Latest Tax cuts to win the masses over

From the Sri Lanka government’s stance in November 2015 which introduced a unit rate of excise duty for the vehicles on the basis of cubic centimeters (cc) that could generate 20 billion rupees for government, the new stance is more friendly to the middle income segment of the country.

In November, a new valuation system was introduced taking full option manufacturing price as the tax base, due to frequent reports on revenue leakages from the under valuation of motor vehicles for tax purposes.

This was the thinking of the former finance minister Ravi Karunanayake and his goal was to further strengthen the process of collecting the duly payable taxes.

We later observed another move with the 2016 budget reducing excise duty to 2.5% for vehicles which are run entirely on Solar, Hydrogen or Helium.

Ravi Karunanayake said some of the vehicles which are being assembled in the country have not been registered with the Department of Motor Traffic Department due to various reasons.

He urged the owners of unregistered vehicles to register their vehicles by 31 March 2016, by paying a fee of 750,000 rupees for commercial vehicles and 1 million rupees for motor cars.

He also introduced a new emission fee for motor vehicles aiming to generate a further 18 billion rupees for the government.

He introduced a new fee charged on the certificate of emission and also increased the emission test fee upto 5,000 rupees per vehicle.

So taking all these quick changes in the recent past made by the people friendly unity government, it is unclear at this moment of time what the government hopes to establish with this carrot to the masses now.

The latest moves by the newly appointed finance minister (Mangala Samaraweera):

·         Tax cut on trucks, motorbikes; 10% telecom levy on data removed

·         Tax cut on trucks, motorbikes; 10% telecom levy on data removed

·         Customs duty on small trucks have been reduced by Rs.300, 000 while the duty on motorcycles (less than 150 cc) has been reduced by 90%.

·         Data capacity per user would be increased by 10%

·         The 10% telecommunications levy imposed on data will be removed from September 1.

As Sri Lanka is struggling to pay debt (IMF and World Bank) and trying hard to forge ahead with the heavily publicized Western Region Megapolis Masterplan used as the catalyst to turn the ailing economy around, these type of sudden moves will only kill the trust of overseas investors as no long term fiscal policy is demonstrated by the Unity Government.

Govt to pump Rs 3.5 bn for Industrial Park in Kalutara

• Government will invest Rs. 3.5 billion to provide infrastructure to set up the Industrial Park in Millaniya, Kalutara
• This would be then offered to Rojana Industrial Park Public Limited of Thailand

Sri Lanka will set up a 150-acre industrial park in Millaniya, Kalutara at a cost of 3.5 billion rupees with a company from Thailand, the State Minister of International Trade Sujeewa Senasinghe said. The Government will invest Rs. 3.5 billion to provide infrastructure to set up the Industrial Park in Millaniya, Kalutara. This would be then offered to Rojana Industrial Park Public Limited of Thailand.

This Park to be built on a rubber estate belonging to the Horana Plantations would be ready by 2018 December covering an area of 150 acres. “We are in the process of acquiring land for the project and also talking with CEB, Water Board and the Road Developed Authority to get water and electricity to the venue. Normally it takes about five years to get all the approvals and build the infrastructure which we hope to do in one year,” he said. A letter of intent to set up an Industrial Park was signed at the the Board of Investment, yesterday.

“Under the phase one we expect an investment in the excess of US$ 500 million. The existing parks are almost full and Sri Lanka has not had any new industrial parks developed after the early 2000s. To bring in investors we need parks of this nature,” Senasinghe said.

 Chai Vinichbutr, vice president of Rojana Industrial Park said that the investment climate in Sri Lanka was good and this was the reason they decided to set up here. Vinichbutr operates about 500 companies in their industrial zones in Thailand and said they aim to draw investors making electronic home appliances like television sets initially and later get auto parts manufacturing.

“We have set up factories with them and we will talk with them to set up their operations in this Park. We aim to draw investors making electronic home appliances like television sets initially and later get auto parts manufacturers. We will also market some of these products locally. The minimum labour wage in Sri Lanka too is still workable for foreign investors,” he remarked.

Assessment of Sri Lanka’s Power Sector

• New ADB and UNDP report estimates $ 54-56 billion investment necessary
• By 2050 the country’s electricity generation capacity will increase from current 3,700 MW to about 34,000 MW
• Report proposes a gradual phasing out of fossil fuels from the country’s electricity mix.

Reuters reports renewable energysources such as wind and solar will attract two-thirds of all investment in power-generating plants between 2016 and 2040 in spite of persistently cheap coal and gas prices. According to a joint study by the UN Development Programme (UNDP) and the Asian Development Bank (ADB), Sri Lanka can meet its current and future electricity demand through the judicious use of renewable energy by 2050.

According to the report, by 2050 the country’s installed electricity generation capacity needs will increase from the current 3,700 megawatts (MW) to about 34,000 MW. Of this, 15,000 MW will be wind energy and about 16,000 MW will be solar energy. The balance capacity is expected to be met by hydro- and biomass-based power plants. Further to the addition of renewable electricity generating sources, the study has identified the need to introduce an electricity storage solution which should provide instantaneous power of 3,600 MW and an energy storage capacity of 15,000 MWh.

This will ensure the stability of the electricity grid. Acknowledging this need, Sri Lanka saw an increase in the share of renewable energy (RE) in the electricity mix when in 2014 the country met its target of generating at least 10% of its electricity using renewable energy.

Source: Report on SL Power Sector by ADB & UNDP

Sri Lanka as one of the countries disproportionately affected by climate change has agreed to ambitious renewable electricity generation targets by 2050. Sri Lanka is among the 48 countries of the Climate Vulnerable Forum that agreed to make their electricity generation 100 per cent renewable as rapidly as possible and by 2050 at the latest,” the report said.

The assessment indicates that the substitution of imported fossil fuel with renewable energy until 2050 provides direct monetary benefits and will reduce Sri Lanka’s fuel import bill by about $ 18 billion cumulatively. The report also identifies the need for structural changes in the retail tariffs of Sri Lanka to warrant financial sustainability of its operations.

The report estimates that total investments to the tune of $ 54-$ 56 billion will be necessary in the powersector to achieve the 100% electricity generation by renewable energy. Further, it emphasizes the need to develop the ancillary services market in light of these changes in the generation system.

Considering the high costs and technical challenges associated with integrating renewables into the electricity generation mix, especially in terms of ancillary and balancing needs, the report proposes a gradual phasing out of fossil fuels from the country’s electricity mix.

Transit-oriented developments to take place in Sri Lanka

• Transit-oriented development in planned modernization and electrification of suburban rail.

Sri Lanka’s railway and urban development authorities are to work together to include property development, known as transit-oriented development, in a planned modernisation and electrification of suburban rail.

Palitha Samarasinghe, director of the Railway Electrification and Modernization Project, said the railway department was in talks with the Urban Development Authority on transit-oriented development or TOD, integrating rail and commercial development schemes. “We are having talks with the UDA on transit-oriented rail operations,” he told a forum. 

“We asked them to consider railway development when planning urban development.” He was responding to a question whether the modernisation, involving station upgrades, includes property development with private sector participation, during the 15th John Diandas Memorial Lecture held by the Chartered Institute of Logistics & Transport Sri Lanka.

“We will consider whatever urban development that can be included,” Samarasinghe said. Transit-oriented development exploits the connectivity between the rail system and the city provided by stations and enables rail operators to earn alternative revenue and generate increased ridership. The higher revenues, in turn, enable the provision of better services to the public as, in places like Hong Kong whose Mass Transit Railway Corporation earns one-third of its revenue from non-fare sources like profit from retail and property management.

ADB & Exim Bank study Trinco economic corridor

• The program was launched to support the GoSL in drawing a blueprint for the Trinco Economic corridor.
• It offers policy recommendations, especially focusing on four areas – FDI promotion, strengthening the competitiveness of SMEs, single window custom system and urbanization.

The Export-Import Bank of Korea together with the Asian Development Bank held a seminar on the Colombo-Trincomalee Economic Corridor (CTEC) recently with the aim of sharing the final policy consultation paper with the Sri Lankan government. Officials from the Ministry of National Policies and Economic Affairs, Ministry of Industry and Commerce, Ministry of Development Strategies and International Trade and Sri Lanka Customs among other organizations were present.

ADB-Knowledge Sharing Program (KSP) joint consulting program was launched in April this year to support the Sri Lankan Government in drawing a blueprint for the corridor. The KSP is a special technical assistance program provided by the Korea Eximbank under its Ministry of Strategy and Finance to share Korea’s development experience and knowledge accumulated over the past decades with partner countries.

KSP offers Joint Consulting Programs with Multilateral Development Banks, Modularization Projects, and Policy Consultation tailored to the needs of partner countries encompassing in-depth analysis, policy recommendations, and training opportunities. “Even though Sri Lanka is just below the threshold of upper-middle income country status, there are challenges that it needs to overcome,” a statement said. “Low foreign direct investment (FDI) inflow compared with those in other countries like Viet Nam and Myanmar, a non-vibrant SME sector, an inadequate custom system and risks arising from unplanned urbanization are some of the challenges.

These factors contributed to a decline in the export to GDP ratio from 29% in 2000 to 12.5% in 2016.” The ADB-KSP program aims to make practical contributions to the CTEC initiative to create an export-oriented economy.

This joint consulting offers comprehensive policy recommendations tailored to the needs of Sri Lanka, especially focusing on four areas – FDI promotion, strengthening the competitiveness of SMEs, single window custom system and urbanization. Korea Exim bank may finance development projects related to these 4 areas and other economic infrastructures in Sri Lanka.

KPIs to be included in 2018 National Budget – Ministry of Finance

•  National Budget for 2018 will be prepared on a Performance Basis
•   For 2018, macroeconomic assumptions include, real GDP growth of 6 percent, inflation to stabilize at 5 percent level, and overall budget deficit to be contained at 4.3 percent of GDP.

Sri Lanka’s finance ministry will focus on inclusion of key performance indicators (KPIs) for all budget proposals from ministries when preparing the budget for 2018. All proposals by line ministries, provincial ministries and the heads of departments should include details of output of such projects accompanied with KPIs, as the Budget 2018 will be prepared on a “performance basis,” Treasury Secretary R.H.S Samaratunga has said. “Priority would be given for ongoing and foreign funded projects where KPI-based measurable outcomes are identified for each project,” a finance ministry statement said.

For 2018, macroeconomic assumptions include, real GDP growth of 6 percent, inflation to stabilize at 5 percent level, and overall budget deficit to be contained at 4.3 percent of GDP, the finance ministry said. The “performance based” macro–fiscal framework for 2018-2020 approved by the Cabinet of Ministers emphasizes the rationalization of recurrent expenditure and prioritization of capital expenditure, while enhancing the government revenue mobilization, public investment and reducing the budget deficit and outstanding government debt. Capital expenditure projects that have been earmarked for implementation by the National Planning Dept for each ministry would also be given priority provided the plans of such projects carry KPIs, Finance and Media Minister Mangala Samaraweera said.

Samaraweera said such improvements in the performance of public finance management should augur well for realization of medium–term economic growth of around 6 to 7 percent. “Formulation of Performance based budget (PBB) from 2018 has been built on the experience of implementing the zero-based budgeting approach adopted in the preceding years.” “Therefore, identifying the scope of the projects, defining the intended measurable outcomes and assessing the socio-economic impact on the projects, comprise the major elements of the performance based budget preparations approach.”

Feasibility assessments of projects forwarded by various ministries are being conducted at the finance ministry with the participation of the secretaries of the respective ministries and the treasury secretary. The treasury secretary has requested all line ministry secretaries, provincial secretaries, heads of departments and heads of state-owned enterprises to submit their proposal without delay. Minister Samaraweera is expected to present the 2018 Budget in Parliament in November.

Mixed Reviews on Sri Lankan Economy - IMF

• ·         Projects 4.7% growth for 2017, higher than Central Bank
• ·         Renews warning on public debt challenge; inclusive of contingent SOE liabilities public debt is 94% of GDP
• ·         Lower the public debt to GDP ratio to 76% of GDP by 2020 under the programmed fiscal consolidation

In its latest Staff Country Report released on Friday, the IMF gave a detailed analysis on the Sri Lankan economy and praised its resilience in 2016 and conceded that, where targets were missed, authorities took meaningful action. However, it pointed out, further monetary tightening would head off the second-round effects of currently high inflation, rein in credit expansion, and protect against potential capital outflows from further US rate hikes.

“Other measures to slow credit growth include raising the reserve requirement and employing macro-prudential instruments, such as: broader use of limits on loan-to-value ratios in vulnerable sectors, and a credit limit or increasing risk weights in the housing sector. The authorities agreed to closely monitor credit growth, particularly to ensure that credit growth was directed towards productive economic activity, and to tighten monetary policy further and use macro-prudential measures, if necessary,” the report said.

Real GDP growth is projected to recover gradually to 4.7% in 2017, supported by the continued momentum in construction and service sectors since late 2016, the IMF said. The Central Bank has already downgraded predictions to about 4.5% growth on weather related vulnerabilities triggering increased imports. Headline inflation peaked in March but will likely stay above 5% for much of the year due to high food prices and base effects from the VAT rate hike in 2016. The current account deficit is expected to widen slightly to 2.5% of GDP due to drought-driven increases in oil and food imports, and higher capital goods imports. 

IMF said public debt rose from 82 to 84% of GDP between 2015 and 2016 largely due to exchange rate depreciation and an increase in guaranteed debt. In 2017, public debt is expected to rise slightly to 85% of GDP due to still large fiscal deficit and exchange rate depreciation.

The medium-term overall deficit target of 3.5% of GDP remains appropriate for reducing the risk of debt distress, and would lower the public debt to GDP ratio to 76% of GDP by 2020 under the programmed fiscal consolidation

“If contingent SOE debt is included, total public debt would rise to 94% of GDP and decline below 90% of GDP by 2020. The likelihood of such a scenario has increased due to delays in energy pricing reform. External debt remains sustainable but is high at 57% of GDP and vulnerable to currency risks. And rollover need will increase as external sovereign debt begins to mature in 2019, calling for advance planning and medium-term debt management,” it warned.

The authorities remain committed to the economic reform program and undertook meaningful corrective actions where targets were missed. As a prior action, the new Inland Revenue Act (IRA) will be submitted to parliament. The authorities also strengthened tax administration and are conducting a diagnostic review of VAT. SOE oversight is improving, and energy pricing reforms are being recalibrated to address earlier setbacks. The Central Bank took steps to address the missed end-2016 reserve target by resuming since March 2017 the build-up of reserves.

In response to high inflation, the Central Bank tightened monetary policy in March 2017, and stands ready to tighten further should inflation or credit growth stay high. “Going forward, the reform momentum should strengthen further, building on the progress made so far. To reduce the risk of debt distress, fiscal consolidation should continue at steady pace.” This would require legislating and implementing the new IRA, strengthening the VAT system and administration, and making further progress in expenditure management and SOE reforms, the IMF advocated. Monetary policy should be tightened to rein in inflation and credit growth, and reserve accumulation should continue while allowing for greater exchange rate flexibility, it said.

LMD Reports Business confidence recovers in Sri Lanka

• ·         Business confidence moved up to 134 in July
• ·         This is the first time the index has crossed the 130 mark since November
• ·         LMD monthly survey reveals that 28% of respondents feel that the economy will improve in the coming 12 months.

Nielsen’s Managing Director Sharang Pant observes that the latest BCI “reflects faith in improving fundamentals”. He states in LMD: “Inflation hasn’t gone up for in last three months, lending rates have not increased although they haven’t dropped either, rupee depreciation has slowed down and GSP+ was granted to Sri Lanka.” The exclusive monthly survey reveals that 28% of respondents feel that the economy will improve in the coming 12 months. Meanwhile, a third of the survey sample expects no change in economic conditions while a further 39% have a negative outlook of the economy.

The latest edition of LMD reports that business confidence moved up to 134 in July. This is the first time the unique index has crossed the 130 mark since November 2016 when the LMD-Nielsen Business Confidence Index (BCI) stood at 144.

Where business prospects are concerned, the magazine notes that businesspeople are rather upbeat – almost half of those surveyed anticipate better times in the next 12 months. The short-term forecast too sees more than a third of respondents expecting sales volumes to increase in the next three months. Looking ahead, a spokesperson for LMD says: “Critical issues raised by those surveyed include the dengue epidemic and challenges posed by the mountain of waste and its disposal. And the release of listed company results for financial year 2016/17 will be closely watched by analysts.” “But in July, macro factors seem to have improved business confidence despite the concerns there are at the ground level,” she adds.

“Clearly, there is so much potential [in Sri Lanka], and that’s the one thing that any entrepreneur seeks out, because it’s the perfect storm in business – commercial gain, and the chance to transform lives...” says Sir Richard Branson, in a wide ranging interview published back in May edition of leading business magazine LMD.

His decision will rest predominantly on whether or not he and his vast team of advisers and aides feel that Virgin can produce a product that will positively impact the lives of those people, LMD asserts. “If you take Sri Lanka as an example, you look at the conditions, what the market looks like and assess it. Where is the gap you can fill? Once you identify something, you can find the best possible people to work on it, to make it a reality – and then go for it,” he states.

USD 193 Million worth solid waste plants in Sri Lanka

• Two plants will add 20 Mega Watts of electricity to the national grid once commissioned.

• The first project will see 700 Metric Tons of waste generated from the Colombo Municipal Council• According to available data the Western Province alone produces around 60 percent of the nation’s waste, with 3,400 metric tons produced per day.

Since the tragedy in Meethotamulla, several issues have arisen over the management of solid waste. Obstructions in the disposal of garbage from Colombo is one of the key issues. The Urban Commissioner said, around 150 to 200 metric tonnes of garbage is collected daily during this period due to the Sinhala and Tamil new year and school holidays. A portion of this garbage was to be disposed at the garbage recycling plant in Dompe, on Thursday, April 20, when it was obstructed by a group including the former Chairman of Dompe.
All three plants are to be completed within a two-year period, the ministry said. Another PPP agreement has been signed with Fairway Holdings for a waste treatment plant in Karadiyana, where 500 MT of waste will be processed into energy. According to available data the Western Province alone produces around 60% of the nation’s waste, with 3,400 metric tons produced per day. About 86% of waste is dumped in the open with only about 6% of this made into compost and about 4% of it recycled. Handling garbage has turned the country’s very fragile political system in to a “black comedy” and we look forward to the positive or negative results of 

Now ironically under the “Yahapalanaya Government”, Sri Lanka will see 2 solid waste-to-energy power plants starting construction as 2 public-private partnership (PPP) projects in Muthurajawela. The total investment for the project will be around 193 million dollars, the Ministry of Megapolis and Western Province Development said. The two plants will add 20 Mega Watts of electricity to the national grid once commissioned and will convert waste generated in Colombo and Gampaha into energy.

The first project will see 700 Metric Tons of waste generated from the Colombo Municipal Council daily being processed through an incineration plant run by the Western Power Company, a fully-owned subsidiary of Aitken Spence Plc. The investment for the project will be 98 million dollars and will add 10 MW to the national grid. The second, also a PPP with a Korean company called K.C.H.T Jang, will invest US 95 million dollars to set up a plant to process up to 630 MT of unsorted waste generated from the suburbs of the Colombo and Gampaha districts. This plant will add another 10 MW to the grid. A 3rd project, with an investment of US 91 million dollars is also due to commence later this month.

Reuters reports Sri Lankan rupee ends firmer on bank dollar sales

The Sri Lankan rupee ended firmer on Tuesday (08/08/17), as dollar selling by banks surpassed mild importer demand for the greenback in dull trade after the long weekend, dealers said. The rupee has been under pressure after the central bank governor on May 18 said the bank would allow gradual depreciation of the currency.

The spot rupee traded at 153.20/30 per dollar, compared with Friday's close of 153.35/45. Both stock and foreign exchange markets were closed on Monday to observe the Buddhist religious holiday.

The central bank held its policy rates steady on Thursday and said tightening measures are helping cool inflation and credit growth, signaling receding concerns about price pressure as it focuses on supporting an economy hit by extreme weather. Analysts said the market shrugged off Thursday's policy decision by the central bank as it was widely expected.

Central Bank Governor Indrajit Coomaraswamy on Thursday said the bank had expected to purchase 1.2 billion dollars directly from the market between March and December, and it had already bought around $1 billion. Coomaraswamy had earlier said the rupee was still "over-valued", and that the monetary authority was buying dollars to avoid any appreciation. The banking regulator is compelled to buy dollars from the market to meet a reserves target set by the International Monetary Fund (IMF) under a $1.5 billion, three-year loan programme.

Silicon Valley’s Tech Giant - Synopsys to invest in R&D capabilities in Sri Lanka

• ·         “Sri Lanka is the latest addition to our worldwide R&D operations, and we are impressed with the engineering talent here” – Aart de Geus, Synopsys Chairman
• ·         Sypnosys will be hiring and developing talent, investing in state­-of-­the-­art facilities, and partnering with universities to build VLSI and EDA expertise in Sri Lanka

Synopsys, Inc. (Nasdaq:SNPS) is the Silicon to Software partner for innovative companies developing the electronic products and software applications we rely on every day. As the world's 15th largest software company, Synopsys has a long history of being a global leader in electronic design automation (EDA) and semiconductor IP and is also growing its leadership in software quality and security solutions.

Synopsys established its operations in Colombo in 2015, and since then the R&D team has grown to approximately 100 engineers involved in the research, design and development of key EDA technologies and products that enable ‘Smart, Secure Everything from Silicon to Software’ in the global electronics market. The Sri Lanka operation is engaged in R&D activities across core EDA, and its objective is to grow in advanced technology areas such as machine learning and artificial intelligence to embrace the era of ‘smart everything’.

Synopsys Inc, has announced it is investing in R&D capabilities in its Sri Lanka operations. To extend its local R&D capabilities, Synopsys is working with the University of Moratuwa, the University of Peradeniya and the University of Ruhuna to build very-large-scale integration (VLSI) and electronic design automation (EDA) skill sets to help graduating engineers meet ever-evolving challenges in semiconductor design, EDA, semiconductor IP and software security and quality.

Synopsys has evolved from its roots as a start-up logic synthesis enterprise in 1986 to being the world leader in EDA and one of the world’s largest software companies, employing more than 11,000 employees in more than 100 offices. The company was founded by Dr. Aart de Geus, one of the world’s leading experts on logic synthesis and simulation. Dr. de Geus is known throughout the electronics and semiconductor industries for his technical, business and community achievements, with multiple awards including Electronic Business Magazine’s ‘CEO of the Year’, the Silicon Valley Engineering Council Hall of Fame Award and the Silicon Valley Leadership Group’s Lifetime Achievement Award.

Dr. Pradip K. Dutta - Corporate Vice President of Synopsys. Inc. and the Managing Director of its wholly owned subsidiary, Synopsys (India) Private Limited said that “We are building up competence in verification technology, which is core to EDA software. We plan to continue to invest and develop expertise in Sri Lanka as part of our R&D presence in South Asia.”

“Sri Lanka is the latest addition to our worldwide R&D operations, and we are impressed with the engineering talent here. We are collaborating with academia in Sri Lanka and across our operations in the US, Europe and Asia Pacific, allowing us to further strengthen our global R&D footprint,” said Dr. Aart de Geus.

Speaking on the growth potential in Sri Lanka, Farazy Fahmy – Director of Research and Development at Synopsys said, “We are hiring and developing talent, investing in state­-of-­the-­art facilities, and partnering with universities to build VLSI and EDA expertise.”