Economic Capsule - June 2016

Economic Capsule
June 2016
Research & Development Unit
234th Issue

C O N T E N T S
BANKING AND FINANCE 
 Dr. Indrajit Coomaraswamy new Central Bank Governor
 Commercial Bank Joins Technology Initiative for Tea Leaf Suppliers in Sri Lanka
 Commercial Bank Launches Sri Lanka’s First Remittance Card
 Commercial Bank adds Crosscurrency Transactions to Online Banking
ECONOMY & BUSINESS 
 Moody's Changes Outlook on Sri Lanka's Rating to Negative
 IMF Approves Three-Year US$ 1.5 Bn Extended Arrangement under EFF for Sri Lanka
 Sri Lanka Economy Grows at 5.5% in 1Q
 Fiscal Sector Developments, Jan-April 2016
 External Sector - March 2016
 Sri Lanka’s PMIs for Manufacturing and Services
 Recent Announcements by the PM
 Other News
 BREXIT

Condominium Industry
in Sri Lanka
October, 2014
Banking & Finance

4< Research & Development Unit >
Dr. Indrajit Coomaraswamy new Central
Bank Governor
Dr. Indrajit Coomaraswamy has been appointed the new
Governor of the Central Bank of Sri Lanka.
 Dr Indrajit Coomaraswamy was an official in the Central Bank of Sri Lanka
from 1974-1989. He worked in the Economic Research, Statistics and Bank
Supervision Departments. During this time he was seconded to the Ministry
of Finance and Planning (1981-89).
 Dr Coomaraswamy was thereafter employed by the Commonwealth
Secretariat from 1990-2008. During that time he held the positions, inter
alia, of Director, Economic Affairs Division and Deputy-Director, Secretary-
General's Office. He was subsequently Interim Director, Social
Transformation Programme Division, Commonwealth Secretariat (Jan-July
2010).
 Dr. Coomaraswamy was a member of the Monetary Policy Consultative
Committee of the Central Bank of Sri Lanka during the period January 2013 –
January 2015.
 Dr. Coomaraswamy was the Advisor to the Ministry of Development
Strategies and International Trade until recently.
 Dr Coomaraswamy completed his undergraduate degree at Cambridge
University and obtained his Doctorate at the University of Sussex, United
Kingdom.

Commercial Bank Joins Technology
Initiative for Tea Leaf Suppliers in Sri Lanka
Commercial Bank has been designated the Preferred
Bank for the issue of the first Hybrid Debit Card
coupled with Sony ‘FeliCa’ Near Field Communication
(NFC) technology in the market, enabling its promoter
Smart Metro (Pvt) Ltd. to deploy a Debit Card cum
Identification Card for tea leaf suppliers.
 Armed with these personalised cards linked to savings accounts at Commercial Bank, tea leaf
suppliers can simply tap their cards on the data acquisition device to promptly identify each supplier
through NFC technology and to obtain a detailed receipt for the weight of the leaves supplied. All
data required for automatic calculation of the payments to leaf suppliers are instantly transmitted to
a central server by the data acquisition device.
 The server generates a file with fund transfer instructions, which will be forwarded to Commercial
Bank to credit monies earned, to the accounts of the cardholders. The account holders may
thereafter withdraw the money they require from the ATMs of the Bank or at branch counters.
Alternatively they can also use the card to pay for purchase of goods and services.
Commercial Bank Managing Director/CEO Mr Jegan Durairatnam (left) makes a symbolic
presentation of a hybrid debit card to the owner of a tea factory in the presence of representatives
of Smart Metro.

Commercial Bank Launches Sri Lanka’s
First Remittance Card
Sri Lanka’s first Remittance Card has been launched by
Commercial Bank . A branded Debit cum ATM Card licensed
by Visa Inc. and issued locally by Commercial Bank to
recipients of remittances, the new Remittance Card
eliminates the need to visit a branch of the bank to collect
remitted funds.
 The card permits an overseas sender to deposit funds directly
into a beneficiary’s account via Commercial Bank’s e Exchange
platform. The funds may be withdrawn from any ATM across
Sri Lanka at the recipient’s convenience.
 The Remittance Card also enables the recipient of the funds to
retain all or a portion of the funds in his or her account and use
the card to make purchases.

Commercial Bank adds Crosscurrency
Transactions to Online Banking
Commercial Bank has added a new dimension to its
Online Banking platform by enabling foreign currency
account holders to carry out fund transfers between
accounts maintained in different currencies other than
Sri Lankan rupees.
 These transactions can be carried out between accounts maintained under a
customers own name in eight major currencies including the US Dollar, British
Pound, Euro, Australian Dollar and Japanese Yen, the Bank said. This facility would
be available 24/7, 365 days of the year.

Condominium Industry
in Sri Lanka
October, 2014
Economy & Business

Moody's Changes Outlook on Sri Lanka's
Rating to Negative
Two key drivers underpin the change in outlook to negative from stable:
1. Further weakening in some of Sri Lanka's fiscal metrics in an environment of subdued GDP
growth which could lead to renewed balance of payments pressure.
2. The possibility that the effectiveness of the fiscal reforms envisaged by the government
may be lower than we currently expect, which could further weaken fiscal and economic
performance.
Rating  Affirmed (B1)
Outlook  to Negative (from Stable)
Moody’s Press Release - Moody's changes outlook on Sri Lanka's rating to negative from stable; affirms government bond rating at B1
Moody's Investors Service has affirmed Sri Lanka's foreign currency issuer and senior
unsecured sovereign ratings at B1 and changed the outlook to negative from stable.

IMF Approves Three-Year US$ 1.5 Bn Extended
Arrangement under EFF for Sri Lanka
 It is also expected to catalyze an additional
US$650 mn in other multilateral and bilateral
loans, bringing total support to about US$2.2 bn
(over and above existing financing
arrangements).
 The Executive Board’s decision will enable an
immediate disbursement of SDR 119.894 mn
(about US$ 168.1 mn), and the remainder will be
available in 6 installments subject to quarterly
reviews. Cont..
The Executive Board of the IMF has approved a 36-month extended
arrangement under the Extended Fund Facility (EFF) with Sri Lanka for an
amount equivalent to SDR 1.1 bn (about US$1.5 bn, or 185 % of quota) .
This type of facility is
designed to meet balance of
payments needs arising
from a deteriorating
external environment and
pressures that may persist
until macroeconomic
policies can be adjusted.

Extended Arrangement under the EFF
‒ Policy Pillars and Key Measures
Cont..
# 1: Fiscal consolidation
Rebuilding tax revenues through a comprehensive reform of both tax policy and administration
will be key in this regard, supplemented by steps toward more effective control over
expenditures and putting state enterprise operations on a more commercial footing.
# 2: Revenue Mobilization
Revenue mobilization is envisioned as the linchpin of programmed fiscal adjustment, and
would be achieved by base-broadening tax policy measures as well as reforms toward efficient
& risk-based tax administration. These will be complemented by efforts to simplify the tax
system.
# 3: Public Financial Management Reform
The program aims to improve expenditure management and fiscal risk monitoring Cont..

# 4: State Enterprise Reform
Loss-making enterprises such as Sri Lankan Airlines need to be restructured or resolved to stop
the hemorrhage of public finances. Other enterprises need to operate on a commercial footing
with the essential first step being market-based pricing of fuel, electricity, and other utilities.
# 5: Enhancing monetary policy effectiveness
The focus of monetary policy will be to keep inflation in the low single digits, while allowing
for a durable transition to a more flexible exchange rate regime.
# 6: Supporting Trade and Investment to Strengthen External Sustainability
Achieving medium-term growth and reserve objectives will require a renewed effort toward
greater integration into regional and global supply chains, higher levels of FDI, and enhancing
prospects for private sector investment.
Extended Arrangement under the EFF
‒ Policy Pillars and Key Measures (cont…)
IMF Full Report - Sri Lanka IMF Staff Report for the 2016 Article IV Consultation

Sri Lanka Economy Grows at 5.5% in 1Q
Rs. 2,088,024 MnRs. 1,978,609 Mn  5.5 %
1Q, 20161Q, 2015
At constant (2010) price
1Q, 2016
 Sri Lanka's economy grew 5.5 % in the first quarter of 2016 from a year
ago, led by industrial activity, especially construction, according to the
Department of Census and Statistics.
 The industrial sector, which contributed 31 % to GDP, grew 8.3 % in the
first quarter of 2016 from year before. Construction activity, which has
a high share of GDP (7.8 %), increased by 12 % during the first quarter
of 2016 compared to first quarter of 2015.
Cont..

Sri Lanka Economy Grows at 5.5% in 1Q (cont..)
 1.9 %
Agriculture
 8.3 %
Industry
 4.9 %
Services
7.98 % 31.01 % 56.39 %
Growth
Share
to GDP
Department of Census and Statistics Press Note - National Accounts Estimates of Sri Lanka - 1st Quarter of 2016

Fiscal Sector Developments, Jan-April 2016
Jan-Apr 2015 Jan-Apr 2016
Revenue 395,117 472,689
Expenditure 666,728 706,133
Budget Deficit 271,517 233,444
Summary of the Budget: January - April 2016 (Rs. Mn) Composition of Government Revenue (Jan-Apr, 2016)
Composition of Government Expenditure (Jan-Apr, 2016)
Government Borrowing: January - April 2016 (Rs. Bn)
Jan-Apr 2016
Domestic borrowings 403.4
Foreign borrowings 50.0
Total gross borrowings 453.4
* Rs. 218.0 bn of the domestic borrowings was
utilized for debt repayments and balance for interest
payments. The net borrowing was Rs. 235.4 bn
during this period. Cont..
15

16
Fiscal Sector Developments, Jan-April 2016 (cont..)
Foreign Financing Disbursements
The total disbursements from commitments
already made by various bilateral and
multilateral development partners during
first four months of 2016 was US$ 311.7 mn
Foreign Financing Disbursements by
Development Partners, Jan-Apr 2016
Debt Service Payments
The total debt service payments from January to April 2016
amounted to US$ 546.8 mn. Of which, US$ 309.7 mn was for
principal payment and the balance US$ 237.1 mn was for
interest payment.
Total estimated debt service payment for 2016 is US$ 1,638.7
mn, of which 33.5 % has already been made by 30th April 2016.
Full Report: Mid-Year Fiscal Position Report 2016, Ministry of Finance, Sri Lanka

External Sector
March 2016
Exports 
 Exports earnings during the first
three months of 2016 declined
by 5.4 %, y-o-y, to USD 2,728
mn reflecting a lower
performance in exports of
transport equipment and
petroleum products.
 Expenditure on imports during
the first three months of 2016
decreased by 4.1 % to USD 4,594
mn, mainly driven by the decline
recorded in fuel imports. Cont..
Jan-Mar
2015 (US$ mn)
Jan-Mar
2016 (US$ mn)
Change
(%)
Total exports 2,884.4 2,728.0 (5.4)
Textiles and garments 1,258.0 1,369.3 8.9
Tea 335.3 313.1 (6.6)
Transport equipment 165.4 47.0 (71.6)
Petroleum products 127.9 74.2 (42.0)
Total imports 4,792.1 4,594.5 (4.1)
Fuel 709.1 485.7 (31.5)
Vehicles 290.5 231.6 (20.3)
Trade Balance (surplus(+)/deficit(-)) -1,907.7 -1,866.5 2.2
Earnings from Tourism 793.6(b) 969.3 22.1
Workers’ Remittances 1,679.4 1,793.4 6.8
Inflows to the CSE (Net) (c) 38.6 -12.5 -132.4
Inflows to the Government (d) 612.1 253.6 -58.6
Of which,
Treasury Bills and Bonds 348.7 43.3 -87.6
Long term Loans 238.2 205.0 -14.0
Foreign Direct Investment (e) 346.4 164.5 -52.5
(c) Includes secondary and primary market transactions
(d) Inflows to the government include capital and current transfers to the government, inflows from
the investments in Treasury bills and Treasury bonds by foreign investors, International Sovereign Bonds and long-term loans of the government.
(e) Data available for the first three months of each period and includes foreign loans to Direct Investment Enterprises as recorded by the Board of
Investment of Sri Lanka.

External Sector – March 2016 (cont..)
 Trade Deficit during the first three months of 2016 contracted by 2.2 % to USD 1,867 mn
from USD 1,908 mn recorded during the same period of 2015.
 During the first quarter of 2016, the overall BOP is estimated to have recorded a deficit of
USD 720.2 mn, compared to a deficit of USD 1,016.8 mn recorded during the
corresponding period of 2015.
Export Performance Import Performance
Central Bank of Sri Lanka Press Release - External Sector Performance – March 2016

Sri Lanka’s PMIs for Manufacturing and
Services
 The Manufacturing PMI fell below 50
threshold for the second consecutive month in
May 2016 recording 47.9 index points a slight
improvement when compared to 41.6 index
points registered in April 2016.
The contraction was mainly due to adverse
weather conditions .
 The Services Sector PMI for May 2016 was 58.1
index points, which is a recovery from 54.7
index points recorded in April 2016.
The increase was underpinned by increases in
new businesses, employment, backlogs of
work and expectations for activity sub-indices.
A PMI index points below 50 indicates a drop in activity. Source: CBSL

Recent Announcements by the PM
 The Council of the European Union had approved lifting a
ban on fisheries exports from Sri Lanka and the country is
now working on getting GSP+ trade benefits
EU lifts fishing ban
Cont..
 Sri Lanka’s port city construction will be converted to a
financial city with a new agreement which is expected to be
signed by August with the China Harbour Engineering
Company.
 According to the PM “we will convert the port city to a
financial city filling the gap between Singapore and Dubai”.
Sri Lanka to sign formal deal for port city in August

Announcements by the PM (cont..)
 Sri Lanka's main prison in the capital Colombo dating back to
the British colonial era will be shifted releasing around 50
acres of land for a 'commercial city’. Plans have been made
to shift the prison to Kaluthara district.
 According to the PM, a 40-50 acre commercial city will come
up in this area.
Welikdada prison transformed into commercial city

Mobitel, Dialog Axiata trial 1Gbps+ 4.5G
• Dialog Axiata and Mobitel have each announced successful trials of 4.5G
technology, demonstrating download speeds in excess of 1Gbps. Sri Lanka is
South Asia's first and one of just 20 countries where 4.5G capabilities have
been demonstrated. Source: www.telegeography.com
Other News
• Cabinet has given the green light for the Megapolis authority to go
ahead with a feasibility study for a Light Rail Transit (LRT) system,
which is estimated to cost USD 3 bn, despite local transport experts
supporting a much cheaper Bus Rapid Transport (BRT) system.
• The LRT will be on the Borella – Malabe route and also connect
Colombo Fort, Kollupitiya, Bambalapitiya, Union Place and
Maradana.
Sri Lanka Light Rail Transit

• What has happened?
A referendum - a vote in which everyone (or nearly everyone) of voting age can take part - was held on 23 June,
2016 to decide whether the UK should leave or remain in the European Union. Leave won by 52% to 48%.
• What is the European Union?
The European Union - often known as the EU - is an economic and political partnership involving 28 European countries. It began
after World War Two to foster economic co-operation, with the idea that countries which trade together are more likely to avoid
going to war with each other.
It has since grown to become a "single market" allowing goods and people to move around, basically as if the member states
were one country.
• What happens now?
For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty.
Cameron or his successor needs to decide when to invoke this - that will then set in motion the formal legal process of
withdrawing from the EU, and give the UK two years to negotiate its withdrawal.
The article has only been in force since late 2009 and it hasn't been tested yet, so no-one really knows how the Brexit process
will work, according to BBC legal correspondent Clive Coleman.
Mr Cameron, who has said he would be stepping down as PM by October, said he will go to the European Council to "explain the
decision the British people have taken".
EU law still stands in the UK until it ceases being a member - and that process could take some time.
The UK will continue to abide by EU treaties and laws, but not take part in any decision-making, as it negotiates a withdrawal
agreement and the terms of its relationship with the now 27 nation bloc. Cont..
Background

• Who wanted the UK to leave the EU?
The UK Independence Party, which won the last European elections, and received nearly four million votes - 13% of those cast -
in May's general election, campaigned for Britain's exit from the EU. About half of Conservative MPs, including five cabinet
ministers, several Labour MPs and the DUP were also in favour of leaving.
• What were their reasons for wanting the UK to leave?
They said Britain was being held back by the EU, which they said imposed too many rules on business and charged billions of
pounds a year in membership fees for little in return. They also wanted Britain to take back full control of its borders and reduce
the number of people coming here to live and/or work.
One of the main principles of EU membership is "free movement", which means you don't need to get a visa to go and live in
another EU country. The Leave campaign also objected to the idea of "ever closer union" and what they see as moves towards
the creation of a "United States of Europe".
• Who wanted the UK to stay in the EU?
Prime Minister David Cameron wanted Britain to stay in the EU. He sought an agreement with other European Union leaders to
change the terms of Britain's membership. He said the deal would give Britain "special" status and help sort out some of the
things British people said they didn't like about the EU, like high levels of immigration - but critics said the deal would make little
difference.
• What were their reasons for wanting the UK to stay?
Those campaigning for Britain to stay in the EU said it gets a big boost from membership - it makes selling things to other EU
countries easier and, they argued, the flow of immigrants, most of whom are young and keen to work, fuels economic growth
and helps pay for public services. They also said Britain's status in the world would be damaged by leaving and that we are more
secure as part of the 28 nation club, rather than going it alone. Cont..
Background

Global Economic Impact
o The referendum wiped a record $3 trillion off the value of global shares and sterling fell to its lowest
level in 31 years against the U.S. dollar.
o The Governor of the Bank of England has announced that BOE will be making available around GBP 345
bn in funding lines to the financial system, to ward off effects.
o Effects were felt across currencies, in Asia and Europe. Yen and Dollar saw gains, along with Gold and US
Treasuries, as investors flocked to ‘safe haven’ assets amidst the volatility.
o Sterling and world stock markets have recovered slightly but investor confidence remains fragile.
o According to British Finance Minister George Osborne, the government would have to cut spending and
raise taxes to stabilize the economy after credit rating agency Fitch became the third agency to
downgrade UK debt.
o European Central Bank President Mario Draghi has announced that central banks around the world
should aim to align monetary policies to mitigate "destabilizing spillovers" between economies.
o Policymakers and companies around the world are scrambling to assess the impact Brexit will have.
o Federal Reserve governor Jerome Powell has said the decision had shifted global risks "to the
downside", while Japanese Prime Minister Shinzo Abe has said “sense of uncertainty and worry about
risks remain in the markets”. Cont..

View’s on Brexit Impact
on Sri Lanka
o Ceylon Chamber of Commerce: Sri Lanka exports 10% of her exports to the UK (around USD 1 bn)
and 28.8% of her exports to the EU (around USD 3 bn).
o The impact on economic activity and dynamism in Britain and Europe would impact on the markets
for our exports there. Britain is a substantial market for other EU countries, and any reduction in
their export earnings and overall incomes would affect their demand for imports.
o Anushka Wijesinha – Economist: We are seeing the strengthening of the USD against many
currencies, especially emerging market currencies. This will put depreciation pressure on the LKR.
o The volatility and serious damper on risk sentiment will likely be felt for the next days and weeks to
come. This will of course affect Sri Lanka, as capital flows to emerging and frontier markets
slowdown.
o There can be implications for Sri Lanka’s borrowing costs in international capital markets, including
implications for the proposed sovereign bond issue. Cont..

View’s on Brexit Impact on Sri Lanka (cont…)
CBSL: Sri Lanka’s balance of trade, tourism & foreign reserves could be adversly affected.
o GSP: There is a possibility that the UK would introduce a preferential tariff system like GSP on its own. When
considering the impact, it appears that only the impact on Sri Lanka’s garments and textiles is significant, since
out of the total exports to Britain, garments and textile exports averages to 83% over the last three years.
o Possible slowdown in the UK economic growth:
• Reduction in imports by UK thereby affecting exports of Sri Lanka.
• Risk of increase in cost of borrowing in any form, and a decline of capital inflows to the country if volatility in
financial markets persist and growth in the UK slows down.
o If the Sterling Pound depreciation trend persists, it will lead to a reduction in Sri Lanka’s export competitiveness
resulting in an adverse impact on the trade balance.
o When it comes to foreign reserve compilation, all foreign exchange assets are valued at mark-to-market basis in
US dollar terms. Accordingly a sharp depreciation of Sterling Pound against the USD is likely to result in some
valuation losses, which in turn, would lead to a decline in external reserves of the country. However, the
increase in gold prices could mitigate this impact to a certain extent.
o Any postponement of any monetary policy tightening by the US Federal Reserve will ease pressure on global
interest rates applicable to emerging market economies like Sri Lanka.

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC
The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information,
it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence
of using such information for whatever purpose. < Research & Development Unit >
Good Economics is
Good Politics

Economic Capsule - June 2016

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