SRI LANKA ECONOMIC OVERVIEW

Nestling off the southern tip of India, the tropical island of Sri Lanka has beguiled travellers for centuries with its palm-fringed beaches, diverse landscapes and historical monuments. Sri Jayawardenepura Kotte is the administrative capital of Sri Lanka, which has a total population of 19.3 million (UN, 2007). The country has a land area of 65,610 sq km (25,332 sq miles) with a varied climate, from tropical humid areas to wet climate zones.

Sri Lanka comprises 9 provinces out of which Colombo is located in the Western Province of Sri Lanka which is considered as the commercial capital of Sri Lanka. Colombo has a city population of over 1.3 million.

GENERAL ECONOMIC OUTLOOK

Sri Lanka is a lower-middle income developing nation with a gross domestic product of about $33 billion. This translates into a per capita income of $1,600. Sri Lanka demonstrated a strong GDP growth of 6.5% in 2007.

The Service Sector is the largest component of GDP at around 63%. In 2007, the service sector continued its strong expansion, fueled primarily by strong growth in telecom, trading, transport, and financial services. Public administration and defense expenditures increased in 2007 due to resumption of hostilities, expansion of public sector employment, and the expenses associated with maintaining a 104-minister cabinet. There also is a growing information technology sector, especially information technology training and software development. The tourism sector has been impeded by the volatile security situation.

Industry Sector accounts for 24% of GDP in 2007. The textile, apparel, and leather products sector is the largest, accounting for 39% of total industrial output. The second-largest industrial sector, at 22% of total manufacturing output, is food, beverages, and tobacco. The third-largest industrial sector is chemical, petroleum, rubber, and plastic products. The construction sector accounts for 7% of GDP. Mining and quarrying accounts for 2% of GDP.

Agriculture Sector has lost its relative importance to the Sri Lankan economy in recent decades. It employs 33% of the working population, but accounts for only about 13% of GDP in 2007.

Rice, the staple cereal, is cultivated extensively. The plantation sector consists of tea, rubber, and coconut; in recent years, the tea crop has made significant contributions to export earnings.

FORECAST SUMMARY (% unless otherwise indicated)

Source: Economist Intelligent Unit  a: Actual. b: Economist Intelligent Unit Estimates. c: Economist Intelligent Unit Forecasts.

FISCAL POLICY

The Fiscal Policy was formulated within the overall development strategy and broader targets enunciated in the Ten-year Vision of the government. The overall fiscal policy and fiscal operations in 2007 were steered with the objective of Meeting Targets in the Medium Term Macro Fiscal Framework (MTMFF) for 2006-2009, which was released along with Budget 2007.

The government will continue to pursue populist policies, with an emphasis on rural development and infrastructure. The budget deficit (including grants) will fall gradually in 2008-12, to stand at 5.7% of GDP in 2012. GDP growth will average around 5.5% a year in 2008-12. Exports and the services sector will remain the main drivers of the economy during the forecast period.

MONETARY POLICY

The Monetary policy objectives, strategy and targets for 2007 were developed by the Central Bank of Sri Lanka mainly after considering the expected macro economic developments for 2007, the higher monetary expansions experienced in 2006. Accordingly, a set of tighter monetary policy targets were fixed for the year 2007 and strong measures were implemented to realize them. Central Bank of Sri Lanka tightened its monetary policy stance in 2007 to reduce high monetary expansion and the demand driven inflation. The central bank of Sri Lanka continued its monetary policy operations within the monetary targeting policy framework under an independently floating regime which maintained Statutory Reserve Ratio (SRR) at 10% and the Bank Rate at 15%.

FOREIGN TRADE & PAYMENTS

Sri Lanka’s exports (mainly apparel, tea, rubber, gems and jewelry) are estimated at $7.6 billion and imports (mainly oil, textiles, food, and machinery) are estimated at $11.5 billion for 2007. The resulting large trade deficit was financed primarily by foreign assistance, commercial borrowing, and by remittances from Sri Lankan expatriate workers. Sri Lanka must diversify its exports beyond garments and tea. Garment exports face increased competition following the 2005 expiration of the worldwide Multifiber Arrangement. The tea industry is challenged by a shortage of plantation labor and by growing competition.

Exports to the United States, Sri Lanka’s most important market, are estimated to be around $2.1 billion in 2007, or 27% of total exports. For many years, the United States has been Sri Lanka’s biggest market for garments, taking almost 60% of total garment exports. India is Sri Lanka’s largest supplier, accounting for 21% of imports valued at over $2 billion. United States exports to Sri Lanka are estimated to be around $210 million in 2007, consisting primarily of textiles and specialized fabrics, tobacco, newsprint, food and beverages, chemicals, synthetic rubber-primary, electrical apparatus, telecommunications equipment, computers and accessories, and industrial supplies.

Sri Lanka is highly dependent on foreign assistance, with the World Bank, the Asian Development Bank, Japan, and other donors disbursing loans totaling $912 million in 2006. Foreign grants amounted to $301 million in 2006. While implementation of aid projects has been spotty over the years, the government is trying to improve this record by streamlining tender processes and increasing project management skills

Share Investment External Rupee Account (SIERA)

As per the current regulations, foreign investors as set out above are required to invest through a Share Investment External Rupee Account (SIERA) maintained with any commercial bank in Sri Lanka. The Procedure for arranging payments through a SIERA account is itemized below:

Foreign investors may use the service of a custodian bank as an intermediary when investing through a SIERA.
Payment for shares should be made through a Cheque/Bank draft or bank guarantee drawn/obtained out of funds in the SIERA and made payable to “Ceylon Development Fund – PRIVATE PLACEMENT” subject to the terms and conditions set out in this Memorandum.

Cheques/Bank Drafts and bank guarantees should be endorsed by the issuing custodian bank to the effect that such payment has been made against funds available in the individual’s SIERA. The endorsement must be clearly indicated on the face of the Cheque/Bank Draft or bank guarantee. Alternatively a document detailing the endorsement should be submitted along with the payment of application.

Application supported by remittances not endorsed by the custodian bank in the manner prescribed above will be rejected at the outset.

Foreign Currency Banking Unit (FCBU)

Foreign Nationals having inward remittances of foreign currency in a Foreign Currency Banking Unit (FCBU) account in any commercial bank operating in Sri Lanka could apply for shares through this account. This procedure would protect a prospective investor from any losses accruing due to fluctuating exchange rates. Enumerated below is the process for arranging payments through this account:

The applicant should forward the Application supported by a Cheque, Bank draft or Bank guarantee drawn in applicant’s FCBU account and made payable to “Ceylon Development Fund –PRIVATE PLACEMENT” subject to terms set out in this Memorandum in lieu of pending allotment of share.

Upon allotment of shares, foreign currency to the extent of the Sri Lanka Rupee equivalent value of the shares allotted should be credited to a SIERA opened in favor of the Applicant.

Cheques and Bank Drafts should be endorsed by the issuing custodian bank to the effect that such payment has been made against funds available in the individual’s FCBU account. The endorsement must be clearly indicated on the face of the Cheque or Bank draft. Alternatively a document detailing the endorsement should be submitted along with the payment and Application.

Governing Law 

This offer and the Subscription Agreements will be governed by, and construed in accordance with, the laws of Sri Lanka. Each Investor irrevocably submits to the jurisdiction of Sri Lankan courts in respect of these matters. This does not prevent an action being taken against an Investor in any other jurisdiction.

The Company shall be governed by and construed in accordance with the Laws, rules and regulations from time to time in Sri Lanka. Investors irrevocably and unconditionally agree to submit to the jurisdiction of the courts of Sri Lanka.