Economic Capsule - JUNE 2013

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June 2013
ECONOMIC CAPSULE

FINANCIAL SECTOR NEWS 
 Central Bank Reduces SRR by 2 Percentage Points
 Further Relaxation of Foreign Exchange Regulations by the Central Bank
 SME Lending: Private Sector Banks Account for Lion’s Share
 Sri Lanka Imposes 10 % Tax on Gold Imports
ECONOMIC & BUSINESS NEWS 
 Economic Growth Slumps in 1Q, 2013
 Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable
 Recent Exchange Rate Behavior
 External Sector Performance—April 2013
 Japan Biggest Lender to Sri Lanka
 Snippets
 Analysis & Forecast - Views of Chief Economist for India and ASEAN H
C O N T E N T S

Central Bank Reduces SRR by 2 Percentage Points
Previous
rate
Current
rate
Effective
date
SRR 8.00  6.0 01.07.13
Repo 7.50  7.0 09.05.13
RRepo 9.50  9.0 09.05.13
SRR
The Statutory Reserve Requirement (SRR) is the
proportion of the deposit liabilities that
commercial banks are required to keep as a cash
deposit with the Central Bank.
At present, demand, time and savings deposits of
commercial banks, denominated in rupee terms,
are subject to the SRR.
At its meeting on 25th
June 2013 the Monetary Board of the Central
Bank of Sri Lanka (CBSL) decided to reduce the Statutory Reserve
Requirement (SRR) by 2 percentage points to 6% from the prevailing
rate of 8% with effect from 1st
July, 2013.
 The CBSL’s decision to reduce the SRR has been influenced by the fact that
downward adjustment of general lending rates have been slower than the desired
pace despite the reductions in the policy rates effected by the CBSL in December,
2012 and May, 2012 and the removal of the credit ceiling with effect from the end
of 2012 by the CBSL.
 The reduction in the SRR is expected to ease market lending rates considerably and
it is also aimed at boosting credit to the private sector with a view to stimulating
economic activity and thereby enhancing growth in the economy.
 The 2 percentage point reduction in the SRR implies that an additional amount of
around Rs. 35-40 bn will now be available to commercial banks for disbursement.
This additional amount will help the banks to generate new loans of a much higher
magnitude due to the multiplier effect, although with a lagged effect, and also
depending on the market appetite for loans.

Further Relaxation of Foreign Exchange Regulations by the Central Bank
New relaxation measures were implemented with effect from 12th June 2013. The highlights of these
policy measures are as follows:
 General permission to transfer funds in an NRFC/RFC account of one bank to another bank.
 Holders of Foreign Exchange Earners Accounts (FEEA) to be eligible to obtain Foreign currency loans.
 General Permission to repatriate capital gains from the sale of residential properties by non-residents.
 Extension of migration allowance to each migrant of age 18 and above.
 Permission for banks to open and maintain Nostro Accounts and invest Nostro balances abroad.
 The quantum of foreign currency notes that may be issued for travel purposes by an authorized dealer will henceforth be increased
from the current level of USD 2,500 to USD 5,000.
 Introduction of standard criteria to permit non-bank financial institutions to accept foreign currency deposits: Licensed Finance
Companies (LFCs) which are rated at a credit rating of A- or above by Central Bank specified credit rating agencies, will be permitted
on application.
 Repatriation of Pre-SIERA (Share Investment External Rupee Account) Foreign Investments in Sri Lanka.
 Opening and maintaining of bank accounts abroad by dual citizens.
 Amendments to the Securities Investments Account (SIA): As a measure of facilitating inward remittances into Sri Lanka for
investment purposes, SIA holders will be granted more flexible avenues to receive and repatriate funds into and out of SIA.
Source: CBSL

SME Lending: Private Sector Banks Account for Lion’s Share
 Sri Lanka’s private commercial banks have
significantly surpassed state-owned banks in
funding Small and Medium Enterprises (SMEs)
in 2012, a stark contrast to the situation in 2011,
according to the latest annual report of the Ministry
of Finance and Planning.
 According to the data compiled by the Department
of Development Finance of the Treasury, Seven
private banks have provided a total of Rs. 230 bn
worth of SME funding during 2012 as opposed to
Rs.34 bn provided by four state banks.
 Commercial Bank has been the single largest lender
to SMEs during 2012, followed by Hatton National
Bank.
SME Loans Provided by Banks
Name of bank
Number of
loans
Amount
(Rs.
Mn)
CBC 77,782 95,513.97
HNB 21,984 62,623.8
DFCC 4,457 20,480.1
NTB 11,998 16,544.53
NDB 4,665 11,953.7
Sampath 2,397 11,348.85
UBC 42,067 11,601.00
Four State owned Banks
(BOC, PB, RDB & LDB) 10,289 34,091.14
Source: Ministry of Finance and Planning

Sri Lanka Imposes 10 % Tax on Gold Imports
Sri Lanka has imposed a 10 % tax on gold imports with
effect from 21.06.13.
Sri Lanka's imports of the precious metal jumped 46.7 % from a
year ago to USD 110 mn in the first four months of this year. It
imported gold worth USD 50 mn in April alone, the central
bank's provisional data showed.
The value of gold imports sank to USD 170 mn in 2012, from
a record USD 604 mn in 2011 after the central bank tightened
monetary policy twice and adopted a flexible exchange rate.

Economic Growth Slumps in 1Q, 2013
 GDP growth slowed down to 6 %
during the first quarter of this year
with growth in the agriculture
sector falling sharply, the services
sector recording a dip and
industries stagnant.
 The GDP growth rate recorded 8%
for the first quarter of 2012.
Sector 1Q, 2012 1Q, 2013
Agriculture
Growth % 12.0 2.0
Share of GDP % 12.7 12.3
Industry
Growth % 10.8 10.7
Services
Growth % 5.8 4.3
GDP growth % 8.0 6.0

Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable
Moody's Investors Service changed the outlook on Sri Lanka's B1 foreign currency
sovereign rating from positive to stable, and affirmed its B1 foreign currency government
bond rating. The action was prompted by:
 The stabilization in the external payments
position, following the sizable loss of
foreign reserves in 2011, but without
enough improvement to support a positive
rating action at this time; and
 The pause in the decline in the
government's very high debt burden, as
ongoing large deficits impede a reduction
that would be credit positive.
Rating Agency Rating Outlook
Fitch BB- Stable
Rating/outlook affirmed in April 2013
S&P B+ Stable
Rating/outlook affirmed in March2013
Moody’s B1 Stable
Rating affirmed/outlook changed to stable

Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable (cont…)
The first driver underlying Moody's decision to affirm Sri Lanka's B1 rating and revise its outlook from positive to
stable is a decline in the strength of the external payments position in the past two years.
In defending the currency in the face of a sharply widening current account deficit, reserves fell from a high of USD
8.1 bn in July 2011 to a low of USD 5.5 bn in February 2012.
In addition, the rapid rise in banks' net foreign liability position since July 2011 - involving an almost doubling to
USD 3.4 bn as of February 2013 - could lead to pressure on the external payments position, if creditor sentiment
deteriorates, or if the current account deficit widens.
Nevertheless, since late last year there has been a stabilization of the external payments position. The
government has taken remedial measures, including abandoning the de facto currency peg to the dollar, tightening
monetary policy, and raising tariffs on imports.
These measures have reduced the current account deficit somewhat, and official foreign exchange reserves have
stabilized, standing at USD 6.9 bn as of April 2013.
However, these reserves remain considerably below the peak achieved when the outlook was changed to positive in
July 2011.
Ratings Rationale

Moody's Changes Outlook on Sri Lanka‘s Sovereign Rating to Stable (cont…)
The second driver behind the rating action is a slowdown in the pace of fiscal consolidation.
 The fiscal deficit has narrowed from a peak of 9.9% of GDP in 2009 to 6.4% in 2012.
 The debt/GDP ratio has also been on a generally declining trajectory, falling from 86% of GDP in 2009, the year
the civil war ended, to 78% of GDP in 2011, although it edged higher to 79% of GDP in 2012 due to currency
depreciation.
 While progress has been made in reducing both debt and deficits, much of this consolidation took place
between 2009 and 2011, and since then, the pace of improvement has slowed. As a result, Sri Lanka's debt
burden remains considerably higher than the 44% of GDP median in 2012 for Sri Lanka's B-Caa rating peers.
Source: Moody’s

Recent Exchange Rate Behavior
 The Sri Lankan rupee
extended its falls on
01.07.13 to trade
around its near
eight-month low on
importer demand
for the USD, with
concerns over
further foreign
outflow from
government
securities also
hurting the currency,
according to dealers.
 The currency was
quoted at 130.60/70
per dollar on
01.07.13 , a level last
seen on Nov. 9,
2012.
Source: CBSL
CBSL opinion ...
The Central Bank will maintain flexibility in the
rupee exchange rate despite the currency’s
weakening trend this month (June) , according to
Central Bank Deputy Governor Nandalal
Weerasinghe .
The Central Bank would make sure the monetary
easing would mainly reduce lending rates and not
result in a drop in the yield on government
securities, which could prompt foreign bond
holders to exit.
“We will maintain stable rates in T-bills and T-
bonds in the short term by absorbing more than
what we want. That is the strategy,” Mr.
Weerasinghe stated.
Exchange Rate (Buying)
Exchange Rate (Selling)

External Sector Performance—April 2013
Category Jan-Apr
2012
USD mn
Jan- Apr
2013
USD mn
Growth
Jan- Apr
(%)
Exports 3,317.9 3,059.8 -7.8
Agricultural Products 752.6 726.8 -3.4
Tea 440.9 440.0 -0.2
Industrial Products 2,537.1 2,322.9 -8.4
Rubber products 295.5 260.1 -12.0
Mineral Products 24.3 6.0 -75.5
Imports 6,789.6 6,025.4 -11.3
Consumer Goods 1,124.1 983.9 -12.5
Intermediate Goods 3,985.4 3,517.9 -11.7
Fuel 1,915.0 1,434.0 -25.1
Textiles and textile articles 714.4 650.4 -9.0
Investment Goods 1,668.0 1,520.0 -8.9
Deficit in the Trade Account -3,471.7 -2,965.6 -14.6
Workers’ Remittances 1982.9 2,109.3 6.4
Portfolio Investments (Net) 171.5 69.4
Earnings from Tourism 339.8 407.2 19.8
Inflows to Commercial Banks 664
Inflows to the Govt. 1,538.0 2,134.8 38.8
 By end April 2013, gross official
reserves (GOR) amounted to USD
6,858 mn. In terms of months of
imports, GOR were equivalent to
4.4 months of imports by end
April 2013.
Source: CBSL

Japan Biggest Lender to Sri Lanka
Overtaking China, Japan became the single largest development finance provider to Sri Lanka during the
first four months of 2013.
The total financing commitment made by the bilateral development partner was USD 429 mn during the
period, according to the Finance Ministry.
Source: Source: Ministry of Finance and Planning

SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS—SNIPPETS
JKH to Sign USD 640 mn Hotel Deal
 John Keells Holdings (JKH), will sign
a USD 640 mn deal to establish an
integrated hotel complex in the
capital of Colombo. This will be the
biggest deal by a local company.
USD 170 mn Maldives Mixed
Development Project in Colombo
Cabinet has approved another mixed
development project worth USD 170
mn by EoN Resorts Group from the
Maldives. They will be given land
owned by the Cey-Nor Foundation
down D.R. Wijewardena Mawatha
SL-India to Review Negative Lists, Remove Barriers to Double Trade to
USD 10bn
Sri Lankan and India have agreed to double bilateral trade to USD 10
bn within the next three years, revise negative lists and remove trade
barriers.
The bilateral trade turnover between the two countries had crossed
the USD 5 bn mark in 2011-12. India’s largest trade partner in South
Asia is Sri Lanka. However, the trade turnover is not equally distributed
and Sri Lanka has continued to experience a higher trade deficit with
India.
SL Sells USD 90 mn 3-yr and USD 164 mn 5-yr Development Bonds
Sri Lanka sold USD 90 mn in dollar-denominated, 3-year development bonds
and USD 164 mn in 5-year bonds.
The government accepted USD 90 mn for 3-year bonds at 6-month LIBOR
plus 400 basis points (bps), the central bank stated in a statement. It had
offered USD 50 mn for the issue.
The Bank also accepted USD 164 mn in 5-year development bonds at 6-
month LIBOR plus 415 basis points, after offering USD 25 mn.

Analysis & Forecast
GDP: The recent increase in electricity and fuel prices will adversely affect the manufacturing sector as well as
corporate earnings with negative consequences for the GDP growth rate in 2Q, 2013. However, these negative
features are expected to be mitigated by the reduction in interest rates and the resulting increase in the demand
for goods and services and investments.
The government is targeting to reduce its budget deficit to 5.8% GDP for 2013. However, for the first four months of
2013 alone the budget deficit had reached 3.9% of GDP.
Summary of Fiscal
Performance
(Jan – Apr 2013)
Rs. bn % Change As % of GDP
Jan - Apr
2013
(Target)
Jan - Apr
2013
(Actual)
Jan-Apr
2012
Deviation of
Actual from
Target
Deviation of Actual
from corresponding
period in 2012
Jan - Apr
2013
Jan-Apr
2012
Revenue and Grants 365.2 314.8 328.7 (13.8) (4.2) 3.6 4.3
Expenditure 642.1 658.4 614.3 2.5 7.2 7.5 8.1
Overall Budget Balance (276.9) (343.5) (285.5) (24.1) (20.3) 3.9 3.8

Analysis & Forecast (cont…)
Emerging Inflationary Pressures:
The price increases in electricity and fuel and possible increase in public transport fares are likely to increase
pressures on inflation during the remaining period of 2013.
Besides, anticipated increase in bank lending will also have inflationary consequences.
As a result, the rate of inflation (yoy) is likely to exceed 8% from August, 2013 and reach double digit levels in 4Q,
2013.
Exchange Rate :
The recent movements in LKR/USD has been led by higher import demand and bond outflows, as has been the case in
most emerging markets and seems to be temporary. The expected lower imports and continued strength in remittances and
tourism earnings are likely to narrow the current account deficit to 4.5% of GDP in 2013 from 6.6% in 2012. The expected
USD inflows for various projects will have a favorable impact on LKR.
Further, the government imposed 10% tax on gold imports after observing the recent increasing trend in gold imports.
This indicates the government’s desire to keep imports under control. Accordingly the LKR/USD rate is likely to remain
between130-132 during the remainder of 2013.

Analysis & Forecast (cont…)
Moody's Changes Outlook on Sri Lanka's Sovereign Rating from Positive to Stable mainly due decline in the strength of the
external payments position in the past two years and slowdown in the pace of fiscal consolidation
Upward Pressures on Rating would build up if :
A strengthening of the external payments position, as reflected in a sustainable rise in official foreign exchange reserves and
reduction in the external vulnerability indicator well below 100%. A shift away from external debt financing towards greater
reliance on foreign direct investment (FDI) could be a key element of such improvement.
The maintenance of relatively strong GDP growth -- coupled with a steady reduction in fiscal deficits -- to the extent that the
government debt burden declines at a faster pace to narrow the wide divergence from its peers and, more importantly, to
reduce the high government debt-service burden.
Downward Pressures on Rating would build up if :
 A reversal in progress on fiscal consolidation,
A substantial worsening of the country's external balance and foreign currency liquidity position
Interest Cost as a % of Government Revenue:
Interest cost on government debt as a percentage of government revenue increased to 48.3% in 2012 from 43.9% in
2011 and further increased to 56.1% during Jan – Apr 2013, compared to 53.2% in the corresponding period of 2012.
Continued increases in this ratio could have destabilizing macroeconomic consequences.

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
“One who conquers the mind, conquers the world’’
The Buddha

Economic Capsule - JUNE 2013

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