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Constant ‘monetary financing’ had little backing from fiscal side, says Central Bank

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by Sanath Nanayakkare

The majority of external obligations in the recent past were financed by sources like the Central Bank of Sri Lanka or through monetary financing, but fiscal consolidation through revenue enhancement as well as expenditure rationalization deemed necessary under such circumstances were hard to come by, R.A.A. Jayalath , Assistant Governor of the Central Bank of Sri Lanka said recently.

He said so while addressing a high level seminar held on the topic on “Confronting the Current Foreign Exchange Crisis in Sri Lanka: Lessons from Global Experience”.

“Thus, a significant amount of monetary financing by the Central bank has resulted in worsening inflation and exchange rate outcome”, he observed.

He went on to say: “In this environment, the tax cuts introduced in 2019-2020 with a reduction of VAT threshold was a grievous policy, in my view. Total impact of such a tax cut was over Rs. 600 billion and some put it at Rs. 800 billion. The resultant revenue drop was about 7.7% of GDP. The mainstream economic theory suggested such tax cuts would enhance money in circulation in the economy supporting growth in the medium to long term. The combination of pandemic-induced additional expenses and limited resource mobilization had widened the fiscal deficit. Tax cuts, low interest rates and high liquidity environment created higher demand for imports. In addition to that, the pandemic hit the brakes on tourism-related revenue which was the fifth largest inflow which had been normalizing after Easter Sunday attack in 2019. The pandemic related mobility restrictions around the world strengthened remittances via banking channels. However, this was short-lived as mobility increased after successful immunization programmes as a result of which the pattern of the flow of remittances changed. This was exacerbated by the fixation of exchange rate at Rs.200 levels”.

“Tourism brought USD 4.4 billion – 5.6% of GDP in 2019 – and it was reduced to 0.8% in 2020. Then the government decided to ban the import of agro-chemicals in April 2021 for health reasons and to promote eco-friendly sustainable agriculture. Although the transition towards organic farming seemed like an environmentally friendly sustainable step, the sudden shift was like a time bomb waiting to explode. Whatever the rational, the sudden transmission was extremely problematic due to lack of organic farming infrastructure, dependence on imported agro chemicals and lack of access to modern agricultural techniques. …….This disrupted the economy’s self-sufficiency in rice production requiring rice imports using scarce foreign exchange reserves. The nation’s external economic performance deteriorated and the current account deficit increased from 1.14 billion in January 2022 from 0.13 in January 2021.”

“When you look at Sri Lanka’s current crisis, we can’t forget the legacy the country has been carrying. Since post-independence, Sri Lanka has been a twin-deficit country except for a few years. The number of times the country has sought assistance from the IMF in its post-independence history shows the frequency of BOP challenges it faced. Today we are seeking the global lending agency’s support for the 17th time.”

“The country’s trade account was continuously in deficit. Import expenditure was almost double the exports. In the current account, it showed some relief mainly because of migrant worker remittances. But that was insufficient to cover the twin deficit. The majority of the country’s foreign exchange inflows didn’t come via non-debt creating flows like FDIs, but through further borrowings. On top of this fiscal balance or the government budget was continuously in deficit. And it was increasing due to ever-increasing commitments of the government sector. Thus the country’s primary account balance – the government budget before deduction of debt servicing expenses – was in deficit except for a few years.”

“Government revenue as a percentage of GDP was constantly on the decline since 1980s except in 2015, and 2016. Tax revenue was declining until 2015, and showed some increase in 2017/2018. But the budget deficit was significant. In 2019, it was around 9.6% and increased to 11.1% in 2020 and 2021, so both fiscal and Balance of Payments ( BOP) issues were at the heart of Sri Lanka’s macroeconomic performance constantly. In addition, heavy and continuous borrowings by the government to bridge the fiscal deficit over the years, has led to monetary policy and exchange rate management having limited effectiveness in managing the fallout of funding the fiscal gap. Subsequent to the global financial crisis and the presence of low interest rates in the developed market, Sri Lanka shifted its strategy significantly towards foreign market borrowings, exposing the country towards global credit cycles. So although we witnessed rapid economic growth, majority of them were coming from borrowed funds and at the same time they were invested mostly in non-tradable sectors or slow-revenue generating sectors.”

“This was reflected in the trade balance which was not sound and was deteriorating. The other factor that led to the rapid shift in our debt composition was when we moved to commercial borrowings, particularly after we lost access to concessional borrowings. Since we graduated to middle-income country status in early 2000, most of our borrowings were commercial borrowings. We didn’t have access to low-cost borrowings from multilateral agencies. And as concessional loans declined, the economy increasingly moved towards commercial loans mostly by way of international sovereign bonds (ISBs) and other bank and overseas borrowings. While the domestic /public debt level remained mostly stable, foreign debt became primarily the force driving the Sri Lankan economy.”

“Foreign debt to GDP ratio increased from 30% in 2014 to above 50% in 2020. Although Sri Lanka’s foreign debt to GDP ratio has witnessed a significant reduction over the past two decades, the change in the composition of high level of external debt has made the economy more vulnerable to a currency crisis in the past few years. Consequently, in 2021, the economy had net repayments to foreign creditors; therefore, the entire budget deficit was financed by domestic financing. It was kind of domestication of external obligations,” the Assistant Governor said.



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Dialog impacted by further forex losses in Q2, accumulated NPAT in 1H negative Rs28.3Bn

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Dialog Axiata PLC announced, Tuesday 09th August 2022, its consolidated financial results for the six months ended 30th June 2022. Financial results included those of Dialog Axiata PLC (the “Company”) and of the Dialog Axiata Group (the “Group”).

Sri Lanka continued to be battered by the socio-economic crisis in Q2 2022 which led to adverse movements in macro variables such as Sri Lankan Rupee (“LKR”) depreciating 23% against the United States Dollar (“USD”), Inflation rising to 54.6% (from 18.7% recorded by end Q1 2022), policy rates increasing by 8 percentage points and 12-month T-Bill rate increasing to 21% (from 12% recorded by end Q1 2022).

Despite the challenging environment witnessed in Q2 2022, the Group sustained its consistent performance to record strong Revenue growth across all business segments, namely, Mobile, Fixed Line, Digital Pay Television, International and Tele-infrastructure, relative to prior periods, namely, Year-to-Date (“YTD”) and Quarter-on-Quarter (“QoQ”). Accordingly, the Group recorded consolidated Revenue of Rs.81.6Bn for 1H 2022 and Rs43.3Bn for Q2 2022. However, driven by higher network spend and escalation in the cost base, Group Earnings Before Interest, Tax, Depreciation and Amortisation (“EBITDA”) declined to Rs27.5Bn for 1H 2022 down by a moderate 1% YTD. On a QoQ basis EBITDA declined 14% to record Rs12.7Bn for Q2 2022.

The Group Net Profit After Tax (“NPAT”) was impacted by the forex losses amid continued depreciation of the Sri Lankan Rupee (“LKR”) against the United States Dollar (“USD”). The resulting forex losses reached Rs.14.2Bn for Q2 2022 and Rs.34.3Bn for 1H 2022. The forex losses were predominantly contributed by market-to-market translational losses from USD denominated borrowings.

Group NPAT recorded a loss of Rs28.3Bn for 1H 2022 and a loss of Rs12.5Bn for Q2 2022 amid forex losses. Normalised for the said forex losses, NPAT continued to decline albeit recording profits of Rs6.0Bn for 1H 2022 and Rs1.6Bn for Q2 2022.

Dialog Group continued to be a significant contributor to state revenues, remitting a total of Rs16.9Bn to the Government of Sri Lanka (GoSL) during the first six months of 2022. Total remittances included Direct Taxes and Levies amounting to Rs9.2Bn and Rs7.7Bn in Consumption Taxes collected on behalf of the GoSL. The total taxes paid increased 46% YTD and 56% QoQ. The Direct Taxes included Rs3.8Bn paid during the quarter in lieu of one-off Surcharge Tax of 25% applicable on PAT of FY2020.

The Group continued to support critical investments in 1H 2022 to provide seamless and consistent connectivity whilst meeting the surge in data demand. Accordingly, the Capital expenditure reached Rs22.4Bn for 1H 2022. Capital expenditure was directed towards investments in High-Speed Broadband infrastructure to further expand Dialog’s leadership in Sri Lanka’s Broadband sector. In line with the above Capex, the Group Operating Free Cash Flow (“OFCF”) declined to Rs2.8Bn for 1H 2022.

During the quarter the Dialog Group entered into loan agreement of up to USD150Mn with the International Finance Corporation (“IFC”) that is expected to help expand and improve the network capacity through the upgrading of existing sites and the deployment of new 4G sites. IFC will also ensure that Dialog adopts an enhanced environmental and social management system (ESMS) according to IFC Performance Standards for their mobile network deployment, in line with Dialog’s endeavors of pursuing green connectivity, supporting global climate action goals and achieving net-zero CO2 emission by 2050.

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Emirates invests over US$ 2 billion to take its on-board customer experience to new heights

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Priding itself on a brand promise of ‘Fly Better’, Emirates is investing over US$ 2 billion to enhance its inflight customer experience, including a massive programme to retrofit over 120 aircraft with the latest interiors, plus an array of other service improvements across all cabins starting in 2022.

Sir Tim Clark, President Emirates Airline said: “While others respond to industry pressures with cost cuts, Emirates is flying against the grain and investing to deliver ever better experiences to our customers. Through the pandemic we’ve continued to launch new services and initiatives to ensure our customers travel with the assurance and ease, including digital initiatives to improve customer experiences on the ground. Now we’re rolling out a series of intensive programmes to take Emirates’ signature inflight experiences to the next level.”

Some of Emirates’ latest initiatives include: elevated meal choices, a brand new vegan menu, a ‘cinema in the sky’ experience, cabin interior upgrades, sustainable choices and a generous approach to the little touches that make travel memorable.

Starting from August, Emirates’ passengers can look forward to:

New Inspirations, New Menus:  An award-winning team of chefs, a world-class catering team and a wide variety of suppliers have been assembled to design and deliver the best fine dining experience in the sky. New menus will be served on select Emirates routes in First Class, featuring dishes such as pan-fried salmon trout with moqueca sauce and creole rice, roasted duck breast with orange thyme jus, steamed broccolini and fondant potatoes. New menus will also be introduced to Business and Economy on the 1st of September.

Purposefully Vegan Choices: Emirates’ new vegan menu is carefully curated to cater to the growing numbers of customers pursuing this thoughtful lifestyle. Vegans, or anyone interested in a delicious and healthy plant-based meal, will enjoy handcrafted gourmet dishes such as pan-roasted king oyster mushrooms, flavoursome jackfruit biryani and sliced kohlrabi garnished with burnt orange. Desserts are a decadent affair with choices of chocolate truffle cake with hazelnut, pistachio and gold leaf, or green grape tart adorned with candied rose petals, vanilla custard, and berry compote glistening with yuzu pearls. Vegan dishes are available to pre-order in all cabin classes.

The Champagne and Caviar Experience: Emirates’ First Class experience, always a benchmark for service excellence, has been upped a notch in 2022. Customers can now savour unlimited portions of Persian caviar as part of the ‘dine on demand’ service, with an exquisite pairing of the world-renowned Dom Perignon vintage champagne. Emirates is the only airline with an exclusive agreement to offer the luxury brand on-board.

Cinema in the Sky: First Class customers can create a memorable movie moment on-board by ordering cinema snacks as they enjoy the 5,000 channels on Emirates’ ice inflight entertainment system. The cinema snack menu includes moreish classics such as lobster rolls, juicy sliders, edamame, and salted popcorn, and can be ordered on demand. All passengers can also curate their own ice experience before their flight, simply by browsing and pre-selecting movies or TV shows on the Emirates app, which can then be synced to ice the moment they board, maximising the seamless travel experience.

Farm to Fork – Sustainable Supply Chain: Emirates’ customers departing on flights from Dubai can begin crunching on fresh greens harvested from Bustanica, the world’s largest vertical farm and newly-opened US$40 million joint venture investment through Emirates Flight Catering. Emirates is continuing to invest in sustainable operations and supply chains, seeking local food suppliers and farms wherever possible to serve the freshest produce on board.

Specialised Hospitality Training for Cabin Crew: Emirates has partnered with Ecole hôtelière de Lausanne, one of the world’s top hospitality management schools, to craft the Emirates Hospitality strategy and encourage inspiring customer experiences. Emirates Cabin Crew have already begun engaging in intensive training programmes focused on delivering the four service pillars: Excellence, Attentiveness, Innovation and Passion.

Upgraded Cabin Interiors in all Classes: The most significant investment is an extensive and record-breaking refurbishment of the aircraft fleet interiors, where cabins will be retrofitted with new or reupholstered seats, new panelling, flooring and other cabin features. Benefitting all Emirates passengers, every cabin class will be refreshed and new Premium Economy cabins installed. After the retrofit, Emirates will have a total of 120 aircraft offering Premium Economy seats – the only airline in the region to offer this cabin class, and enhanced interiors and features across all other cabins. With its first aircraft scheduled to roll into the Emirates Engineering Centre for retrofitting in November, planning work and trials have begun in earnest.

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Janashakthi Life strengthens board with two new appointments

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Janashakthi Insurance PLC, one of the key players in Sri Lanka’s insurance industry, announced the appointments of Sivakrishnarajah Renganathan and Dr. Nishan de Mel as Independent Non-Executive Directors of the organization with effect from 27th July 2022.

“We are pleased to welcome S. Renganathan and Dr. Nishan de Mel to the Board of Janashakthi Insurance PLC, as we continue to accelerate the execution of our strategic priorities to expand our presence in the Life Insurance segment,” said Prakash Schaffter, Executive Deputy Chairman of Janashakthi Insurance PLC.

“Renganathan joins us with a rich tenure of 41 years in the banking sector and extensive financial and managerial experience which will provide valuable insights as we continue to pursue our growth journey. Dr. de Mel is an economist with extensive knowledge and experience in strategic planning, that will enable our growth strategy to drive transformation through effective strategic planning. We are confident that they will provide valuable perspectives and will create a new dynamic within the Board as we continue to transform the insurance industry to better serve our customers and communities”, he concluded.

Sivakrishnarajah Renganathan is the former Managing Director/ Chief Executive Officer of Commercial Bank of Ceylon PLC, Commercial Development Co., PLC and Deputy Chairman of Commercial Bank of Maldives. He had held several key positions in the Bank. He has led Commercial Bank’s acquisition of the banking operations of Credit Agricole Indosuez in Bangladesh. In addition, he has served among others, as a Member of the General Council of the Institute of Bankers of Bangladesh, Founder / President of the Sri Lanka Bangladesh Chamber of Commerce and Industry, Executive Member of the Foreign Investors Chamber of Commerce and Industry in Bangladesh.

Renganathan, a Fellow of the Chartered Institute of Management Accountants, UK (FCMA), Fellow of the Chartered Global Management Accountant (CGMA), Fellow of the London Institute of Banking & Finance, UK (FLIBF) and a Fellow of the Institute of Bankers Sri Lanka (FIB), had received extensive Leadership, Management and Banking training, both locally and overseas.

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