LMD Interview – Exploring Sri Lanka’s Health Trends


Date – 18th July 2018

What are the trends affecting population growth in Sri Lanka?

  • Experts on demographics predict that by 2040 the population would be in the range of 22-24 Mn
  • A recent trend affecting this is the uptick in fertility rates that has been on the rise for various reasons
  • However, a factor negatively affecting population growth is the growth in Non-Communicable Diseases (NCD’s).
  • According to the World Health Organisation (WHO) 1/5th of the deaths are caused by this. In Sri Lanka, Cardiovascular related problems and Diabetes are the most common NCD’s.

How prepared is Sri Lanka with respect to dealing with an aging population?

  • This is a usual phenomenon you observe as health standards and thus life expectancy improves
  • Currently there are approx. 2 Mn people (approx. 10% of the population) over the age of 65.
  • This trend is expected to continue and by the year 2040, the aging population would account for about a quarter of the total population.
  • A particular challenge is that those who are in the very old category; i.e. people who are above 70-80 years of age are growing at a faster pace.
  • This raises many challenges such as increasing pension and public health care expenditure
  • This is an area which the country as has not invested in and hence it gives rise to opportunities for the private sector to invest in fields such as geriatric care and assisted living

What are the findings with respect to female labour force participation?

  • The usual trend is that as health standards improve, female labour force participation increases.
  • Sri Lanka has seen an improved participation rate, but in the past few years it has stagnated at around 35%.
  • But this is a global phenomenon; social and cultural factors usually start to shift once a country has achieved an advanced stage of development during the late stage of its demographic transition.
  • This is an area that cannot be ignored since in the context of Sri Lanka there is a large female population and females account for a larger share of the educated population.
  • Day care facilities and related support services is an area that has been neglected by government policy while the private sector should look to do more to facilitate this.

The Global Economy in July 2018

New developments in trade tensions were a highlight of global markets in July, with the US imposing $34 billion worth of tariffs on Chinese imports, with China responding in kind. The US later threatened further tariffs of $200 billion after failing to make progress in negotiations. On a more positive note, the US and the EU agreed to work toward eliminating trade barriers on industrial goods, spurring gains in markets. Emerging markets saw a moderate recovery from the sell-off seen in June, while being pressured by falling oil prices. Meanwhile, US markets enjoyed a positive month on the back of a strong quarterly earnings season and a positive US jobs report.

The Federal Reserve described the US economy as strong for the first time since 2006, indicating that it is on course to raise rates in September, while a December rate hike is still on the cards. The US Yield curve has continued to flatten close to levels not seen in 11 years, supported by upbeat data on the jobs market and business activity, which reinforced expectations of further interest rate hikes by the Federal Reserve.

The Turkish lira and Chinese yuan also hit record lows, attributed to pressure from rising trade tensions and unanchored inflation expectations stemming from a loose monetary policy, respectively.  Portfolio flows to emerging markets reversed from the outflows seen in June, with $11.9bn in portfolio inflows, according to the Institute of International Finance (IIF). Analysts however warned that “further yuan weakness could prove to be a significant headwind for such portfolio flows as it has in the past”, citing the yuan’s fall to 13-month lows amid policy easing and trade tensions with the United States.

Meanwhile, Brexit uncertainty has led to the Sterling pound dropping to 11-month lows against the dollar, amid the increasing likelihood of a no-deal Brexit. However, the BOE raised interest rates, on the belief that the economy is operating close to full capacity. Analysts have criticised the move, stressing continued Brexit uncertainty.

Brent crude oil prices slowed from the surge seen in June, on increasing US crude stockpiles and worries that trade tensions could hit energy demand. Increasing output by top oil exporter Saudi Arabia has also weighed on prices. Prices however received some support from strike action in Norway and Iraq, in addition to production outages in Canada and falling output in Libya. Prices have moved in a $72.00-$78.00 range this month.

Channel Eye Interview – Exploring Sri Lanka’s Health Trends


Date – 13th June 2018

What are the current trends relating to fertility rates?

  • Typically as health standards of a country improves, fertility levels tend to drop.
  • This has indeed been Sri Lanka’s experience where the fertility rate was on a downward trend starting from the 1960’s till late 1990’s
  • But quite unusually, since then the fertility rate started to trend upwards. The most recent Census data revealed that fertility rates were above regional peers such as Bangladesh
  • The possible factors that may have contributed to this are: 1) Marriages taking place within a younger age bracket 2) A larger proportion of the population getting married 3) Greater optimism post- natural disasters & conflicts
  • The reason for the importance of looking at fertility related data is that it is a significant factor that determines population size. Analysts expect that higher fertility levels might lead to an additional 1-4mn population increase by 2040
  • However, it is too early to tell whether this trend would continue.

What is the current state of Non Communicable Diseases (NCD’s) in Sri Lanka?

  • As income levels in an economy improves, a greater incidence of NCD’s is to be expected.
  • Cardiovascular problems, cancer, high blood pressure are the most common NCD’s.
  • The challenge of NCD’s is you cannot be immunized against it, and it requires a lifestyle change
  • Hence there is a greater focus on prevention instead of treatment which has given rise to the concept of ‘Wellness’
  • This is an opportunity for private firms to capitalize on, as government hospitals may be inadequately equipped to tackle this problem.

How prepared is Sri Lanka with respect to dealing with an aging population?

  • Improving life expectancy contributes to a growth in the aging population.
  • Currently there are approx. 2 mn people (approx. 10% of the population) over the age of 65.
  • This trend is expected to continue and by the year 2040, the aging population would account for about a quarter of the total population.
  • This raises many challenges such as increasing pension and public health care expenditure
  • But at the same time, this also gives rise to opportunities for the private sector investment in the fields of geriatric care and assisted living

What is the link between health trends and female labour force participation?

  • The usual trend is that as health standards improve, female labour force participation increases.
  • Sri Lanka has seen an improved participation rate, but in the past few years it has stagnated at a level below 50%.
  • The possible reasons for this are 1) Social and cultural factors 2) Lack of child day care facilities
  • Social and cultural factors usually start to shift once a country has achieved an advanced stage of development during the late stage of demographic transition
  • Day care facilities and related support services is an area that has been neglected by government policy while the private sector should look to do more to facilitate this.
  • This is an area that cannot be ignored since in the context of an aging population, in order to generate more economic activity, greater participation in the labour force must be encouraged.

The Global Economy in June 2018

Global markets endured a significant downturn by end June, with Emerging and Asian stock markets tumbling to ten-month and nine-month lows respectively. Investors have retreated from risk assets following the escalating tit-for-tat trade war between the US and China, lifting safe-haven US Treasury Yields.

China’s yuan weakened beyond the psychologically key 6.6 per dollar level, stoking concerns that it is fast becoming a weapon in the US trade war. However, China’s Central Bank later pledged that it would keep the currency stable, after nearing ten-month lows. Other emerging market currencies were also affected by the combination of escalating tensions and a rising dollar, with the Indian rupee and Hungarian forint dropping to record lows.

The Federal Reserve raised interest rates, as expected, and signalled two more hikes this year – citing higher inflation. As a result, rising US Treasury Yields have led to the flattest yield curve in nearly 11-years. Meanwhile, the ECB announced that it would “call time” on its three-year bond buying programme by the end of 2018, at a meeting of the bank’s governing council in Latvia. The ECB President Mario Draghi cited healthy growth, managed inflation and low unemployment as key factors.

Net portfolio flows to emerging markets were once again negative in June, with $8bn in non-resident portfolio outflows, according to the Institute of International Finance (IIF). Analysts noted that unlike other recent bouts of EM outflows, this recent downturn has featured outflows from China, likely prompted by escalating U.S.- China trade disputes and the sharp renminbi depreciation. June caps off the weakest quarter for emerging markets since the end of 2016. However, analysts also noted that it would not be surprising to see a relief rally and some rebalancing if the trade narrative improves and/or the U.S. dollar heads lower.

Brent crude oil prices reached a high of $79.44 a barrel on the 29th of June, as supply concerns over US sanctions on Iran, an OPEC agreement to raise output and anticipated increases in demand have driven prices higher. Prices have moved in a $74.00-$80.00 range this month.

LMD Interview – Recent challenges facing the Microfinance Sector


Date – 20th June 2018

What are the reasons behind the growing interest in the microfinance sector?

  • Amongst the private, for-profit segment, Finance Companies and informal lending by individuals (colloquially referred to as ‘Poli Mudalali’) are the main players in the sector.
  • There has been growing interest by Banks where some banks have setup or acquired separate entities to conduct microfinance lending activities.
  • The Microfinance sector has approx. Rs 70 bn in gross loans which is still a fraction of lending compared to the Banking sector
  • However, given the vulnerability of the population segments that these microfinance lendings are targeted at, these activities carry significant risks.

What is happening to household indebtedness?

  • At present, Microfinance is mostly an unregulated market and hence there is less constraints with regard to how much can be lent, caps on interest rates etc.
  • As a first step towards regulating this segment, the Central Bank introduced the Microfinance Act in 2016
  • The Act allows private firms engaged in Microfinance lending to register and hence would come under regulatory supervision of the Central Bank
  • However, the focus of the Act is on bringing firms into a common regulatory framework while at the same time the Act has very little to say about consumer protection to prevent over-lending.
  • CBSL surveys reveal that household indebtedness is on the rise. In 2016 household debt was approx. Rs. 375,000 per household.
  • While the amounts are small in a global context, the debt levels in agricultural areas such as Anuradhapura is higher than the national average.

Is microfinance being used for the purpose it is being used for?

  • Successful case studies such as Grameem Bank in Bangladesh reveal that when done right, microfinance lending can have a significant impact on boosting economic activity and improving the livelihood of households.
  • However, in Sri Lanka the majority of the microfinance lending is not to facilitate income-generating activities but instead they are more consumption driven.
  • Borrowing for the latter is problematic as it doesn’t really improve your livelihood over a long term and households can get trapped in cycles of debt because of it.
  • Hence the importance of having checks and balances in place to prevent over-lending.

LMD Interview – The effects/issues of the SL Fuel Pricing Formula


Date – May 2018

How important is it to have a fuel pricing formula?

  • Generally in Sri Lanka and many other developing countries, fuel prices are administered in a very ad hoc manner; largely in line with the political agendas of the leaders rather than in response to the changes in the global oil prices.
  • Sri Lanka being a fuel deficient country, i.e. a country that imports nearly all of it fuel requirements, this creates macroeconomic instability.
  • At the moment, the global oil prices are on the rise; it has hit the $70 per barrel benchmark and the global analysts are expecting the trend to continue.
  • Meanwhile in Sri Lanka, we had not seen a fuel price increase since 2015, until the sharp price hike introduced in Early May 2018.
  • The idea of a pricing formula is to transfer the changes in the international prices to the domestic market prices in a timely and transparent manner, so that there are no imbalances or distortions in the pricing system.
  • Therefore, it is very important to have a fuel price revision and also a transparent formula that would determine the pricing of fuel.

In the study that Frontier Research did, it was stated that subsidies are not a good thing. Could you elaborate on it?

  • Having these prices continuously subsidized has mainly impacted our external balance.
  • In 2017 for example, our fuel bill increased by 40%; close to around $ 1bn increase. At the same time, the trade deficit has also increased by $ 800mn.
  • Had the domestic fuel prices been increased in 2017, the consumers would have adjusted their consumption to these prices and the need to import so much fuel would have reduced, thereby reducing the trade deficit.
  • On the fiscal side, the subsidy cost the Government has to bear is also quite significant.
  • In fact, in Sri Lanka and several other developing countries, these subsidy costs are borne by the particular State Owned Enterprises, in our case, the Ceylon Petroleum Corporation.
  • The Government is said to owe the CPC nearly Rs. 320bn in terms of subsidy cost reimbursements.
  • This is a huge cost the CPC has to bear and it is funded mainly through loans – mostly through foreign loans. This keeps on adding to our external debt as well.
  • These are just two main macroeconomic instabilities caused by these distortions.

So the Fuel Pricing Formula was originally brought in 2002. But why was it not continued beyond that?

  • One of the biggest reasons was that, though the formula was implemented, it was not done in an efficient manner. That is, the Government did go for price revisions but not to the extent for it to be effective.
  • In 2002-03 period oil prices in the international market was much lower, so the pass-through or the reduction in the Government subsidy was very minimal. So the adjustment that happened in the domestic prices was not so much.
  • But by the end of 2003, the oil prices started going up at a rapid pace in the global market.
  • By that time, the Government had not gone for sufficient increases in the prices. So they had to go for much larger increases and the entire event was blamed on the fuel pricing formula.
  • This was also the time of elections and it became a point of contention that was brought up frequently by the Opposition party at that time.
  • That is basically how the formula had to come to a halt.

So If the Fuel pricing formula is beneficial why are there protests happening now?

  • Most of the protests done are politically driven and are not very well informed. Most are saying that these price increases are unwarranted or unfair.
  • This is something the current Government has to answer because when they reduced the fuel prices in 2015, in lieu of the election results it was done purely to reinforce the public that they had made the correct decision.
  • But now when the prices are increased citing higher world market prices, that is something the public will not understand.
  • It all comes down to how the Government will be able to convince the public of the benefits of the fuel pricing formula.

LMD Interview – Tourism Sector Update (April 2018)


Date – April 2018

How has the tourism industry been fairing up to now?

  • There were some issues recently due to weather disruptions, the unrest in Kandy as well as the most recent incidents where tourists were assaulted in places such as Mirissa.
  • Despite this, tourism earnings have picked up and the Government has revised up their tourism arrivals target for end 2018 to 3 mn.

What should the response be to incidents where tourists have been assaulted?

  • The formal tourist establishments have used these incidents as a justification to curb the growth of the informal sector along the coastal belt which has been growing at a rapid rate.
  • The Government too is looking at ways to make sure that measures that were proposed in the budget for 2018 such as a licensing system for Informal establishments are implemented.
  • While it is necessary to have some level of regulation to ensure the wellbeing of tourists, at the same time it is important not to overregulate the sector which could squander the growth that has been taking place in the sector, as it promotes more broad based growth.

The Government has announced that it would tear down illegal constructions along the coastline. Is this the most appropriate course of action?

  • Any constructions that are done in a haphazard/ unsafe manner that could destroy the overall appeal/ attractiveness of a particular location, should be curtailed.
  • But at the same time, residents in those tourist locations should be given the opportunity to take advantage of the tourism boom to better their livelihoods.
  • Hence there is a need to strike a balance between growth and ensuring the wellbeing of tourists.

Does a tourist get value for money in Sri Lanka?

  • Most hotels in Sri Lanka have high room rates which are maintained at a high level partly due to policies such as minimum room rates.
  • While at the same time, the quality of the facilities and the level of service doesn’t seem to be commensurate with the price being paid.
  • In conclusion, the perception is that tourists don’t seem to be getting value for money and hence this is an area to focus on for improvement.

The Global Economy in May 2018

Global markets in May experienced the continuation of the pressure being felt by emerging markets (EMs) as the US Dollar strengthened and US 10-year yields crossed the 3% mark, with the Federal Reserve certain to hike rates in June. Many emerging market currencies weakened significantly against the dollar. Argentina, Turkey and Indonesia were among the most affected. Indonesia avoided the worst of it by proactively hiking interest rates, while Argentina negotiated a $50bn standby facility with the IMF. However, Turkey’s rate hikes were a delayed response thanks to political interference in the central bank.

Net foreign portfolio flows to emerging markets continued to be negative in May, following on from April, with $12.3bn in net outflows from the EMs monitored by the Institute of International Finance (IIF). However, the IIF is keen to point out that a broader measure of foreign investor sentiment – which includes capital investment in property, factories or other assets – is more encouraging for emerging markets investors. Accordingly, net capital flows into EMs of $32 billion in April was well above the 2017 average inflows of $7 billion a month.

The month came to an end with concerns about Italy due to its continuing political issues. The prospect of a euro-skeptic, populist governing alliance in Italy spooked investors about the likelihood of another Eurozone crisis, causing a short-lived risk off sentiment in global financial markets. Those concerns have tapered off since then, but the situation has raised the question about the financial impact of the end of monetary policy easing on countries like Italy which struggle from high indebtedness.

Trade related tensions continued to simmer, with President Trump criticizing the outcomes of negotiations with China and re-imposing steel and aluminum related tariffs on the EU and Canada. This has again raised the possibility of a spiral of retaliatory tariffs, impacting global growth. In such a scenario, most analysts think the US Dollar will weaken, like during previous bouts of US protectionism. But a contrarian view is that it could make US growth -and thereby US assets – standout relative to the rest, putting emerging market currencies under pressure.

Brent crude oil prices moved within the $70 to $80 range through the month, with prices reaching a high of $79.80 a barrel on the 23rd of May. This was driven by concerns over supply reductions following the US announcement of re-imposing sanctions on Iran and the reducing supplies from crisis-ridden Venezuela. However, prices moderated slightly in the latter part of the month with Saudi Arabia and Russia pushing the OPEC-led group of oil producers to increase output to offset these supply reductions.

LMD Interview – Tourism Sector Update (March 2018)


Date – 15th March 2018

What is the tourist industry or Government doing to curb incidences such as Tuk-Tuk scams/ fake tour guides?

  • Tourists are increasingly becoming more aware of it as, unlike in the past where you would depend on brochures provided by official tour operators, they read blogs done by other tourists which highlight these issues more prominently
  • A related issue is with regard to unlicensed tour guides in the city.
  • This is an opportunity for Sri Lankan tourism to capitalize on, as in the absence of such tour guides, tourists themselves may get into it as a business. A Chinese tour group may have a Chinese tour guide who is also a tourist.
  • Similar to the licensed tour guides that operate in the cultural triangle, the government can introduce a similar system in Colombo

What can be done to improve the state of the National Carrier; Sri Lankan Airlines?

  • Given the financial woes facing Sri Lankan, it’s difficult to expect much in terms of improving the quality of service of the airlines
  • Instead the focus should be on opening it up to attract more airlines; particularly budget airlines.
  • The success of tourist destination such as Thailand, Indonesia can partly be explained by the effort made to attract budget airlines to the destinations in order to facilitate high tourist volumes.
  • Given that we are catering more to profile of tourists that prefer budget airlines, this would be a positive development in terms of achieving the tourist arrivals targets

How is the level of Environmental Sustainability of the tourism industry?

  • This is an area that needs to be paid attention to given recent incidences of over-crowding at National Parks and historic sites
  • Steps taken to limit the number of vehicles entering National parks would be a positive step
  • There is also a need to broad base the tourist hotspots. Ex: There are close to 30 National Parks in Sri Lanka but the lion share of tourists are concentrated in a few places
  • Part of the reason for this is because the tour itinerary followed by tour operators has not really changed in the past 20-30 years.
  • Broad basing tourism hotspots can help to ease the pressure on popular tourist locations while providing the space for other locations to develop.
  • You can also make incremental investments to reduce the overcrowding at popular tourist attractions. Ex: Issuing tickets with timed entry to Sigiriya

The Global Economy in April 2018

Global markets in April were marked by a resurgent US Dollar, increasing crude oil prices, rising US Treasury yields and doubts over the sustainability of the synchronized global growth that underpinned market performances at the start of the year. Even as the US Federal Reserve held rates at its recent meeting, markets appeared to be certain of a hike in June with the Fed pointing to higher inflation. Markets appeared to be less focused on US-China trade tensions as other headlines took over in the month, including the dialogue between the two Korean leaders pointing to a reduction in geopolitical tensions in the East Asian region.

Foreign inflows to emerging markets appeared to have ground to a halt in April with $200mn in outflows from the EMs monitored by the Institute of International Finance (IIF). Further, the IIF stated that $5.6bn left EM stocks and bonds in the week to April 23. This could help explain why the JPMorgan Emerging Market Currency Index ended April with its biggest loss in 17 months. Given the broad weakness in most EM currencies, central banks in Argentina and Indonesia, in particular, were seen resorting to interventions in forex markets to stabilize their currencies.

Despite these figures, analysts have continued to stress that this is not a repeat of the 2013 ‘Taper Tantrum’ – where EMs suffered major outflows and deceleration in growth – which also happened in the context of rising US yields and a strengthening US dollar. Analysts point to improved fundamentals, like smaller current account deficits and higher foreign currency reserves, as evidence of EM resilience compared to five years ago.

Furthermore, it appears that the optimistic expectations for global growth persist with some arguing that growth will bounce back from the soft patch experienced in recent months. This is in line with the IMF’s April update to its economic outlook. However, the IMF did note that global growth could slowdown beyond the next two years as advanced economies close their output gaps.

Brent crude oil prices continued to rise in the past month, reaching the highest levels since November 2014. A major factor in this rise has been concern that President Trump will reimpose sanctions on Iran, which he did on the 9th of April, leading to a possible reduction in crude supplies from the country. In addition, supplies from Venezuela continued to contract amidst the country’s continued social and economic turmoil.