Courtesy Gradient Alliance Monthly Bulletin: March 2016

The Central Bank of Sri Lanka (CBSL) is to issue sovereign bonds of about USD 3bn in the international capital markets, as the government attempts to bring a worsening fiscal situation under control.

Sri Lanka is impacted by a widening fiscal deficit caused by spiraling public sector wages, discovery of about Rs.1.1 trillion in unpaid bills and low tax revenue. Thus increasing reliance on debt to meet such expenses, and also to also pay down almost USD 4bn of loan obligations falling due in 2016.

Issuing a statement CBSL says The issuances in single or multiple tranches would be in US dollar and Chinese Renminbi (Panda/Dim Sum) with a fixed coupon and medium to long term maturities where non-resident investors will be eligible to invest at the primary issuance.”

These funds are in addition to the government trying to obtain USD 1.5bn from the International Monetary Fund (IMF) to avert a possible balance of payment crisis. It was only in late last year that the new government raised USD 2.15bn to pay off loan obligations and meet recurring expenses.

Taxes galore as govt. struggles to make ends meet.

In April 2016 the government is likely to increase Value Added Tax (VAT), re-impose Capital Gains Tax (CGT), and double Nation Building Tax (NBT) to boost state coffers. A dire situation was made worse by the discovery of about Rs.1.1 trillion in unpaid bills at state-owned entities, which were supposedly accumulated during the previous government. Mr. Ranil Wickramasinghe, Prime Minister, noted that VAT would be increased to 15% from 11%, while CGT will be reintroduced.

The VAT increase is not imposed on electricity bills and essential goods. Previously VAT exempt sectors, telecoms, private education and the health sector are now liable. He further noted;

• The government now owes Rs. 9.5 trillion (USD 65.6bn) or 74.9% of GDP. The former regime had not included Rs. 1.04 trillion.

• Rs. 1.21 trillion debts to be paid this year.

• CPC is in Rs. 365bn of debt, Sri Lanka Ports Authority owes Rs. Source: Ministry of Finance and Gradient Alliance Analysis 5.6% 5.7% 5.8% 5.9% 6.0% 6.1% 6.2% 6.3% 6.4% 6.5% (1,000.0) – 1,000.0 2,000.0 3,000.0 2012 2013 2014 2015 2016E Summary of the budget (Rs.bn) Total revenue and grants Total expenditure Budget deficit Budget deficit as a % GDP 260bn and SriLankan Airlines Rs. 211bn.

• Sri Lanka Transport Board has failed to pay Rs. 23bn of provident funds while state departments and ministries have tacked up debt of Rs. 58.4bn. The Highways Ministry alone is Rs. 24 bn in debt. According to Mr. Anushka Wijesinha, Chief Economist of the Ceylon Chamber of Commerce, The government is responding to an urgent revenue need. But ad hoc tax policy changes like these will hurt investor sentiment. The credibility of the Budget is lost.” On CGT, Vajira Kulatilaka, Chairman, CSE told the Daily FT

• People will definitely have a negative perception of this and that impact is going to be larger than the real impact of the tax and how much people will be taxed due to this,”

• It was quite a surprise for us actually. They should not keep us in the dark and we cannot expect the CSE to calm down and trade as they are already distressed with the way markets are behaving. They should have also publicised the rates and the duration for which capital gains will be taxed.”

Sri Lankan economy grows a slow 4.8% in 2015.

According to the Department of Census and Statistics the economy grew 4.8% year over year (YoY) in 2015.

Perhaps more significantly GDP in the fourth quarter of 2015 increased a paltry 2.5% YoY (vs. 9.9% in 4Q14) as tepid growth in services (+2.7% YoY) and industries (+1.9% YoY) offset a continuing decline in agriculture (-0.5% YoY).

For the full year 2015, the services sector (~62% of GDP) grew 5.3% YoY driven by (i) Wholesale and retail trade, (ii) Transportation of goods and passengers including Warehousing and (iii) Financial Service activities and auxiliary financial services.

Significantly Accommodation, Food and beverage service activities, a wide barometer for tourism sector (domestic and foreign) declined 1.3% YoY. Meanwhile industries (~26% of GDP) grew 3.0% YoY (vs.3.5% YoY in 2014) driven by Manufacture of food, beverages & Tobacco products offsetting a 0.9% YoY decline in construction.

Agriculture sector in 2015 grew 5.5% YoY (vs. 4.9% YoY in 2015) with rice and vegetable production increasing 23.3% YoY and 24.9% YoY offsetting a 1.5% YoY decline in Marine fishing and Marine Aquaculture. Agriculture sector’s contribution to GDP continued to decline and is now is only 7.9% of GDP with GDP per agriculture sector worker persistently underperforming the national average.

In 2016 as fertiliser subsidies the government will provide over Rs.37bn to paddy farmers, Rs.4bn to vegetable farmers and about Rs.2bn to tea and rubber farmers.

Port City back on, its official.

The government officially informed the CHEC Port City Colombo of its ability to resume construction of the Port City. The USD 1.4bn project has been suspended since March 2015 following accusations of non compliance to regulations and lack of a detailed environmental assessment.

Construction company, China Communications Construction Company, estimated that the suspension to result in losses of more than USD 380,000 a day and sought permission from the Government to build a protective breakwater to maintain the already-reclaimed land.