Fitch downgrades Sri Lanka rating to ‘B+’ on external debt

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Fitch downgrades Sri Lanka rating to ‘B+’ on external debt

Author LBO
Posted on February 29, 2016

Feb 29, 2016 (LBO) – Fitch Ratings has downgraded Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) one notch to ‘B+’ from ‘BB-‘.

A Negative Outlook has been assigned to the IDRs. The issue ratings on Sri Lanka’s senior unsecured foreign- and local-currency bonds are also downgraded to ‘B+’ from ‘BB-‘. The Country Ceiling is downgraded to ‘B+’ from ‘BB-‘ and the Short-Term Foreign-Currency IDR is affirmed at ‘B’.

Fitch said the rating action reflects increasing refinancing risks.

“The Sri Lankan sovereign faces increased refinancing risks on account of high upcoming external debt maturities. Further, the sovereign’s external liquidity position remains strained, reflecting pressure on foreign exchange reserves.”

“In Fitch’s view, this partly reflects a weakening in policy coherence that increases the likelihood of Sri Lanka requiring external liquidity support from the IMF and other multilateral institutions.”

A statement from Fitch said Sri Lanka’s external liquidity ratio, as measured by Fitch at the end of 2015, was 70.9%, which is far below the median of ‘B’-rated peers’ of 171.9% and the ‘BB’ median of 152.4%.

Another reason for the rating action was significant debt maturities.

“Sri Lanka faces significant debt maturities in 2016 amid the country’s vulnerability to a shift in investor sentiment. Fitch estimates the sovereign’s external debt service to be close to USD4bn for the rest of 2016, compared with FX reserves of USD6.3bn (end-January 2016).”

“Sri Lanka’s vulnerability to a shift in investor sentiment was evident when investors sold-off the equivalent of nearly USD2bn in local-currency government securities in 2015. A further outflow from treasury bills and treasury bonds, which account for about 31% of the country’s FX reserves, could put more pressure on reserves.”

However, prevailing low oil prices will continue to support Sri Lanka’s current-account deficit in the near term, Fitch said. Fitch expects the current-account deficit to remain manageable at about 3% of GDP over 2016-17.

In terms of weaker public finances, the deterioration in Sri Lanka’s fiscal finances is driven partly by consistently low general government revenues.

At an estimated 13% of GDP, Sri Lanka’s gross general government revenues remain far below the ‘B’ median of 25.4% and the ‘BB’ median of 26%. The 2016 budget did little to address this issue directly and absent any significant fiscal consolidation, Fitch expects continued fiscal slippage over 2016-17.

Sri Lanka’s gross general government debt (GGGD) burden is estimated to have increased to more than 75% of GDP by the end of 2015, up from 71% at the end of 2014 and much higher than the ‘B’ median of 52% of GDP and ‘BB’ median of 43.6%.

Fitch has revised downwards its forecast for foreign-exchange reserves, with reserve coverage of current external payments now forecast to decline to 2.9 months in 2016 from an estimated 3.4 months in 2015. This forecast compares unfavourably with Fitch’s earlier forecast of 3.9 months for 2016 and is well below the ‘BB’ median of 4.2 months.

While the authorities have undertaken certain measures to support external finances, including entering into bilateral swaps with other central banks, Fitch does not view this to be a sustainable way to improve the stability of the external finances.

Sri Lanka has also increased its issuance of foreign-currency debt, which Fitch estimates now makes up close to 46% of total public debt, up from nearly 42% at the end of 2014. This has increased vulnerability of Sri Lanka’s public debt to a significant depreciation of the exchange rate, which would increase the debt burden in local currency terms.

Sri Lanka’s macroeconomic performance remains stronger than some of its peers’ in the ‘B’ and ‘BB’ range with real GDP growth for the five-year period ending 2015 averaging close to 6%, compared with the ‘B’ median of 4.6% and ‘BB’ median of 3.9%.

Sri Lanka also continues to score highly, compared with the ‘B’ median, on basic human development indicators, such as education, health and literacy, which is indicated by its favourable ranking in the UN’s Human Development Index. These relative structural strengths, combined with a clean external debt service record and smooth transition of power during the presidential and parliamentary elections in 2015 indicates a basic level of political stability, which supports the rating at ‘B+’.

Sri Lanka hikes VAT, taxes capital gains before IMF loan talks

Sri Lanka hikes VAT, taxes capital gains before IMF loan talks
COLOMBO | BY SHIHAR ANEEZ AND RANGA SIRILAL

Sri Lanka will raise its value added tax and reintroduce capital gains tax to break out of a debt trap, Prime Minister Ranil Wickremesinghe said on Tuesday, ahead of talks on a $1.5-billion loan it is seeking from the International Monetary Fund.

Sri Lanka's finances are under scrutiny after ratings agency Fitch last week downgraded its sovereign rating by a notch, to "B+", spurred by a ballooning fiscal deficit, rising foreign debt and sluggish growth prospects.

It also faces a balance-of-payments crisis after a third of its foreign exchange reserves was depleted within the 15 months to January by the central bank's defence of the rupee currency, pressured by heavy debt piled up under the previous government.

"This crisis can be overcome only by reducing the budget deficit and a medium-term joint financial programme aiming at suitable reforms to reduce the debt burden," Wickremesinghe told lawmakers.

Taking action to boost revenues, he announced that VAT would be hiked to 15 percent from 11 percent, while capital gains will be taxed for the first time since 1987.

Wickremesinghe said the government owed 9.5 trillion rupees ($65.6 billion), as he revised some of the main budget numbers presented in November.

He said the former government headed by Mahinda Rajapaksa has not included 1.04 trillion rupees in borrowing by state enterprises in the national debt, which was estimated at 8.48 trillion rupees at the end of last year.

The prime minister, also the minister of policy planning and economic development, said the country has to pay 1.21 trillion rupees on its debts this year, including 562 billion rupees in interest.

The IMF has long called on Sri Lanka to reduce its budget deficit, raise revenues, and bolster its foreign exchange reserves. These are likely to be the main conditions for the grant of a loan, economists say.

Sri Lankan shares fell more than 2 percent on Tuesday, hitting a near two-year low on concerns over the government's possible tax hikes to qualify for what the finance ministry expects will be a $1.5-billion IMF loan. [nL3N1633XT]

The uncertainty over taxes also hit the rupee LKR=LK currency.

"The government is responding to an urgent revenue need," Anushka Wijesinghe, the chief economist of Sri Lanka's main business chamber, told Reuters.

"But ad hoc tax policy changes like these will hurt investor sentiment. The credibility of the budget is lost."

($1=144.8500 Sri Lankan rupees)

(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Douglas Busvine and Clarence Fernande
================
VAT A Let-Down!
by Ashanthi Warunasuirya

Having failed to secure the much anticipated foreign assistance to carry out its promises, the government is now looking at increasing taxes. However, sustaining political power at the expense of the people is hardly justifiable. It is a known fact that a government cannot survive without taxes. In order to cover its daily expenses, every government imposes direct taxes upon the income of the rich and indirect taxes upon consumer goods such as fuel, communication and food items. However, there has to be a just basis when imposing taxes. Hence it is important to analyse how just the May 2016 tax hike is.

The government has been forced to increase taxes as they currently do not have enough finances to carry out the promises made to the people during the polls. Although the Yahapalana administration had high hopes of receiving international financial assistance, it has not become a reality. In reality, no foreign country is willing to provide money for a government to carry out its election promises. Thus the government has been compelled to turn back towards the very people they had previously deceived.

Some would opine that this is a fraud being committed in broad daylight. The Value Added Tax (VAT) that previously stood at 11 percent has been increased to 15 per cent with effect from May 2. According to Finance Minister Ravi Karunanayake, the education and pharmaceutical sectors have been exempted from this increase. Accordingly, import or export of communication equipment including copper cables for the telecommunication industry and the issue of licences to local telecommunication operators by the TRC are liable for increased VAT. The supply of goods and services to any specified project other than housing projects approved on or after May 5 will also be taxed.

Expressing his views on the recent tax hike, former President Mahinda Rajapaksa has said that the present government made irresponsible promises at the presidential election in order to win votes. He has said that after winning, they had to fulfill at least some of their election pledges if they were to win the parliamentary election.

Rajapaksa has said that for more than a year now the government has been borrowing heavily in the foreign as well as domestic markets to pay for the salary increases and various handouts they gave in its bid to win the election. Rajapaksa has said that after January 2015, the government has obtained USD7,436 million in foreign loans, nearly half of which (USD3,298 million) has to be paid back before the end of this year, apart from the hundreds of billions of rupees the government has been borrowing in the domestic market by issuing treasury bills and bonds. According to him, the government is now trying to collect taxes from the people to repay these debts. While the former President made these comments on tax hikes, Media Minister Gayantha Karunathilake called these taxes ‘Rajapaksa taxes.’ He has said the government has been compelled to increase taxes in order to save the country as they have been given the country amidst immense financial debts. Pointing out that the economy has to be managed with the commitment of all, the minister has further said that VAT has been increased with a minimum burden to the people. He has also said that conditions would be more favourable after the Prime Minister’s oncoming China tour and the President’s Japan visit.

However, various social groups have expressed different views on this matter. Accordingly, the national organiser of the All Island Cafeteria Owners Union, Asela Sampath said the prices of food items sold in cafeterias will be increased parallel to the 15 per cent VAT increase. He said the prices of food items will be increased at least by 10 rupees.

Sri Lanka to lose US$ 39.8 mn from TPP exclusion

Sri Lanka to lose US$ 39.8 mn from TPP exclusion
MAY 11 2016

The level of trade diversion or market loss for Sri Lanka due to Sri Lanka being excluded in the Trans-Pacific Partnership (TPP) is expected to be around US$ 39.8 million, Preliminary estimates by the Institute of Policy Studies of Sri Lanka (IPS) shows.

The TPP was signed last February bringing together 12 countries, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, US, and Vietnam. These countries accounts for more than one-third of world’s GDP, and one quarter of world trade.

TPP will now undergo a two year ratification process in all the 12 countries.

Trans-Pacific Partnership (TPP)

A country-wise analysis shows that the biggest loss in exports for Sri Lanka would be in the USA (81%). To a much lesser extent, export loss will also take place in Mexico (8.8 per cent), Canada (5.7 %) and Japan (1.7%).

“When reviewing the garment sector, Sri Lanka need to carefully address the TPP under which tax free garment export opportunities have been given to countries such as Vietnam. This has enabled them to engage in competitive markets and supply the American and Japanese markets at low rates. This may also affect exports from Sri Lanka in the future. TPP must therefore be reviewed further,” the study said.

Duty free market access provided under the Agreement for member countries would result in cheaper prices for goods traded among TPP countries. This can in turn would be diverted towards TPP countries where buyers can benefit from purchasing cheaper goods.

The size and scope of this trade deal makes it a pertinent trade policy issue for both members and non-members like Sri Lanka.

Countries such as Korea, Taiwan, the Philippines, Colombia, Thailand, Indonesia, have expressed an interest in joining the mega regional grouping. Therefore, the risks of trade loss or diversion are likely to increase with time given that Sri Lanka is also not part of the other mega-regional trade agreements under negotiations.

Sri Lanka too has cast its eyes on TPP and is currently conducting a feasibility study to determine the pros and cons of the Agreement.

Sri Lanka should strive to improve the competitiveness of its own exports by creating competitive infrastructure services, promoting export oriented foreign investment, facilitating goods across borders effectively, addressing export market issues through trade agreements, and improving

access to inputs of materials, capital, and technology for the export sector.

In November 2015, Prime Minister, Ranil Wickremesinghe stressed the need for an urgent review of the TPP in his Economic Policy Statement.The IPS study was conducted by Research Fellow Dr. Janaka Wijayasiri and Research Officer Nipuni Perera.

The Sad Story Of Widows In The North

The Sad Story Of Widows In The North
by Dilisha Abeysundara

War widows
At a time the blazing sun’s heat was boiling the still waters of Nandikadal lagoon situated in the South Eastern part of mullaitivu, we arrived at Salewaraji’s residence. Through the walls of her shabby and small house, dark shadows of a sad past were thoroughly visible. “During the height of war my husband and three off my children were killed by shell fire. Now with the remaining three children I have been compelled to make a living with utmost difficulty” she said.

47 year old Salevaraji (assumed name) who lives in Kapopilaw, Mullaitiu, along with her three children had lived in IDP camps for over two and a half years after the end of war. During the war her husband had provided for the family by selling sweets in LTTE bunkers in Walliyamulliwaikkal. Unfortunately on the 29th of  May  2009 her husband along with three children had perished from a shell attack. Two other children who had survived the blast have become disabled. At present Salevaraji has been compelled to make a living along with these two disabled children and one other child. 

The never-ending burden of life and unemployment “Only one of my children is doing a job. He is earning some money by fishing. Our whole family depends on what he earns. Even he is carrying out his work without any facility. Although the government  promised to give us fishing nets so far we have not received anything. The disabled children cannot do any work. I cannot  send them away. Selvaraji puts out her sorrow without a pause. From time to time she wipes off tears from her eyes.

“ We need money to live. We need money to buy medicine for the children. Previously they were treated by the Army. I too am earning a little money by preparing food for villagers. Even that is hard to continue as we all are ridden by poverty”.

This plight is not confined only to Mullaitivu. According to investigations carried out by various civil society organisations it has been uncovered that around 40,000-60,000 women have become widows in the North. In a recent survey conducted by the government 50,000 families have reported that they are headed by females. According to the 2012/13 Domestic unit income and expenses report of the department of statistics the majority of the female heads of household belongs to the 40-59 age group. Half of them are widows.

The 30 year war has destroyed the lives of widows in the North. “Even after the conclusion of the war, the problem of war widows has become a serious issue. It is only now that its true impact has started to emerge. Economically they have faced various problems,” Additional District Secretary of Mulllaitivu District Mr. M. Mohandas says. 

The biggest problem is that these women do not have sufficient means to provide for their families. Although the North has witnessed some infrastructural development after the war, it has not done much to thousands of poverty-ridden women such as Selvaraji. “Even during the war we had no means of employment. That is why my husband tried to sell sweets. Even now there is no favourable condition to earn money. I am only able to find some money by cooking meals for neighbours,” Selvaraji said. This problem of unemployment among women in North was confirmed by  Mohandas as well.

Is the Govt support on widows adequate?

According to 2014 Govt statistics unemployment among women in Sri Lanka is 65 percent. Out of the four districts that have the most number of unemployed women, Killinochchi and Mulliativu are at the top. At present a project has been initiated to empower the war widows here. The Ministry for Women and children’s affairs has allocated Rs. 5.43 Million to provide self employment facilities to war widows. Under this project 181 families would receive a monthly allowance of Rs. 30,000. Further, over 54000 families in Jaffna are receiving Samurdhi benefits. However, when queried as to how many war widows are receiving Samurdhi benefits, the Samurdhi officer at the Jaffna District secretariat office said that he was unaware of the number. Apart from this the government has also initiated a programme to grant a monthly allowance of Rs.3000 for families affected by the war.

However, Northern Province Chief Minister C.V. Vigneshwaran points out that this programme is not something that is focused on war widows and that the government officials do not have any clear idea as to what type of families that can be admitted to the category of “families affected by the war” “Even having enough funds at hand, these officials do not give them to those who are in need. When asked why they are not giving away the funds, they said that they had not yet identified the various need groups. When asked as to how they are planning to dispense the funds, they said that the families must personally apply for it. Then I explained to them that the people would never do such a thing,”  Vigneshwaran said. 

Claiming that he had instructed development officials to look for families in need by engaging in field visits, the Chief Minister further claimed that the Prime Minister has also listened to his proposal of increasing the allowance to Rs 6000 Rupees. “We have decided to allocate the majority of the Rs 6 Million funds that we have received from the consolidated fund, for the benefit of war widows. Up until recently there was no ministry for women’s affairs in the Northern provincial council. Now we have set up such a ministry. We did not receive any government funding for this. We have requested funds from international organisations” he said.

Expressing his views on the matter, Northern Province Governor Reginald Cooray said that although the government and the international community have spent a fortune on rebuilding the North, it has still not been able to cure all the wounds of war. “There are two main reasons that have aggravated the problem of widows in the North. First, as a percentage from the entire population in the area, the number of women is very high. Since a lot of lives have been lost in war the situation has become even worse. The second reason is the added burden that has fallen on these widows such as feeding and teaching the children while having to provide for the family. These reasons have pushed these women in to misery. “ the Governor said. 

Meanwhile the chairman of the national committee for war widows Mrs. Shantha Abhimanasingham PC points out that the small scale projects initiated by the central and provincial government aimed at the welfare of war widows, they are inadequate to address the issues faced by them. “During the LTTE insurgency most of these women had lived by cultivating in government and other deserted lands. However,  since many of the land had fallen in to the hands of the military as well as the owners who had gone abroad a long time ago, their way of living has been threatened. They have even lost their houses. Since the prices of necessary commodities are still high, they have faced many difficulties in surviving,” she further said.

“This has prevented them from sending their children off to school. They are not able to bear the expenses of books and transport. If this continues, there is a danger of uneducated youth falling into dangerous ways”  Abhimanasingham said. At present, for a woman to live alone in society is like getting stranded in the ocean. Especially women who are left helpless due to the burden of providing for their families often become easy prey for wrongdoers. Re-marriage is frowned upon in the Sri Lankan culture, especially in the North. Therefore the widows in the North have faced an immense problem of survival. Unemployment, economic hardships, education of the children, sexual abuse and mental stress are some of the problems faced by these women. 

There are 1237 war widows in Killinochchi alone. Out of the 4967 widows 1442 have suffered their fate from the war. 985 families are headed by women below  40 years. In the Jaffna district there are 13000 families that are headed by women.

Parameshwari’s Story

34 year old Parameshwari’s husband had died in 2009 from a landmine. Being a mother of four children she is living a hard life. “When my husband died our youngest daughter was only two months old. My husband was the sole provider for the family. He was a fisherman. I got married at the age of 16. My father had also perished in the sea. After my husband’s death I could not figure out how to survive alone. There were many problems. Even though I wanted to send my children to school it was not possible. I had given up all hopes of living, but I had to hold on for the sake of my children. In 2010 an NGO came to help me. Now I make my living by selling sweets but that is not enough to provide for my children. Now my eldest son is working as a labourer. “Parameshwari is living with mental stress. Although she is receiving help from her relatives, the loss of a father and a husband has become a serious problem. She expressed her dislike towards getting married again.
“I thought of getting married again but I cannot do so while the children are around. There was such a woman in our village who got married again but the villagers spoke ill of her. I do not need to suffer such insults. It would not be good for the children too. What would happen to them if I could not look after them after getting married?”

This is how Parameshwari sees the issue of re-marriage. Is re-marriage off limits to a widow? For most widows in the North it is against their religious culture and they continue to live alone and bear up the hardships of life. Furthermore they have doubts as to whether the new husband would be trustworthy and whether the children would be looked after.

In a survey conducted by the Jaffna Women’s Development Center it has been revealed that 52 percent of the widows have consented to a re-marriage but 42 percent have refused to comment. Many have not spoken about getting abused. Hence the Tamil community must be more sympathetic and humane towards these war widows.

The problem of dowry has also prevented many widows from thinking about a re-marriage, the Center says. For a woman who is making a living out of scraps, finding a dowry would be  like falling into the fire from the frying pan. There is an urgent need of providing physical and mental health support to these women. Not only the widows, but also their relatives must be made aware of these problems.

“The majority of war widows are young women. In order to rebuild their lives the cultural bonds must be relaxed, former dean of the Jaffna University Art Faculty and the head of the Social Sciences department,” Prof. R. Shivachandran says. He pointed out that Tamil political leaders including the TNA must make a request from the public to allow these widows to re-marry. “Even at the height of war these women had means of earning an income. Some were even proud that their relatives were in the LTTE  and since all such things have now been wiped off they have faced a serious mental collapse. Even though it is not shown  these are the reasons why some widows are prone to prostitution, narcotics and even suicide.

“Getting married at an early age due to the war, getting abused and cultural barriers have aggravated mental problems among these women,” Psychiatrist at the Mullaitivu hospital Dr. C. Wijendran says. Many political parties and NGOs have raised their concern about the rising level of prostitution in the area. So far accurate data has not been received. Under this crippled social system, there is no wonder why these women turn into such darker ways. The lives of thousands of widows living in the north and the lives of their family members cannot be cured just by bags of cash.