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Moody’s downgrade ‘unwarranted, erroneous suggesting reckless reaction’

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Government wades into battle with facts, figures and projections

In an extraordinary hard-hitting rejoinder to Moody’s downgrade of their Sri Lanka rating from B2 to Caa1 with a stable outlook, the Ministry of Finance, State Ministry of Money, Capital Markets and Public Enterprise Reforms (headed by former Central Bank Governor Ajith Nivard Cabraal) and the Central Bank accused the well-known rating agency of an “unwarranted and erroneous” finding that suggests a “reckless reaction.”

It said that “instead of understanding the economic turnaround as well as awaiting the Budget that is due in November, the downgrade of SL at the beginning of the Economic Revival is inexplicable.”

“This hasty rating action seems similar to the previous premature and reckless downgrades by rating agencies in the immediate aftermath of the ending of the internal conflict in 2009 and during the political impasse at the end of 2018. In both instances, the rating actions were proven to be hasty and erroneous, and those actions only resulted in several investors suffering unnecessary loses and missing out on emerging opportunities.”

“Moody’s rating downgrade fails to recognize and do justice to the ground reality of the ongoing rapid economic recovery backed by vastly improved business confidence arising from the return of political stability and policy stability after a lapse of five years,” the presentation said.

It went on to stress that Sri Lanka, like many of its peers in the emerging market group, experienced initial capital outflows, exchange rate depreciation, showdown in activity and pressure on government finances in response to the effects of the Covid-19 pandemic.

“But, the swiftness with which decisions were taken followed by the landslide victory of the government, enabled Sri Lanka to move along a recovery path towards growth and stability,” it said.

Since May, merchandise exports had bounced back, and by July, had returned to pre-Covid monthly averages of USD one billion, the presentation supported by graphs and charts said.

It argued that SL recognized the probable external sector pressure early, and decisively curtailed non-essential imports in order to prioritize external debt service obligations. The cumulative trade deficit by end December is expected to be around only USD 5.8 billion, significantly down from USD eight billion the previous year.

“The savings on the import bill due to the curtailment of non-essential imports as well as significant reductions in the fuel import bill is expected to be over USD 2.0 billion,” the presentation said.

Discussing the vital tourism sector, it said that although inbound tourist movements are yet not possible given the global pandemic situation, other service exports, including IT services and shipping remain robust. It added that workers’ remittances have recorded a sharp increase in spite of the initial expectations of a slowdown and at current trends, “the cumulative decline in workers remittances is likely to be marginal, compared to previous expectations of a decline of 15%.”

On foreign direct investment, it admitted that FDI inflows had slowed, but the investment pipeline is strengthening. While FDI slowed in the first half of this year (from a peak of USD 2,000 billion in 2018), looking ahead prospects were promising particularly with expected inflows into the Port City project and for new manufacturing projects.

“The expected finalization of new legislation for the Port City within a month will result in the realization of investment by those who have already completed due diligence on such investment,” the presentation said. “Other expected investments include import alternative industries as well as investments by international financial institutions.”

“FDI inflows during 2020 are expected to be over USD 750 million, which is only about USD 400 million less that in 2019. At the start of the pandemic, FDIs were expected to be only around USD 300 million for the year 2020.”

The presentation further said that stock market indices have improved dramatically to pre-Covid levels and are likely to gain further momentum. Also, foreign inflows to the government securities market have already showed signs of resumption and according to initial responses, are likely to increase in the coming months, particularly in the wake of the attractive SWAP arrangements offered by the SL authorities.

With increased emphasis on domestic agriculture, agro-based industries and resource-based industries, domestic economic activities have turned around remarkably and recorded V-shaped recoveries. A bumper Yala crop was expected to follow the bumper Maha. Industrial production has rebounded, electricity generation is normalizing with greater reliance on hydropower generation and the construction sector has gradually gathered pace.

The exchange rate had appreciated sharply since mid-April and remains stable at appreciated levels, allowing the Central Bank to accumulate reserves through market purchases of foreign exchange. Foreign inflows following the Moody’s downgrade enabled the Central Bank to purchase USD 30 million from the forex market on Sept. 29.

The presentation further said that the Debt to GDP ration which increased in recent years is expected to improve in the medium term; that envisaged financing inflows for 2020 favours domestic markets and strategic foreign financing; and that foreign Treasury bills and bonds holdings are likely to attract a substantial volume of investments in coming months.

Other positives outlined includes that official reserves of CBSL had increased to USD 7.4 bn. by end August 2020; a policy environment facilitating high economic growth beyond the recovery stage while preserving macro-economic stability and a “deep and unwavering commitment to our investors.”

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Majority of 300 luxury vehicles to be released

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… some shipped in without opening LCs, EU wants restrictions abolished

By Shamindra Ferdinando

The majority of the luxury vehicles imported by special permit holders in contravention of the import ban imposed by the government in view of precarious economic situation caused by corona first wave are likely to be released subject to penalties.

Well informed sources said that those vehicles shipped in without even opening LCs would be released. Among the violators were many government servants.

Sources said that vehicles brought in without opening LCs were likely to be confiscated.

“We have categorised over 300 vehicles, including BMWs, Mercedes-Benz and Audis into two groups. Customs are now in the process of evaluating individual cases,” a high ranking state official said.

The government announced a ban on vehicle imports to arrest the depletion of foreign reserves. Sources acknowledged that at the time the vehicles

arrived in Sri Lanka the second corona wave hadn’t erupted. The situation was far worse now and further deteriorating, they said, adding that the Customs were being inundated with requests for releasing vehicles on sympathetic grounds.

Controversy surrounds the failure on the part of the government to strictly implement the import ban in view of the sharp drop in state revenue due to the pandemic.

Recently, the EU demanded that Sri Lanka immediately lift import ban or face the consequences. The EU issued the warning in talks with government representatives. Foreign Minister Dinesh Gunawardena explained the circumstances that compelled the government to impose import restrictions. The EU sought an explanation as to when the ban would be lifted. The Foreign Ministry quoted Foreign Minister Gunawardena as having explained to the EU the challenges Sri Lanka economy was facing amidst the dwindling foreign currency reserve situation due to the significant reduction in remittances and tourism revenue induced by the COVID-19 global pandemic. The minister said that the import restrictions were being reviewed.

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Nearly 74,000 persons under home quarantine

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Close to 74,000 people belonging to 27,974 families had been placed under home quarantine, Police Spokesman DIG Ajith Rohana said on Wednesday (25).

He said that the number of cases from the Minuwangoda and Peliyagoda clusters had increased to 17,436 with 458 persons had tested positive for the virus on Tuesday.

Two wards of the Kethumathi Maternity Hospital, Panadura were temporarily closed on Wednesday after two pregnant women admitted there tested COVID-19 positive.

The two women are from Atalugama, which has been declared an isolated area. During the last few days close to half of the COVID-19 patients detected in Colombo District are from Atalugama.

The two women have been sent to Neville Fernando Hospital, Malabe. The patients and staff in Wards 3 and 4 at the Kethumathi Maternity Hospital are now under quarantine. Their family members too have been asked to undergone self-quarantine.

The Police had arrested 61 persons who had violated quarantine laws within the 24 hours that ended at 8 am yesterday, Police spokesman, DIG Ajith Rohana said, adding that they had been arrested for not wearing masks or for not maintaining physical distancing. With those altogether 688 persons had been arrested for violating quarantine laws from October 30, he said.

Commissioner General of Prisons Thushara Upuldeniya said that apart from Welikada, the spread of COVID-19 had been controlled at other prisons. COVID-19 cases had been reported from six prisons, he added.

“We are conducting PCR tests and hope that the situation in Welikada too would be brought under control. Twenty four new cases were detected from prisons on November 24 and from October 04, we have identified 708 cases within the prison system.”

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Severity of impact of second wave on economy could be far worse than anticipated – CBSL

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By Shyam Nuwan Ganewatte

The impact of the second wave of COVID-19 could be severer on the economic growth than previously anticipated, Director of Economic Research at the Central Bank Dr. Chandranath Amarasekara said yesterday (26).

Dr. Amarasekera said so responding to a query by The Island at a CBSL media briefing. The top official said that an assessment couldn’t be made yet as the second wave was continuing.

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