declined by Rs 5 to Rs 10, whilst poorer sorts were sold dearer from last levels with good demand. All BPs were lower to last by Rs 5 to Rs 10. All Low Grown Fngs too were irregularly lower to last by Rs 5 and more at times. Select Best BOP1As along with the Best, declined by Rs 10, whilst Below Best and others were firm on last levels. Dust Select Best Dust1s along with the Best and Below Best types declined Rs 15 to Rs 20, poorer sorts declined further. Clean secondaries were firm, whilst the balance were irregular. Best Low Grown Dust/Dust1s shed Rs 15 to Rs 20, whilst the balance were irregular and were mostly firm.

The turmoil in Libya, Syria and some other parts in the Middle East have

disrupted free movement of teas



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Expolanka launches 'Cottage Craft' to revive Handicraft Industry: Eco-friendly rural craftsmen to benefit Expolanka launched Cottage Craft in March 2011 with an aim to develop Sri Lanka's local cottage handicraft industry, by building a partnership with the many smalltime craftsmen working from different parts of rural Sri Lanka. This will work to bring such culturally iconic items prized by visitors and locals alike such as mats, pottery, cane works and jewellery to the urban consumer. The partnership will allow local craftsmen to benefit directly from the sale of their goods, which are produced by their masterful craftsmanship that has passed down from generation to generation for millennia. In ancient times however craftsmen of Sri Lanka enjoyed the king's patronage to develop and sustain their industry, which they have had to forego since the opening up of the economy. The handicraft industry in Sri Lanka has indeed been struggling to survive in the recent past. For this reason, local craftsmen welcome this initiative by Expolanka which helps them to not only sustain their livelihoods but ensure the survival of their niche industry. The consumer can also take pleasure in taking part in this process by knowing that their purchases directly reward the local handicraft industry and thus help to keep an integral part of Sri Lankan culture alive, as the history of handicrafts in Sri Lanka is as long as the history of Sri Lanka itself. Not only is Cottage Craft driven by local talent and locally produced inputs, this sustainable business initiative uses all eco-friendly recycled material for its packaging, such as tea-stained and saffron paper produced by Expolanka's own Neptune Papers, a market leader in recycling in Sri Lanka. Cottage Craft, with its sustainable and inclusive approach to business operations and design, offers handicrafts for the nation - produced by the people who have always made them, packaged in guilt-free eco-friendly material. Thus, Expolanka's dynamism is reflected not only in its steady expansion and growing international presence, but also in its understanding that true corporate accountability goes beyond isolated CSR activities and is measured by the social and environmental sustainability of a corporation's operations.

Saffron paper



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Cottage Craft handicrafts is an example of such an honest understanding of corporate accountability, as the business's growth is directly tied to the development of local industries (and therefore raising the standard of living of the local population) and its operations are aimed at safeguarding the environment through the use of all-natural products and recycled materials. Corporate sustainability comes from within, and Expolanka has a Green Team, comprising of individuals from different business units of the organization, with an aim to develop, promote, and build awareness of environmentally friendly business operations and initiatives, which will work to improve sustainability and minimize environmental damage. In addition to campaigns led by the Green Team such as participating in Earth Hour and the World Environmental Day Awareness Program, there are regular CSR projects carried out by Expolanka such as organization-wide paper recycling campaigns and the Charity Tea Auction for National Cancer Institute of Maharagama held earlier this year in collaboration with the Colours of Courage trust which raised Rs 6 million. It seems "stakeholder responsibility" will always remain a core value at Expolanka as it continues to extend its responsibility towards the community and environment, as with the Cottage Craft handicrafts initiative which safeguards the sustainability of the local handicraft industry, community, and environment.

With tourist arrivals also steadily pouring into the country, Cottage Craft handicrafts will also contribute to the growth of the tourist industry as tourists always seek to take back with them a part of Sri Lanka's culture in the form of a souvenir at the end of their visit. In this way, Cottage Craft handicrafts will help to carry more of Sri Lanka's handicrafts, a source of national pride, across borders to be showcased in many homes in many different lands. Expolanka was a pioneer in International Trade in Sri Lanka and is now a formidable diversified group with core strengths also in Transportation and Manufacturing, which includes the production of herbal pharmaceuticals as well as paper recycling through Neptune Papers.

Neptune Papers currently works with a wide range of financial institutions and banks, government bodies, diplomatic bodies, and hospitals. Its services include a completely free paper shredding service for confidential papers, thus reducing pollution by eliminating the need for burning. Neptune Papers shreds over 2.5 million kg of confidential documents every year. By developing such business strengths. Expolanka shows that they have identified the global trend of and demand for "going green", and thereby the needs of its stakeholders such as consumers, the community, and the environment, and that it has realized a truth that many corporate entities find difficult to swallow - that life is sustainable for only so long as the practices of individuals and organizations of the world are environmentally sustainable.

Paper shredding

Paper in the drying process



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Stock Market



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Unit Trust industry stable and secure Charumini de Silva The Unit Trust industry is stable and secure for investors as inflation and interest rates decreased with the national economy recording a positive growth. The mass market has realized the potential of the stock market since the Unit Trust is one of the safest financial instruments where people could invest in, while enjoying a higher return on their investment. With the steady growth and economic developments taking place in the country the former volatile situation in the financial sector has ceased. At present there is a positive impact that Sri Lanka will experience a rapid economic growth within the next few years. Unit Trusts were introduced to Sri Lanka in 1992. However due to the war, which prevailed for over three decades impeded the growth of the financial sector and the country was unable to promote Unit Trust Funds among local and foreign investors. Countries such as China and India also launched Unit Trusts at the same time when Sri Lanka introduced Unit Trust, but they made speedy advances from it. Since peace and stability has returned to the country; Sri Lanka too could make headway in the Unit Trust industry. The Colombo Stock Exchange (CSE) together with the Securities and Exchange Commission of Sri Lanka (SEC) has modified its laws and regulations to encourage the Unit Trusts. Previously limited foreign participation is now available for Unit Trusts and it has already benefited the industry. Majority of the public has not understood the concept of the Unit Trust due to lack of awareness. However, during the post war scenario the investors have shown a commendable response. Unit Trusts are an



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alternative financial instrument with less risk and it is a preferred mechanism for householders to invest in the stock market or in debt market. The public are slowly identifying the potential in the Unit Trust industry and this will be an excellent gateway for companies that wish to list on the CSE to raise capital. An investor can enter into the unit trust market with a small amount of capital. Even for a small investor it is easy to enter into the market since the investor need not have to select in which company the investment should be made and need not have a frequent knowledge about the capital market. These funds are managed by fund managers. The fund managers are under the purview of the SEC. There is much potential for the fund managers to manage the pension industry and high net worth fund managers. These funds could be converted from savings to investments through professional fund managers. The first unit trust was launched in the city of London in 1868 and from small beginnings this movement has snowballed to a great extent worldwide in many countries. This introduced the idea of selling a “unit” or participation in a trust fund which can be traced in Great Britain to the foreign and Colonial Government Trust, formed as an unincorporated trust in the same year. The significant features to be noted in a Unit Trust are: A Trust Deed is executed between a licensed Fund Management Company (FMC) and a reputed financial institution called Trustee The management of this trust fund is placed in the hands of the FMC which is licensed by the Securities and Exchange Commission of Sri Lanka (SEC) with a minimum issued capital of Rs 25 million. Investing public invest in the trust through the FMC and the investors capital is held by the trustee until it is withdrawn by the investor. Investments could be in joint names and also in the names of minors. Investors in the trust are allotted ‘units’ for their investments based on the selling price calculated at the end of the day. This pricing mechanism is called forward pricing. The investors are provided with a Unit Certificate commencing the investment. In more recent times the units are issued in a script less format. There is no par value for units although usually initial offer price of a trust fund is fixed at Rs 10 per unit. The unit value is based on the Net Asset Value (NAV) of the securities held by the trust on the date of valuation. FMCs’ publish in newspapers the buying and selling prices of units of a particular trust which gives an indication of the transaction price to the investors in Unit Trusts. The number of units outstanding in a trust can vary up or down depending on the investor activities in the trust fund. The unit trust funds operating in Sri Lanka are open ended, close ended and listed funds and capable of issuing any number of units without any limitation for open ended funds and limited number of units for close ended funds. FMC maintains the investor’s personal details and the transaction details to provide accurate information and service to investors in the trust. When the investors apply to withdraw their investments FMC verifies with the details and check their identity before payments are made. Usually investors can withdraw their funds within a period of 3 - 4 days from the date of their withdrawal application. The value they realize for their units is based on the appropriate managers buying price for that transaction. The trustee, and the SEC monitors the activities to ensure all transactions are within the provisions of the deed and related securities law in the country. FMC declare dividends based on income realized and accrued to keep the investors to enjoy a return annually. However, some funds are long-term growth oriented funds



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and may not declare dividends on a regular basis. The growth is achieved due to the nature of the asset class in which trust fund makes its investments, such as shares of growth companies. Unit Trust industry in Sri Lanka In Sri Lanka the unit trust concept was first introduced in 1991 when the share market was in its early stages and particularly soon after foreign investors were allowed to invest in the Sri Lankan stock market. Initial funds launched in 1991 - 1992 were balanced funds which primarily invest in share market and fixed income securities. Public awareness about unit trusts in Sri Lanka is found to be lower since the formation of unit trusts in 1991. The Unit Trust Association of Sri Lanka has conducted awareness campaign from time to time for the benefit of the public to know about unit trusts and to use them to save their money for their medium to long-term financial requirements.



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CSE has dreary week

The Colombo Stock Exchange grew 11.72 percent year-to-date with subdues market activity last week.

The market saw an overall dreary sentiment during the week paving the way for eager turnover and volume levels. Lack of liquidity in the market backed by April seasonal effect is the main contributor for the current lackluster market behavior, Bartleet Mallory Stockbrokers (BMS) said.

The benchmark All Share Price Index climbed a marginal 36.65 points (+0.5%) while the Milanka Price Index of more liquid stocks shed 3.41 points (-0.0%) to close the week ending April 8, with mixed moods.

The market recorded a cumulative turnover of Rs. 8,201 million and a volume level of 215 million during the week. The average daily turnover for the week stood at Rs. 1,640 million and the average daily volume level hovered around 43 million for the week ended April 8, 2011.

"Year-to-date, the market has achieved an average daily turnover of Rs. 3,058 million, and an average daily volume of 107 million shares. On that note, this week’s performance on average depicts a significant downswing, in our view," BMS said.

"High net-worth individuals and institutional investors made their presence felt while the retail investor interest was evident on illiquid speculative stocks during the week, in our view. Banking and Finance, Diversified and Food and Beverage stocks gained investor attention during the week.

Foreign investor participation was more skewed towards buying side, generating a net foreign inflow of Rs. 301 million," it said.

BMS said Stores and Supplies sector emerged as the top sector gainer (+10.4%WoW) while the Plantation sector (2.6%WoW) emerged as the top sector loser during the week.

"We expect the market to continue with the current momentum as retail investors opt to become liquid ahead of the April festive season. Hence, we advise our investors to take advantage of such market conditions to accumulate fundamentally rich stocks," BMS said.

Meanwhile, John Keells Stockbrokers (JKSB) releasing an update on the plantations sector noted: "With crude oil prices currently over U $100,we expect commodity prices to surge in the medium term on growing demand from countries such as India, China along with Japan as reconstruction activity begins in



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the country. Given the above, we expect the rubber industry to remain strong on excess demand in the medium term which should undoubtedly feed in to higher prices.

Although tea prices have remained attractive,we expect firms with heavy exposure to the tea segment (GP from tea as a %of total GP)to experience a decline in profitability in the event of an upward revision in wages with the expiry of the current agreement in March 2011.However, the impact on the rubber segment is likely to be less given its low labour intensity."

JKSB said strong commodity prices during the 4QFY10/3QFY11 saw the plantations segment posting a cumulative profit of Rs.1,567 million, a growth of 95%over the comparative quarter in 2009.Kotagala Plantations PLC (KOTA)and Kegalle Plantations PLC (KGAL)were the largest contributors to the segment’s earnings posting Rs.239 million and Rs.227 million respectively, thanks to a sharp increase in rubber prices despite a fall in production due to adverse weather conditions.

Earnings in most companies were supported by rising turnover and a decline in cost of production consequent to reduction in output as well as normalized cost of sales which excludes the one off adjustment that was seen in the comparative quarter in 2009 due to the previous wage hike.

Companies such as Horana Plantations PLC (HOPL), Malwatte Valley Plantations PLC, Namunukula Plantations PLC (NAMU), KGAL and KOTA with significant exposure to rubber were the largest beneficiaries of soaring rubber prices.



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How to buy/sell shares in Primary, Secondary markets In the Primary market from a new share issue (Initial Public Offering)

• An investor who wishes to buy shares should open a Securities Account in the Central Depository System (CDS) through a stockbroker or a custodian bank

• Select a stock broker, there are 28 licensed stock broking companies

• The duly completed Client Account Opening Forms together with the relevant supporting documents must be handed over to the stockbroker or a custodian bank.

• The CDS system will generate a Client Account Number and this would be handed over to the stockbroker or a custodian bank confirming the CDS account opening.

• Through newspapers, websites, radio channels and television a company gives publicity to prospective investors when it wishes to be listed or is going to issue shares through an Initial Public Offering (IPO)

• In a share issue, the company publishes a booklet called “Prospectus” with information about the company, financial status, future plans and the offer.

• A Prospectus can be obtained free of cost from a stockbroker/ Managers to the issue/ Colombo Stock Exchange (CSE), its branches and web site/ Bankers to the issue/ company offering the shares or any other place that the company indicates

• Companies issue prospectus and application forms before the issue opening day. • Investors over 18 years of age can apply for IPOs

• The Prospectus must be read carefully, and the application form to purchase the shares must be

completed accurately and clearly. If necessary, consult an expert for advice. Remember to indicate your CDS account number, National Identity Card number and place your signature on the application form.

• Send this form directly to the company concerned /a stockbroker/custodian bank/ Managers to the issue with payment for the amount due through a cheque or bank draft. For example if you are applying for 100 shares and the issue price of a share is Rs 20.00 you have to write a cheque/draft amounting to Rs 2,000.

• Prospectus indicates the share issue opening day and the closing day. Make sure to send the application form along with the cheque/bank draft before the issue closing day. If an issue has more buyers than shares offered the share issue will be closed on the opening day itself.

• Immediately after the share issue closes, the company will evaluate the demand for the issue and if investors have asked for more shares than the company initially planned to issue (i.e in the event of oversubscription), the company will announce the way that they are going to distribute their shares.



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• The allotted shares would be credited to the applicant’s CDS account electronically. Companies will not issue share certificates from January 01, 2011.

• Where an application is accepted only in part, the refund payment will be made as specified by the applicant due to oversubscription of the primary issue. For example if you have applied for 1,000 shares at Rs 20.00 per share (total value is Rs 20,000) and due to oversubscription you might only get 600 shares. The company is required to reimburse the money for the balance 400 shares (Rs 8,000) within 10 Market days (working days) of the closing date, excluding date of closure of allocation list.

• Thereafter the CSE will announce the first trading day of the shares. Trading of shares will commence within 22 Market days (working days) after the closing of the IPO.

• If the shareholder wishes to sell his shares, he can contact the stock broker and give instructions to sell these shares once the shares are listed.

• Most often first time investors come to the stock market by applying for shares at an IPO. New comers should pay attention to the following areas of the company which is going to be listed.

• Business environment • Management of the company • Future earnings and valuation • Competition • Tax incentives • Research and valuation reports issued by stock brokers or independent organizations • The above information about the company can be obtained from an investment advisor. • Buying and selling shares on the Secondary Market

• This is a market in which an investor could either buy from or sell to another investor, subsequent

to the original issuance in the primary market.

• You must first find yourself a stock broker /custodian bank and open a CDS account through them. • How do you place an order with a Stockbroker?

• If you have the shares by way of certificates you should deposit those in your CDS account on or

before December 31, 2011.

• Any investor can maintain one or more CDS account through 28 stock broker companies. • The stock broker company will allocate you an investment advisor to advice you to buy/sell shares

• Make sure that you deal with only “Certified Investment Advisors”. All investment advisors should

obtain this qualification in order to advice investors

• You can contact your broker through the following ways to trade in the secondary market. • Phone • Fax



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• E mail • Personal visit or • The Internet

• You need to provide your Stock broker (investment advisor) with the name of the company, price

and amount of shares you want to buy/sell. Investment Advisor will advise you as to what to buy/sell

• The investment advisor will place your order but the ultimate decision to buy/sell should be taken by the investor.

• Once the order is processed, he will inform you of the shares you were able to purchase at the price you required.

• Once the order is executed, you will receive a Bought/Sold Note from the broker. This document confirms the transactions that have taken place with your approval.

• Bought/Sold notes are dispatched by the broker to the clients, before commencement of the next trading session.

• The buyer must make payment for shares bought by the 3rd trading day after the purchase (T+3). A first time investor might have to make an advanced payment prior to the purchase of shares. The seller will receive payment for shares sold by the 3rd trading day after the sale (T+3)

• Any investor can change their broker through the CDS without making a payment.

• After buying the shares, an investor can hold the shares for a desired period of time. The selling price & the decision to sell are determined by the investor. You can obtain research reports from your stock brokers to assist you with this decision.

• CDS shall forward to the account holder a monthly statement if such account was active during a particular month (monthly statement). An Active account shall be an account with at least one transaction (purchase/sale/deposit/withdrawal/transfer) during the period/s referred to above.

• You should check share prices and observe market activity regularly. You can do it by calling the stockbroker, going through daily newspapers, by accessing the website of the Colombo Stock Exchange (CSE) www.cse.lk or by accessing your stockbroker’s website. You can even visit your stockbroker/stockbroker branch or branches of the CSE. The CSE has branch offices in Matara, Kandy, Kurunegala, Negombo and Jaffna.

• The investment advisor shall not buy/sell shares without your instructions. If there is a query please contact the Compliance Officer of the stock broking company immediately.



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Carsons, Bukit & ComBank boosts market - CSE surges unexpectedly on three mega deals

Three big deals in Bukit Darah, Carsons and Commercial Bank triggered an unexpected surge on the Colombo bourse yesterday with turnover topping Rs.4.5 billion, up from the previous day’sRs.1.55 billion, with both indices too gaining sharply – the All Share by 120.63 points (1.62%) and the Milanka by 42.38 points (0.60%) with 162 gainers strongly outpacing 32 losers.

"Overall the market was positive and we hope that it will take off after the New Year holidays which expected earnings coming in," Arjuna Dassanayake of Acuity Stockbrokers said.

He said that the two deals in Bukit and Carsons, the first of nearly 1.9 million shares and the other of over 1.4 million shares, and over 1 million ComBank transacted drove the market well into positive territory.

Although there was no confirmation, brokers and analysts believed that the Bukit and Carsons deals were intra group. They included nearly 1.2 million Bukit crossed at Rs.1,203 per share and over 1.4 million Carsons crossed at Rs.662.

Carsons closed Rs.7.20 up at Rs.677 while Bukit was up Rs.46.40 up to close at Rs.1,249.90. Brokers noted that all but a few shares done in both companies were covered by the two crossings.

ComBank closed Rs.1.40 up at Rs.273 on million shares traded between Rs.270.10 and Rs.273 with three crossings of 0.5 million, 0.2 million and 0.3 million shares done at Rs.275. Here too nearly all the shares traded during the day were accounted for by crossings.

Other useful contributors to turnover included Browns, up Rs.9.40 to close at Rs.350 on nearly 0.5 million shares done between Rs.340 and Rs.353, Central Finance gaining Rs.91 to close at Rs.1,369.90 traded between Rs.1,270 and Rs.1,385, Lion up Rs.22.10 to Rs.251 on nearly 0.6 million shares done between Rs.235 and Rs.260 and Hayleys up Rs.7.90 to Rs.424.90 on nearly 0.2 million shares done between Rs.410 and Rs.425.

Other counters that showed quantity and price gains included Lankem, up Rs.20.30 to Rs.484 on over 0.1 million shares, United Motors, up Rs.17.50 to Rs.181.50 on over 0.3 million shares and Distilleries up a rupee to Rs.190.60 on nearly 0.3 million shares.

Dimo was up Rs.110.20 to close at Rs.1,699 on 24,800 shares while JKH moved up 30 cents to Rs.296.90 on over 0.1 million shares.



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Brokers said that there was a lot of green on the trading boards yesterday with only two counters, Bairaha Farms and Royal Ceramics, which were traded in significant quantities dipping slightly at close – Bairaha by 60 cents and Royal Ceramics by 20 cents.

The CSE announced that Expo Lanka Holdings was making an offer for subscription of 172 million shares priced at Rs.14 per share to be listed on the Main Board of the Exchange with subscriptions opening on May 12.

The offer will be lead managed by John Keells Capital while CT Capital (Pvt) Ltd will be joint managers and SSP Corporate Services registrars.



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Mother of all Stock Exchanges If history had its way, it would only be right and proper that London Stock Exchange’s (LSE: LSE) Xavier Rolet heads up the merged London and Toronto exchanges. That’s because the one he runs right now is the spiritual mother of many the world’s securities-trading houses, including the Canadian one. And since Rolet will be chief executive, history really is having its way. And for the same reason, the much older Deutsche Boerse should automatically take control of its merger with NYSE Euronext. But the New York exchange, which is nearly 220 years old if we apply the coffee-house test (see below), is assuming the mantle. So that’s a draw for history. Fuelled by caffeine But let’s look at the profound global influence of the LSE since a bunch of apparently uncouth and noisy traders got together at Jonathan’s coffee house in Change Alley in 1698. For a start there’d hardly be a Canada, as we know it, without the LSE because the public shares of its founding commercial entities such as Hudson Bay Company were held in London. The Toronto Exchange didn’t see the light of day until late 1861. In fact, applying the coffee house test again, the TSX is nearly 30 years younger than the Montreal Exchange, which started in Exchange coffee house in the city. Even the French-speaking bourse owes something to the LSE because it was founded by J. Lorn MacDougall of Scots extraction, who saw it as a child of the mother of all exchanges. In passing, here’s one to ponder for history buffs. When is an exchange an exchange? Is it when a group of brokers formally establish an association, or when they open for business in a building, or when they just sit down in a coffee house and start trading securities, which is what a few New York traders did in Tontine’s instead of standing on the kerb? The Deutsche Boerse is in no doubt: it daringly hails 1585 as its debut when somebody first began running a market in securities, probably in a bierhalle. Britain rules the exchanges Look around half the planet and you see mum’s many progeny. One among several, the Alexandria stock exchange was established -- in the Café de l’Europe, believe it or not -- with the support of expatriate British brokers in 1883 and, in an unwanted demonstration of how the LSE model helped build an economy, it became the fifth-busiest in the world, until Egypt fell victim of centrally-run, Soviet-style policies and the exchange was put in mothballs for 30 years. The Tel Aviv exchange, the only one in Israel and known generally as the “bourse”, also owes its heritage to the LSE, having been established in 1935 by the Anglo-Palestine Bank. And we haven’t mentioned Asia yet, where the LSE model travelled with the expansion of the old Empire. The Colombo stock exchange in Sri Lanka started in 1896, buying and selling shares in mainly British-owned plantations. By then, the Bombay exchange, which claims rather dubiously to be the oldest in Asia and inevitably modelled along LSE lines, had been operating for more than 20 years. And so was the very British Hong Kong exchange in business by then -- it dates its origins to 1866. As you would expect, it’s the same story Down Under where the Australian exchange, now embroiled in its own much-disputed merger with its Singapore counterpart, harks back to the opening of the Sydney bourse in 1871. The ASX started out proud of its British heritage but breast-beating patriots now fiercely defend its Aussie credentials, even though its 80 year-old merger partner is another child of the LSE. It first started



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trading under the umbrella of the Malaysian exchange. (Editor’s note -- Aussie Fools will be pleased to hear we launched www.fool.com.au last week). Century of mergers And while we’re picking over history’s entrails, much has been made of the relentless pace of mergers as mighty exchanges crash together across the globe. In fact, it was ever thus. Hardly were exchanges established than they began to merge, albeit within national boundaries, for exactly the same reasons as today. Namely, because improvements in communications and systems steadily made isolated exchanges vulnerable. That’s why the original Alexandrian and Cairo exchanges became the Egyptian one, while the Manila and Makati exchanges became the Philippine one. New Zealand’s four exchanges merged in 1974, Canada’s three exchanges did so in all but name just before the turn of the millennium. Australia’s six exchanges became what was eventually called the ASX, and today’s Hong Kong Exchanges and Clearing is the combination of four different houses. And it may not be too long before somebody snaps up the newly-opened Laos exchange. As the Financial Times reported, this hotbed of capitalism quotes just two shares, both in government-controlled companies. Plus ca change…



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ICT



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ICT-BPO industry: Lanka developing the right skills

The ICT and BPO Era of Sri Lanka Welcome to the thirty fourth edition of the regular column "ICT and BPO Catalyst - To Make Sri Lankan Economic Dreams a Reality!" Here in this column, with the support of The Island – Financial Review, we are on a journey to increase the awareness on Information and Communications Technology (ICT) and Business Process Outsourcing (BPO) sectors that are set to play a crucial role in our economy in this new development era of our country.

New Year Greetings First of all let me wish you a very happy Sinhala and Hindu New year. It’s a time that most Sri Lankans take a break and visit their loved ones. It also connects us back to traditions. I believe it is important to celebrate traditions of this nature that you inherit from your ancestors because it helps you realize who you really are. Although we speak about new trends in the world such ICT and BPO and how it could help Sri Lanka, I am never a believer of bringing or copying everything from the west. I am a believer of taking only the good things from wherever it arises from, but still maintain your own good things as well. ‘Think Global, Act Local’ is a good motto to go by. We should also be about modernizing rather than westernizing.

SLASSCOM launches direct link The inaugural session of direct link, an initiative of Sri Lanka Association of the Software and Service Companies (SLASSCOM) was held last week and I had the opportunity to participate in it. This is meant to be an industry and academia network. SLASSCOM represents the ICT and BPO industry in Sri Lanka.

Higher Education Ministry Secretary Dr Sunil J Nawaratne was the Chief Guest at the event and he said that the mindset change is the key to developing the country and it is time for Sri Lanka to change its way of thinking about the big picture. The forum discussed the importance of aligning what academia produces with what the industry needs. This is both in terms of quality and quantity. When it comes to ICT and BPO, it’s an open secret that there is a significant issue with both quality and quantity of human resources. We don’t have an enough number of people for the industry to grow and we haven’t developed the right skills. At the same time the universities produce thousands of graduates who are unemployable. So, there is an obvious disparity.

I have heard that there are 30,000 or more graduates (mostly in the arts stream) in Sri Lanka who don’t have jobs at the moment. Why can’t the academia and industry work together to utilise these brainy youth in more productive areas? There are a variety of areas in the country where there is a serious skills



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shortage, so it is important to develop skills for the right requirements, rather than just keep on producing thousands of graduates based on the traditional curriculums.

It is great to see the government realizing the problem and coming forward to work with the industry to solve the problem.

The higher education ministry secretary Dr Nawaratne said at the event that the academia does not understand the market, market trends and skills and the universities are more product oriented, where they hardly look at the market. He emphasized that minimizing this gap would definitely help to minimize the unemployment rate of the graduates whilst helping growing industries like ICT and BPO.

The Sri Lankan IT and BPO industry export earnings are estimated to be US $ 390 million for 2010. Sri Lanka has set a target of US$ one billion in revenue with an employment figure of 100,000 by 2015 in the ICT and BPO industry. This is a challenging target but is definitely achievable. However, one of the key prerequisites for this growth to realize is the human resource capacity development in the industry.

Communication Skills A part of the problem with our education system is not being aligned to the industry and not producing people for the jobs available. Another problem with it is the lack of focus for developing communications skills of students. In my opinion, this is true for both Sinhalese/Tamil and English. Of course our students can speak their first language (Sinhalese/Tamil), but I am not convinced that they can speak it well in professional environments and the education system hasn’t really had much focus in improving communication skills, soft skills and overall presentation skills. The problem is obviously grave for English.

We see this when we meet students, school leavers and young people. When interviewing people, it becomes even more apparent how weak their communication skills can be. In some instances you find people with great potential who are skilled enough and very sharp, but then again their communication lets them down.

Many English tuition providers and institutes are in the business of improving English of adults but I believe it’s a problem that should have been tackled when students were much younger. Especially, the teaching of English as a subject and learning other subjects in English are vastly two different things. The introduction of English medium into O/L and A/L is a good step forward but availability of teachers seems to be a problem. Also, the majority still doesn’t select the English medium at government schools, so I believe there should be other ways to teach them English. A part of that is to look at the way we teach English. There seems to be a lot of focus on grammar and written language but when it comes to speaking, there is a lack of focus and that’s where people are struggling.

A venture titled ‘Say it in English’ was released recently. ‘Say it in English’ seeks to help anyone who speaks either Sinhala or Tamil, but has difficulty in expressing themselves in English. They do this by connecting them to real-time, on-line caller assistance. The service is primarily provided by retired senior citizens, who have had their primary education in English and have a heart to help their fellow countrymen. ‘Say it in English’ also re-integrates these senior citizens back into the workforce. It seeks to help people with their every day communication needs in English rather than specialized areas. Dialog is offering the service to its users from around the country.

I have no doubt in my mind that the best way to improve communication skills in any language is to use it. The problem with English is that most youngsters don’t get to speak a word of it until they become adults and that could be pretty late. Even in my case it was the case but fortunately through work I had



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opportunities to speak in English and that automatically improved the fluency. I was a debater at school and was a part of oratory and debating arena in Sinhalese. This background helped me to improve overall communication skills and I am glad that I did it when I was at school. I encourage school children to get involved in such extracurricular activities, because they play a key role in shaping up the individual that you are going to be in the future.

Previous Columns In case you have missed previous columns of this series, please drop a line to [email protected], I will email you the web links of previous columns.

Career Advice I have been a mentor to many young people while serving as the Director for Young IT at the Australian Computer Society and also am an online mentor at http://www.itpro.lk/mentors. I am happy to extend that to the readers of The Island column as well. So, please feel free to drop an email to [email protected] with your career related queries.

Events If you have an event or a group that you would like me to talk to, I can see if I can make some time for such activities. I am happy to speak to groups about the ICT/BPO sector, its benefits, youth leadership, careers, communication skills and entrepreneurship. I always take pleasure from such social services.

If you have any questions, you can contact me and I am more than happy to discuss topics and questions you may have through this column.



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FCCISL Events



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Sunday Observer – April 17, 2011

FCCISL/CCPIT to promote trade A delegation from the China Council for the Promotion of International Trade, and Sub-Council of Shanghai Pudong Chamber of International Commerce visited the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) recently. Established in September 1993, Shanghai Pudong Sub-Council is a China Council for the Promotion of International Trade (CCPIT). The CCPIT aims at promoting activities of trade, investment and cooperation in economy and technology between China and other countries and regions all over the world, so as to enhance the mutual understanding and friendship between Chinese and people from other countries and regions as well as economic and trade circles. The delegation, which comprised 10 members, represented manufacturing and marketing of furniture, glassware, LAD chips, wedding dresses and automobile industries and was headed by Chairman CCPIT Chen Bing Hui. The delegation had fruitful discussions with the FCCISL President, Board members and senior officials. Interest was shown in investing in Sri Lanka, and Jayaweera identified current opportunities with special emphasis on booming industries, market forces and labour market standards. A Cooperation Agreement was signed by the President of FCCISL and the Chairman of CCPIT in order to facilitate trade promotion between the two countries.

11th – 17th april 2011 alerts/en/2011/april 17, 2011.pdf · though the public was strongly...

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