Economic Capsule - March 2015

1. Economic Capsule
March 2015
Research & Development Unit
219th Issue

2. C O N T E N T S
BANKING SECTOR NEWS 
 New Operating Instructions on the Special Interest Scheme for Senior Citizens
 Removal of the 5 % Special Standing Deposit Facility Rate
ECONOMIC & BUSINESS NEWS 
 Government Borrowings
 GDP 2014
 External Sector Performance – January 2015
 RBI, CBSL Enter into USD 400 mn Currency Swap
 News Snippets
Analysis & Forecast
 Sri Lanka Economic Prospects: ADB

3. Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
Banking News

4. < Research & Development Unit >
New Operating Instructions on the
Special Interest Scheme for Senior Citizens
• Eligible senior citizens:
All resident Sri Lankan citizens above 60 years of age
• Deposits covered:
a) One year Rupee fixed deposits of up to Rs. 1.0 mn in total opened
in banks by eligible senior citizens on an individual basis with effect
from 16.01.2015.
b) Fixed deposits of up to Rs. 2.5 mn opened prior to 16.01.2015
under the 12% Special Interest Scheme.
• Interest rate payable with effect from the date of opening the deposit:
a) 15% per annum for (a) above
b) 12% per annum for (b) above
Accordingly, the Operating Instructions dated 25.02.2015 on this scheme were revoked
Source: CBSL

5. < Research & Development Unit >
Removal of the 5 % Special Standing
Deposit Facility Rate
• Benefiting from lower interest rates and higher demand for
bank funds, credit to the private sector revived after a setback
recorded particularly in the early part of 2014.
• Given signs of sustained increase in credit flows to the private
sector, the view of the Central Bank was that the restriction
placed on access to the SDF is no longer required.
• Accordingly, the 5 % SDF rate was withdrawn with effect from
2 March 2015. The Central Bank is also of the view that the
removal of the special SDF rate of 5 % would help stabilise
overnight interest rates within the policy rate corridor of the
Central Bank.
In September 2014,
the Central Bank
rationalized access
to its Standing
Deposit Facility
(SDF) with a view to
encourage
commercial banks
to utilize the
substantially high
amount of excess
liquidity prevailing
in the market to
enhance credit flows
to the private sector
at reasonable
interest rates. Source: CBSL

6. Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
Economic & Business
News

7. Government Borrowings (Jan 1 - Apr 3 2015)
< Research & Development Unit >
T-Bill Auctions
Total Amount
Accepted
(Rs Mn)
Weighted Average
Yield P.A. After Tax
– Range (%)
91 Day 72,641 5.76 - 7.10
182 Day 60,043 5.86 - 7.31
364 Day 81,938 6.00 - 7.37
T-Bond Auctions
Issue
Date
Period of
Maturity
Amount
Accepted
(Rs Mn)
Weighted
Average Yield
(net of tax)
(%)
12.03.15 3Y 2M 22,943 8.70
26.03.15 4Y 6M 19,245 8.92
17.03.15 4Y 6M 24,763 9.13
30.03.15 5Y 2M 5,265 9.07
17.03.15 6Y 4M 21,206 9.55
10.03.15 7Y 4M 18,240 9.17
26.03.15 8Y 5M 20,100 9.73
12.03.15 8Y 5M 14,462 9.79
30.03.15 10Y 20,103 10.03
10.03.15 10Y 15,707 10.09
10.03.15 20Y 17,890 11.20
27.02.15 30Y 10,058 11.73
Sri Lanka Development Bonds (SLDBs)
Issue Date Tenor
Amount
Accepted
(USD Mn)
Weighted
Average
Margin (bps)
over 6M
LIBOR
02.03.15 3Y 156.5 377
27.03.15 5Y 100.0 405
• The government’s debt burden,
inclusive of central government
guaranteed contingent liabilities,
amount to 88.9% of GDP as revealed
by the last budget presented by the
government (Jan. 2015).
• Government’s borrowings in USD
terms for the period 01 Jan – 03 April,
2015 amounted to USD 3.45 bn.
• While the government needs to
borrow to fund its expenditure, it
nevertheless will contribute to
increase the already high debt burden
of the country.
• Therefore, the government will have
to increasingly focus on attracting
more FDI which will help to reduce its
dependence on debt.
Source: CBSL

8. GDP 2014
1Q 2Q 3Q 4Q
7.6 7.8 7.7 6.4
< Research & Development Unit >
Agriculture
Services
Industry
Industry
Agriculture
Services
Share(%)
Source: DCS

9. External Sector Performance – January 2015
< Research & Development Unit >
Category
Jan 2014
US$ mn
Jan 2015
US$ mn
Growth
(%)
Exports 903.9 909.8 0.6
Textiles and garments 412.0 409.9 -0.5
Tea 116.1 113.5 -2.2
Imports 1,655.5 1,681.6 1.6
Fuel 491.2 289.2 -41.1
Machinery and Equipment 196.9 240.6 22.2
Trade Balance -751.5 -771.9 2.7
Earnings from Tourism 233.3 248.7 6.6
Workers’ Remittances 555.5 523.5 -5.8
• In January 2015, the BOP is
estimated to have recorded a
deficit of USD 696.5 mn,
compared to the surplus of
USD 732.9 mn in the
corresponding period of 2014.
• Sri Lanka’s gross official
reserves estimated to be USD
7.4 bn as at end February
2015. Gross official reserves
were equivalent to 4.5
months of imports.
Source: CBSL

10. < Research & Development Unit >
• The Reserve Bank of India has signed a Currency Swap
Agreement with the Central Bank of Sri Lanka.
• The Central Bank of Sri Lanka can make withdrawals of
US Dollar or Euro in multiple tranches up to a maximum
of USD 400 million or its equivalent. This is expected to
further economic co-operation between the two
countries.
• The agreement is valid for a period of three years from
the date of signing.
Source: RBI
RBI, CBSL Enter into USD 400 mn
Currency Swaps

11. < Research & Development Unit >
Sri Lanka JKH Waterfront Project Viable
• Sri Lanka's John Keells Holdings is confident of the
viability of its Waterfront development project, which
will target the corporate conference market in the
region, Ajith Gunewardene stated with gaming
appearing to be off the table.
• According to JKH Deputy Chairman Ajit Gunewardene,
the core of the project is to target the conference and
corporate incentive market from the region. It is a very
large market that today the country cannot cater to,
because it does not have the facilities.
• The space within the project at any given time can
accommodate up to three thousand delegates. Sri
Lanka could also host large international conferences
and exhibitions of the style now found in Shanghai and
Singapore.
• The project will also have commercial space and 450
apartment, creating a "mega community within the city.
Sri Lanka confident of regaining GSP Plus: DG Commerce
• Sri Lanka is confident of regaining the GSP Plus trade deal
giving duty free access to the European Union which
would help exporters, a top trade official has stated.
• According to R.D.S. Kumararatne, Director General,
Department of Commerce, the new government was
acting to meet EU conditions required to regain the trade
concession and that recent talks had indicated the EU
was favourably inclined.
Sri Lanka to Call Bids for Kandy Expressway This Month
• Sri Lanka is planning to call expressions of interest to
build an expressway to Kandy in central hills this month,
According to Highways Minister Kabir Hashim .
• The 'Central Expressway' leading to Kandy would be the
first phase of an expressway leading to the Jaffna
peninsula.
News Snippets
Cont..

12. < Research & Development Unit >
Sri Lanka Energy Utilities to Raise US$ 2.5bn Through
Bonds
• Sri Lanka's state-owned energy utilities are to issue USD
2.5 bn worth of bonds as part of a restructuring plan by
the new government.
• The financial restructuring of the debt-ridden Ceylon
Petroleum Corporation and Ceylon Electricity Board is
part of a wider 10-year energy sector plan announced
by Power and Energy Minister.
• One of the aims of the new plan is the broadening of
energy sector investments to include bonds,
debentures, public-private partnerships and other novel
financial instruments.
• The CPC is to issue two billion US dollars in bonds while
the CEB will issue 500 million dollars in debentures to
restructure their debt portfolios, according to the Sri
Lanka energy sector development plan for 2015-2025.
Sri Lanka Tea, Rubber Estates Suffer Massive Losses amid
Falling Commodity Prices
• Falling international commodity prices due to an
underlying strengthening of the US dollars has hit Sri
Lanka's plantations firms which has lost Rs. 2.8 bn in the
past year on tea and rubber.
• By the end of 2014, 19 regional plantations companies
has stated that they lost an average of 30 rupees per
kilogram of tea sold with an average cost of 455 rupees
and a net sales average of 455 rupees.
• The loss on a kilogramme of rubber was 35 rupees, with
average cost of production at 327 rupees and net sales
average of 292 rupees.
News Snippets (cont…)
Source: economynext

13. Condominium Industry
in Sri Lanka
October, 2014
Research & Development Unit
Analysis & Forecast

14. Sri Lanka Economic Prospects: ADB
< Research & Development Unit >
Economic Growth:
o Risks to economic growth arise from uncertainties during
the transition and a wait-and-see approach adopted by
investors.
o Growth in 2015 will be affected by the political transition
and the revised priorities of the government.
o Construction will slow after leading growth in the recent years, driven by large government
infrastructure projects.
o Political uncertainty would retard private investment. While investment is likely to lose
momentum in 2015, consumption is expected to pick up. Price reductions for food and fuel
will encourage private consumption, and government consumption will rise with the shift
in the budget toward recurrent expenditure. Cont..

15. Sri Lanka Economic Prospects: ADB (cont…)
< Research & Development Unit >
o Somewhat faster growth in advanced economies will benefit export industries such as
apparel and tourism. How well agriculture performs after mixed fortunes over the past 5
years will depend on the weather, but increases in government-guaranteed prices for several
agricultural products should boost production. Against this backdrop, assuming that politics
settle in the second half of 2015 and that investment rebounds, growth is projected to ease
to 7.0% in 2015 and then strengthen to 7.3% in 2016.
Inflation:
o Inflation is expected to remain low in 2015, held in check by a series of reductions in fuel
prices in September and December 2014 and January 2015 that are expected to restrain
other prices. With international oil prices expected to remain low this year and next,
inflationary pressures are eased. Moreover, the government’s revised budget announced tax
reductions for several essential items including flour, bread, milk powder, and sugar.
Accordingly, inflation is expected to ebb to 2.0% in 2015 before rebounding to 5.0% in 2016
on account of the base effect. Cont..

16. Sri Lanka Economic Prospects: ADB (cont…)
< Research & Development Unit >
Monetary Policy:
o With inflation remaining low, the central bank has signaled that monetary policy will
maintain its current accommodative stance. Policy rates are likely to be kept low in 2015,
supporting higher private sector credit.
External Sector:
o Exports will continue to improve in 2015 and 2016 as Sri Lanka’s partner economies pick
up pace. Imports are expected to rise, though imports of investment goods will likely
slow on more moderate investment.
o Higher domestic consumption will exert upward pressure on imports and shift the
composition of imports away from investment to consumption goods, while low
international oil and food prices will help contain total value.
Cont..

17. Sri Lanka Economic Prospects: ADB (cont…)
< Research & Development Unit >
o Earnings from tourism and remittances are expected to continue current growth trends.
They will contain the current account deficit at 1.4% of GDP in 2015. The deficit is
projected to widen marginally to 1.5% in 2016 as the economy and domestic investment
pick up.
Foreign Investments:
o Indications are that Sri Lanka is being viewed more favorably internationally with the
change in government and its policies, which will attract higher foreign investment and
cement trade ties, especially with Europe and the US. These factors will strengthen the
balance of payments position in the medium term.
Cont..

18. Sri Lanka Economic Prospects: ADB (cont…)
< Research & Development Unit >
o With GDP per capita estimated at about $3,700 in 2014, Sri Lanka is at
the cusp of gaining upper-middle-income status. While the country has
been focusing on infrastructure and human capital development, the
time has come to adjust strategy to enable it to rise to the next stage of
development. Private sector investment should take over the role of
driving economic growth. A new focus on human capital development
has already started, and emphasis should gradually shift to higher skills
and tertiary education to meet the market requirements of the
knowledge economy.
o With upper-middle-income status comes the need for greater gains in
efficiency, or total factor productivity, to continue climbing to high-
income status. Sri Lanka should start by strengthening its technological
readiness to accept technology transfer through foreign direct
investment. At the same time, it should begin innovating. The
development of infrastructure and human resources should be adapted
to this new policy agenda.

19. 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.
“Courage is the first virtue that makes all
other virtues possible”
Aristotle