March 29, 2014

SriLankan Airlines, economy and tourism

Published : 1:17 am December 30, 2013 | 1,602 views | No comments so far |

SriLankan Airlines CEO Kapila Chandrasena estimates aviation industry’s contribution to national economy at 3.8% of GDP, of which SriLankan Airlines’ contribution is at 2.2%. With a GDP value of $ 60 billion, 2.2% works out to around $ 1.3 billion.
He said total contribution to economy comprised of 2.2 percentage points from UL and an estimated 1.6 from other airlines including Mihin Air.
“As travel and tourism grows, their contribution to the economy will rise in tandem and we forecast in the next five years the overall industry contribution to be around 5 or 6%, with SriLankan Airlines giving a major impetus,” Chandrasena said.
The future scenario compares well with 6% by Greece or over 5% in Hong Kong. Malaysia’s contribution is around 3% whilst Thailand and New Zealand are higher at 9% and 11% respectively.
“Sri Lanka is strategically located to harness the predicted boom in tourism, especially out of India and China. Our new fleet will help us position SriLankan Airlines effectively to tap this growing segment,” the CEO said.
Demand out of Sri Lanka grew at an impressive annual growth rate of 8.6% (net of capacity) for the past two years, and is forecast to maintain the same trend for next five years, according to the SriLankan Airlines CEO. Combined total number of passengers carried during the two years (2011/12 and 2012/13) was 7.86 million, with trend forecasts showing the figure to rise to nearly 12 million by 2017/18.
“Demand into Sri Lanka out of key markets is showing very good growth prospects, with Asian countries leading the growth,” he said, adding that “Sri Lanka is located in an enviable position to capture some of the strongest and fastest growing regional travel flows in the world, including India and China.”
For example, air passenger traffic in India and China is forecast to grow by 70% by 2017/18. Intra-Asian travel is also estimated to boom further by 2030 as Asia Pacific’s middle income class rapidly grows. Colombo’s attractiveness as a hub to facilitate some of the strongest and fastest growing travel between North East Asia and Europe, South East Asia and India, South East Asia and Middle East, Southeast Asia and Europe and China and Europe will be greater as well.
In the first quarter of 2014, SriLankan will formally join the oneworld alliance. This, among other major benefits, will enhance rewards and recognition for top-tier FlySmiLes members with ability to earn and redeem with any alliance member.
“Being invited to join the oneworld alliance and being the first carrier in the Indian Ocean is a major boost for SriLankan Airlines. We should be on course to join this prestigious and biggest alliance by April 2014,” Chandrasena added.
oneworld is an alliance of the world’s leading airlines committed to providing the highest level of service and convenience to frequent international travellers. These include leading brands from each global region. Besides American, they feature LAN from South America; airberlin, British Airways, Finnair, Iberia and Russia’s S7 Airlines from Europe; Qatar Airways and Royal Jordanian, from the Middle East; Asia-Pacific’s Cathay Pacific Airways, Japan Airlines, Malaysia Airlines and Qantas; and some 30 affiliated airlines. Besides SriLankan Airlines, US Airways and Brazil’s TAM are also lining up to join early next year.
With the addition of these airlines, the oneworld network will expand to almost 1,000 destinations in more than 150 countries, served by 14,250 daily departures – equivalent to a oneworld flight taking off or landing every three seconds around the clock – carrying 475 million passengers last year and generating annual revenues of US$ 140 billion. There are 140 million members of established oneworld airlines’ frequent flyer programs as well.

March 22, 2014

Frontier Markets Private Equity firm of the year in Asia Region for 2013

Jupiter Capital wins global award

Indika Hettiarachchi, Managing Director of Jupiter Capital accepting the award from Drew Wilson, Asia Editor, PEI and Clare Burrows Staff Writer, PEI.

Jupiter Capital Partners, has been named the "Frontier Markets Private Equity firm of the year in Asia Region for 2013". Jupiter was awarded this honour at the Annual Awards organized by Private Equity International (PEI).

Other nominees for this award were Vietnam based Mekong Capital and global investment firm Kohlberg Kravis and Roberts. PEI is a world's leading financial media group specialized in business to business information market in private equity, private real estate, private debt and infrastructure.

PEI has been conducting annual awards since 2001 and awards are conducted under three geographic regions: Asia, Americas and Middle East, Europe and Africa.

Jupiter was launched in 2012 as the first Sri Lankan independent private equity firm with the aim of developing a platform to channel equity investments into Sri Lanka's Small and Medium Enterprises. The Company has put in place an investment platform where Sri Lankan institutional and individual investors can invest in high growth SMEs. Jupiter is also working towards establishing a US$ 75 million Sri Lanka Fund with funding from international institutional investors. In addition, Jupiter provides investment placement services for larger private equity deals.

Commenting on the award Indika Hettiarachchi, Managing Director of Jupiter said: "This award is a testament to our success in drawing attention to Sri Lanka among global private equity and institutional investment community. This award places Jupiter among the world's leading Private Equity firms and it is a rare recognition for a one year old firm based in a small frontier market like Sri Lanka. This award also reflects global investor interest in Sri Lanka.

- See more at: http://www.dailynews.lk/?q=business/jupiter-capital-wins-global-award#sthash.lG4UsRrD.dpuf

Sri Lanka lubricant market stagnant in 2013: Chevron

18 Mar, 2014 10:59:22

Mar 18, 2014 (LBO) - Sri Lanka's lubricant market is estimated to have stagnated or contracted further in 2013, on top of a decline in 2012, Chevron's unit in the island said while cautioning against state attempts to expand trade freedoms of the people.

"We estimate that the lubricants consumption would have remained stagnant or reduced further on top of the 4 contraction in 2012 due to adverse weather conditions in the first quarter of the year, reduced vehicle imports and longer oil drain intervals," Chevron Lubricants chief Kishu Gomes told shareholders."The reduced demand from the thermal power sector also contributed to the lower consumption of lubricants."
Thermal power generation has since picked up amidst dry weather.
Sri Lanka's lubricant market is estimated at around 55 million litres a year.
While revenues fell to 11.2 billion rupees in 2013 from 11.7 percent in 2012, cost fell to 7.0 billion rupees from 7.9 billion, helping boost profits to 2.5 billion rupees from 2.2 billion rupees.
Gomes said raw material prices were favourable and the firm had improved efficiencies.

Anti-Competitive
The firm spoke out against state moves to relax a licensing regime and help consumers by improving their trade freedoms.
"While all big global and regional lubricant players have a presence in the Sri Lankan market, with 13 players operating in a market that is relatively small with a potential of 55 mn litres per annum, the Ministry of Petroleum Industries has initiated action to award further licences to new entrants to the lubricants industry," Gomes said.
"While more competition may be good for the consumer it becomes imperative to bring about the right regulations and put in place a legal framework to ensure sanity in the market for fair play and to safeguard the consumers."
Sri Lanka's lubricants market was at one time an absolute state monopoly, and for several years after the lube business was spun off from state-run Ceylon Petroleum Corporation it continued as a private monopoly.
The industry was opened up in stages, allowing incumbents to continue making large profits.
Mercantilist Legacy
Economic analysts say monopolies were introduced to Asia by Mercantilist imperial companies such as the Dutch East India company (VOC) and the British East India company.
In Sri Lanka the most draconian of them involved a cinnamon monopoly, but there were many others ranging from salt to tobacco.
The legacy of their grip slackened in Sri Lanka especially in the mid 19th century as free traders and other liberals especially in Britain defeated Mercantilism, economic nationalism and slavery.
However after independence from British rule, many state enterprises were created with monopolies which were enforced strictly against citizens by the elected ruling class in a range of areas that were not seen even under colonial rule, critics say.
Analysts say most modern multi-national firms which are true-capitalist companies usually thrive on competition and rely on branding and quality to win over customers rather than depending on the coercive police power of the state involving regulation, licensing or import taxes.
In Western markets there are also competition regulations against monopoly power of a dominant single player.
In general it is about 38 percent market share in the EU and 60 percent in the US, though there is debate about freely won market share.
Chevron however inherited a 100 percent state monopoly under a privatization program in the 1990s and has since seen its market share reduce amid competition.
Lube Fraud
Gomes also said there was widespread fraud in the industry involving product adulteration and 'cross filling' containers of branded with other companies, especially by unlicensed players.
"With the increased number of players that may enter the market in 2014, these issues are likely to get aggravated," he claimed.
It was not clear how the activities of unlicensed players or frauds by existing licensed players are related to the entry of new licensed players.
Gomes said the Public Utilities Commission of Sri Lanka was the shadow regulator for the industry but lacked the teeth to combat fraud.
Economic analysts say and copyright and anti-fraud laws have to be enforced and regulations should be directed at enforcing internationally accepted standards required by motor manufacturers, but limiting the number of players should not be a goal in a free country

SRI LANKA TO ALLOW MORE LUBRICANT MARKETERS

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Sri Lanka to allow more lubricant marketers

December 24

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Sri Lanka will soon grant more licenses to allow companies to sell lubricants on the island, officials said. Sandya Wijebandara, additional secretary of Sri Lanka’s petroleum ministry, told a business forum in Colombo that three companies have already applied to start dealerships.

Wijebandara said more applications were expected by the deadline. ”We are ready to license any number of players who meet the criteria,” she said. There are expectations that at least 10 other players may enter the industry.

Soumen Ganguly from Lanka IOC, a unit of Indian Oil Corp., said Sri Lanka only had a 50,000 metric ton a year market and already there are 10 players. By comparison, India has a 1.3 million ton market and there are 25 companies, he said. He felt it may be difficult to do business with 23 players in Sri Lanka. Though Sri Lanka’s Public Utilities Commission acts as the regulator for lubricants, it lacks the ability to prosecute those who sell low quality oils, Ganguly said.

Currently, Chevron, Lanka OIC and state-run Ceylon Petroleum Corp. are among the front-runners to receive the new licenses.

PUCSL Director General Damitha Kumarasinghe cited the benefits of increased competition.

(November 26, 2013)

More players to enter Lubricants market?

Lubricant player calls for an effective regulator

TUESDAY, 18 MARCH 2014 10:11

The Public Utilities Commission of Sri Lanka, which operates as the shadow regulator in the absence of a proper regulator, has not been empowered to deal with the issues confronting the lubricant industry, a top official of Sri Lanka’s largest lubricant industry player stated.

“The necessity for an effective regulator is an urgent need of the hour from the perspective of all stakeholders,” Chevron Lubricants Lanka PLC Managing Director/CEO Kishu Gomes said in his review to the company annual report 2013.

The CEO pointed out that the further issuance of licences to new players in a relatively small market, product adulteration in various forms and rebranding and distribution of products by nonlicenced players were among the issues the industry faced due to the lack of proper regulation.

“While all big global and regional lubricant players have a presence in the Sri Lankan market, with 13 players operating in a market that is relatively small with a potential of 55 million litres per annum, the Ministry of Petroleum Industries has initiated action to award further licences to new entrants to the lubricants industry,” he said.

Gomes noted that while more competition may be good for the consumer, it becomes imperative to bring about the right regulations and put in place a legal framework to ensure sanity in the market for fair play and to safeguard the consumers.

Although this issue has been brought to the notice of all stakeholders by the industry players, there has been no success.

“It is hoped that the government be judicious in issuing licences to more players, as this could have an adverse effect on the industry as a whole,” he further stated.

Gomes went on to state that product adulteration in various forms is also continuing, posing a serious risk to the consumer.

“The rebranding and distribution of products by non-licenced players also continues unabated while ‘cross filling’, the filling of products to containers proprietary to other players thereby misleading the customer and avoiding duties and taxes to the government coffers in some cases,” Gomes added.

He is of the view that with the increased number of players that may enter the market in 2014, these issues are likely to get aggravated.

Sri Lanka Pharma market size is USD450mn

Bangladesh pushes biosimilar pharma JVs with Sri Lanka

Published : 12:00 am March 22, 2014 | 32 views | No comments so far |

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First ever govt-to-govt effort of this nature mulled
With a guaranteed cold chain!: Bangladeshi Health Secy. Uddin
Can help reduce our medical import bills: Rishad

For the first time, a government to government level cooperation effort is emerging to strengthen the supply of a crucial class of medicines in the $ 450 million Lankan pharmaceutical market. The Bangladeshi pharmaceutical sector, which manufactures no less than 450 generic drugs for 5,300 registered brands, is now ready to partner with Sri Lanka to produce vital medicines used by seriously ill patients.
“Our local pharmaceutical manufacturers cater to 97% of the internal demand and they also export. We are ready to support Sri Lanka to produce biosimilar pharmaceuticals such as insulin and finalise them to finish product levels with a guaranteed cold chain. We are ready for government to government level JVs to begin with,” said Bangladesh Health Secretary M.N. Neaz Uddin.
Bangladeshi Health Secretary Uddin was addressing Minister of Industry and Commerce Rishad Bathiudeen on 20 March at the EDB premises in Colombo. Secretary Uddin is in Colombo leading a 10-member strong Bangladeshi health sector delegation to the country.
Biosimilar pharmaceutical products such as insulin, growth hormones, and hepatitis B vaccines are used by critically ill patients. It is estimated that this segment consists of around 9% of Sri Lanka’s $ 450 million overall pharmaceutical market. Bangladesh manufactures more than 450 generic drugs for 5,300 registered brands with 8,300 different forms of dosages and strengths.

All top ten pharmaceutical manufacturers are of Bangladeshi origin without being multinationals, indicating a strong domestic manufacturing base.
When it comes to Bangladeshi pharmaceutical exports, Beximo Pharmaceuticals is the leader taking for 19% of its $ 70 million exports (in 2012). The Bangledeshi domestic pharmaceutical market alone is estimated to be around $ 1.25 billion.
“Our local pharmaceutical manufacturers cater to 97% of the internal demand and they also export. We are ready to support Sri Lanka to produce biosimilar pharmaceuticals such as insulin and finalise them to finish product levels with a guaranteed cold chain. This is the first time we are looking at government to government level cooperation in the sector between both countries. We also invite Sri Lanka to visit and see some of our pharmaceutical manufacturing plants. We have high quality products and we are very competitive in pricing. Pharmaceutical joint ventures are a goal in Bangladeshi-Sri Lanka cooperation,” said Health Secretary Uddin.
“A government to government level joint venture can also help reduce our pharmaceutical import bill. Your suggestions are interesting and let us discuss terms and products on this with line agencies here. Our Economic Development Minister Basil Rajapaksa is keen to commence a pharmaceutical zone in Sri Lanka and your initiatives can help advance his vision,” said Minister Bathiudeen. “We are thankful for your invitation to visit your pharma plants of which we will consider favourably,” he added.

March 18, 2014

Potential output of Sri Lanka: It is dangerous to speed the car beyond installed engine capacity

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Once this condition is met, there will be neither inflation nor deflation in the economy. Thus, the potential output is the level of output which the economy can attain without causing either inflation or deflation. Both inflation and deflation are considered two public enemies to be fought. Inflation reduces real wellbeing of people, enriches borrowers at the expense of savers and lenders, taxes exports and subsidises imports, puts pressure on the exchange rate to depreciate and causes havoc and chaos in an economy, to mention but a few of the evils of inflation.
Deflation leads to a reduction in output, employment and the use of resources in an economy. Hence, to sustain economic growth in the long run, a proper economic policy should seek to avoid either one and establish stability in prices. That can be done only by sticking economic growth to its potential output. The objective of the IMF Working Paper has been to estimate the potential output in Sri Lanka so that the economic policy makers could design a growth path helpful to its long term sustainable growth.
Both positive and negative output gaps are dangerous
If an economy’s actual output differs from its potential output, it generates an ‘output gap’ – the difference between the two expressed as a percentage of the potential output. If the actual output is bigger than the potential gap, it creates a ‘positive output gap’ and if it is smaller, a ‘negative output gap’. One might conclude that a positive output gap is a desirable outcome since it produces more of the goods and services which an economy can produce based on its installed capacity. But this is not so. That is because any positive output gap is a temporary achievement since the economy has no capacity to sustain it forever.
As such, when the output increases above the potential output, it generates a new money income increasing the aggregate demand in the economy. But when the output falls in the subsequent years, the demand becomes higher than the supply creating an excess demand. Economists call this ‘overheating the economy’ just like a vehicle driving above its engine capacity gets overheated. Unless the cooling mechanism of the vehicle is effective, the overheating could cause permanent damage to the engine.
Similarly, in the case of an economy, overheating causes inflation generating all the inflation related evils in the economy. If there is a negative output gap, then, there is deflation causing unemployment and economic recession. Hence, proper economic policies should avoid both. As such, the advantage of estimating the potential output is the availability of a benchmark for policy makers, namely, those in the Central Bank and in the Ministry of Finance, to assess the desirability of economic activities.
Monetary policy action to depend on the type of output gap
If there is a negative output gap, then, of course, it justifies a central bank’s loosening its monetary policy stance to increase the aggregate demand to the level of the potential output. However, once the economy reaches the potential output level, the bank should immediately halt its expansionary monetary policy to avoid the increase in the aggregate demand over the aggregate supply and thereby prevent the economy from getting overheated.
If there is a positive output gap, the Bank’s monetary policy stance should be in the other way about. It should take restrictive monetary policy action to curtail the aggregate demand and eliminate the inflationary pressures. Accordingly, an accurate knowledge of the size of the potential output in an economy is the most important prerequisite for a central bank to design its monetary policy programme.
Potential output is determined by an economy’s installed capacity
The output of an economy is similar to the output produced by an individual. If an individual works longer hours using more of his labour, applies new knowledge bringing his human capital into production and sophisticated equipment facilitating production process, he could produce more. These are called inputs – labour, technology and physical capital – used for production.
At any time, a given level of labour, technology and physical capital will determine the maximum output – or potential output in economists’ terminology – he can produce. If he can acquire more labour, better technology and better equipment, he can increase his potential output. Similarly, for an economy, there is a potential output level fixed by the available labour, technology and physical capital.
If an economy desires to increase this potential output, one of the prerequisites is to increase each one of them. Since an economy is a growing enterprise, these are not fixed but subject to constant change. The infusion of new inputs will make the conditions better; in the opposite, the non-development of new inputs or neglect of the maintenance of the existing inputs will reverse the initial growth.
Temporary episodes of faster growth are not sustainable
An economy might show some periods of faster growth in the output followed by a decline in the output thereafter. These are called temporary improvements in the economy. Any researcher seeking to estimate the potential output will have to eliminate these temporary episodes of increased output and concentrate on the permanent growth as determined by the installed capacity of an economy.
To do so, researchers have to use advanced estimation techniques and subject them to rigorous testing methods. This is exactly what the four researchers under reference have done. They have built an economic model highlighting the output gap, unemployment gap and the capacity utilisation gap and tested the model with the quarterly data for Sri Lanka from the beginning of 1997 to the end of 2012.
Hysteresis Effect: Past behaviour matters
In building the model, an important element they have used is the impact of the past behaviour of a particular factor on its current behaviour, known as the Hysteresis Effect in science and used by economists.
Accordingly, past inflation affect the current inflation by causing to have higher or lower inflation expectations, past unemployment will affect the current unemployment by pushing the wages upward and past capacity utilisation will affect the current capacity utilisation by creating constraints for new capacity utilisation. This is intuitively understandable since what we do today is guided by what we have experienced yesterday. It is valid for both negative and positive experiences but more strongly for negative experiences. For instance, if we our gas cooker had a leak leading to a fire in the cooker yesterday, it is quite natural for us to become extra cautious and restrain ourselves in our behaviour.
Sri Lanka’s potential growth rate is more or less equal to the actual growth
By applying different estimation methods used by reputed economists, the researchers have come up with an estimate of an annual potential output growth experienced by Sri Lanka ranging between 6.5% and 6.8%. On average, this works out to an annual potential output growth of 6.7%. This is more or less equal to the country’s actual average output growth during 2002-12 which stands at 6.4%.
Accordingly, on average, Sri Lanka had had a slight but negligible negative output gap in the past. However, it poses problems for the authorities who aspire to increase the growth rate above 8% per annum over the next decade since there is no installed capacity in the economy to sustain that growth rate as at present. Though the country may have temporary surges in economic growth as it had experienced in 2010 immediately after the end of the war, such growth rates cannot be continued unless there is an expansion in its capacity.
Enhancement of capacity is a matter for the government and not for the central bank
This is a problem to be tackled by the Ministry of Finance and Ministry of Economic Development and not by the Central Bank. Why the Central Bank cannot do it is because it does not have real resources except the power to print money. If money is printed to increase the potential output, the result is the increase in the aggregate demand over the potential output thereby overheating the economy.
But, the Government can have real resources transferred to it through taxation and direct those real resources to enhance the potential output capacity of the economy. But those expenses of the government should be properly prioritised, directed to productive infrastructure and development of human capital including research and technology. But it requires a reorientation of the country’s budgetary policy.
A multi-pronged approach to enhance capacity
To increase the capacity to raise its potential output, Sri Lanka should have a multi-pronged approach. It involves, on the economy side, investment in necessary and productive infrastructure, acquisition of new technology, employment of the unemployed youth in productive employment, acquisition of modern technology and management practices and diversion of a greater volume of output for continuous investment.
On the fiscal side, it involves many reforms in the budgetary processes. One is the diversion of unproductive and inefficient budgetary allocations to necessary human capital development – that is, more investment in education, health and acquisition of technology. Another is the reform of the important but presently loss making public enterprises and closing or handing over to private sector the unimportant public enterprises.
Halt the expansion of the State sector
A third reform is the halting of undesirable public sector expansion which has become a serious problem for taming the budget and bringing down the need for borrowing more simply for repaying the principal and paying interest. On the economic environment side, the necessary reforms should include protection of property rights, observance of the rule of law, maintenance of law and order and establishment of an independent Judiciary to facilitate the concerned citizens to seek redress against what they perceive to be injustice committed by governmental authorities.
On the business side, action should be taken to improve the country’s ease of doing business. In the global arena, Sri Lanka should be integrated seamlessly to the international markets so that what it produces above the country’s aggregate demand could be sold to foreigners. These are difficult but not impossible reforms if the authorities make a firm commitment to undertaking them.
Without these reforms, the continued expansion of the economy through liberal monetary policy and expansionary fiscal policy will only overheat the economy creating inflation and along with that inflation, bringing all the evils of inflation to the economy.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank, can be reached at waw1949@gmail.com.)

March 11, 2014

Sri Lanka - remittances top forex earner; oil top forex spender

Migrant worker remittances to top US$ 7 billion

Rasika Somarathna

Foreign Employment Promotion and Welfare Minister Dilan Perera expects Sri Lankan migrant worker remittances to surge over US $7 billion in 2013, an increase of at least US $1 billion from the previous year.

In 2012, migrant worker remittances rose to US $6.1 billion, the highest contribution from a single sector to the country's foreign revenue. The workers' remittances were 10 percent of the country's GDP in 2012. While noting that present trends indicate migrant worker remittances will hit the US $7billion mark for the first time this year Minister Perera said that his Ministry targets remittances of US $10 billion by 2020. Current figures show with over 1.7 million Sri Lankan's working abroad, migrant workers constitute 17 percent of Sri Lanka's working population.

The Minister meanwhile attributed the surge in worker remittances to the thrust adopted by his ministry to increase the migration of skilled manpower for better salaries and perks rather than unskilled and female domestic workers.

The Minister was of the opinion that Sri Lanka could put these large foreign revenue generated by its migrant workers to better use if the country can curb monies spent on imports, especially crude oil, medicine and certain food items. The monies spent by Sri Lanka to import crude oil is equivalent to the amount remitted by its migrant workers in 2012, the Minister pointed out. In addition to crude oil the country also spends heavily to buy sugar, wheat flour and medicine, he noted.

He said indications were that Sri Lanka will be able to produce its own crude oil in the future and also become self sufficient in its Sugar needs. Also the government has been able to save a huge drain on foreign exchange in the import of crops such as rice, flour and several other food items by producing the required amounts.

"This augurs well for the country's future and this would enable our foreign earnings especially those contributed by the migrant workers to be used for more gainful development work to benefit the country as a whole" he added. The Minister noted the above participating in a function to promote sugar cane cultivation in the Halielea area recently.

http://www.dailynews.lk/local/migrant-worker-remittances-top-us-7-billion

March 03, 2014

Central Bank Economist - excellent interview

The economy, decoded

Hassan Zaman, chief economist at Bangladesh Bank, speaks on economic trends

Hassan Zaman

The last quarter of 2013 has been unusual for Bangladesh, as the economy took a terrible beating ahead of the national elections. In such a testing period, all major indicators are now under the microscope for analysis, to see how they fared. With economists making assumptions of their own, it is time to look at the fine print on the macroeconomic fundamentals. The Daily Star caught up with Hassan Zaman, chief economist at Bangladesh Bank, to get insights into economic goals.

The Daily Star (TDS): How do you evaluate the post-election economic situation in Bangladesh?

Hassan Zaman (HZ): The services sector is about 50 percent of our economy and the recent return to normal business activity is vital for this sector as trading, transport, education, health and personal services are all dependent on having people go about their normal lives. As for manufacturing, impressive export performance this year suggests that existing capacity is being utilised effectively, though there is still a bit of a 'wait and see' sentiment related to making major new investments. We are however seeing signs of greater optimism with a slow uptick in credit demand and potential foreign investors resuming visits. Our current forecast is that economic growth is likely to range between 5.8 percent and 6.1 percent with the assumption that January-June will partially make up for losses suffered in the first half of the fiscal year, especially in the services sector.

TDS: What would explain the difference in growth forecasts by the central bank and the finance ministry?

HZ: There is an important difference between a growth target set at the beginning of the year, which is the finance ministry's prerogative, and a growth forecast that is a prediction typically updated regularly during the course of the year. It is good to have a range of professional economists engage in growth forecasting, whether they are in different government agencies or in think-tanks. That is why the Bangladesh Bank is now investing in growth forecasting just like other central banks have their own growth forecasts, which are often different from other government agencies. It is then useful for policy purposes to have coordination meetings between finance and planning ministries and the central bank to share these forecasts and views on economic trends.

TDS: How do you explain this year's drop in remittances from last year?

HZ: First of all, there has been a 36 percent drop in the number of new migrants going abroad in fiscal 2013 compared to the previous year. So, this is a key factor. However, this could have explained a lower growth in remittance this year, but the fact that remittance growth has so far been negative must also mean that the existing stock of migrants are sending back less money through official channels. This may have been due to pre-election jitters, which might be reversed in the months ahead. We need a few more months before we draw definite conclusions on this. Currently, our external balances are very comfortable, but in the medium term, we obviously need remittance growth to resume and need relevant authorities to step up efforts to send people abroad. Meanwhile, BB will seek to make it more cost-effective to use official remittance channels.

TDS: What's your view on a think-tank's recent predictions for double-digit inflation in Bangladesh by the middle of the year?
HZ: Inflation is currently at around 7.5 percent and I doubt it will be double-digits by the middle of the year. However, with proposed hikes in electricity prices and wages in both the public and private sectors, there are inflationary risks ahead as the Monetary Policy Statement (MPS) pointed out.

TDS: What's your take on some economists expressing that the central bank should have set the inflation target at 6 percent for the current fiscal year and 5 percent two years later?

HZ: Inflation hits the poorest the hardest, particularly those on fixed incomes. I therefore agree that progressively over the next two years, we should reduce our inflation targets to the range you indicate, though this is done in consultation with the finance ministry during the budget process. We did not want to bring our inflation target to lower than 7 percent in fiscal 2014, as it would have implied putting the brakes on monetary expansion, which in turn would have dented the prospects of economic recovery.

TDS: How do you describe the latest monetary policy statement—contractionary, accommodative or traditional?

HZ: I think there is little point to giving a one-word adjective to a monetary policy statement. The point of a monetary policy statement is to review the progress we have made over the past six months and then provide clear signals as to the priorities Bangladesh Bank sees looking forward over the next six months and the medium term. Specifically, the MPS shares some key monetary growth numbers, which we believe will contribute to national inflation and growth objectives as well as articulate priorities in the areas of exchange rate management, financial markets and monetary-fiscal coordination.

TDS: The central bank has announced a monetary policy following severe political unrest, but no changes were made to the policy rates. As a result, there are no differences between the new and old policy statements. Was there scope for change?

HZ: We did not lower the policy rates as average inflation has been creeping up in the last few months, and there are inflation risks ahead. So in many ways, there is policy continuity. However, in our most recent MPS we emphasised some areas that are different from the previous one. For instance, we showed that in addition to the monetary policy, the central bank has other policy instruments in the area of financial sector regulatory and promotional policies, which can be used to support economic growth. These were used to give businesses badly affected by the recent shutdowns more time to repay loans; various export-promotion incentives were enhanced as well, especially through the Export Development Fund.

TDS: What are the hurdles to formulating a monetary policy?

HZ: There are actually not too many hurdles as such; the good thing is that we are given the independence to devise what we feel is the right monetary stance, and we do not get directed by any other part of the government, except of course, the extent of government borrowing from the banking system is set at the start of the year. In general, we take into account external opinions and people will have different views on our monetary stance, our exchange rate interventions, financial sector policies and they are typically voiced around the time of our twice-yearly MPS. We know that not everyone will be happy with the directions we choose to take but we are not here to win popularity contests, and we do what we think is best for the economy.

TDS: The Federation of Bangladesh Chambers of Commerce and Industry has said that it sees no instructions in the MPS on cutting interest rates? What's your reaction?

HZ: We can only directly bring down the rates, which we lend to other banks, but we cannot set retail interest rates, as that is the bank's decision. Despite a fair amount of liquidity, bank-lending rates are only coming down slowly due to a number of reasons. The impact of a few high-profile scams lingers over the industry with unsettled claims still being resolved. Other poor lending decisions taken earlier have also unfortunately limited the space banks have to lower rates. BB is working with the banks on the unsettled bills issue and in general, on improvements to the loan approval process. Second, competing interest rates, such as savings certificates and government treasury bills/bonds, are at levels that have set benchmarks for risk-free investments for individuals and banks alike and are now significantly above inflation. Third, there is still insufficient competition in the form of different sources of finance and our domestic banks are compelled to reduce operating costs and spreads—though we are now encouraging these alternative sources.

TDS: What are the merits and risks to private equity and foreign loan sources in the MPS that you mentioned?

HZ: I have discussed the importance of competition in our financial sector beyond just among banks and nonbank financial institutions. It is critical for our large industries to be able to access multiple sources of financing, so that neither the bank nor clients are too dependent on each other. Moreover, tapping our capital market is not only useful for the depth of the market, but also for financial disclosure, transparency and improved corporate governance of these firms. As for private equity and venture capital, we should encourage these, as it is critical both for start-ups as well as established firms. Several large funds are interested in Bangladesh but we need to work on some regulatory issues related to their valuation at the end of their investments and lock-in period issues in order to encourage these investments. As for access to foreign loans, the interest rates are significantly lower and hence, attractive and from a macro viewpoint these are different from foreign portfolio investments, which are the most likely to cause sudden external capital flight concerns as happened in India last year. That said we are monitoring their growth closely.

TDS: How do you respond to drastic falls in default loans in the last quarter of 2013?

HZ: I would not read too much into this. The last quarter of 2013 was an unusual one for obvious reasons and in order to give firms some breathing space, the central bank has temporarily relaxed loan-rescheduling rules. There was also some real cash recovery but it is hard to separate these factors and hence, it is impossible to draw inferences on the health of the banks from last quarters' figures. It is best to wait for the default loan figures that will come out later this year to get a more meaningful picture.

Published: 12:00 am Sunday, March 02, 2014

Last modified: 12:17 am Sunday, March 02, 2014

http://www.thedailystar.net/exclusive/the-economy-decoded-13644

Unemployment -

Educated unemploy-ment is worrying

High time to link education to job market

ECONOMIST Intelligence Unit of the famous British journal Economist in a report analysed by Prothom Alo reveals that 47 percent of graduates in Bangladesh are jobless. This is the highest unemployment figure among the educated in South Asia, next only to Afghanistan.

Add to this the overall figure of 22 lakh entering the job market in Bangladesh every year with only 7 lakh getting any job. So, at 14.2 percent unemployment rate, six crore will be jobless by 2015. Leave aside more than one crore six lakh daily wage earners eking uncertain living.

But if we were to raise the unemployment figure only by 2 percent, the GDP growth rate could have reached 8 percent. Conversely, rising unemployment is a big drag on the economy and even on the society in that frustrated youth are susceptible to evil influence of drugs and violence. With job generation, productivity and wealth creation awaiting the much-needed push, the newcomers are mere headcounts. But they shouldn't have been a liability if they could be turned into manpower in tune with job market requirements both at home and abroad.

Our policymakers should strategise to reap demographic dividends from the burgeoning youth population. This calls for fundamental shift in educational contents and enrolment patterns.
The overarching need is for making critical investments in education, research, technology and development with adequate policy support for assured job creation projecting into the future.

Published: 12:00 am Monday, March 03, 2014

Bangladesh - few highlights

Economy

Forex

Garment exports are the main foreign exchange earner (80% of Bangladesh exports are garments)
Remittances are the second most important mainstay of its economy after garment exports

Exports

Garments are the main exports (80%). Exported primarily to US, Europe, Canada

Good growth: Bangladesh's garment exports increased from $6.8 billion in 2005 to $19.9 billion in 2012, recording a compounded annual growth rate (CAGR) of 16.6%. During the same period, India's outward shipments rose from $8.7 billion to $13.8 billion, a CAGR of just 6.8%.
Infrastructure support: Bangladesh offers sops like uninterrupted power and a priority at the Chittagong port for shipment. "They have to take it very seriously as the garment exports contribute 80% of Bangladesh's total export earnings."
The association surveyed the $20 billion industry, the world's second largest and a mainstay of the Bangladesh economy, to determine which of the 4,500 factories were paying the new legally required wage
Bangladesh's government agreed last November (2013) to raise the minimum monthly wage for the country's four million garment workers to $68, an increase of 77 percent, after protests and strikes in the crisis-hit industry.
Riots don't impact negatively in medium-term: Asked if recent events like a spate of fires and collapse of garment factories, which led to some anxiety over safety norms at these units among the Western retailers sourcing goods from the country's eastern neighbour, is favourable for India, Iyer (Exim Bank India Chief General Manager) replied in the negative.

He said in October 2013, because of these incidents, there was a slowdown in Bangladeshi garment exports, which grew only 3%. But initial trends point out to a robust growth of over 41% in November, suggesting a healthy bounce back by the key sector.

Iyer said many of the sourcing companies have South Asia offices situated in India, but they source garments from either Bangladesh or Sri Lanka.

Tea is the next big export after garments

Economic Growth

Politics affects economic growth in medium-term:

Lower economic growth: Rarely could politics be so damaging to an economy. Bangladesh, whose growth in 2012-13 was a healthy 6.3%, was aiming to achieve 7.2% in 2013-14.The World Bank's half-yearly report says the most Bangladesh can achieve is 5.7% growth in the current fiscal. Disruptions caused by political turmoil were responsible for the drop in growth. The opposition agitation adversely affected the economy, whose fundamentals inspire a lot of confidence.
Drop in investment - both domestic and foreign capital stays away: The Bank says that the turmoil over elections has led to a drop in investment, with both domestic and foreign capital staying away from investing in Bangladesh.
Drop in imports as country is not importing manufacturing equipment & capital goods. This affects economy in the long run. Due to rising exports and drop in import costs, Bangladesh registered a huge surplus in foreign transactions in the first half of this fiscal, around $1.38 billion, almost thrice than in the same period last year. But Bangladesh economists are worried. The drop in imports shows the country is not importing manufacturing equipment and capital goods. Zaid Bakht of the Bangladesh Institute of Development Studies says this will affect the economy in the long run.
Transportation most affected during violence: Failure to transport goods to urban markets hit farmers hard because Bangladesh harvested its third successive bumper crop this season. Exporters were desperate because they were not able to reach garments and other commodities to Chittagong port for shipping because the violence on the Dhaka-Chittagong highway was the worst with hundreds of trucks burned down on the Sitakunda-Satkania stretch.

Mutual Funds

The mutual fund sector registered a gain of 8.73 percent last year against 5.19 percent by DSEX (2013)
The biggest gainer last year was the Fourth ICB Mutual Fund, which rose by 37.69 percent, while the ICB Islamic Mutual Fund was the worst loser, plunging by 2.3 percent.
The top assent manager in terms of asset under management is Race Asset Management Company having 45 percent market share in the industry, followed by LR Global Bangladesh Asset Management Company and AIMS of Bangladesh.

Politics

Hasina - Awami League
Khaleda Zia - Bangaldesh National Part (BNP)
Jamaet-e-Islaam - supports BNP
22 years equally shared by Hasina and Khaleda Zia: Out of last 22 years (except for 2 years), the country was run for a equal number of years by Hasina and Khaleda Zia. (as on Jan 2014)