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COVID-19 and the Sri Lankan economy: Policy choices and trade-offs

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By Chathurrdhika Yogarajah

Sri Lanka’s macro-economic outlook amidst the COVID-19 pandemic came under the spotlight at a webinar panel discussion held on October 11, to mark the release of IPS’ flagship report, ‘Sri Lanka: State of the Economy 2021’. The event featured presentations by Dr Dushni Weerakoon and Dr Asanka Wijesinghe from IPS with expert insights from Dr Missaka Warusawitharana, Financial Economist, Johns Hopkins University, USA. Tharindu Udayanga from IPS moderated the discussion.

Prospects and Possibilities Dr Dushni Weerakoon, Executive Director, IPS

A V-shaped recovery is likely to take shape, but Sri Lanka faces a relatively weak output growth. A critical challenge is to lift the growth rate to, at least, 5-6% and maintain that momentum in the medium term. How investments perform will be a crucial determinant, as the dip in investment was a major driver of output contraction in 2020. With little fiscal space, Sri Lanka relied mostly on monetary policy. There was a surge in direct financing of fiscal spending, and there were efforts to ensure that borrowing costs were kept low via yield-control measures.

Sri Lanka is not so fortunately placed when considering the risks related to large-scale debt monetisation programmes due to high debt levels, elevated exposure to foreign debt with repayments of sizeable amounts in the medium term, and the low reserve stockpiles. With such weak fundamentals, the backbone of debt monetisation programmes is policy credibility. But for the last 18 months, there has been no notable effort to curtail discretionary spending and anchor fiscal plans. Thus, Sri Lanka is reluctant to deal with IMF conditionalities.

Policy measures must address fiscal imbalances through cuts in national spending or raising national income. As the latter takes time, the governments tend to focus on a policy mix to cut national spending that includes tighter budgets allowing interest rates to move with market fundamentals and implementing more flexible exchange rates. The downside is that the growth suffers in the short term with worsening debt ratios. These are politically difficult choices when economic conditions are tight as they are now.

Sri Lanka must firm up its access to foreign capital markets to balance the risks. If Sri Lanka comes to an adjustment on the fiscal front and improves access to capital markets, this will free up the space for a more orderly macroeconomic adjustment. Though the exchange rate may initially overshoot, it can be stabilised over time. This will allow the Central Bank to reverse its debt monetisation and focus on price stability, as that will be an area of concern in the coming months. A policy framework along these lines will provide a more robust environment to support investment and sustain Sri Lanka’s recovery.

Opportunities and Costs Dr Asanka Wijesinghe, Research Economist, IPS

During the pre-pandemic period, there was stabilisation in the rate of globalisation, but Sri Lanka’s openness has continuously declined especially after 2005 due to GDP growth in nontradeable sectors. However, Bangladesh, India, and South Asia, in general, show an increasing trend of openness. COVID-19 led to a deep plunge in the world’s industrial production and trade in 2019. But even after this collapse, it recovered by the beginning of 2021. There is no evidence to show deglobalisation effects due to the pandemic.

When the world trade outlook is taken into consideration, the WTO predicts a pickup in global trade volumes for the year 2022. An IMF database that uses signals emitted by sea vessels also showed an uptick in world trade from the beginning of 2021. Sri Lanka should ready itself to take advantage of trade diversion and investments opportunities the tariffs imposed on China’s textiles by the US, for instance. At present, its global value chain (GVC) participation is low and in fact declined from 2009 to 2019. In contrast countries like Bangladesh, Viet Nam, India and Pakistan showed an increasing trend. He pointed out that the US-China trade war presents opportunities for Sri Lanka to increase both forward and backward GVC participation.

A key challenge is the costly policy of import substitution, resulting in resource misallocation, reduced competitiveness, and possible retaliation from trade partners. Another challenge for Sri Lanka is the potential withdrawal of GSP+ which will be a hard hit on the seafood and textile industries. Sri Lanka should work to secure GSP+, disengage from the ‘anti-trade’ bias, integrate with GVCs, and restructure existing regional trade agreements.

Roads to Recovery

Dr Missaka Warusawitharana, Financial Economist, Johns Hopkins University, USA

Sri Lanka’s growth trajectory has not been in line with its true potential, adversely impacting the well-being of the people. This can be attributed to the low level of productivity growth. Although the manufacturing sector has contributed to growth, it has not demonstrated sufficient productivity that would enable the country to achieve a better output.

Further, the current fiscal difficulties can be pinned to structural imbalances in the country’s budgets that have spanned decades along with different administrations that have been unwilling to make hard choices. In the longer term, budgets must be structured to bring the debt down to a manageable level.

The world economy is moving away from physical goods to a digital-based economy, requiring greater provision of services. Sri Lanka scores well on the Human Development Index with its knowledgeable workforce. The need is to increase productivity by investing more in education and service-producing industries and improve the business environment by reducing institutional barriers.

Link to blog: https://www.ips.lk/talkingeconomics/2021/10/15/covid-19-and-the-sri-lankan-economy-policy-choices-and-trade-offs/

Chathurrdhika Yogarajah is a Research Assistant at IPS with research interests in macroeconomics and trade policy. She holds a BSc (Hons) in Agricultural Technology and Management, specialised in Applied Economics and Business Management from the University of Peradeniya with First Class Honours. She is currently reading for her Master’s in Agricultural Economics at the Postgraduate Institute of Agriculture, Peradeniya. (Talk with Chathurrdhika: chathurrdhika@ips.lk)



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Creating innovative spaces and world class construction projects

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The Access Group consists of some of the country’s pioneering and innovative companies that have contributed to Sri Lanka’s corporate landscape.

Access Projects is among them – they commenced their own unique journey into creating iconic buildings with their flagship Access Towers 25 years ago. At the time, it was a unique building with its own footprint.

Heading the Access Projects is Managing Director Dilshan Ferdinando who has been associated with creating architecturally exceptional innovative spaces that have gone on to be some of the finest buildings in Sri Lanka.

The company made their mark in the field of construction in the leisure industry – from the interior fit out of the Cinnamon Lakeside Hotel, to the lobby refurbishment and improvements of Chaya Blue in Trincomalee and Chaya Tranz in Hikkaduwa.

Another unique project was The Water’s Edge Golf Club, Club House and the banquet hall, undertaken personally by Dilshan himself to transform a marshy land into Colombo’s second Golf Course. This was a sustainable venture that was spread over 160 acres with an engineered set of water ways, lakes and canals. It involved removing perimeter urban waste and dredging 50 acres and using that material to create the golf playing fields. It still stands today with every tree retained and functional as a banquet facility.

” This was at the time when the war had ended and the hospitality industry was taking off. ” recalls Dilshan, ” We went on to do several banquet halls for city hotels as well as the renovations of the villas of Club Dolphin at Waikkal, yet another iconic hotel.”

The interiors of Waters Edge Golf & Country Club including the banquet hall was designed and built by Access Projects initially.

Yet another unique venture undertaken by Access Projects was the construction of Cape Weligama, a 50 key ultra-luxury resort for The Dilmah Group. “The project involved creating one of a kind, iconic villas with 13 swimming pools – the moon shaped pool was the largest infinity pool in Sri Lanka at the time, in 2014. The projects sought to use timber and locally sourced material for sustainability. It came with specific attention to detail, creating spaces that were all its own,” he adds.

When the iconic Galle Face Hotel sought restoration and renovation to meet the design elements of the Fifties, they chose Access Projects to handle the construction. Dilshan recalls carrying out extensive research with old photographs, paying attention to details and highlights that brought out the old world look and feel. A new ballroom was added to blend in with the existing architectural design of the old one, while all systems were renovated and updated.

Access Projects has also undertaken several iconic projects such as the Anantara Resort, a 250 key luxury hotel for the Hemas Group along with staff quarters and the banquet hall.

Access Projects was tasked with the construction of a modern 18 storeyed building for the Academy of Design – it came with specific design requirements – ‘ we made sure every one of those requirements were met – within budget and the time frame given.” he says.

Accredited with ISO 9001 – 2008 and ISO 14001 – 2004, and accredited to CIDA (Construction Industry Development Authority), Access Projects specializes in midscale specialist construction projects that call for attention to detail and meeting exacting architect and customer needs.

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CEAT radials designated Original Equipment for locally–assembled Mahindra Bolero City Pik-ups

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CEAT Kelani Holdings has reached another milestone in radial tyre manufacture in Sri Lanka with the Company’s appointment as an Original Equipment Manufacturer (OEM) for Bolero City Pik-up vehicles assembled in Sri Lanka by Mahindra & Mahindra (M&M) India in collaboration with Ideal Motors.

All Mahindra Bolero City Pik-ups rolling off the assembly line at the Mahindra Ideal Lanka Automotive Assembly Plant at Welipenna, Matugama are fitted with CEAT Milaze HD radial tyres in the size of 215/75 R15, manufactured at the CEAT Kelani plant in Kelaniya, under an OEM agreement between the two companies.

CEAT has already supplied 180 of these high performance radial tyres for 36 vehicles that will be assembled in November and December this year and has committed to supply up to 720 tyres per month from January 2022 onwards for a targeted maximum of 144 vehicles to be produced monthly by the Mahindra Ideal Lanka joint venture, the Company said.

Commenting on the agreement, CEAT Kelani Managing Director Ravi Dadlani said: “We are delighted to contribute to the local value addition component of the Mahindra and Ideal Motors venture, while doing what we do best – producing high quality tyres designed and engineered for local conditions and supporting the government’s efforts to conserve foreign exchange. Over the past two decades, CEAT has built the equity of the ‘Made in Sri Lanka’ proposition in the tyre industry, and we are proud and appreciative of the opportunity, as exclusive tyre supplier, to support the aspirations of Mahindra and Ideal Motors to progress to vehicles made in Sri Lanka.”

The Managing Director of Mahindra Ideal Lanka Pvt Ltd. Nalin Welgama noted that “This new initiative is a step in the right direction and supports the government policy framework for Sri Lanka’s migration from a market economy to a production-based economy.”

The CEAT Milaze tyres manufactured by CEAT Kelani for the Mahindra Bolero City Pik-up feature profiled shoulder lateral grooves that provide better heat dissipation and wide-angle circumferential grooves that resist cuts and chips. Angular transversal notches and sipes provide enhanced grip and uniform wear, while the angular notched 4-rib high land area design provides longer tyre life and durability.

No stranger to the OEM segment, CEAT Kelani Holdings has been the exclusive original equipment tyre supplier for Mahindra KUV100 compact SUVs assembled in Sri Lanka since 2019. All locally-assembled Mahindra KUV100 vehicles are fitted with CEAT FUELSMARRT 185/60 R 15 tyres.

CEAT Kelani Holdings is considered one of the most successful India – Sri Lanka joint ventures. The joint venture’s cumulative investment in Sri Lanka to date totals Rs 8 billion, inclusive of Rs 3 billion invested since January 2018 for expansion of volumes, technology upgrades and new product development. The company’s manufacturing operations in Sri Lanka encompass pneumatic tyres in the radial (passenger cars, vans and SUVs), commercial (nylon and radial), motorcycle, three-wheeler and agricultural vehicle segments.

The CEAT brand accounts for market shares in Sri Lanka of 48 per cent in the Radial segment, 80 per cent in the Truck category, 84 per cent Light Truck tyre category, 51 per cent in the Three-Wheeler tyre segment, 36 per cent in the Motorcycle tyre segment and 72 per cent in the Agricultural vehicle tyre category. CEAT Kelani exports about 20 per cent of its production to 16 countries in South Asia, the Middle East, Africa and the Far East.

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ComBank wins Best Corporate Citizen Sustainability Award 2021

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Commercial Bank Managing Director/Group CEO S. Renganathan (second from left) receives the award from the Chief Guest, Norwegian Ambassado Trine Jøranli Eskedal. Also in the picture (from left) are Commercial Bank’s Group Chief Marketing Officer Hasrath Munasinghe, Ceylon Chamber of Commerce Chairman Vish Govindasamy, the Bank’s Chief Operating Officer Sanath Manatunge and Assistant General Manager Services Chinthaka Darmasena.

The Commercial Bank of Ceylon PLC was declared Sri Lanka’s ‘Best Corporate Citizen’ in 2021 by the Ceylon Chamber of Commerce (CCC) on Tuesday night, achieving the pinnacle of recognition for sustainability and good corporate citizenship in the country’s corporate sector.

The coveted ‘Best Corporate Citizen Sustainability Award 2021’ was presented to Sri Lanka’s benchmark bank at an awards gala attended by the cream of corporate Sri Lanka, in recognition of the Bank’s status as the sustainable champion of the local corporate world.

Commercial Bank also won the award for the Finance sector at the awards for ‘Sector Based Sustainability Champions,’ the ‘Governance’ certificate in the category awards for ‘Consistent Commitment and Continuous Improvement’ and was second runner-up for the newly-introduced award for ‘Demonstrated Resilient Practices for COVID-19 Context,’ in addition to receiving an award for being among the Top 10 Best Corporate Citizens in Sri Lanka.

“Sustainability is the cornerstone of our corporate ethos and influences everything we do,” Commercial Bank Managing Director and Group CEO S. Renganathan commented. “This is demonstrated by the fact that we are Sri Lanka’s first fully carbon neutral bank. Commercial Bank is therefore elated to win the Best Corporate Citizen Sustainability Award for 2021. This will be a stimulus for an even deeper commitment to best practices in sustainability at every employee level.”

The Finance sector award recognises Commercial Bank’s position as the most progressive banking institution in the country and its commitment to preserving the environment through responsible lending protocols. The Bank’s multifaceted Green initiatives include lending to support Sustainable and Green operations, migrating customers to paperless banking, improving efficiency in the use of energy, water and other resources in its own operations and supporting community initiatives that help conserve habitats and the environment.

The Bank pioneered a mandatory social and environmental screening process for its project lending activities and was the first bank in Sri Lanka to venture into Green Financing. It also revolutionised digital banking by introducing features in its ‘Flash’ mobile application to measure and offset customer impact on the environment. The Bank has also achieved the momentous feat of becoming the largest lender to the SME sector and is a leader in digital innovation in the country’s banking sector.

Commercial Bank finances projects that focus on renewable energy, energy and resource efficiency, waste management, emission reductions, smart agriculture and green buildings. The Bank’s Green Financing is geared towards the fight against climate change, meeting the United Nations Sustainable Development Goals 7 and 12: Affordable and Clean Energy, and Responsible Consumption and Production.

Additionally, the Bank has numerous commitments including a mangrove restoration project in Koggala, a marine turtle conservation initiative to protect the biodiversity of the ocean, and support to the ‘Thuru Mithuru’ initiative of the Sri Lanka Army to promote self-sufficiency in essential food.

The Best Corporate Citizen Sustainability Awards programme has been in operation for 18 consecutive years and received 63 applications in 2021, the highest number of applications received in the history of the programme.

Established in 1839, the Ceylon Chamber of Commerce is the oldest and one of the leading business chambers in Sri Lanka. A confederation of Trade Associations, Bilateral Business Councils, and Regional and Sectoral Chambers of Commerce and Industry, it is considered the leading voice of the private sector in Sri Lanka.

The first Sri Lankan bank to be listed among the Top 1000 Banks of the World and the only Sri Lankan bank to be so listed for 11 years consecutively, Commercial Bank operates a network of 268 branches and 931 automated machines in Sri Lanka. The Bank’s overseas operations encompass Bangladesh, where the Bank operates 19 outlets; Myanmar, where it has a Microfinance company in Nay Pyi Taw; and the Maldives, where the Bank has a fully-fledged Tier I Bank with a majority stake.

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