Press Release – CBSL

In February 2012, earnings from exports increased by 7.6 per cent to US dollars 879 million while the expenditure on imports increased by 27.9 per cent to US dollars 1,581 million over the corresponding month of the previous year.

The largest contribution to the export earnings in February 2012 was from industrial exports. Industrial exports grew by 3.3 per cent, year-on-year in February 2012 mainly driven by gem, diamonds and jewellery and rubber products. Export earnings from gems, diamonds and jewellery increased by 34.1 per cent. Earnings from rubber based products increased by 17.5 per cent due to the continuous high demand from major export destinations, particularly from the USA. Earnings from textiles and garments exports, which accounted for about 40 per cent of total export earnings, increased moderately by 1.4 per cent. Earnings from petroleum products, transport equipment, food, beverages and tobacco, leather, travel goods and footwear and ceramic products declined in February 2012.

Earnings from agricultural exports declined in February 2012, as a result of lower performance recorded in traditional agricultural exports of tea and rubber. Earnings from tea exports declined by 11.6 per cent, year-on-year, to US dollars 105 million mainly due to geo political uncertainties in major tea importing countries in the Middle East. Rubber exports declined by 32.9 per cent to US dollars 18 million due to elevated demand from the domestic rubber manufacturing industries. However, coconut exports increased by 46.5 per cent in February 2012, mainly due to higher production and favourable prices in the international market. Among the non-traditional agricultural exports, earnings from spices declined by 40.4 per cent in February 2012 due to a decrease in the volume of cinnamon, pepper and cloves exports. Vegetables and minor agricultural exports also declined during this period, while unmanufactured tobacco and sea food performed well.

Sources: Sri Lanka Customs and Central Bank of Sri Lanka

Expenditure on imports increased by 27.9 per cent in February 2012 compared to the same month of the previous year. Expenditure on intermediate goods increased by 36.8 per cent to US dollars 947 million mainly due to higher petroleum imports. Expenditure on petroleum imports increased by 111.7 per cent to US dollars 506 million in February 2012 compared to that of February 2011, reflecting substantial increase in both price and volume of imports. The average price of crude oil imports increased by 16.2 per cent to US dollars 119.86 per barrel in February 2012. Expenditure on imports of textiles and clothing, fertiliser, diamond and precious stones, vehicles and machinery parts and food preparations declined in February 2012. Reflecting continuous expansion in economic activities, investment goods imports grew by 41.3 per cent to US dollars 380 million in February 2012. All three major categories of investment goods; transport equipment, building materials and machinery and equipment recorded growth rates of 74.4 per cent, 38.6 per cent and 25.6 per cent, respectively. Expenditure on imports of consumer goods declined by 7.5 per cent to US dollars 251 million in February 2012. Import expenditure on food and beverages declined as prices of major imported food items such as sugar, lentils, onions, chilies and potatoes were lower in the international market.

In cumulative terms, earnings from exports increased marginally by 3.3 per cent to US dollars 1,797 million during January – February 2012 compared with the same period of 2011. Industrial exports, which accounted for 74.2 per cent of total exports, increased by 1 per cent during the first two months of 2012. Among the industrial exports, the textiles and garments and rubber products grew by 1.5 per cent and 19.1 per cent, respectively. Cumulative expenditure on imports during the first two months of 2012 increased by 24.7 per cent to US dollars 3,496 million. Expenditure on investment goods imports increased by 57.8 per cent to US dollars 903 million, mainly on account of machinery and equipment and transport equipment. Expenditure on imports of intermediate goods increased by 22.2 per cent to US dollars 2,044 million during the first two months of 2012. Expenditure on petroleum imports increased by 58.1 per cent to US dollars 1,021 million. However, expenditure on imports of textiles and clothing and gold decreased by 4.8 per cent and 37 per cent, respectively. Expenditure on consumer goods during the first two months of 2012 decreased by 2.2 per cent to US dollars 539 million. The trade deficit during the January-February 2012 stood at US dollars 1,699 million.

Tourist arrivals in February 2012 increased by 27 per cent to 83,549 while earnings from tourism grew at a healthy rate of 35 per cent to US dollars 86 million compared to the corresponding month of 2011.Worker’s remittances amounted to US dollars 470 million in February 2012 compared to US dollars 393 million in February 2011, recording a year-on-year growth of 19.6 per cent.

By end February 2012, gross official reserves, excluding Asian Clearing Union (ACU) balances, amounted to US dollars 5,522 million. Further, by end February 2012 total external reserves, which include gross official reserves and foreign assets of commercial banks amounted to US dollars 6,774 million. In terms of months of imports, gross official reserves and total external reserves by end February 2012 were equivalent to 3.2 months and 3.9 months, respectively.

The performance of the external sector for the period under consideration is further illustrated in the table below.

External Sector Performance

Sources:CentralBankofSriLankaandSriLankaCustoms

(a)Revised

(b) Provisional

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Central Bank of Sri Lanka Press Release.

The Sri Lankan economy registered its highest post-independence growth rate of 8.3 per cent in 2011, over the 8 per cent growth in 2010, with increased contribution from Industry and Services sectors. The growth in Agriculture sector was subdued, but was adequate to enforce a substantial downward pressure on domestic commodity prices. While year-on-year non-food inflation increased in March 2012 due to the full impact of the adjustment of domestic energy prices and bus fares, year-on-year food inflation remained negative for the third consecutive month. Overall, the year-on-year change in the Colombo Consumers’ Price Index increased to 5.5 per cent in March 2012 from 2.7 per cent in February.

Domestic foreign exchange market has shown clear signs of stabilisation following the expected volatility during the early stages of allowing greater flexibility in the Rupee/US dollar exchange rate. Accordingly, the Rupee, which depreciated against the US dollar to Rs. 130.41 on  21st March, appreciated by 3.94 per cent during the period from 21st March to 4th April 2012 to reach Rs. 125.47. The increased foreign exchange inflows contributed to this stabilisation, while prudential measures implemented by the Central Bank supported this development. Significant foreign inflows in the first three months of the year included the inflows to the Government securities market amounting to US dollars 400 million and inflows to the Colombo Stock Exchange of US dollars 164 million. Thereafter, on 2nd April 2012, the eighth tranche under the IMF-SBA facility amounting to US dollars 427 million was also received. These and other foreign receipts to the private sector and the Government, have now raised the gross official reserves (without ACU balances) to approximately US dollars 6.1 billion as at 4th April 2012, which is equivalent to 3.6 months of imports.

In the meantime, broad money supply (M2b) grew by 21.9 per cent, year-on-year, in February 2012. Net Credit to the Government (NCG), increased substantially by Rs. 136.3 billion during the first two months of the year, while credit extended to the private sector also increased, year-on-year, by 34.4 per cent. This increase, amounting to around Rs.100 billion in the first two months of the year, has resulted in the continued high growth of monetary aggregates, although the recent policy measures introduced by the Central Bank are expected to decelerate the expansion in broad money supply in the near term. Towards such outcome, it is essential that the current shortfall in Government revenue is effectively addressed and public expenditure is further rationalised, so as to significantly lower the reliance on bank sources to finance the Government budget deficit. Such a course of action would reverse the trend observed in the first quarter of 2012, and in that context, the recent upward revision of customs and excise duties on selected items by the Government is a display of its commitment to the necessary fiscal consolidation process.

Meanwhile, notwithstanding the increase in the Central Bank policy interest rates in February 2012 and the Direction issued to restrain the growth of credit extended by licensed banks, there are still some signs that credit growth is continuing at an undesired pace. Therefore, the Monetary Board is of the view that a further adjustment of policy rates of the Central Bank is warranted to ensure a smooth deceleration of credit growth through the year in order to achieve the target set for end year, and to anchor inflation expectations. Accordingly, the Monetary Board, at its meeting held on 5th April, decided to raise the Repurchase rate and the Reverse Repurchase rate of the Central Bank by 25 basis points and 75 basis points respectively, to 7.75 per cent and 9.75 per cent, effective from the close of business on 5th April 2012.

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Central Bank of Sri Lanka – Press Release

Foreign exchange inflows continued to remain healthy during the past few weeks. Reflecting this trend, the exchange rate appreciated to around Rs. 128 per US dollar by 30^th March from around Rs. 130 a week ago. The Central Bank also absorbed a substantial part of such foreign exchange inflows, resulting in the gross official reserves increasing considerably during March 2012. In the meantime, the month-to-month growth in import expenditure decelerated to 20 per cent in January 2012 from 34 per cent in December 2011. A further deceleration in import growth is expected in response to various policy measures introduced by the Central Bank and the Government in February and March 2012.

At the same time, other foreign exchange inflows to different sectors of the economy are being realised as expected. In addition to funds already raised by commercial banks to strengthen their capital base, more than US dollars 500 million of further investment is expected during the next few weeks. Positive inflows to the equity market are continuing with the total net inflows to the Colombo Stock Exchange amounting to US dollars 164.2 million by 30^th March. The inflows in respect of Treasury bills and bonds have also amounted to US dollars 400 million so far in 2012.

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Central Bank of Sri Lanka Press Release on Recent sharp depreciation of Sri Lanka Rupee.

As has been announced from time to time, the Central Bank has been intervening in the domestic forex market in recent years to build up foreign reserves and to smooth out any undue fluctuations in the exchange rate. Such interventions resulted in the build up of foreign reserves to a historically high level of US dollars 8.2 billion by August 2011, thereby preventing an excessive appreciation of the rupee. However, during the second half of 2011, the widened trade deficit underpinned mainly by the sharp increase in import expenditure necessitated the Central Bank to supply foreign exchange to meet a part of such increased demand, despite increased receipts on account of remittances, tourism and inflows to the capital and Financial Account.

Although the Central Bank expected this import demand to decelerate towards the latter part of 2011 due to the uncertain global conditions, such a moderation did not take place and therefore, on 3^rd February 2012, the following policy measures were introduced to strengthen the external sector of the economy, and to contain the high growth in bank credit: first, an increase in the policy interest rates by 50 basis points with effect from 3^rd February 2012, so that the resultant increase in borrowing cost would restrain credit growth leading to the reduction of import demand; and second, a Central Bank direction to commercial banks to limit their credit expansion in 2012 to 18 per cent [23 per cent if 5 per cent of funds could be raised from abroad] as compared to the 2011 increase of 34 per cent, with a view to effectively reduce the quantity of credit granted.

At the same time, in view of increased oil prices in the international market, the government has also decided to increase the domestic prices of petroleum products with effect from 12^th February 2012. Such policy action would encourage energy conservation and help reduce the use of oil products, thereby reducing the expenditure of imports further. In addition, several expected inflows to the Financial Account of the Balance of Payments in 2012, as set out in the Central Bank’s ‘Road Map for 2012 and beyond’, are now at varied stages of realisation and such inflows are expected to augment inflows during 2012.

In this background, with effect from 10^th February 2012, the Central Bank decided to limit its intervention in the forex market, so as to limit the supply of foreign exchange to the extent needed to settle the bulk of petroleum import bills, and to absorb surplus forex liquidity that would flow into the market from various sources including the issue of Tier-2 capital by banks, inflows to equity and bond markets etc., that may otherwise lead to the undue appreciation of the rupee.

In light of the above measures and actions, the Central Bank has projected that the Balance of Payments in 2012 would record a comfortable surplus and such a surplus would serve to ease any pressure on the forex market. In that context, the recent depreciation of the Sri Lanka Rupee, which seems to be a reaction of forex dealers adjusting to the more vibrant market driven policy framework, would appear to be a temporary over-shooting of the realistic level.

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Key Budget Proposals on Corporate Bodies

Corporate Income taxes

Tax rates applicable to companies (excluding businesses  related to liquor and tobacco products) will be reduced to 28.0%.

The tax rate of businesses engaged in manufacturing or import of liquor and tobacco products will be increased from 35.0% to 40.0%.

Concessionary tax rate of 15.0% will be reduced to 12.0%
Tax on profits from agricultural undertaking will not exceed 10.0%

Other Business related taxes

VAT: The present 20.0% rate will be reduced to 12.0%

Deemed  Dividend  Tax:  Reduce  distributable  profits  for  deemed  dividend  tax  from  25.0%  to  10.0%  to  promote
investment

NBT: Reduce from 3.0% to 2.0% and the threshold will be reduced from Rs.650,000 to Rs.500,000 (per quarter)

Social Responsibility Levy, Regional Infrastructure Development Levy and Debit Tax, Turnover Tax (by municipal
councils) are discontinued

ESC:  The present threshold of Rs. 7. 5mn per quarter will be increased to Rs 25.0mn

Exports and Imports Industry

Impose CESS on all exports in raw and semi processed form : To encourage value added exports

Income tax rate of all export companies to be reduced from 15.0% to 12.0%

Reduction in income tax from 15.0% to 10.0% in companies which have domestic value addition (above 65.0%)
and brand names with patent rights

Tourism & related business

Levy of $20 per bed on all 05 star hotels that has a room rate less than $125 per night

Lowered income tax rate from 15.0% to 12.0%

NBT: threshold increased from Rs.500,000 to Rs.12,500,000 (per quarter)

NBT: removal of exemption ‐ services of star hotels above the rank of three Star
 

Banking and Financial institutions

Abolish the bank debit tax

Reduce VAT on financial services from 20.0% to 12.0%

Reduce tax on profits of banking and financial institutions from 35.0% to 28.0%

Transfer  tax  savings  to  investment  fund  account  with  CBSL.  Regulations  requiring  banks  to  adopt  low  market
rates and long term maturity for lending these funds will be introduced.

Stock market related taxes

To encourage listing in CSE: recognize expenditure in relation to such activities as a deductible expenditure for
tax purposes subject to a 1.0% of the value of the IPO

Increase share transaction levy from 0.2% to 0.3%

WHT on corporate debt securities will be treated on par with government securities

Insurance sector

Exempt re‐insurance commissions and claims from VAT to reduce the transaction cost of insurance

Unit trusts

Exempt from the Economic Service Charge

Tax exemptions: Unit Trusts or Mutual Funds from investment in listed debentures and equity

Telecommunication Industry

Combine  all  taxes  on  the  industry  (VAT,  NBT  ,Cellular  Mobile  Subscriber’s  Levy,  ECL)  and  impose  a
Telecommunications Levy of 20.0%

In place of license fees and CESS, a 2.0% percent license fee on gross revenue will be imposed

Exempt high‐tech equipment and machinery  from duties and VAT

Reduce the minimum floor rate for local calls from Rs. 2 per minute to Rs. 1.50 per minute from July 2011

Impose a levy of Rs. 2.0 per minute for outgoing International calls

Customs duty will be removed for goods relating to telecommunication

Gem & Jewellery Industry

Increase the foreign exchange allowances granted to import raw gem stone from US$ 10,000 to US$ 50,000 per
person

Remove all taxes on raw gem stones at the point of import
 
Garments and Textile industry

Machinery  and  equipment  to  manufacture  textile,  leather,  footwear  and  bags  will  be  exempted  from  import
duties and VAT
 
Liquor and Tobacco

Increase  tax  on  profits  of  businesses  engaged  in  the  manufacture  and  distribution  of  liquor,  cigarettes from 35.0% to 40.0%

Construction industry

Reduce income tax on the construction industry from 15.0% to 12.0%

Plantation Sector

Increase  the  subsidy  by  Rs.  50,000  per  hectare  to  small  holder  tea  growers  to  encourage  replanting  and  new
planting

To encourage valued added exports

 Increase export CESS on bulk tea to Rs.10.0 per kg
 Increase CESS on export of raw rubber from Rs.4.0 to Rs.8.0

Other Agri related proposals

05 year tax exemption for investment in seed farming and other planting material

Tax on profits from agricultural undertaking will not exceed 10.0%

Fisheries

Grant  credit  facilities  at  a  concessionary  interest  rate  of  8.0%  to  promote  inland  fishery  and  aquatic  resources
activities

Exempt the fisheries industry from income tax for period of 5 years

Livestock

Increase the farm gate price for liquid milk to Rs.50.00 per liter

Electricity

8.0%  increase  in  tariff  except  for  the  first  90  units  (excluding  religious  places,  government,  hospitals,  schools,
vocational training institute, universities, small business and SME)

Motor vehicles

Use  of  electrically  operated  vehicles  and  hybrid  electric  vehicles  will  be  encouraged  by  reducing  prevailing
Customs duty to a lower duty, i.e. 30% to 15%, 15% to 5% and 5% to zero

Imports by vehicle assembly business will see a new rate of duty of 15% from 30%

The rates applicable for vehicle registration and transfer will be revised

Reduced duties and taxes on passenger transportation vehicles by 25.0%

Shopping for Branded Products: 
To  promote  Sri  Lanka  as  an  attractive  destination  for  international  shopping  for  branded  items,  internationally  branded
items are exempted from VAT and Import duty.

Exchange control facilitation: to promote exports and develop local capital markets

Foreigners are allowed to invest in rupee denominated debentures by local companies

Sri Lankan companies are allowed to borrow from foreign sources

Permission is granted for foreign companies to open places of business in Sri Lanka

foreigners on tour or businesses in Sri Lanka are allowed to open accounts in foreign currency

Sri Lankan residents are allowed to invest in equity of overseas companies

Tax exemptions:

Tax holiday: A five year tax holiday will be offered for any company, which carries on a new undertaking, with a
minimum  investment  of  not  less  than  US$  5000  (but  not  more  than  US$  10  mn)  or  an  amount  equal  to  such
amount in rupees in such activities as specified by the Minister from time to time.

Personal income taxes

Reduce the current tax rates on personal income ranging from 5.0% ‐ 35.0% to 4.0% ‐ 24.0%

Increase the tax free threshold income from Rs. 300,000 to Rs. 500,000 and the tax slabs from Rs.400,000 to Rs
500,000

Source :  Lanka Securities (Pvt) Ltd (www.lsl.lk)

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Press Release – Central Bank of Sri Lanka

25-11-2009.

The trade deficit contracted for the ninth consecutive month in September 2009 by 62.2 per cent to US dollars 220 million. The cumulative trade deficit decreased by 60.0 per cent to US dollars 1,848 million during the first eight months of 2009 from US dollars 4,615 million in the corresponding period of 2008. Workers’ remittances increased by 10.3 per cent to US dollars 2,481 million during this period. As a result, Workers’ remittances during the first nine months of 2009 were US dollars 634 million (about 34 per cent) in excess of the trade deficit.

Earnings from exports, which took on an increasing trend since April 2009 reversed in September following the usual seasonal pattern. Accordingly, export earnings in September 2009 amounted to US dollars 568 million reporting a decline of 12.8 per cent, year-on-year.

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