Cabraal and Central Bank responds to debt default fears
Recent commentary on Sri Lanka’s credit outlook ignores the numerous policy initiatives of the Government of Sri Lanka, which have already started yielding results
The Government of Sri Lanka observes that the concerns expressed in the media in reference to recent reports on Sri Lanka’s ability to service its debt obligations by international banks are one sided, and do not take into consideration the numerous of policy measures that have been introduced to revive the economy and ensure macroeconomic stability. These innovative policy measures are not restricted to traditional debt-based solutions to service the current debt obligations. Measures to build resources through non-debt solutions, the preservation of foreign currency resources and the gradual phasing down of the relative share of foreign debt are already yielding desired results, with a high likelihood of harnessing further improvements during the remainder of the year and beyond.
Certain media reports published recently attempts to raise concerns about Sri Lanka’s ability to honour its debt service obligations, based on backward looking and linear assumptions, thus ignoring the expected outcome of the novel policy regime currently in place. While gross official reserves have moderated somewhat since end December 2020, such moderation is not expected to continue. When all relevant facts are considered, it becomes apparent that the fears raised in certain reports are, in fact, merely hypothetical. The Sri Lankan economy, which is over US dollars 80 billion, has major natural and regular sources of foreign exchange inflows, including merchandise and services exports, workers’ remittances, programme and project related inflows, equity investment, and other financial flows. Aided by the post-COVID revival of the economy, such foreign exchange inflows are projected at US dollars 32 billion in 2021, even without major forms of borrowings, such as floating International Sovereign Bonds (ISBs). These projected inflows are expected to increase by about US dollars 2-3 billion annually in the period ahead with the support of well targeted policies and strategies of the Government. At the same time, authorities will continue to take measures to build up official reserves with the help of measures already implemented and further measures as necessary in the period ahead. It is noteworthy that the Government has launched a major drive towards promoting real inflows of foreign exchange through actively facilitating various merchandise and services exports, in both traditional and non-traditional sectors. The import curtailment measures and the steady recovery in export earnings would continue to improve liquidity in the domestic foreign exchange market. Further, envisaged equity investment flows through the Colombo Port City and Industrial Zones and the reprioritisation of project financing would help reduce the share of foreign debt notably in the period ahead, thereby dispelling concerns about debt sustainability.
In this context, settling the maturing ISBs of US dollars 1.0-1.5 billion, per year, over the medium term, need not be viewed as a major source of concern, given the entire stock of outstanding ISBs account for only 16.7 per cent of Sri Lanka’s total government debt as of end February 2021. It is also stressed that lenders in the majority of 83.3 per cent of the debt stock have raised no concern whatsoever about Sri Lanka’s ability to honour debt obligations. The authorities remain committed to honoring all upcoming debt obligations, leaving zero probability of any form of default on any obligation, which would jeopardise the longstanding relations with stakeholders and the impeccable credit history of the country.
The engagement with the International Monetary Fund (IMF) continues at staff level and as a member state in technical exchanges of know-how. Exploration of liquidity facilitation arrangements with regional central banks is also continuing, with some discussions are at an advanced stage.
As indicated in the Budget 2021, the Government has adopted a novel approach in relation to foreign financing, while enhancing the effectiveness of already secured financing channels, aimed at reducing the share of foreign financing of the budget deficit over the medium term. Reflecting the impact of measures already put in place by the Government, the relative share of outstanding external debt has already declined notably. The Government aims to reduce its external debt over the medium term to around a third of the total debt, and already the share of external debt has declined to around 40 per cent by end 2020 from over 48 per cent at end 2019.
The measures introduced to manage non-essential imports helped ease trade deficit to USD 5,978 million in 2020 from USD 7,997 million in 2019. The trade deficit is further expected to shrink in 2021 to around USD 4 billion. Export facilitation is expected to continue through allowing intermediate goods imports unhindered and promoting domestic value chain improvements, which would result in export earnings of about USD 13 billion in 2021.
Additionally, despite the projections of downturn in workers’ remittances, Sri Lanka recorded an increase of over USD 400 million remittances in 2020 with an aggregate of USD 7.1 billion. The policy measures to further incentivise remittances flows were facilitated with the Budget 2021 announcement of an additional Rs. 2 for conversion of per USD remittance, and the banks were required to sell 10 per cent of such remittance conversion to the Central Bank. The Central Bank has already commenced such absorption of conversions into its foreign exchange reserve. Further arrangements to improve foreign currency liquidity have been introduced, including a mandatory conversion of ¼ of export proceeds.
The Government is also in the process of channeling in official credit sources, with priority being envisaged for policy loans with a significantly high liquidity component. In addition, the commercial external financing component of the already lined-up term financing facility and other market financing components are envisaged in line with Budget 2021.
Sri Lanka Development Bonds (SLDBs) and loans of Overseas Banking Units (OBUs) also remain sources of foreign currency financing mainly from domestic foreign currency earning entities. The recently introduced measures to entice foreign investors to the government securities market and the real economy through an attractive foreign exchange swap arrangement are also likely to help enhance foreign currency inflows in the near term.
Real investment flows to the country remain a promising source based on the Colombo Port City related developments. The land reclamation work had been completed and the required legislation is being finalised. In December 2020, the Sri Lankan conglomerate, LOLC Group, signed an agreement with the Port City developers for a Mixed Development Project valued at USD 1 billion, which is set to break ground in mid-2021.
In this context, the Government reiterates its utmost commitment on meeting its external debt obligations, which will be facilitated not only through direct and indirect financing arrangements but also through highlighted policy measures and the current work plan to increase non-debt creating forex inflows.
The Government wishes to reiterate that even in the midst of various concerns raised by many parties on Sri Lanka’s debt service capability at the height of the COVID-19 pandemic, the Government was able to service its total external debt of around USD 4.3 billion in 2020.
The recent research reports indicate different figures of external debt obligations for 2021. The external debt obligations of the Government for 2021 amount to around USD 3.7 billion including the amortisation payments of USD 2.5 billion. Of this amount, thus far in 2021, the Government has settled over USD 500 million.
Sri Lanka will engage freely with all its investment and development partners and implement the envisaged measures to build up reserves through non-debt creating inflows while reviewing closely the international capital market developments.
Investors are invited to approach the Sri Lankan policy authorities at the highest levels who always remain open for constructive dialogue and will welcome any one-on-one engagement or roadshow discussions, without being dissuaded by premature one-sided opinion expressed without factoring the ground realities and the actual outcomes of policy measures introduced by the Government of Sri Lanka.
Cabinet approves rationalization of VAT exemptions and abolition of SVAT System
The Cabinet of Ministers granted concurrence to the resolution forwarded by the Minister of Finance, Economic Stabilization and National Policies to remove most of the releases from Value Added Tax (VAT), further retaining releases that ease the pressure on low – income families to secure the fundamental sectors of the economy as well as the releases for sectors such as education, health and agriculture, as well as to revise the provisions applicable for the Value Added Tax (VAT) act so that the Simplified Value Added Tax (SVAT) methodology can be canceled with effect from 01.01.2024 by introducing a more formal methodology for repaying the Value Added Tax (VAT) and to instruct the Legal Draftsman to prepare a draft bill for the purpose.
Venora Lanka Power Panels to set up assembly plant in Australia
By Hiran H.Senewiratne
Sri Lanka- based, export- oriented manufacturer, Venora Lanka Power Panels (Pvt) Ltd, with a state of the art electric panel factory at the Export Processing Zone, Biyagama, will set up an assembly plant in Australia.
“Once we set up the electric panel assembly plant in Australia, we will export all our panels from Sri Lanka and that plant will do 30 percent value addition to the product to supply that market, the company’s chairman/ Managing Director, engineer Sagara Gunawardena told The Island Financial Review.
Gunawardena said that the company is a value- addition assembly plant and he would be investing AUS $ 2 million for the project to be set up in Melbourne and hire 100 engineers and other professionals. He explained that the venture has enormous potential.
Venora Lanka provides power panels to mega projects in Sri Lanka and exports to Bangladesh, Maldives, Kenya, Ethiopia, Seychelles and Myanmar. Panel assembling is strictly in compliance with IEC 61439 standards, it was explained.
Gunawardena added: ‘I firmly believe that, being a truly customer focused organization, every employee and every process in the organization has to be aligned behind delighting customers. Therefore, at a time when the country is facing a major dollar crisis, my company would be aiming at bringing dollars into the country, while providing employment for local professionals, especially engineers.
‘At Venora Lanka we do not try to change customers’ mindsets. Instead, we take time to understand what they really want and focus our brand on delivering that. Venora is values- driven first and cost- driven second – creating a unique brand proposition.
‘Since the US dollar rate has come down, it is our concern that importers and suppliers do not change their prices, which is really affecting the manufacturing sector.
Company sources added: ‘The company has several wings of operation, such as local and overseas projects, switch board assembling, telecommunication infrastructure installations, earthing, lighting and surge protection, incorporating world renowned brands.
‘Venora Lanka Power Panels is the first Sri Lankan company to receive the licence, in accordance with the UK Trade Mark Act 1994, to use the trade mark “Best Enterprise”. It won a global award at the event, ‘Golden Awards for Quality and Business Prestige’, held in Geneva, Switzerland, in 2015.
‘Within a short span of time, with the perfect blend of progressive thinking and expertise, Venora Group has expanded to consist of, Venora International Projects, Venora Telecom, Venora Industrial Solutions and Venora Lanka Power Panels (BOI approved). Further, Venora has established its overseas presence through Venora Engineering Kenya and Venora Engineering Myanmar.’
Share market moves into positive territory; indices up
By Hiran H. Senewiratne
CSE trading got off to a positive note yesterday but during the last session of the day the momentum slowed. However, the market is now moving towards positive territory following the Central Bank announcement of a downward trend in interest rates, market analysts said.
Amid those developments the market witnesses improvements in both indices and in the turnover.
The All- Share Price Index up by 12.8 points and S and P SL 20 rose by 6.97 points. Turnover stood at Rs 710 million with one crossing. The crossing was reported in JKH which crossed 430,000 shares to the tune of Rs 60.2 million; its shares traded at Rs 140.
In the retail market top seven companies that mainly contributed to the turnover were; JKH Rs 212 million (1.5 million shares traded), Access Engineering Rs 44.7 million ( three million shares traded), Lanka IOC Rs 34.5 million (264,000 shares traded), Browns Investments Rs 28.6 million (5.3 million shares traded), LOLC Finance Rs 23.8 million (4.7 million shares traded), Capital Alliance Rs 22.9 million (615,000 shares traded) and First Capital Holdings Rs 19.2 million (574,000 shares traded). During the day the 31.4 million shares volumes changed hands in 9000 transactions.
Yesterday, the Central Bank’s US dollar buying rate was Rs 285.16 and the selling rate Rs 298.85.
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