Sri Lanka’s Central Bank guarantees Covid-19 credit facility to all SMEs

Sri Lanka’s Central Bank said it would guarantee banks loans to affected coronavirus businesses from their funds as well as 175 billion liquidity rupees generated through two reserve ratio cuts. “Under this scheme, we are allowing banks to grant loans to meet the working capital requirements of the businesses concerned,” the monetary authority said in a statement.

The Central Bank said it would operate in parallel with a refinancing (printed money) scheme of 150 billion rupees. The Central Bank reported banks could use their deposits or the liquidity released from two cuts in the reserve ratio, which amounted to nearly 180 billion rupees and offer 4 per cent of the loans.

The guarantee would preferably have come from the Treasury. However, any losses from central banks will also end up at the Treasury, analysts note. Unlike primary bank refinancing, there is no strain on the rupee or foreign reserve losses when banks donate their funds.

The Central Bank already pays 5.5% for money released from SRR cuts, which to some extent will discourage misinvestments. The Central Bank is injecting capital at 1 per cent on the 150 billion rupee refinancing, while the policy rate is 6.5 per cent.

This system, launched on 1 July 2020, will run in tandem with the Saubagya COVID-19 Recovery Facility and the new provision approved by the Monetary Board according to Section 83 of the Monetary Law Act, within the already announced Rs. 150 billion thresholds.

Below this scheme, the Central Bank will provide banks with a credit guarantee, varying from 80 per cent for less significant loans to 50 per cent for comparatively large loans, allowing banks to grant loans to meet the working capital requirements of the businesses concerned.

With the Central Bank attracting a significantly higher percentage of credit risk, banks can extend their lending to vulnerable businesses focusing on such businesses’ viability and cash flows, rather than collateral. Banks will have to use their funds, in particular the additional liquidity of close to rupees one hundred eighty billion provided by the Central Bank through a cumulative reduction in the statutory reserve ratio (SRR) of 300 basis points so far during the pandemic period, to grant companies loans of 4 per cent.

The Central Bank must offer a 5 per cent interest subsidy to cover the sum of bank deposits. Operating guidelines for this scheme will be given to banks in due course immediately.

OSL Take: The government of Sri Lanka has not left any stones unturned in the path to bring the country’s economy back to normalcy following the post-COVID 19 pandemic situation. Given Sri Lanka’s terrestrial positioning in the Indian Ocean, the ease of doing business environment and the many trade accords, as well as trade discounts enjoyed by the country, all will undoubtedly expedite the country’s economic revival. Foreign businesses/investors could, therefore, explore business/investment opportunities in Sri Lanka with confidence.

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Sri Lanka is cutting policy rates by 100bp during the slowdown of Coronavirus

Sri Lanka has slashed the policy rate by 100 basis points. The action means that one can inject money into the banking system at 5.50 per cent and withdraw excess money at 4.5 per cent.

"The Board arrived at this decision to induce a further reduction in market lending rates, thereby encouraging the financial system to aggressively improve lending to productive sectors of the economy, which would reinforce support for COVID-19 hit businesses as well as the wider economy, given the conditions of subdued inflation."

"While recovery expected in the second half of the year with the help of monetary and fiscal stimulus measures, the implementation of growth and confidence-building structural reforms is necessary for fostering strong and sustainable economic growth in the medium term."

Money market rates drifted around the earlier floor policy rate of 5.50 per cent amid excess liquidity injected in March and April through domestic asset purchases, which caused currency pressure and hit businesses and the economy in general.

Nonetheless, private credit was also low, which tends to hold rates close to the floor rate. As analysts have shown, Sri Lanka's Central Bank typically triggers monetary uncertainty by injecting massive amounts of money to keep the price below the maximum rate or in the middle of the corridor as the market regains from the last balance of expenses crisis and borrowing picks up.

Credit to the private sector was around 30 billion rupees in May, data shows, although there is a pickup in government credit as the deficit spreads. The Central Bank has also reduced the legal reserve ratio, with Sri Lanka's interest rates being one of the factors being higher than other countries with more excellent monetary stability.

Excess liquidity from purchases of domestic assets ultimately leads to foreign exchange shortages (and reserve losses when liquidity is mopped up by dollar sales) in a fixed exchange rate system when credit picks up. The Central Bank has withdrawn some excess cash from the system over the past week. Further money is also to provide through the ref-financing of bank loans by central banks and the discounting of contractors bills.

OSL Take: The government of Sri Lanka has made all arrangements to ensure a hassle-free and safe visit for tourists planning to make a trip to the island. With international airlines all geared to recommence flights to Sri Lanka, the country is now geared for foreign travellers looking at leisure/business/investment opportunities. The World Health Organization has recommended Sri Lanka as one of the safe countries concerning COVID 19. Hence, Sri Lanka’s tourism industry shows signs of picking up from where things stopped before the COVID 19 lockdown. Foreign businesses/investors looking at opportunities could explore business/investment opportunities in Sri Lanka’s tourism industry.

Many large scale real estate development plans that were on hold during the COVID 19 lockdown have now recommenced operations. Given Sri Lanka’s resumption of economic activities much faster than other countries in the region, business opportunities in Sri Lanka are expected to open up more quickly than anticipated. Also, Sri Lanka’s geographical positioning in the Indian Ocean, the ease of doing business environment, the many trade accords as well as trade reductions enjoyed by the country will undoubtedly help Sri Lanka regain its position as a business hub in the South Asian region. Hence, this will create many business/investment opportunities in Sri Lanka’s real estate development as well as construction sectors.

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Sri Lanka calls for foreign bids to purchase four helicopters

Sri Lanka will call for international tenders to buy four used Sri Lankan Air Force (SLAF) helicopters to prepare pilots for Peacekeeping Missions. Co-Cabinet spokesman Romesh Pathirana told reporters today July 9th President Gotabaya Rajapaksa on behalf of the Defense Ministry had sought approval from the Cabinet to make the purchase.

Pathirana said the SLAF currently trains Pilot Officers using two 1981 helicopters. “Currently, units of Sri Lankan Air Force are on peacekeeping missions in Sudan and Central Africa. It has been identified as a prime necessity to train and assign new pilots to those units“, Pathirana said.

The Departments of Government and the Armed Forces are to keep vehicles unclaimed and held by Customs, the Minister’s Cabinet has agreed. Co-Cabinet spokesperson, Minister Romesh Pathirana said, these vehicles, referred to as escheat vehicles, would be provided to meet State authorities’ demand for cars.

Prime Minister Mahinda Rajapaksa presented the cabinet proposal for that move. Pathirana said government organisations had requested vehicles for the respective organisations including the Armed Forces.

OSL Take: The Sri Lankan is in the process of making necessary arrangements to reopen the country to foreign visitors from August 1st. The country’s economic activities have already restarted, and the tourism industry will kick start from August 1st.

Given Sri Lanka’s geological positioning in the Indian Ocean, the ease of doing business environment, the many trade deals, as well as trade reductions enjoyed by the country, it will be easy for the island to become a business hub in the South Asian region. Foreign businesses/investors could, therefore, confidently explore opportunities in Sri Lanka.

International airlines have already made arrangements to resume flights to Colombo, expressing confidence in the manner in which Sri Lanka has contained the spread of COVID 19. Foreign businesses/investors interested in exploring opportunities in Sri Lanka could confidently make arrangements to visit the island soon.

Also, Sri Lanka’s geographical positioning in the Indian Ocean, the ease of doing business environment, the many trade contracts as well as trade reductions enjoyed by the country will help Sri Lanka regain its position as a business hub in the South Asian region. Business/investment interest in Sri Lanka would, therefore, see an increase shortly. Foreign businesses/investors could, therefore, explore business/investment opportunities in Sri Lanka’s real estate sector.

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South Korea's third-largest conglomerate committed to investing more in Sri Lanka

Dr A. Saj U. Mendis, Sri Lankan Ambassador to the Republic of Korea, met with the top management of SK Group, South Korea's third-largest conglomerate (Chaebol), to discuss investment and FDI in Sri Lanka. Dr Mendis has met with the President and CEO of SK E&S Co Ltd. for the same, including Jeong Joon Yu as well as the Board of Directors at the head office of the company.

With regards to sales and market capitalisation, the SK Group is one of the biggest companies in the world. SK Group's income was $220 billion in 2019, and the market value was close to $280 billion, making SK Group one of the world's 25 biggest companies. The business has 95 branches and employs more than 70,000 people worldwide. Among other things, the SK Group has a stellar global reputation in companies such as chemical, petroleum, oil, wireless mobile services, financial services, telecommunications, manufacturing, shipping and semiconductors.

The discussion with SK E&S' CEO and Board of Directors focused on, among other things, an LNG project to be set up on Build-Own-Operate-Transfer (BOOT) in Sri Lanka for a total cost of $600 million in LNG delivery. The technical experts claimed, during the discussion with Ambassador Dr Mendis, that the proposed project would be able to supply 930 MW of LNG power plants in Sri Lanka. The proposed megaproject will create semi-skilled and skilled jobs for nearly 1,000 nationals of Sri Lanka. The proposal mentioned above has been discussed and deliberated with the appropriate Sri Lankan authorities and is pending final clearance.

SK E&S' CEO and Board of Directors also told D. Mendis that the SK Group is keen and eager to invest more in Sri Lanka, particularly in sectors such as IT and ITES, construction and telecommunications, among others. Ambassador Dr Mendis said a clear and compelling presentation of a company in the SK Group calibre in Sri Lanka would emanate a positive perception and message of Sri Lanka's potential to foreign corporations and investors.

Dr Mendis also pointed out that Sri Lanka's equity (stock) market, also known as the Colombo Stock Exchange (CSE), is highly attractive to woo foreign institutional investments (FII) since the CSE's price earning ratio is 10.8. Any stock market with a P/E ratio of less than 15 with a vibrant and diversified economy will be highly desirable and financially sanguine for any large-scale institutional investor, especially foreign investors and private equity (PE) firms.

SK E&S' top management paid due attention to Sri Lanka's economic and investment views and added that they would look positively and favourably at Sri Lanka. On a separate note, Dr Mendis reported that KB Financial Group of Kookmin Bank, the Republic of Korea's largest commercial bank, recently committed a mega-investment in the highly reputed and diversified LOLC Group, the Sri Lankan "Blue Chip" corporate.

OSL Take: The higher education sector in Sri Lanka is fast becoming a hotbed for foreign investments, given the potential for the development in the industry. Sri Lankan authorities are paying particular attention to the development of technical and vocational education in the country. There have also been many foreign universities that have opened up affiliate colleges in Sri Lanka targeting local as well as the regional student population. Foreign businesses/investors could, therefore, explore business/investment opportunities in Sri Lanka's higher education sector.

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Singapore, Sri Lanka affirms diplomatic relations with the Agri-Business and Digitalisation Webinar

A webinar on Monday (27 July) declared that the COVID-19 pandemic would build opportunities for Singapore and Sri Lanka to strengthen trade ties. Highlighted for particular emphasis were the trade ties with agri-business and digitalisation. Speaking at the webinar, the High Commissioner of Singapore for Sri Lanka, S. Chandra Das, spoke of new prospects given the fact that COVID-19 was "a very tiring time both (for) diplomatic and business cooperation."

"And as we begin to rebuild our economies and cultures, new ideas will start to multiply. COVID-19 (will) inspire us to re-envision possibilities and explore new opportunities, "he said. Chandra Das tallied: "Singapore and Sri Lanka have a long-standing commercial relationship, particularly (in) the food sector."

"Our import of Sri Lankan produce has evolved from cayenne spices to crabs, both in terms of quantity and variety," he said. The High Commissioner of Sri Lanka to Singapore, Sashikala Premawardhane, said food security was one of the regions in which the two nations could enhance cooperation.

"On the investment side we did very well between 2015 and 2019," she said, pointing out that Singapore was the fifth biggest investor in Sri Lanka. He added that about 100 Singaporean companies were working in Sri Lanka. "We see tremendous possibilities for the two nations to increase relations particularly in the fields of economics, commerce and investment, "she said.

COVID-19 emphasised the importance of keeping countries in contact at a time when borders were closed, and supply chains disrupted to ensure food security problems did not obstruct economic activity, she said. Locally, Singapore produces less than 10 per cent of its food needs.

The webinar on business opportunities took place on the 50th anniversary of diplomatic relations between Singapore and Sri Lanka. It touched particularly on areas such as digitalisation and agri-business. Chandra Das said: "The friendly relationships that we have enjoyed today between our two countries focused on historical events, including family bonds, long before our independence."

A declaration from the High Commission of Sri Lanka in Singapore noted that relations between the two countries date back to at least the 1800s, as both share the same ancient maritime trading routes. During the webinar, the topics discussed included company digitisation, food supply resilience in Singapore and food security.

According to the Sri Lankan High Commission, total bilateral trade last year was estimated at $883 million (S$ 1.21 billion) with Sri Lankan exports estimated at $115 million.

OSL Take: The Sri Lanka Investor Forum in Singapore and the many B2B meetings held are indicative of the potential for business/investments of local companies. The government of Sri Lanka is engaged in an investment drive along with the aggressive development programme that covers all critical economic sectors islandwide. Foreign businesses/investors could explore business/investment opportunities in Sri Lanka.

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Opportunities in the e-commerce sector as the base in Sri Lanka is increasing by 245 percent

"The COVID-19 lockdown has changed Sri Lankan customer habits as has the rest of the world," said Dr Rohantha Athukorala, Clootrack Sri Lanka, Maldives and Pakistan Country Leader, addressing the Metropolitan Rotary Club at The Hilton. Citing Kantar Sri Lanka's post-lockdown research study, the insight is that the e-consumer basket in Sri Lanka has increased from an $11 to $38. This lead was driven by e-payment, e-banking, online medical consultation and e-sports, which we see in Sri Lanka as the new lifestyle.

The underlying reason means the e-commerce eco-systems will have a significant post-COVID-19 change, and according to him, the private sector will have to change its business model.

"We also hear of a second wave of the deadly COVID-19 virus in China and Chennai, and clusters are also appearing in Sri Lanka, which means we have to prepare for a second wave," said Dr Athukorala.

Dr Athukorala also directs the COVID-19 Spread Rotary Stop for Sri Lanka.

"The decent news is that over two hundred firms are in the procedure of being approved by the Sri Lankan Standards Institute for a 'COVID-19 Control Environment' qualification, which means that the companies are putting up protections for a possible second wave that is cautious decision-making.

"Businesses like Akbar Brothers have gone on to place the company as the primary tea company globally certified as a 'COVID-19 Control Environment, which means that we in Sri Lanka are taking the high ground internationally, in a wise manner," opined Athukorala.

As the previous Chairman of Sri Lanka Export's Development Board and Sri Lanka Tourism, Dr Athukorala possesses the domain knowledge to back up that statement.

Recently, Anantaya Resorts and Spa announced to the world, that it is the first global hotel property to receive the 'COVID-19 Control Environment' certification that puts Sri Lanka on the global media.

The speaker went on to disclose the findings of the analysis of LMRB/Kantar. The results revealed that 13 per cent tried online education in Sri Lanka, 12 per cent tried live broadcasting via mobile media, 9 per cent tried online shopping, 8 per cent tried online shopping, 7 per cent paid their bills using smartphones. It also revealed a dramatic shift where 7 per cent conducted online religious activities.

"This is the current reality, and we in Sri Lanka need to improve based on this hard data so that we remain engaged with the Sri Lankan household," he said. Under the leadership of eminent business personality, Ruwan Jinasena, Metropolitan's Rotary Club is driving a critical project under the COVID-19 plan ‘Stop the Spread’, to certify the 'Tuk-tuk' community in Sri Lanka's urban markets, which is another first for Sri Lanka.

OSL Take: Sri Lanka showcases tremendous growth potential in the e-commerce arena, adding to an already diverse eco-system. There is growing interest in investment coming from many sources to Sri Lanka, and with a sustained support system, the Sri Lankan e-commerce will be able to compete internationally. Sri Lanka is currently engaged in a programme to transform the country into an e-economy. The government of Sri Lanka has introduced many programmes and provided many incentives to businesses involved in ICT to help develop the country's ICT and digital infrastructure sectors. All this has resulted in the expansion of business/investment opportunities in Sri Lanka's ICT and digital infrastructure sectors.

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India agrees with Sri Lanka on $400 million in currency swap

India's Reserve Bank has agreed to a $400 million currency swap facility for Sri Lanka until November 2022, tweeted on Friday by the Indian high commission. The development comes amid COVID-19 as a relief to Sri Lanka and will help in its post-pandemic economic recovery. A currency swap is a trade where two parties exchange interest and principal in separate currencies.

Currency swaps used to get foreign currency loans at a higher interest rate than can be provided by borrowing directly from an international market. The intervention of the RBI follows a recent bilateral 'technical dialogue' on rescheduling the outstanding debt repayment to India from Colombo.  A currency swap is a trade where two parties exchange interest and principal in separate currencies. Companies doing business overseas often use currency swaps to get loan rates in the local currency that are more attractive than if they borrow money from a local bank.

The Federation of Indian Chambers of Commerce and Industry (FICCI) in association with the Laxman Kadigamar Institute of Diplomatic Relations and Strategic Studies recently organised a webinar on 'Deepening Economic Collaboration between India and Sri Lanka.' Addressing the webinar, Sri Lankan Foreign Secretary Ravinatha Aryasinha said the neighbours could explore potential textile, IT and agribusiness collaborations, sectors in which India was 'powerful.'

Assuring that Sri Lanka will "facilitate, secure and foster a free environment for Indian investors," he invited Indian businesses in the production of industrial zones, automotive parts, pharmaceutical, textile and engineering activities. Ravinatha Aryasinha also speaking on Sri Lanka's exports, commented on market access difficulties, difficulties that were often created by non-tariff barriers in receiving countries. He said they were an impediment and urged FICCI to work with the Sri Lankan Mission in New Delhi to help improve Sri Lankan spice exports and concentrate on the Indian market.

Both countries are currently involved in rescheduling negotiations on debt repayments. The last round of the debate on Sri Lanka's rescheduling of bilateral debt repayment took place on July 22. The Indian mission, involving senior representatives from the Ministry of External Activities, Ministry of Finance, and EXIM Bank, interacted via a video conference with representatives from the Sri Lankan Department of External Resources.

A statement from the Sri Lankan Indian mission said, "The next round of technical discussions between the two sides on the debt repayment rescheduling is expected to take place soon”. On May 23, Sri Lankan President Gotabaya Rajapaksa spoke to Prime Minister Narendra Modi asking the former Indian government to provide USD 1.1 billion of individual swap facilities under the SAARC project amid the COVID pandemic to supplement USD 400 million.

OSL Take: Sri Lanka and India boast of strong bilateral and trade ties that have been further bolstered by the free trade agreement (FTA). Sri Lankan businesses are, therefore given preferential treatment when engaging in business ventures in India. Local companies could use this benefit to form joint ventures/partnerships with Indian companies. Foreign businesses/investors looking at doing business with India could explore the possibility of setting up base in Sri Lanka to reach out to the Indian market.

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