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Sri Lanka Development Update 2021 – World Bank Report

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Amid the COVID-19 pandemic, Sri Lanka’s economy contracted by 3.6 per cent in 2020, the worst growth performance on record, as is the case in many countries fighting the pandemic. Swift measures enacted by the government in the second quarter helped contain the first wave of COVID-19 successfully, but these measures hit sectors like tourism, construction, and transport especially hard, while collapsing global demand impacted the textile industry.

Job and earning losses disrupted private consumption and uncertainty impeded investment. As a result, the economy contracted by 16.4 per cent (y-o-y) in the second quarter. The economy began to recover in the third quarter as the first wave was brought under control and containment measures were relaxed. The momentum continued in the fourth quarter as the economy was broadly kept open despite a second wave of COVID-19 infections.

The government took proactive measures to mitigate the impact of the pandemic. Despite limited fiscal space, resources were allocated (approximately 0.7 per cent of GDP) for health measures, cash transfers, and postponed tax payments. While public expenditures increased, revenues declined, resulting in a widening of the fiscal deficit in 2020. Due to the economic contraction and the elevated fiscal deficit amid COVID-19, public and publicly guaranteed debt is estimated to have increased to 109.7 percent of GDP. In line with the government strategy to reduce external debt over the medi- um-term, debt financing relied increasingly on domestic sources.

The Central Bank of Sri Lanka (CBSL) significantly contributed to the crisis response. It undertook considerable monetary policy easing, for which there was room given benign inflation, and additional measures to increase liquidity in the market and support businesses. It also introduced financial sector regulatory measures, like a debt moratorium for COVID-19 affected businesses and individuals.

However, despite these efforts, bank lending to the private sector remained low. By contrast, credit to the government and state-owned enterprises surged and accounted for 80 per cent of the total credit in 2020.

The pandemic likely exacerbated pre-existing financial sector vulnerabilities, although the full impact of COVID-19 cannot yet be observed. An improved trade balance and strong remittance inflows narrowed the current account deficit. A sharp drop in imports in 2020 more than offset the decline in exports. However, with financial inflows insufficient to meet external liabilities, reserves declined to an 11-year low in February 2021, before a currency swap worth US$ 1.5 billion with the People’s Bank of China was approved in March 2021. Due to a shortage of foreign currency, the exchange rate depreciated by 6.5 per cent from January through March 17, 2021.

The CBSL took several measures to preserve foreign exchange reserves and reduce pressures on the exchange rate. Growth is expected to recover to 3.4 per cent in 2021, mainly reflecting a base effect and FDI inflows. Gradually normalizing tourism and other economic activities as well as already signed investments will support growth. However, the subdued global recovery may dampen export demand. Over the medium-term, continued trade restrictions, economic scarring from the slowdown and the high debt burden may weigh on growth prospects.

Through an enhanced focus on an export-oriented growth model that taps the full potential of private investment, the country could realize its ambitions to increase its competitiveness and raise growth in a sustainable manner. The forecast is subject to both upside and downside risks. If the global economy recovers faster than expected and the global tourism industry rebounds more quickly with the progress on vaccination programs, the growth outlook could become more favorable.

On the other hand, downward risks persist, pertaining to debt and external sustainability given high debt and low external buffers, especially because the repayment profile requires accessing financial markets frequently. Given large refinancing requirements, constrained market access amid rating downgrades is a challenge. Thus, striking a balance between supporting the economy amid COVID-19 and ensuring fiscal sustainability is key. A reform program to provide a fiscal anchor could help Sri Lanka to reduce debt vulnerabilities and lower sovereign risk.

The COVID-19 impact on employment and poverty

The economic contraction in the wake of COVID-19 has reversed past progress, at least temporarily. Poverty is expected to have risen since the onset of the pandemic mostly due to widespread job and earning losses. Simulations suggest that job losses were more likely to occur in urban areas and among private sector and own-account workers. Job losses were concentrated in the lower-middle of the income distribution: workers most vulnerable to job loss are located between the 20th and 40th percentiles of the pre-pandemic earnings distribution.

Temporary absence from work and job losses occurred less frequently than declines in earnings. While informal workers are more likely to suffer earnings losses, formal workers have been affected as well, for example in the export-oriented apparel industry. With jobs lost and earnings reduced, the $3.20 poverty rate is projected to have increased from 9.2 per cent in 2019 to 11.7 per cent in 2020.

The poorest experienced the largest proportionate earnings shock while the smallest proportionate income losses were suffered by the richest. The latter tend to have formal, secure jobs and better access to digital technology that allows them to conduct wage work or business operations remotely. To mitigate the impact of the economic hardship on the poor and vulnerable, the government implemented several livelihood support programs, which helped to soften the labor market shock and the impact on poverty.

Further progress in restoring livelihoods and making them more resilient could help Sri Lanka to continue its path of poverty reduction and shared prosperity. The current social protection system could support the reintegration of those who lost their jobs. In the medium term, social safety nets could be better targeted toward the poor and vulnerable, and adjusted to allow for support to be scaled up quickly and effectively in times of crises. Unequal opportunities to work from home have introduced new economic and spatial divides as working remotely is nearly exclusively an option for high income earners, and small and medium-sized enterprises were unlikely to adopt digital technologies.

In the medium to long-term, digital technologies could become an important engine for job growth. However, despite wide scale ownership of cellphones in Sri Lanka, the digital revolution will fall short of expectations without expansion of high-speed networks and accessible data on the whole island. Sri Lanka could provide new opportunities for economic mobility through policies that expand or universalize access to digital infrastructure.

Investments in digital literacy are a prerequisite for widely shared benefits from these new opportunities.

Growth should recover gradually in 2021. The economy is expected to grow by 3.4 per cent in 2021, from a low base, as vaccination programs progress in Sri Lanka and its major trading partners.

Already-signed investments into the Colombo Port City and Hambantota Industrial Zone and gradually normalizing domestic economic activities should provide an impetus to growth. However, the momentum of the recovery is expected to be constrained due to: (i) subdued export demand and tourism, as well as lower remittances growth amidst the sluggish global recovery; and (ii) the challenging domestic macroeconomic situation. Continued import restrictions and the high debt bur- den will adversely affect growth and poverty reduction over the medium-term. Inflationary pressure is expected to materialize in 2021-2023 due to the partial monetization of large fiscal deficits. External buffers are expected to remain low, with subdued financial inflows and significant financing needs. The current account deficit is projected to remain low in 2021, with strict import restrictions largely offsetting relatively low garment exports and tourism receipts.

Courtesy – Sri Lanka

Financial Chronicle



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SriLankan Engineering converts Airbus A320 passenger aircraft to a cargo freighter for operator Fits Air

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SriLankan Engineering the engineering and maintenance arm of SriLankan Airlines, has entered into a strategic collaboration with UK-based Avensis Aviation to offer Maintenance (MRO) services for the embodiment of Passenger-to-Freighter (PTF) conversions for Airbus A320 and A330 aircraft.

The first output of this collaboration was the embodiment of a PTF conversion of an Airbus A320 aircraft for the operator FitsAir which was recently completed on time and within the budget.

SriLankan Engineering is an EASA approved MRO facility with major maintenance check capability at its base in Colombo, Sri Lanka. The expansion into aircraft modification and conversions is part of its strategy to rapidly develop its maintenance portfolio and thereby attract foreign airlines to Sri Lanka for maintenance services.

“With Covid restricting passenger travel, many airlines and aircraft leasing companies are converting passenger aircraft into cargo freighters. SriLankan Airlines has already converted its own aircraft and has the expertise to offer this service externally. The cargo conversion market is booming, and we are getting onboard at the right time. Avensis Aviation is the ideal partner for us as they bring in the modification approvals and the customer reach.” said Shevantha Weerasekera Head of Engineering for SriLankan Airlines.

“Avensis Aviation provides innovative and scalable aircraft conversion solutions ranging from its light ‘LEVIS’ Preighter conversion to ‘NAVIS’ full freighter conversion through its European Aviation Safety Agency (EASA) approved modification,” said Rubin Flower (Director of Business Development Avensis Aviation).

Asitha Ranaweera Deputy Chief Officer for FitsAir stated, “Though it seemed a simple straightforward process, working remotely with a designer, covid protocols, regulatory compliances made the project slightly complicated. However, the Sri Lankan Engineering team has stood up to the task and performed well to deliver the aircraft in an excellent condition.”

The technical sales teams of SriLankan Engineering and Avensis will aggressively promote the aircraft conversion portfolio to attract more maintenance activity to Sri Lanka.

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Stability and sustainability underpin Q1 results for HNB

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HNB recorded a Profit After Tax (PAT) of Rs 4.7 Bn during the first quarter of 2021 while Profit Before income Tax (PBT) amounted to Rs 5.5 Bn. At Group level PBT and PAT were at Rs 5.9 Bn and Rs 4.8 Bn respectively.

The substantial monetary loosening adopted to revive the pandemic hit economy resulted in AWPLR dropping by nearly 400 bps over the past 12 months. This resulted in the interest income decreasing by 13% YoY to Rs 23.7 Bn. Interest expenses too exhibited a decline of 17.2% YoY to Rs 13.1 Bn driven by strong CASA (current accounts and savings accounts) mobilization. The CASA ratio improved from 36.2% in March 2020 to 39.7% by the end of Q1 2021 as the CASA base grew by 30% YoY to Rs 395 Bn. As a result, the Bank’s Net Interest Income (NII) for the first three months 2021 decreased by 7.2% YoY to Rs 10.6 Bn.

Commenting on the Bank’s results Managing Director / CEO of HNB Jonathan Alles stated: “HNB has demonstrated resilience, strength and stability during a year of unprecedented disruption. We are grateful for the complete trust and support of our customers, investors and other stakeholders throughout this time. I also wish to place on record my deepest appreciation for the unwavering dedication of our staff in continuing to serve our clientele through multiple waves of the pandemic, despite the inherent risks involved. Our top priority during this time was to ensure their safety while supporting customers affected by the pandemic.

“We provided moratoria under three phases while granting working capital finance out of CBSL schemes and our own funds. In addition to the financial assistance provided during the last year, we enhanced our digital proposition to ensure that customers could securely and reliably access all of our services while staying safe from the pandemic. This included introducing many new features on SOLO – our digital payment platform, and the launch of our new Digital Banking App and e-commerce capabilities for SME clients among many others. We are currently in the process of further refining these powerful new services, which will undoubtedly provide greater convenience for all HNB customers in the future.”

Net Fee and Commission income for the first quarter grew by 10.2% YoY to Rs 2.3 Bn as business activity rebounded during the period. The Credit Cards business, Trade and Remittances which constitute a major share of fees performed well despite restrictions on imports continuing to be in place. Other fee sources, which also encompass digital business lines rose by 24.4% YoY.

Exchange rate volatility and movements during the period, led to substantial revaluation gains on swaps and forward agreements. Swap costs were also lower relative to the corresponding quarter of 2020 as swap premiums declined in line with Dollar interest rates. Accordingly, the Bank recorded a net exchange gain of Rs 1.9 Bn which was a 53% YoY improvement compared to Q1 2020. The total dividend income from investments for Q1 2021 was Rs 421Mn compared to Rs 13Mn in the corresponding period of 2020, as dividends declared for the financial year 2019 were paid only in Q2 2020 due to the pandemic.

NPA ratio of the Bank improved marginally to 4.28% as at end of Q1 2021 compared to 4.31% as at end December 2020, as majority of customers who were previously under moratorium commenced repayments since October 2020. The impairment charge for the quarter ended 31st March 2021 was Rs 2.7Bn in comparison to Rs 4.7Bn recorded for Q1 2020. The impairment for Q1 2020 included a charge of Rs 708Mn on account of sovereign bonds mainly as a result of the sovereign downgrade that was effected in April 2020.

“More than a year after the pandemic, it is unfortunate that we are now seeing the most severe rise in COVID-19 cases to date. All of the lessons that we have learned over the past year will be put to the test. While progress has been made in terms of vaccinations, the economic impact of this latest wave of COVID-19 infections will hinge on how effectively we as a nation are able to rally together to control the spread of the virus.

In this crucial moment, as a responsible domestic systemically important bank, as always, we will continue to support our valued customers and play a meaningful role as an essential service provider. We have already enabled all our digital channels, and are also fully geared to support business revival and help rebuild our nation. We request the public to remain calm, adhering to all health and safety guidelines provided and to act with responsibility and compassion towards one another. We also urge the authorities to expand the vaccination programme and in particular seek their support to make vaccination a priority for front line and critical staff across the banking industry,” Alles stated.

The zealous focus on cost optimization facilitated a marginal 1% YoY dip in Operating costs to Rs 5.8 Bn. Cost to Income was hence improved by a commendable 170 bps relative to the comparative period in 2020 to 38% for Q1 2021.

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Green Energy Champion 2021 off to a great start!

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Applications welcome till 22nd May

The Green Energy Champion (GEC) 2021 which was launched earlier this year is off to a great start, to find the next set of green energy champions who will revolutionise the areas of sustainable mobility, energy efficiency, and renewable energies in Sri Lanka.

An invitation to all energy innovators was disseminated island wide in April and continues to remain open until 22nd May for all startups and SMEs in the country that possess creative and innovative products, activities, and projects which promote energy efficiency and the use of renewable energy solutions in Sri Lanka.

Green Energy Champion was initiated in 2016 with the aim of encouraging the innovation and implementation of Green Energy solutions in Sri Lanka, particularly to serve the day-to-day needs of the public. The first three editions witnessed excellent receptivity, with participants ranging from private households and universities to municipalities, public authorities, and small and medium-sized enterprises. The GEC campaign has also played a significant role in creating awareness and educating the general public on energy efficiency via print and online media over the years.

Green Energy Champion is implemented by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, on behalf of the Federal Foreign Office, in association with the Sri Lankan Ministry of Power – State Ministry of Solar, Wind and Hydro Power Generation Projects Development.

The past competitions have unveiled several successful initiatives over the years – efficiently leveraging solar, biomass, and hydro energies to establish a shared vision where renewables form the basis of energy for the future. The previous winning entries succeeded tremendously in showcasing best-practice models for sustainable energy in the country while also paving the way for similar projects to be implemented in the future.

This year, the Green Energy Champion offers applicants the chance to gain exclusive access to an advanced business accelerator program – the Green Energy Champion Accelerator 2021, implemented by Hatch and Good Life X – which will help fine-tune and develop their business ideas while also preparing them for exciting local and international partnerships in the Green Energy ecosystem. Green Energy Champion is also offering up to LKR 1.5 million in product development support.

The six-month long accelerator program will be followed by a formal Partner Matchmaking Event aimed at facilitating networking amongst key green energy stakeholders. The final phase of Green Energy Champion 2021 will be marked by a ‘Demo Day’ where shortlisted candidates, having completed their training and networking requirements, will showcase their renewed ideas and solutions.

If you are in the business of energy sustainability, then there is no doubt that the Green Energy Champion is for you! The accelerator will actively support you with business and market intelligence to establish and grow your business, while also enabling you to identify potential opportunities and take calculated risks for smooth market entry. Furthermore, it will offer visibility among key political stakeholders while also extending potential penetration opportunities in global markets.

So, head on over to www.greenenergychampion.lk to apply or get more details on what is undoubtedly going to be a great opportunity for you and your business!

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