Archive for July, 2018

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.