The Nation GAIN: 2012-04-29

Wednesday, May 2, 2012

Tea hub aims global market leadership

By Dilina Kulathunga

Sri Lanka would have the capacity to increase its annual global market share in tea exports from the current 15% share to at least 20% through the adoption of the tea hub concept, which has been a debated topic in recent times, says a top industry official. According to Rohan Fernando, a member of the Tea Exporters Association of SL (TEA), the tea hub concept which allows importation of tea from other tea producing countries and blend, pack and re-export from Sri Lanka is likely to position the country as a dominant player in the world map and will have no deterrent impact on the long-term sustainability of the tea industry.

“The reality that we all have to realize is that Sri Lanka is only exporting about 300 million kilograms of tea out of the total world exports of 1.8 billion kilograms but using a tea hub concept, we would be able to substantially improve revenues from tea exports,” Fernando said refuting allegations leveled against the concept that Sri Lanka would open way for ‘cheap tea’ to dominate the market.

When the issue was recently taken up for discussion with the Minister of Plantation Industries, Mahinda Samarasinghe, some exporters voiced concern that allowing a tea hub would allow ‘cheap tea’ to be blended with Pure Ceylon Tea which affects the premium quality synonymous with Sri Lanka.

“There is nothing called ‘cheap tea’, either there is good tea or bad tea. We have a clear strategy to position the ‘Pure Ceylon Tea’ to a niche as a premium product which is more expensive but unique in taste while the ‘blended multi-origin tea’ will be positioned separately with a clear distinction,” Fernando said denying that this is an effort to sell cheap tea to the world.

He says that tea blending and packaging is not a new phenomenon and if the tea hub concept is not allowed in Sri Lanka, local exporters may think of even expanding their present blending facilities in other countries.

“Sri Lanka might run the risk of becoming isolated or somebody else would come and set up similar facilities unless we become proactive. After all, how many kilograms of Pure Ceylon Tea are we exporting under our own brands?” he asked pointing out that only around 12% out of our total tea exports consist of our own brands.

Meanwhile, a director of MJF Group and an established tea exporter under Dilmah brand, Malik J Fernando said: “we are totally against this proposal on the grounds that, this proposal is intended to facilitate packing of multi-origin foreign brands and ‘trading’ local brands and not to develop the premium, Sri Lankan brands”.

“It is my well-considered opinion that the quality of Ceylon tea and its image as the world’s finest tea will be irreparably tarnished if free importation of black tea is permitted. At the present time, CTC manufactured tea, green tea and speciality teas not grown here can be imported, subject to certain regulations,” he said concluding that with the current exchange rate policy of the government resulting from the balance of payments problem, the request by TEA makes even less sense.

“All exporters, including packaged tea exporters, are getting windfall rupee profits as a result of the progressive devaluation of the rupee,” he further pointed out.

Chicken surplus to dent margins

By Azhar Razak

The Chairman & Chief Executive Officer of Three Acre Farms PLC (TAF), the largest poultry player in Sri Lanka says that margins of poultry firms in the island will be affected in the coming years as the poultry industry is anticipated to be over capacity in the coming years due to the rapid expansion of key players in the market.

“With growing market trends and the Sri Lankan economy predicted to reach over 8% growth in 2012, it can easily be said that the poultry industry’s contribution to the economy will increase multiple-fold in the coming years. We expect that the consumption of Chicken Meat will increase to about 8Kg per capita by 2016, which is highly favourable for the poultry industry in general and TAF in particular,” TAF Chairman and CEO, Cheng Chih Kwong, Primus said in the Annual Report released last week.

Reviewing operations for the year 2011, he noted that with the intervention by the government to import layer hatching eggs to increase supply of day old chicks (DOC) during the 4th quarter of 2010, the industry entered into a cycle of excess supply of DOC in 1st quarter of 2011 and that subsequently the market showed a shortage of demand for poultry products in the 2nd and 3rd quarter of 2011, when major players were forced to scale down their operations to reduce losses.

“Consequently when the market normalized around the final quarter of the year, the local production was insufficient to meet the demands for day old chicks. These fluctuations in demand pattern greatly contributed to increased operational costs within the Company and the poultry industry as a whole,” Primus analysed.

Meanwhile, Primus who also heads TAF’s parent company, Ceylon Grain Elevators (CGE) said that CGE had achieved its highest ever feed sales volume in 2011 despite facing numerous challenges.

“The Company continued to expand its farming capacity with the addition of 4 new modern environmental controlled (EC) broiler houses, and will continue to increase our farm capacity in the future,” Primus mentioned in his message in CGE Annual Report which was also released last week.

About 70% of the contribution to livestock sub-sector in Sri Lanka comes from chicken meat and eggs. Chicken meat and eggs remain the cheapest source of animal protein. While the country’s economy progresses, the domestic per capita income also increased, and improving Sri Lankan purchasing power. Currently the annual chicken meat consumption in Sri Lanka is approximately 5.7Kg and 54 eggs per person.

Do not change track, advises Pathfinder

Top policy advocacy institute, the Pathfinder Foundation (PF) last week warned that it will be important the present stabilization policies adopted by the Central Bank of Sri Lanka in recent times are allowed to run their course and that failure to do so will increase the depth and duration of the economic downturn. In a comment issued by the body, it stated that although both the exchange and interest rates came under some pressure last week, despite the courageous reforms introduced by the Authorities in early February 2012, it is important, however, to learn from the policy mistakes of the recent past and to resist imminent pressure to manipulate these two key economic prices.

“It is important that the Authorities abide by the policy commitments that they have made in the recent past. These policy measures should be supplemented by a new package of reforms that increases the competitiveness of the economy and strengthens its growth framework,” PF said in their recent comment titled ‘no more backtracking’.

They noted that the policy stance adopted during August 2011 – February 2012 clearly demonstrated that attempts to resist market pressures are extremely costly with the attempt to defend the misaligned policies resulted in $3.6 billion being spent on propping up the Rupee and a hemorrhaging of a quarter of the country’s foreign reserves, much of it borrowed from abroad on commercial terms.

“The following lessons should be drawn from the recent policy mistakes. A very high price has to be paid in terms of the deterioration in the external finances; the foregoing of growth and employment; and the increase in the burden on the people, if economic policies seek to defy market forces. No one can hold down interest rates and support the value of the Rupee at the same time when there are imbalances in the economy. The less the exchange rate is allowed to adjust towards its market-determined value, the higher the interest rates will have to be allowed to move and vice versa. The failure to respond to global trends in a timely manner (e.g. an increase in the oil price) inevitably results in more painful action further down the line,” they commented.

Meanwhile, PF said that although the Central Bank has raised the Repurchase and Reverse Repurchase Rates by 50 and 125 basis points (bps) respectively the continuation of the rise of market-determined interest rates suggests that these actions are trailing well behind the markets.

“The simultaneous pressure on the exchange and interest rates indicates that the adjustment necessary to stabilize the economy (i.e. address the sharp deterioration in the external position) is not complete as yet,” the statement further pointed out.

Low unemployment threatens stability

The Central Bank has warned that further tightening of labor market conditions may pose challenges to economic and price stability as well as social stability since increased economic activity has absorbed a majority of the labor force resulting in a continued low rate of unemployment. According to Central Bank Annual Report 2011, Sri Lanka’s unemployment rate has been below 5 per cent in each quarter since the second half of 2010, and greater foreign employment opportunities, in spite of adverse global economic conditions, continue to tighten labour market conditions further.

“This could give rise to a wage-price spiral where wage pressures may lead to upward pressure on prices as well, although the continued low consumer price inflation, which has remained at a single digit level during the past three years, remain a dampening factor. Hence, to sustain the growth momentum of the economy it is essential to support improvements in labor productivity and increase capital intensity,” the Annual Report suggested.

It further noted that the labor force participation rate, which was 48.2 per cent in 2011, still has room for improvement and ease pressure in the labor market through absorbing population currently not in the labor force into the market.

“Therefore, it is essential that physical infrastructure and social infrastructure facilities including good quality public transportation, urban housing, and childcare facilities continue to be developed to promote labor productivity and increased labor force participation. Recent advances in Sri Lanka’s information and communication technology could also provide alternative flexible work arrangements for some types of work, which may also help in reducing labor costs while attracting those not in the labor force into the labor market,” the Annual Report further highlighted.(AR)

Exchange loss concerns Overseas Realty

The Chairman of Sri Lanka's premier property developing firm, Overseas Realty (Ceylon) PLC (OSEA) says that the firm will have to carefully monitor and manage foreign exchange risk as it suffered by an exchange loss in 2011 as a result of the depreciation of the rupee.

“Due to further depreciation of the SLR in the 1st quarter of 2012, foreign exchange risk will have to be carefully monitored and managed,” OSEA Chairman told shareholders at the release of the firm’s 2011 annual report last week.

He noted that group profit was affected by an exchange loss of Rs. 39.8 Mn consequent on the depreciation of the Sri Lanka Rupee (SLR) in 2011 compared with an exchange gain of Rs. 83.7 Mn in 2010.

“With the continued growth and development of the national economy, 2011 saw increased demand for the leasing of quality office space at the World Trade Center (WTC) Colombo as well as apartment sales at Havelock City,” Tao said.

The Group has registered a healthy growth in both revenue and profit with revenue of Rs. 2,491 Mn showing an increase of 47% and Profit before Tax excluding fair value gains on investment property of Rs. 609 Mn showing an increase of 35%. The Group’s Profit after Tax after fair value gains for 2011 was Rs. 2,707 Mn registering a growth of 196%.

“Revenue generated through leasing of space at the World Trade Centre (WTC) Colombo of Rs. 847 Mn saw significant growth of 21% over the previous year. Occupancy which was at 72% at the start of the year closed at 89% with committed occupancy being 95%,” the firm’s annual report mentioned.(AR)

Hikes needed to curb losses- CB

While the commitment of the government to improve the infrastructure base of the country is commendable, financially viable institutions, effective regulations, proper pricing and precise targeting are essential to maintain the sustainability of services provided, the 2011 Annual Report of the Central Bank stated. In this context, it noted that the recent fuel price adjustments followed by electricity tariff and transport fare adjustments were steps in the right direction.

“Such price revisions are essential to correct adverse macro-economic implications caused by the heavy losses incurred by the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) due to the sale of their products at prices below cost. At the same time, it is important for other State Owned Enterprises (SOEs) providing infrastructure such as Sri Lanka Railways, Sri Lanka Transport Board, Postal Service, SriLankan Airlines, National Water Supply and Drainage Board to ensure the financial viability by improving financial management and pricing,” the Annual Report stated reiterating that less dependence of these entities on the government budget and the banking system to finance their operating losses is important to avoid the likely macroeconomic implications.

Last week, The Nation had exclusively reported that seven of Sri Lanka’s largest State Owned Enterprises had incurred a combined loss of a staggering Rs.151.5 billion in 2011 with state run entities CPC, CEB and SriLankan Airlines suffering a total loss of Rs.138.6 billion.

Meanwhile, the Annual Report stated that in 2011, policy measures were initiated by the government to improve the performance of SOEs to increase their return on investment through the development of an economically feasible cost reflective pricing structure and thereby reducing the reliance on the Government budget.

“SOEs are also expected to explore innovative Public-Private Partnership (PPP) strategies and attract private investments to catalyse the development process,” the Annual Report further highlighted.

BoC to focus on SMEs, expand overseas

By Azhar Razak

Sri Lanka’s largest commercial bank, Bank of Ceylon (BoC) is planning on opening special SME units in each district in the island this year and would look to expand its network internationally including the planned expansion of Chennai and Malé Branches. According to the Bank’s 2011 Annual Report, BoC is exploring the possibilities of positioning its UK subsidiary in the Euro Zone countries, where a large number of Sri Lankan diaspora live, to mobilise deposits and inward remittances.

“Our plans to expand globally will divert our already increased banking business activities on to a whole new global platform and bring further foreign remittances to the country through a full-fledged world banking system,” the management said in their commentary.

The report noted that the Bank intends to expand its network to over 1,000 worldwide network correspondence banks and exchange houses to provide services to the Sri Lankan diaspora as well as to facilitate international trading parties.

“The Bank of Ceylon became the first commercial bank to establish an SME Advisory

Centre in Kurunegala last year and will continue to establish more centres that will assist in the SME expansion drive,” BoC Chairman, Dr Gamini Wickramasinghe said in his message in the Report released last week.

He said the Bank’s future strategic goals include achieving the broad based growth projections unveiled in the Government’s Budget for 2012 which focus on sustainable growth, earmarking exports, agriculture, construction, infrastructure development, tourism, education and improving upon the government’s policy of financial inclusion to promote the SME sector and micro entrepreneurship.

“The Bank’s role in the development of Sri Lanka’s socio-economic growth will aspire to increase accessibility to the domestic market. Overall, we are proceeding in the right direction to accomplish our set targets for 2012,” Dr Wickramasinghe added.

CBEU asks for 15%-25% salary hike

By Dilina Kulathunga

The Ceylon Bank Employees Union (CBEU), which consists of about 18,000 employees from leading state banks in the country, continues to demand for a 15% to 25% salary increase from the treasury.

“We are asking for what we deserve according to the ‘Collective Agreement’ with the employers which we have entered in to, to increase the salaries of the employees from the laborer level to Chief Manager Level. After all, this is not an unreasonable demand because we are asking for only a maximum of 8% annual salary hike”, the president of the CBEU, Amarapala Gamage said.

According to Gamage the employers are bound to increase the salaries once in every three years based on the ‘Collective Agreement’ and this year’s increment was due on 01^st January 2012 although by now almost four months have lapsed. The last time an increment was granted as per the agreement was on 01^st January 2009.

Further he added that as a result of this trade union action which commenced on the 02^nd of April the employees of the leading sate banks such as People’s bank, Bank of Ceylon, National Savings Bank and The State Mortgage and Investment Bank have done away with reporting to work on weekends, collection of credit and any form of function in the bank to demonstrate their protest.

“We had a fruitful discussion with the secretary to the treasury, Dr. P.B Jayasundara and also with the top management of these banks who are yet to come to a compromise. We are looking forward to a positive response failing of which we are going to resort to another trade union action on the 24^th this month”, Gamage further added.

Meanwhile the head of retail banking at People’s Bank Renuka Jayasinghe when contacted by The Nation said that the operations of the bank had been as usual and the Saturday banking too had not been affected so far despite the claim by the CBEU that the employees had not been reporting since they resorted to a trade union action from the 02^nd April 2012.

“In fact the employees reported to work on the 14^th April in view of the Sinhala and Tamil New Year, though the union earlier decided not to report for work”, Jayasinghe added.

Policy inconsistency deterring investment – ADB

Boosting private investment will be a major challenge going forward as growth in private investment—domestic and foreign—is falling below planned levels despite the improved political and economic environment, the Asian Development Bank cautioned in its latest report last week. Releasing the Asian Development Outlook 2012, it stated that one reason for the failure is that the government has taken only a few steps to reduce red tape and improve the business climate needed to create the conditions for ramping up private investment.

“Although Sri Lanka’s position in the World Bank’s Doing Business index has improved in 2012 to 89 (out of 183 countries) from 98 in 2011, some challenges still deter private investment especially paying taxes,” the ADB said in the report titled ‘Economic trends and prospects in developing Asia: South Asia’.

It noted that investor confidence is a key factor in attracting investment and this requires a predictable policy environment as articulated and reinforced through the legal, regulatory, and institutional framework.

“Thus, the lack of such an environment for the private sector is a major obstacle to private sector development. Developing that framework will reduce uncertainties in the business environment and avoid unplanned actions that may send mixed signals to potential investors,” the report highlighted.

The government’s Development Policy Framework for 2010–2016 seeks private investor participation (beyond the traditional areas of industry and commerce) in infrastructure. The framework projects private investment to rise from around 21% of GDP in 2011 to about 26–28% in the next few years.

Meanwhile, the report also noted that the impact of currency depreciation on external debt, additional budget borrowing, and slower growth is on course to worsen the debt-to-GDP ratio in 2012.

The public debt ratio has been reduced over the last few years, although it was still very high at an estimated 78.9% of GDP at end-November 2011.

The ADB report has forecast that Sri Lanka’s GDP is expected to edge down to 7.0% in 2012 from the high 8.3% in 2011 but recover to 8.0% in 2013. It further projected that export growth is expected to fall to 11.0% in 2012, mainly owing to weaker demand, especially from Europe although the trade gap is projected to stabilise, as import growth will also be much slower as higher interest rates, tighter credit, and a marked depreciation in the exchange rate are felt, especially for consumer goods.

“The current account deficit is projected to edge down to 6.4% of GDP in 2012, reflecting the more stable trade gap and continued large gains in remittance receipts,” it noted.

Port shift not compulsory - SLPA Chief

By Dilina Kulathunga

The Chairman of Sri Lanka Ports Authority (SLPA), Dr Priyath Bandu Wicrema last week said that the recent directive to shift vessels carrying imported vehicles from Colombo Port to Hambantota with effect from May 31, 2012 is not mandatory and that the clearance at Colombo port would purely depend on space availability.

“Certainly it is up to the vehicle importers to decide between the two ports. But we have made ourselves very clear that we do not allow any vehicle to be parked inside container terminals which has been the practice. So, as long as they can clear their vehicles immediately upon unloading we do not oppose anyone to import vehicles through Colombo port,” the SLPA Chief said in an exclusive interview with The Nation.

The Sri Lanka Ports Authority said in a statement last week the decision to unload motor vehicles imported to Sri Lanka at Hambantota Port remains unchanged despite ‘disparaging remarks by some parties’.

“SLPA would like to state that the ongoing process of handling ships carrying vehicles at Magam Ruhunupura Mahinda Rajapaksa Port from May 31, 2012 will remain as decided,” the statement noted.

Meanwhile, the chairman of Ceylon Motor Traders Association (CMTA), Tilak Gunasekera who in a complete change of stance to which he said a fortnight ago that member companies importing brand new vehicles would not consider importing from the new port, last week said that it will now be up to the individual companies to decide on which port they would use.

“I believe it is up to the individual companies to decide whether they are going to clear their shipments from Colombo or H’tota. But, since the used vehicle importers would shift to the new port we do not expect major crisis in space in Colombo. Sri Lanka Customs is also very efficient that the clearance could be done pretty fast”, Karunarathne added.

He further added that luxury vehicles such as Audi, Mercedezs, BMW, Jaguar and the likes are anyway shipped in containers so that they would anyway continue to be cleared from Colombo while the other cheaper car importers can decide between the two ports.

Vehicle Importers Association of Sri Lanka in a press conference held a fortnight ago expressed positively for the SLPA’s decision to redirect the vessels carrying vehicles to H’tota from June 1, 2012.

Speed breaker on remittances?

The Central Bank says that workers’ remittances, which are estimated to grow substantially in 2012, are expected to moderate its growth in the medium term in line with expanding domestic economic activities.

“With the tight domestic labour market conditions, migration for foreign employment is expected to decline gradually resulting in a deceleration of workers’ remittances in 2013 and beyond in contrast to the substantially high growth rates recorded since 2009,” the Central Bank 2011 Annual Report stated.

Workers’ remittances, which constitute a greater share of private transfers, continued to be the foremost foreign exchange earner in 2011, surpassing the export earnings from textiles and garments for the third consecutive year. Gross workers’ remittances increased notably by 25 per cent to US dollars 5.1 billion, from US dollars 4.1 billion in 2010.

Economic growth to lose pace in 2012

The Sri Lankan economy is projected to grow at a slower rate of 7.2 per cent in 2012 compared to the impressive growth rate of 8.3 per cent recorded in 2011, the Central Bank admits. With the expected revival in the global economy, the economy is however expected to regain pace next year expanding by around 8 per cent and continue to grow over 8 per cent per annum over the medium term.

“The increase in capacity utilisation, improved productivity and diversification supported by continued development of infrastructure facilities, and continued expansion in income generating activities in the Northern and Eastern provinces will provide the basis for sustained growth over the medium term,” the Central Bank highlighted in its 2011 Annual Report released last week.

It noted that in order to sustain the expected high growth, investments are required to be raised gradually to around 32-33 per cent of GDP in the medium term, and this level of investment is mainly expected from domestic savings.

However, in 2011 domestic savings declined from 19.3 per cent in 2010 to 15.4 per cent as domestic consumption (as a percentage of GDP) increased from 80.7 per cent in 2010 to 84.6 per cent. On the other hand, total investment as a percentage of GDP increased from 27.6 per cent in 2010 to 29.9 per cent in 2011 as private investment increased from 21.4 per cent in 2010 to 23.7 per cent in 2011 while public investment increased marginally to 6.3 per cent from 6.2 per cent in 2010.

Pure economics not practical: Cabraal

By Dilina Kulathunga

Despite the Central Bank being an independent body, Governors of Central Banks cannot act in a tunnel vision purely focusing on economic fundamentals ignoring the political scenario of those countries, the Governor of the Central Bank said last week answering a question on the feasibility of adopting a formula for the revision of petroleum prices reflecting market fluctuations.

“We must realise that we do not live in a pure economics world. This is a world of politics and economics and therefore every economically sound decision may not be politically viable”, CBSL Governor, Ajith Nivard Cabraal pointed out.

Addressing the media following the presentation of the 2011 Annual Report, the Governor further noted that although that as the governor of the CB, he totally endorsed such a formula in place, it was important to understand whether our people were prepared to go to the filling station not knowing how much they would have to pay for a liter of Petrol the following day.

“Unfortunately it doesn’t work that way always everywhere and that is why we need to strike the correct balance between economics and politics in making such policy decisions”, he said illustrating how difficult it was in the neighbouring India to increase price of fuel by as little as Rs. 3 to Rs. 4 as it was strong enough for a regime change.

He further acknowledged that although he himself had so many discussions with the government authorities on matters which are economically significant, these discussions are not shared to the general public always as there was a clear demarcation as to what is and what is not published.

Responding to criticisms levelled against the secretary to the ministry of finance, Dr P. B Jayasundara and himself on mismanaging the economy by several sections of the economy, he asked whether the achievement of the highest growth rate of 8.3% in 2011 in the history of Sri Lanka a crime.

“Last year has been a historic year for Sri Lanka since liberalisation with many achievements in our economy. We had the highest gross official reserves of US $ 8.2 billion by mid August 2011, above 8% growth for two consecutive years, lowest inflation for the past 38 months and the lowest unemployment rate of 4.2% among others”, he added refuting those allegations.

During the latter part of 2011 the 3% Rupee depreciation was criticised as ‘too little too late’ but since last February the criticism of the policies were of ‘too many, too late’ questioning the consistency of the economic policies which creates an uncertain environment for the stakeholders to consider decisions.

Responding to these latest developments the governor said that those were not ad hoc decisions but were judgmental calls which were taken at right times because the CB had a clear vision unlike many others who found fault with everything but could not be held accountable for what they said.

Tackling inflation, a key challenge - CB

By Azhar Razak

The Central Bank of Sri Lanka (CBSL) last week said that given the uncertain outlook for global commodity prices, especially with regard to oil, the key challenge ahead would be to maintain inflation at a low and stable level.

“Although the recently implemented policy measures would moderate growth and ease demand pressures to some extent, monetary policy will need to continue to focus on restraining demand pressures to maintain inflation at a mid-single digit level,” the island’s monetary authority highlighted in the CBSL Annual Report 2011 released last week.

The report noted that managing supply side shocks to ensure an adequate domestic food supply would also be required to complement demand management strategies whilst developing quality seed varieties to suit local conditions, expanding cultivation to different agro climatic zones to ensure uninterrupted supply, increasing storage facilities and improving supply chains to ensure a reasonable price for producers and consumers are some areas that may need to be addressed in this regard.

“The weak recovery in the global economy as well as geopolitical uncertainties in Sri Lanka’s traditional export markets is likely to affect export growth. Demand for exports needs to be improved through diversification of both markets and products. Also, foreign inflows must be strengthened, particularly in the areas of service inflows and FDIs through appropriate policies and macroeconomic environment,” CBSL identified.

It further added that high oil prices in international markets can have a significant impact on an oil dependent economy like Sri Lanka pointing out that policies need to be put in place to mitigate the impact of high oil prices by promoting energy efficient production technologies, increasing the use of renewable energy sources and energy conservation.

“Moreover, a price mechanism that reflects movements in international energy prices may need to be considered to help avoid the need for large adjustments of domestic energy prices while lessening the burden on public enterprises,” the Report suggested.

Meanwhile, the report cautioned that since substantial decline in unemployment is expected to tighten labour market conditions, policies need to be put in place to improve labour productivity and to address structural rigidities in the labour market while increasing capital intensity to deal

with any manpower shortages.

“Attention should also be paid to realign Sri Lanka’s education system to generate a human capital base with the skills necessary to sustain this new growth momentum,” it further pointed out.