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CBSL implements credit guarantee to accelerate lending

The Monetary Board of the Central Bank of Sri Lanka has decided to implement a Credit Guarantee and Interest Subsidy Scheme to accelerate lending by banks to businesses adversely affected by the COVID-19 pandemic.

"This scheme, which will be launched on 01 July 2020, will operate in parallel with the Saubagya COVID-19 Renaissance Facility and the new Facility approved by the Monetary Board under Section 83 of the Monetary Law Act, within the already announced threshold of Rs. 150 billion," the Central Bank said.

Under this Scheme, the Central Bank will provide a credit guarantee to banks, ranging from 80 per cent for smaller loans to 50 per cent for relatively large loans, enabling banks to grant loans to address working capital requirements of the affected businesses.

With the Central Bank absorbing a significantly higher percentage of the credit risk, banks can extend their lending to vulnerable businesses focusing on the viability and cash flows of such businesses rather than collateral.

Banks are expected to use their own funds, particularly the additional liquidity of close to Rs. 180 billion provided by the Central Bank through the cumulative reduction in the Statutory Reserve Ratio (SRR) of 300 basis points thus far during the pandemic period, to grant loans at 4 per cent to businesses. The Central Bank will provide an interest subsidy of 5 per cent to cover the cost of funds of banks.

CBSL said that operating instructions on this scheme will be issued to banks in immediate due course.

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CBSL says Coronavirus likely to affect economic performance

The Monetary Board of the Central Bank of Sri Lanka has decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 6.50 per cent and 7.50 per cent, respectively, and thereby continue its accommodative monetary policy stance.

The Board arrived at this decision  following  a  careful  analysis  of the current  and  expected developments in the domestic economy and the financial market as well as the global economy. The decision of the Monetary Board is consistent with the aim of maintaining inflation in the 4-6 per cent range while supporting economic growth to reach its potential over the medium term.

Coronavirus will affect Sri Lanka's economic performance

The exact impact on the Sri Lankan economy would depend on the extent of the global spread of the COVID-19 outbreak, its persistence and policy responses of major economies andtrading partners, the Central Bank said.

Sri Lanka’s economic links with China could be directly affected as significant volumes of consumer goods, intermediate goods and investment goods are imported from China. The likely slowdown of the  global economy and disruptions to the supply chain could affect Sri Lanka’s merchandise and service exports as well as related logistics.

The slowdown in global tourist movements will affect Sri Lanka’s tourism sector, in addition to the direct impact of lower arrivals from China. The spread of the virus to countries with a significant number of Sri Lankan migrant workers could affect remittance inflows as well. These adverse implications are likely to outweigh any marginal benefit arising from reduced global energy prices and international interest rates.

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SEC continues engagement with capital market stakeholders

As part of its continuing efforts to reach out to market participants Mr. Viraj Dayaratne PC, Chairman of the Securities and Exchange Commission of Sri Lanka (SEC) along with other Commission Members met with representatives of the Ceylon Chamber of Commerce, Law Firms and Stockbroker Firms.  

These interactions were held as part of a series of meetings that the Chairman commenced with various stakeholders after assuming office in January 2020. During the meetings, the Chairman briefed the delegates of the reasons that prevented the stock  market from being opened during the recent curfew which was imposed by the Government in order to minimize the risk of the COVID-19 (coronavirus) spreading.

He went on to state that in order to ensure that there were no operational difficulties in similar situations in the future, he had appointed a joint committee comprising members of the SEC  and Colombo Stock Exchange (CSE) to digitize all core activities of the market and that the process of such digitization was progressing smoothly and that they were hopeful that within a period of three months it would be possible to have such a system in place.

The SEC recently approved the amendment of the necessary Rules to offer investors a fully digital onboarding experience. This transformation is expected to enable stockbrokers to strengthen service delivery, improve efficiency and have greater agility.
Meeting the representatives of the Ceylon Chamber of Commerce

The delegation from the Chamber pointed out the need to encourage more companies to list as well as to have in place an apex committee comprising capital market stakeholders including the SEC, CSE, Central Bank of Sri Lanka, Ministry of Finance and other key  policy makers including industry bodies to decide on matters related to capital market policy.

The delegates from the law firms contended that certain regulatory measures presently in force are seen as an impediment to new listings and also stated that the SEC  at times had been somewhat rigid in the application of Rules and Regulations.
Meeting with the Stock Broker Firms on Digitalization of the Colombo Stock Market

The Chairman explained on the need to have a robust regulatory system in order to ensure the integrity of the market but said that the SEC will certainly adopt a very pragmatic and practical approach in the process of regulation and called upon the delegates to point out any particular Rules or Regulations which they consider to be too rigid so that they could be looked at by the SEC.  

The Chairman also informed them that the Commission  was at  present going  through  the  draft SEC  Act and  the Demutualization Act and that its recommendations would be submitted to the Ministry of Finance before the end of next month and assured them that  steps would be taken to ensure their speedy enactment. The law firms were requested to submit any recommendations they had with regard to the draft laws as well as on any other regulatory matter.

In the discussions with the stockbroker firms, the SEC Chairman explained the work that was in progress with regard to the digitization of the stock market and called upon the broker firms to support and actively participate in the ongoing initiatives of the SEC-CSE joint committee.

He also referred to the other joint committee that had been established to broad base the market and create awareness amongst the general public and called upon the stockbroker firms to partner with the SEC and CSE in these initiatives and to play a more aggressive role.

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Inflation rises to 7.6% in January

Sri Lanka’s headline inflation as measured by the year-on-year change in the National Consumer Price Index has increased to 7.6 percent in January from 6.2 percent in December, the Statistics Office of the Sri Lanka Central Bank (CBSL) said.

The rise in inflation was driven by the monthly increase in prices of items in both Food and Non-food categories.

Food inflation has increased substantially from 8.6 percent in December 2019 to 13.7 percent in January 2020, the highest since November 2017. Non-food inflation has stood at 3.0 percent in January 2020.

The change in the NCPI measured on an annual average basis increased to 4.1 percent in January 2020 from 3.5 percent in December 2019.

The monthly change of NCPI recorded at 1.5 percent in January 2020 and it was due to the price increases observed in the items of both Food and Non-food categories.

Within the Food category, prices of vegetables, coconut, red onions and fresh fish recorded increases in January 2020. In addition, prices of items in the Non-Food category also recorded increases during the month owing to price increases of the items in Housing, Water, Electricity, Gas and other fuels (housing rent); Education (tuition fees); and Alcoholic Beverages and Tobacco sub-categories

The core inflation, which reflects the underlying inflation in the economy, decreased from 5.2 percent in December 2019 to 3.9 percent in January 2020, on a year-on-year basis, recording the lowest since January 2019.

Meanwhile, former finance minister Mangala Samaraweera commenting on the increase in inflation said that 'Sri Lanka's great leap backwards is gaining momentum' as the Gotabaya Rajapaksa regime is celebrating 100 days in office.
ms inflation
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Central Bank introduces new credit schemes to revive an ailing economy

The Central Bank observed that growth of the Sri Lankan economy has fallen to dismal levels and the impact of the COVID-19 pandemic may result in severe stress on economic and financial system stability in the period ahead unless immediate remedial actions are taken.
"In this context, in support of the government’s efforts to revive the economy, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 16 June 2020, decided to introduce new credit schemes under the Section 83 of the Monetary Law Act No. 58 of 1949," CBSL said.

Accordingly, in addition to the already disbursed Rs. 27.5 billion under the refinance scheme introduced on 27 March 2020, the Central Bank will provide funding to Licensed Commercial Banks (LCBs) at the concessionary rate of 1.00 per cent against the pledge of a broad spectrum of collateral, on the condition that LCBs in turn will on-lend to domestic businesses at 4.00 per cent, while ensuring the greatest possible distribution of this facility. This scheme along with the existing refinance Scheme will provide Rs. 150 billion in total to the businesses affected by the COVID-19 pandemic.

In addition, the construction sector enterprises will be provided with a facility to borrow from LCBs, using guarantees issued by the government equivalent to the amount due on account of contracts carried out in the past, under a new dedicated credit scheme funded by the Central Bank and made available at the aforementioned concessionary rates.

The regulator said that operating instructions on these new credit schemes will be issued in immediate due course.

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Central Bank clarifies misreporting on forensic audit reports

The Central Bank of Sri Lanka (CBSL) in a statement clarified several instances of misreporting in the media with respect to the forensic audits that were carried out. 

The Central Bank noted that the Monetary Board, in consultation with the Auditor General and the Attorney General, took measures to commission six forensic audits pursuant to the recommendations of the Presidential Commission of Inquiry appointed to investigate and inquire into and report on the issuance of Treasury bonds during the period of 01st February 2015 to 31st March 2016 and matters that had come to light over the recent years in audit reports and in findings of internal investigations pursuant to the exercise of certain regulatory and agency functions undertaken by the CBSL.

The procurement of the five forensic audits were carried out by a Cabinet Appointed Consultant Procurement Committee and the contracts were awarded to audit firms with a global practice and international experience in forensic auditing with the approval of the Cabinet of Ministers.

Out of the six forensic audits initiated, five forensic audits have been completed so far at a cost of Rs 275 million (approximately), contrary to various amounts stated in the media, the Central Bank said adding that the procurement process of the sixth forensic audit is currently underway.

Some mainstream media had reported that the cost of the forensic audits had exceeded Rs. 900 million.

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Fitch revises ratings on 11 Sri Lankan financial institutions

Fitch Ratings has revised the National Long-Term Ratings of Sri Lankan financial institutions following the recalibration of the agency's Sri Lankan national rating scale. The recalibration is to reflect changes in the relative creditworthiness among Sri Lankan issuers following Fitch's downgrade of the sovereign rating to 'B-'/Negative from 'B'/Negative on 24 April 2020. Revision ratings are used to modify ratings for reasons that are not related to credit quality in order to reflect changes in the national rating scale.

The National Ratings of the Sri Lankan banks consider their creditworthiness relative to other issuers in the country. The recalibration of the Sri Lankan National Rating scale has resulted in the upward revision of the National Long-Term Ratings of the following Sri Lankan financial institutions:


Commercial Bank of Ceylon PLC (CB) to 'AA+(lka)' from 'AA(lka)'

Hatton National Bank PLC (HNB) to 'AA+(lka)' from 'AA-(lka)'

Sampath Bank PLC to 'AA-(lka)' from 'A+(lka)'

Seylan Bank PLC to 'A(lka)' from 'A-(lka)'

Cargills Bank Limited to 'A+(lka)' from 'A-(lka)'

Amana Bank PLC to 'BB+(lka)' from 'BB(lka)'

Non-Bank Financial Institutions

Serendib Finance Limited to 'AA-(lka)' from 'A+(lka)' (please see http://www.fitchratings.com/site/pr/10125353)

HNB Finance Limited to 'AA-(lka)' from 'A(lka)'

Siyapatha Finance PLC to 'A(lka)' from 'A-(lka)'

Richard Pieris Finance Limited to 'A-(lka)' from 'BBB+(lka)' (please see http://www.fitchratings.com/site/pr/10125353)

Fintrex Finance Limited to 'B+(lka)' from 'B(lka)'

The National Ratings of Bank of Ceylon (BOC) and People's Bank (Sri Lanka) (PB) have been affirmed at 'AA+(lka)' but the Outlook remains Negative. The Outlook on the National Ratings of Commercial Bank (CB) and Hatton Nationa Bank (HNB) are also Negative.

The Negative Outlooks are aligned with the Negative Outlooks on both the sovereign rating and Sri Lanka's operating environment mid-point. They reflect Fitch Ratings' expectation of sovereign support benefitting BOC's and PB's overall credit profiles while CB's and HNB's ratings are constrained by the sovereign's credit profile.

Meanwhile, The Outlook on Serendib Finance and HNB Finance reflect the Negative Outlook on the ratings of their respective parents, CB and HNB. The Outlook on Sampath Bank, Seylan Bank, Cargills Bank, Amana Bank, Siyapatha Finance, Richard Pieris Finance and Fintrex Finance is Stable.

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SME debt relief credit negative for banks, sovereign: Moody’s warns

The one-year debt moratorium announced by the government for the small and medium-sized enterprises (SMEs) is credit negative for the Sri Lankan banks and sovereign as it would undermine the banks’ asset quality and may not support the country’s overall economic growth, Moody's rating agency warned.

“The debt moratorium is credit negative for Sri Lankan banks and the sovereign because it risks increasing SMEs’ risk appetite and relaxing their attitude toward debt repayments, ” the rating agency said in a research note.

This in turn will undermine banks’ asset quality and constrain the sovereign’s credit profile.


 SME activities made up for about half of Sri Lanka’s gross domestic product and employment.

“However, similar to our expectation on any macroeconomic benefits from the tax cuts announced for businesses and households, they are similarly unlikely to lead to significant and sustained acceleration in economic activity,” the agency said.

Moody’s noted that the scope of this debt moratorium is much wider than last year’s moratorium for the tourism sector, given that the SME loans constitute a significant part of the banking system’s gross loans.

Moody’s said among the Sri Lankan banks it rates, Hatton National Bank and Sampath Bank would be the most affected, given that SME banking is one of their core businesses. Bank of Ceylon (BOC) will be the least affected because its loan book is largely exposed to state-owned enterprises and large local corporates, the rating agency pointed out.

“The debt moratorium will help slow the banks’ nonperforming loan formation this year, but we anticipate an increase in bad debts when the grace period ends, especially if the domestic economic conditions remain weak,” Moody’s said.

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Fitch recalibrates Sri Lanka National Rating Scale

Fitch Ratings says today that it has recalibrated its Sri Lanka National Rating scale to reflect changes in the relative creditworthiness among Sri Lankan issuers following Fitch's downgrade of the country's sovereign rating to 'B-' from 'B' on 24 April 2020.

"The Outlook on Sri Lanka's Long-Term Issuer Default Rating is Negative," Fitch Ratings said.

The recalibration will result in rating actions for some issuers with Sri Lankan national ratings. These rating revisions will be announced soon, the ratings agency added.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka's national scale ratings are denoted by the unique identifier '(lka)'.

Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National scales are not comparable with Fitch's international ratings scales or with other countries' national rating scales.

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Sri Lanka's credit outlook downgraded to negative on account of tax cuts: S&P

Credit rating agency Standard and Poor (S&P) has downgraded Sri Lanka’s credit rating to negative from stable. The agency downgraded Sri Lanka's ‘B’ rating to ‘negative’ from stable on account of the various tax cuts by implemented by the new administration.
As a result, Sri Lanka's sovereign dollar-denominated bonds came under pressure on Tuesday citing increased risks from a deteriorating fiscal position. The negative outlook reflects their view that a larger-than-expected fiscal deficit will increase the government’s financing needs and concerns over debt sustainability.

“The negative outlook reflects our view that Sri Lanka’s fiscal trajectory over the next two to three years could deviate from a fiscal consolidation path,” the rating agency said adding that the sizable deficits will add to Sri Lanka’s already-large debt stock at a faster pace.

Sri Lanka must also repay US$ 4.8 billion, as external foreign debt this year, which is thus far the largest debt repayment in the history of Sri Lanka.

Fitch Ratings downgrade

Meanwhile, Fitch Ratings had previously revised the outlook on Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'Negative' from 'Stable' in December 2019 citing rising risks to debt sustainability from a significant shift in fiscal policy and the potential for roll-back of fiscal and economic reforms in the aftermath of Presidential elections in November.
The need for using scarce money prudently

Former Central Bank Deputy Governor Dr. W. A. Wijewardena recently in an op ed observed that the new government is seeking a Parliamentary majority in the upcoming general election and as a result, all governmental resources are now being diverted to attaining that goal at the expense of sound economic policies.

"At a time when the Treasury was limping with a huge cash shortage, (The President) has offered a costly tax cut to citizens and jobs for 100,000 Samurdhi kids. The first would drain the Treasury of a promised revenue flow of about Rs. 600 billion and the latter would impose an unexpected cost of Rs. 42 billion on his already fragile budget numbers. That latter amount is a lot of money equal to the annual administration budgets of some 14 state universities," he said.

"This is a serious choice to be made by a government which is planning to increase the university admissions by about a quarter by establishing 300 odd university colleges. The government does not have money for this and, hence, the available moneys will have to be spent prudently," he pointed out.

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Colombo stock exchange to implement new stock market circuit breaker

The Securities and Exchange Commission (SEC) has directed the Colombo Stock Exchange (CSE) to implement the new circuit breaker structure when the market reopens after its closure on 20 March.

The SEC has introduced a new three-tier circuit breaker system on the CSE in a bid to strengthen the country’s capital market and prevent excessive price distortions in the S&P SL20 Index.

Under the new system:

  •     The first circuit breaker will trigger a 30-minute market halt if the S&P SL20 index drops 5%.
  •     The second circuit breaker will trigger a second 30-minute market halt if the S&P SL20 index drops a further 2.5%.
  •     The third circuit breaker will trigger a third market halt if the S&P SL20 index drops a further 2.5% – closing the market for the day.

The SEC has directed the CSE to implement the new circuit breaker structure when the market eventually reopens.

The CSE has been closed since 20 March amid a nationwide lockdown to curb the spread of Covid-19.

“The SEC if of the view that the prevailing conditions are not conducive for the stock market to function in a fair, orderly and equitable manner,” the regulator said at the time

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Rupee falls, recent VAT cuts likely to widen deficit in 2020

Sri Lankan rupee fell 0.22% to 181.25/35 per dollar on Monday, compared to Friday's close of 180.85/181.00, Refinitiv data showed. It is up 0.7% so far this year.

Meanwhile, foreign investors were net buyers of government securities on a net basis for the sixth straight week, purchasing a net 4.3 billion rupees worth of government securities in the week ended Nov. 27.

Total foreign outflows from government securities through Nov. 27 stood at 43.7 billion rupees, according to central bank data.

The government said on Wednesday it had decided to reduce value-added tax (VAT) to 8% from 15% from Dec. 1, and abolish some other taxes as well, in its attempt to boost economic growth that has fallen to a near two-decade low.

Emerging Asia Economics said in a note on Monday that the tax cut decision would provide a significant boost to the economy, but put increased strain on the country's fragile public finances.

“Unless Sri Lanka raises taxes elsewhere or cuts spending, the VAT cuts will lead to around $2 billion in lost revenue (around 2% of GDP) and the deficit is likely to widen to around 6.5% of GDP in 2020," it said.

“This is much larger than the 5.3% deficit target agreed with by the IMF (International Monetary Fund), who could withhold future loan payments unless the government reverses course."

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