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The year in review

02 Jan 2022

  • A look back at Sri Lanka’s economy in 2021
By Madhusha Thavapalakumar Another eventful year came to an end last Friday. Looking back at 2021, there was no short-supply of topics that kept us amused or entertained throughout the year, including unexpected appointments to key state institutions, unforeseen resignations from state enterprises, the drop of the country’s gross official reserves to a 12-year low, exports regaining momentum, various swaps and loans, and downgrades by international rating agencies.  The Market Mine this week is providing a sector-wise and month-wise summary of economically significant events that occurred during the last, event-packed, year.  Highlights of the past year
  • Gross official reserves
  The country’s gross official reserves became one of the hot topics last year, particularly during the second half, as it kept plunging and plunging, and eventually hit a 12 year low of $ 1.6 billion by the end of November. The year began with reserves of $ 4.8 billion, and ended at $ 3.1 billion after the saving grace of a Yuan swap of $ 1.5 billion from the People’s Bank of China on 29 December.  The reasons for the drops in reserves were said to be a drop in tourism earnings, led by the prevailing pandemic, and dwindled worker remittances due to this very same directive. 
  • Rupee value
  Thanks to the directive issued by Central Bank of Sri Lanka (CBSL) former Governor Prof. W.D. Lakshman, a few days before his retirement last year, advising Licensed Commercial Banks (LCBs) to keep the selling rate of the US dollar below Rs. 203, the second half of the year witnessed a contained rupee depreciation after it hit an all-time low of Rs. 210 in September.  The year began with the selling rate of the US dollar being quoted around Rs. 185/-, and as of last Thursday (30 December), the rupee depreciated to around Rs. 203/-. 
  • Worker remittances
  Worker remittances in the second half of the year were mired in a fiasco because of the aforementioned directive issued by CBSL. While LCBs and a number of authorised money changers offered less than Rs. 203 for every dollar that is converted, many other “unauthorised” money changers offered a rate between Rs. 230-240, and Sri Lankan migrants chose these changers to convert their remittances. On the other hand, most of the workers choose to reduce the amount of money they send to Sri Lanka. The latest statistics of remittances available are only till the month of October 2021.  According to the CBSL, October remittances were reported as $ 317.4 million, and cumulative remittances until October had fallen by 14% to $ 4.9 billion. October was the fifth consecutive month where remittances recorded a gradual drop. June remittances dropped to $ 478 million, which saw a further drop to $ 453 million in July. August and September remittances were $ 447 million and $ 353 million, respectively. In January 2021, worker remittances were recorded as $ 675 million. As of October, this was halved. 
  • Gross Domestic Product 
  The Gross Domestic Product (GDP) growth rate for the fourth quarter of 2021 will only be released in March this year. Reversing the contraction recorded in the first quarter of 2020, even when Covid-19 impacted only the last two weeks of that particular quarter, last year’s first quarter recorded a GDP growth of 4.3%, according to the Department of Census and Statistics (DCS).  The Department stated that even though the second wave had an impact in the first quarter’s growth, the new normalisation of lifestyles has been credited for supporting economic activities for businesses to carry out their operations.  Meanwhile, the GDP growth rate for the second quarter of 2021was estimated as 12.3% of the positive growth rate. This positive growth comes against the backdrop of a 16.4% contraction in the economy reported in the second quarter of the previous year.  However, driven by a 41-day lockdown and increase in input prices due to import restrictions, the gross domestic product (GDP) rate of Sri Lanka for the third quarter of 2021 has contracted by 1.3%, according to the Department. The DCS added that infected patients with the Delta strain were reported to exceed local hospital capacity, with an increase in the number of deaths, which had a negative impact on the expanding economic activities in the “new normal”.
  • Export earnings
  Earnings from merchandise exports in January 2021 were 8.0% lower compared to January 2020. Earnings from exports in January 2021 were recorded at $ 924 million compared to $ 1,005 million in January 2020, and $ 964 million in December 2020.  Surpassing the previous high recorded in March 2019 ($ 1,137 million), earnings from exports in October 2021 grew by 40.4% over October 2020 to reach $ 1,200 million. Increases in earnings were observed in agricultural and industrial exports, while a marginal decline was recorded in mineral exports. Cumulative export earnings, which increased by 22.1% during January-October 2021, amounted to $ 10,134 million, compared to $ 8,299 million recorded in the corresponding period in 2020. 
  • Import expenditure 
  Merchandise imports declined by 8.3% in January 2021 compared to January 2020, continuing the year-on-year declining trend observed since March 2020. Expenditure on merchandise imports amounted to $ 1,592 million in January 2021, compared to $ 1,735 million in January 2020. The restrictions imposed by the Government on the importation of non-essential goods mainly contributed to this outcome. Expenditure on merchandise imports increased by 24.3 % to $ 1,694 million in October 2021, compared to $ 1,363 million recorded in October 2020. An increase in import expenditure was observed in intermediate goods and investment goods, while a decline was observed in consumer goods. On a cumulative basis, total import expenditure from January to October 2021 amounted to $ 16,632 million, compared to $ 13,145 million recorded in the corresponding period in 2020. 
  • Trade deficit
  The deficit in the trade account narrowed in January 2021 by $ 63 million to $ 667 million, from $ 730 million recorded in January 2020, with a larger decline in imports compared to the decline in exports. In December 2020, the trade deficit was $ 562 million. The deficit in the trade account narrowed to $ 495 million in October 2021, compared to the deficit of $ 509 million recorded in October 2020, and the same level recorded in September 2021. The cumulative deficit in the trade account widened during January to October 2021 to $ 6,498 million from $ 4,846 million in the corresponding period of 2020. 
  • Tourism arrivals 
  Up to 20 December, the total arrivals of tourists into the country was around 150,000 according to the statistics provided by the Ministry of Tourism. Despite targeting 800,000 tourist arrivals for 2021 in the early months of last year, the first quarter only amounted to 9,629 arrivals due to the travel restrictions imposed in the beginning of the year. A summary of important economic incidents, by month   January   
  • The benchmark of the All Share Price Index (ASPI) crossed the 7,000-point level on 6 January for the first time since 24 November 2015, closing the trading day on 7,036.76 points. The ASPI first crossed the 7,000 mark on 1 October 2010 and reached its highest points level recording 7,811.80 points on 14 February 2011
  • After failing to achieve the lowered tax revenue target for the year 2020, the Inland Revenue Department (IRD) was given a tax revenue target which is closer to the tax collected by the IRD about five years ago. The tax revenue target given to the IRD was Rs. 685.5 billion, inclusive of a Rs. 110 million target given to Sri Lanka Customs to collect import value-added tax (VAT) on behalf of the IRD, which meant the tax revenue that should be achieved by the IRD was about Rs. 575.5 billion for the year 2021
  • By the end of the first week of the new year, the Colombo Stock Exchange (CSE) had recorded a net foreign outflow (NFO) of Rs. 964.65 million, with Rs. 1.52 billion worth foreign sales being reported from the CSE against foreign purchases reported as Rs. 563.62 million during this period
  • The Sri Lanka rupee (LKR) hit its lowest value in eight months on 20 January with the selling rate of the US dollar peaking at Rs. 198.26, recording a depreciation of 4.4% in the first 20 days of the new year
  • After successfully achieving the revised export target amidst Covid-19-induced supply chain disruptions, the Government set an ambitious export target of about $ 13 billion for 2021
  February   
  • The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) in the first week of February officially released the public consultation paper regarding the implementation of the number portability facility, to gather the views of the public regarding the implementation of this new facility
  • The special deposit account (SDA) facility that was announced by the Government in 2020, amidst the initial outbreak of the pandemic, had attracted total deposits of approximately $ 400 million as of early February 2021
  • ASPI retained its position as the best performing primary stock market index in the world with the index closing trading on 5 February 2021 at 8,275.37 points, marking a 22.16% growth year-to-date (YTD). According to Colombo Stock Exchange (CSE) research, the ASPI, as of 5 February 2021, had recorded greater percentage growth than any other primary index globally in 2021
  • Trading at CSE halted twice in the early hours of 11 February as the S&P SL20 index, which includes the 20 largest and most liquid stocks in the country, dropped by over 5%
  • Two main state banks turned down a request from the loss-making debt-ridden state enterprise Ceylon Petroleum Corporation (CPC) to restructure its Rs. 600 billion debt to them
  March   
  • The Ministry of Finance revoked the Inland Revenue Department’s (IRD) authority to collect the Goods and Services Tax (GST) that was announced in the 2021 Budget, and planned to collect these monies itself
  • Sri Lanka’s first National Financial Inclusion Strategy (NFIS) was launched in a joint effort led by the Central Bank of Sri Lanka (CBSL) and assisted by the International Finance Corporation (IFC)
  • The Ministry of Finance and local ceramic importers reached an agreement to implement a size-based cess of Rs. 490 per square meter of tile, following a number of discussions with the relevant authorities
  • The Department of Excise set a fresh excise revenue target of Rs. 160 billion last year, after achieving excise revenue of Rs. 123.52 billion amidst disruptions and setbacks caused by the prevailing pandemic 
  • The Prime Ministers of Sri Lanka and Bangladesh were expected to request their respective central banks and other relevant financial institutions to co-operate closely in swaps and investments, according to the recent discussions held between the two Premiers
  • Discussions were held between Mahinda Rajapaksa and Sheikh Hasina during Rajapaksa’s recent state visit to Bangladesh at the invitation of Hasina
  April   
  • The Government said it was targeting Sri Lanka’s ascension to the 25th place in the Ease of Doing Business Index (EDBI) by 2025, with an aim to attract more Foreign Direct Investments (FDIs) into the country
  • The SDA, which was announced during the peak of a potential foreign exchange crisis amidst the local outbreak of the pandemic in 2020, was set to be extended by another year
  • The Colombo Racecourse Mall, which falls under the Urban Development Authority (UDA), was said to be leased out to a private company, similar to the recent lease of the Arcade Independence Square to Softlogic Holdings
  • The Sri Lankan Government on 12 April signed a $ 500 million loan agreement with China Development Bank (CDB), in a move to strengthen the country’s deteriorating foreign reserves
  • Issuing a notice on 16 April, the CBSL stated that the Monetary Board has decided to reduce the percentage of mandatory conversion requirement of export proceeds of goods into Sri Lankan Rupees from 25% to 10%
  May   
  • The Telecommunications Regulatory Commission of Sri Lanka (TRCSL) was in the trial stage to activate 5G broadband, and if the trial was completed successfully, the Commission hoped to launch 5G broadband for the whole island by 2027, the TRCSL said
  • Despite the continuation of the import restriction measures, expenditure on merchandise imports increased significantly in March 2021 to $ 1,926 million, which was the highest monthly import value since March 2018, according to the recently released external sector performance report of the Central Bank
  • Sri Lanka identified 18 amendments to be made to the controversial Sri Lanka-Singapore Free Trade Agreement (SLSFTA) and anticipated conducting negotiations with Singapore
  • The Hambantota International Port Group (HIPG) was said to partner with Intertek Lanka (Pvt.) Ltd. to establish a state-of-the-art petroleum testing laboratory which would be unique to Sri Lanka. Through this facility, Intertek was to provide innovative and bespoke assurance, testing, inspection, and certification services 
  • CSE had recorded 9.3% growth in Year-to-Date (YTD) All Share Price Index (ASPI) within the first five months of 2021
  June  
  • The Bandaranaike International Airport (BIA) reopened on 1 June after the outbreak of the third wave, but passengers from India or Vietnam or with a travel history to these countries within the past 14 days were not permitted to enter the country
  • Any potential disruptions to salt production or supply as a result of the MV X-Press Pearl disaster was not expected in the country, even in the coming days, the Government assured in June
  • The Information and Communication Technology Agency (ICTA), in collaboration with PwC Sri Lanka, introduced a new Credit Evaluation Framework to be adopted by lenders when lending to tech companies with minimal collateral. Technology companies are evaluated using existing generic credit evaluation frameworks, which have inherent shortcomings in evaluating the merits and demerits of a technology company
  • The Ministry of Environment was focusing on implementing an alternative programme to prevent 750 ml plastic bottles from entering the environment, by proposing consumers who purchase 750 ml plastic bottles to keep a monetary recycling deposit. Upon the return of the empty bottle, the deposit can be claimed
  • Issuing a statement, Fitch Ratings noted that the end of the suspension on Sri Lankan banks’ investments in international sovereign bonds (ISBs) issued by the Sri Lanka sovereign (rated CCC) has the potential to increase banks’ exposure to sovereign and foreign-currency funding and liquidity risks 
  • After maintaining the local fuel prices for 21 months, the Government revised the prices in June. Accordingly, the price of a litre of 92 octane petrol was increased by Rs. 20 to Rs. 157, 95 octane Euro by Rs. 23 to Rs. 184, diesel by Rs. 12 to Rs. 111, super diesel by Rs. 12 to Rs. 144, and kerosene by Rs. 7 to Rs. 77
  July  
  • The Government increased the interest rate provided for SDAs by a further 2% for a period of 10 months in the face of dwindling reserves
  • The Generalised Scheme of Preferences (GSP) provided by Japan for Sri Lanka, which was under review for extension according to the 2020 Annual Report of the Central Bank of Sri Lanka, was extended for a period of 10 years until 31 March 2031
  • The forex-starved Government issued fresh regulations limiting the repatriation of funds and foreign exchange issuance for a period of six months beginning 2 July 2021. Under the regulations, repatriation of funds under the migration allowance out of funds received as monetary gifts by an emigrant from an immediate family member has been suspended
  • Basil Rajapaksa took his oaths as Minister of Finance before President Gotabaya Rajapaksa at the Presidential Secretariat on 8 July 
  • Then State Minister of Money and Capital Market, and State Enterprise Reforms Ajith Nivaard Cabraal said the Government hopes to bring in foreign currency by utilising resources that have been left idle
  • Sanjeeva Jayawardena PC was re-appointed to the Monetary Board of the Central Bank of Sri Lanka (CBSL), for a fresh term of six years, up to June 2027, by President Gotabaya Rajapaksa, consequent to his nomination being approved by the Parliamentary Council
  August  
  • Omani Shumookh International LLC submitted an investment proposal to the Government of Sri Lanka for the development of a 100 MW solar park in Siyambalanduwa in Sri Lanka, according to reports
  • The visa fee for the recently approved Digital Nomad Visa was set as $ 600, according to sources from the Ministry of Tourism
  • Prof. Ranjith Bandara was appointed as the National Trade Policy Committee Chairperson  
  • Amidst dwindling reserves and the rapid local spread of the Covid-19 virus, the Ministry of Tourism was given a target of $ 500 million in the form of tourism earnings to be brought into the country by the new Minister of Finance Basil Rajapaksa 
  • As the Group of Seven (G7) developed nations pushed the world towards a singular, regulated tax rate, the Organisation for Economic Co-operation and Development (OECD) had gott Barbados to sign on to a new tax agreement that will likely result in increased taxes for companies registered, leaving Sri Lanka and five other countries in the list of countries that were yet to accede the plan
  September  
  • Sri Lanka was set to get an accumulated influx of $ 1.2 billion from the International Monetary Fund (IMF), Bangladesh, and China Development Bank (CDB).
  • CBSL further extended the concessions that have been granted to borrowers who have been affected due to Covid-19 till 31 December 2021, considering the new surge of the pandemic.
  • Ajith Nivard Cabraal stepped down as the State Minister of Money and Capital Market and State Enterprise Reforms took over the Central Bank of Sri Lanka as the Governor once again. 
  • The Board of Investment of Sri Lanka (BOI) managed to secure around $ 461 million foreign direct investment (FDI) and local investment till August last year amidst the country’s battle with the pandemic
  October  
  • Announcing a roadmap for the next six months, Central Bank Governor Ajith Nivard Cabraal stated that the 100% cash margin requirement that was imposed on the importation of non-essential goods would be removed with effect from 1 October
  • However, Cabraal requested the importers not to stockpile extra inventories as the Government had sufficient reserves to permit them to import those non-essential items
  • The Sri Lankan Government was said to obtain a credit line of $ 500 million from the Indian Government, which was expected to be diverted towards milk powder importation amidst a shortage in the market
  • Sri Lanka opened its stall in World Expo Dubai 2020 
  • The Ceylon Petroleum Corporation (CPC) was expected to establish a wholly-owned Liquefied Petroleum (LP) gas subsidiary in the next four months, breaking the current duopoly enjoyed by Litro Gas and Laugfs Gas at that moment
  November  
  • Retailers were stocking cigarettes around the country, creating an artificial shortage amidst talks of a cigarette price formula and possible moves by the Government to increase prices through Budget 2022
  • Budget 2022 was presented in the Parliament
  • CBSL released Rs. 179,280 million in order to facilitate the Covid-19-affected businesses through the Saubhagya Covid-19 Renaissance Loan Scheme Facility 
  • CBSL in a report released called for the adoption of a suitable cost-reflective pricing mechanism for fuel, considering the volatility observed in global energy market prices
  • The Urban Development Authority (UDA) presented a property portfolio of 46 land parcels available for both prospective local and international investors, with the aim of attracting total investments of approximately $ 6 billion
  • CPC failed to secure a loan of $ 2.5 billion from US-based PSL America Inc. to refinance the colossal sum of money the state institution owes to two state banks
  December  
  • A great resignation took place at the BOI, where Chairman Sanjaya Mohottala and board members Dr. Harsha Cabral PC, Dr. Sanjay Kulatunga, and Dr. Harsha Subasinghe tendered their resignations 
  • The Sri Lanka Economic Summit 2021 (SLES 2021) was inaugurated by the Chief Guest Finance Minister Basil Rajapaksa, on 6 December, under the theme “Springboard for revival: Opportunity to reset” 
  • Fitch Ratings downgraded the long-term foreign currency Issuer Default Rating (IDR) of Sri Lanka to “CC”
  • CBSL postponed a press conference updating the public on the current status of the proposed foreign exchange inflows set out in the CBSL Six-Month Road Map before the end of the month, as previously promised
  • Fuel prices increased with effect from 21 December. Accordingly, the revised prices are : 
    • Petrol 92 Octane from Rs 157 to 177  by Rs 20 per litre 
    • Petrol 95 Octane from Rs 184 to 207 by Rs. 23 per litre
    • Auto Diesel from Rs 111 to 121 by Rs. 10 per litre
    • Super Diesel from Rs 144 to 159 by Rs. 15 per litre
    • Kerosene from Rs 77 to 87 by Rs. 10 per litre
  • The People’s Bank of China (PBoC) released a receipt of the ¥ 10 billion (equivalent to $ 1.5 billion) currency swap to the Central Bank of Sri Lanka (CBSL) last Wednesday (29 December), increasing the official foreign reserves of Sri Lanka to $ 3.1 billion

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