Economic

Brand new SENARO GN 125 motorcycles were donated to the President’s Office this morning (15). The assembly of these bikes followed the Standard Operating Procedure (SOP) that was introduced by the Ministry of Industry for manufacturing, assembling, and producing vehicle components in Sri Lanka.

President Ranil Wickremesinghe was officially given the keys and accompanying documents by Senaro Motor Corporation Managing Director Mr. Roshana Waduge.

The newly built assembly factory in the Yakkala area has been producing the SENARO GN 125 motorcycle with 35% value addition through locally produced spare parts, thanks to Senaro Motor Company Pvt. Ltd. The company has invested Rs. 1.5 billion in this venture, with the full financial support of the Bank of Ceylon. The goal is to increase the value addition to 50% in the near future and create more than 160 direct job opportunities.

Introduced to the Sri Lankan market, the SENARO GN 125 motorcycle is now a force in reviving the local economy and adding new energy to local enterprise.

Chairman of the Bank of Ceylon, Ronald C. Perera (PC), General Manager Russell Fonseka, Deputy General Manager Rohana Kumara, Director, Senaro Motor Company Mohan Somachandra and other officials were present on this occasion.

The CCPI, measured on an annual average basis, increased marginally to 4.2 per cent in July 2021 from 4.1 per cent in June 2021.

Monthly change of CCPI recorded at 0.50 per cent in July 2021 due to price increases observed in items of the Non-food category.

 The core inflation (Y-o-Y), which reflects the underlying inflation in the economy, increased to 3.7 per cent in July 2021 from 3.2 per cent in June 2021.

The selling price of the US dollar which was at Rs. 380 in commercial banks yesterday (12) morning has come down to Rs. 365 today (13).

With the appointment of Ranil Wickremesinghe as the new Prime Minister, the optimistic situation regarding political and economic stability seems to have contributed to the strengthening of the rupee.

The Securities and Exchange Commission of Sri Lanka (SEC) has decided to direct the Colombo Stock Exchange (CSE) to temporarily close the stock market for a period of five business days commencing from 18th April 2022.

The Board of Directors of the Colombo Stock Exchange (CSE) by way of a communication dated 15th April 2022 has called upon the Securities and Exchange Commission of Sri Lanka (SEC) to temporarily close the stock market citing the present situation in the country. Many other stakeholders of the securities market including the Colombo Stock Brokers Association have also sought the temporary closure of the market on the same grounds.

The SEC has carefully considered the grounds that have been adduced by them and has evaluated the impact the present situation in the country could have on the stock market, in particular the ability to conduct an orderly and fair market for trading in securities.

The SEC is of the view that it would be in the best interests of investors as well as other market participants if they are afforded an opportunity to have more clarity and understanding of the economic conditions presently prevalent, in order for them to make informed investment decisions. Therefore, acting in terms of the provisions contained in Section 30 of the Securities and Exchange Commission Act No. 19 of 2021, the SEC has decided to direct the CSE to temporarily close the stock market for a period of five business days commencing from 18th April 2022.

Sri Lanka's central bank on Sunday further tightened controls on the outflow of foreign currency to combat a growing cash crunch triggered by the coronavirus pandemic.

Foreign exchange reserves have almost halved since late 2019 to $4 billion after the rupee sank to a record low in 2020.

The economy has been badly hit by the spread of the virus and lockdowns in its worst downturn since independence from Britain in 1948.

The Central Bank of Sri Lanka said overseas investments by local firms would be suspended for six months.

The amount of capital that companies and citizens can take out of the island nation would also be restricted, it added. Sri Lanka has already banned imports of luxury goods and cars since 2020 to combat the foreign currency outflows.

The government is planning to extend the import ban to mobile phones, computers and electronic consumer goods, local media reported recently.

The central bank said in a statement that the restrictions were to "assist and maintain the financial system's stability."

International rating agencies have expressed concern over Sri Lanka's ability to service its huge foreign debt.

But central bank governor W.D. Lakshman has said the country will meet its debt obligations, which amount to $3.6 billion in the next six months.

The country's debt has ballooned over the past two decades after the financing of several infrastructure projects that critics say have become white elephants. (AFP)

Closing at 8,244.55 points today (04), Colombo Stock Exchange’s All Share Price Index (ASPI) lost 226.88 basis points during the day's trading.

The S&P SL20 Index ended the day 146.11 basis points lower at 2,684.82.

The turnover for the day was Rs. 1.96 billion.

Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2013=100), increased to 5.2 per cent in June 2021 from 4.5 per cent in May 2021.

The Colombo Stock Exchange (CSE) has temporarily halted regular trading due to the S&P SL20 Index dropping over 5 percent from the previous close, as set out in the CSE Directive dated April 30, 2020.

Trading has been halted for 30 minutes while the halt will be lifted at 2.14 p.m.

The Central Bank Monday (28) printed the highest amount of money recorded in a single day to bridge a budget hole, amid shrinking tax income, largely due to virus-related lockdowns and increased expenditure to contain the virus.

Finance Minister Basil Rajapaksa, in his budget speech for the fiscal year 2022, said the tax on cigarettes is proposed to be increased with immediate effect.

Accordingly, the current retail price of a stick of a cigarette will be moved up by Rs. 5.00.

The government expects a revenue of Rs. 8 billion through this initiative, he noted.

In addition, the excise tax is proposed to be increased with immediate effect. An additional revenue of Rs. 25 billion is expected through this tax increase.

Sri Lanka's 'CCC' rating reflects a challenging foreign-currency sovereign external debt repayment burden over the medium term, low foreign-exchange reserves and high and rising government debt that gives rise to sustainability risks, Fitch Ratings said on Monday (14).

"External liquidity pressures have eased somewhat in recent months following bilateral loan disbursements, and our expectation of a forthcoming IMF special drawing rights (SDR) allocation. Nevertheless, Sri Lanka's medium-term debt service challenges are substantial and pose risks to the sovereign's debt repayment capacity, in Fitch's view. A total of about USD29 billion in foreign-currency debt obligations are due between now and 2026, against foreign-exchange reserves of USD4.5 billion as of end-April 2021," it said.

The authorities have recently secured project financing through various multilateral and bilateral channels, including the Asian Development Bank (AAA/Stable), Asian Infrastructure Investment Bank (AAA/Stable), China Development Bank (A+/Stable) and The Export-Import Bank of Korea (AA-/Stable), as well as swap facilities under the South Asian Association for Regional Cooperation (SAARC) currency framework and the People's Bank of China, equivalent to USD400 million and USD1.5 billion, respectively.

The planned IMF SDR allocation would also add USD780 million to reserves. These resources should enable Sri Lanka to meet its remaining debt maturities through the rest of this year, including a USD1 billion International Sovereign Bond maturing in July. However, the authorities have yet to specify their plans for meeting the country's foreign-currency debt-servicing needs for 2022 and the medium term. They have consistently indicated that they do not plan to seek programme financing from the IMF.

Fitch projected foreign-exchange reserves to remain at about USD 4.5 billion by end-2021 before declining to USD3.9 billion by end-2022.

"Under our baseline, the current account deficit is likely to widen to 2.8% in 2021 and narrow to 2.1% of GDP in 2022. Our forecasts assume remittances will remain resilient in 2021-2022 and tourism is likely to recover only from 2022," Fitch Ratings said.

Economy contracts by 3.6%

Sri Lanka's economy contracted by 3.6% in 2020 as a result of the Covid-19 pandemic. We project growth of 3.8% in 2021, down from an earlier forecast of 4.9%, in light of a recent surge in virus cases. We expect the economy to grow by 3.9% in 2022. There remains a high degree of uncertainty associated with our forecasts in light of the evolution of new Covid-19 cases in the country. The authorities plan to inoculate 60% of the population by end-2021, but this target could be hampered by vaccine supply shortages.

Travel and tourism, an important driver of the economy, have been hit hard and the outlook for recovery remains uncertain, particularly given the recent surge in virus cases. The direct contribution of tourism to pre-pandemic GDP was about 4%, but the indirect contribution was much higher. Tourist arrivals in the first five months of 2021 were 97% lower than the same period last year.

The general government deficit widened to 11.1% of GDP in 2020, from 9.6% in 2019, as the economic contraction led to a sharp fall in fiscal revenue. We expect the deficit to remain elevated in 2021 and 2022 at 11.1% and 10.4%, respectively. Our deficit projections are wider than those presented by the government under its growth-oriented strategy of 9.4% and 7.5%, respectively. Under our forecasts, the revenue-to-GDP ratio in 2021 would rise to 10.9% in 2021 and 11.1% in 2022, compared with the authorities' projections of 11.9% and 13.0%, respectively.

The government's fiscal consolidation strategy is based on a planned acceleration in GDP growth, underpinned by tax cuts, as opposed to direct revenue-raising or expenditure measures, albeit supported by planned improvements in tax administration. The interest-to-revenue ratio remains high, at around 71% as of 2020, well above the 'CCC' median of 13%. The government expects to achieve primary surpluses from 2023, supported by annual GDP growth of 6%, which appear optimistic in our view as we anticipate growth that is closer to 4%, still above the pace in the immediate pre-pandemic period.

General government debt reached 101% of GDP by end-2020, broadly in line with our forecast at our last review in November. Our baseline forecasts suggest this ratio will rise further to 108% by 2022. Fitch does not think the government will meet its 2025 targets of reducing government debt to 70% of GDP and narrowing the fiscal deficit to 4% of GDP.

Sri Lanka's basic human development indicators, including education standards, are high compared with those of rating category peers. The UN Human Development Index Score positions Sri Lanka in the 62nd percentile, well above the 27th percentile for the 'CCC' median. The country's per capita income of about USD3,822 is also above the 'CCC' median of USD2,662.

The banking sector is vulnerable to Sri Lankan sovereign weakness due to the banks' significant direct exposure to the sovereign and their domestically focused operations. The operating environment for banks remains challenging, and asset quality continues to be a key risk. Reported asset-quality measures at end-2020 - impaired loans for Fitch-rated banks rose to 9.7% by end-2020 from 9.5% at end-2019 -- likely understate the extent of credit impairment due to forbearance measures.

ESG - Governance: Sri Lanka has an ESG Relevance Score of '5' for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Sri Lanka has a medium World Bank Governance Indicator ranking in the 46th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.