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Wednesday February 28th, 2024

China backs resumption of stalled FTA with Sri Lanka

ECONOMYNEXT – China has signaled the desire to re-start a stalled Free Trade Agreement talks with Sri Lanka to boost exports and come out of an economic crisis, during a visit of Foreign Minister Wang Yi, Beijing’s ambassador to Colombo said.

Free trade talks with between China and Sri Lanka hit a hurdle in 2018 under the last administration because Beijing disagreed with Colombo’s demand for a review of the deal after 10 years according to officials familiar with the issue.

“Already we had six rounds… I would like to ask the Sri Lankan government why the talks were halted. I don’t know why,” Qi Zhenhong, China Ambassador to Sri Lanka told select journalists at Galle Face Hotel as Chinese State Councilor and Foreign Minister Wang Yi left the island ending a two-day official visit.

“During the State Councilor’s visit this time, he himself and leaders of Sri Lanka had a very good discussion on the Free Trade Agreement (FTA) as well as a Comprehensive Economic and Technical Co-operation framework.”

China has invested billions of dollars building ports, airports, roads and power stations in the Indian Ocean island nation just off the southern toe of India as part of its Belt and Road Initiative to increase its trade and other connections across Asia and beyond.

Troubled History

Under the last administration, which tried to neutralize a pro-Chinese investment policy, concerns were raised that such investments were driving the country of 21 million people deeper into debt and undermining its sovereignty, prompting greater scrutiny of deals with China.

Sri Lanka consumers and businesses import more goods from China than it at the moment, some of which are inputs for exports to third countries.

Ministerial level discussions about an FTA agreement have not been held since March 2017 while lower-level discussions between officials have made little progress after the deadlock over a 10 year review, Colombo officials have said.

Free trade benefits the poor, but can hurt the profits and revenues of companies which previously charged higher than world prices from consumers under tariff protection.

The review clause that Sri Lanka requested in 2017 would allow it to change some of the deal terms if they were hurting the island nation’s businesses.

So-called ‘sunset clauses’ can increase uncertainty and put businesses that invest on the basis of a free trade deal at risk.

However, Ambassador Qi Zhenhong says China has a very “flexible policy” on that.

“Today when State Counselor Wang Yi had discussions with the Sri Lankan leaders, he explained that we should encourage exports and professionals to study the FTA discussions very soon,” he said.

“Wang said any questions or concerns on the FTA from the Sri Lanka side can be raised. We are open for that.”

“And if one particular item is not good enough for Sri Lanka, you can ask more and we will do the study. We have a flexible policy.”

Uncertain Impacts

Officials from the last government had said that China wanted zero tariffs on 90 percent of goods the two countries sold to each other as soon as an agreement was signed while Sri Lanka wanted it to start with zero tariffs on only half of the products concerned and expand gradually over 20 years.

China’s push for free trade pacts with the Maldives in 2017 drew criticism from opposition political groups who said it had been rushed through parliament with less than an hour of debate.
Sri Lanka in 2018 has wanted more time to negotiate the deal as it was not sure about the economic impact of a rushed deal on its economy.

“There is not a single reason that China will take advantage of Sri Lanka through FTA or through trade,” Qi Zhenhong, clad in a black suit with a pinned badge of Sri Lanka and Chinese national flags crossed on his blazer, said.

“Free trade is a global trend and Sri Lanka has a very unique strategic geopolitical position.”

“I think if we can have a Free Trade Agreement, Sri Lanka can export its products to the market of 1.4 billion populations and you can take the advantage of China”

“And Sri Lanka can become a hub or sub hub for the products and to the different regions. If you have the manufacturing industry, the financial industry will follow.”

Free Trade Resistance

Though a leader in free trade in the region at one time, Sri Lanka has seen import tariffs go up over the last 15 or so years with protectionists gaining more political clout.

India has tried to expand its existing FTA to a comprehensive economic partnership for more than a decade.

However, it has met with resistance from domestic business lobbies, trade unions and politically-motivated opposition parties.

Though exports to India under the free trade deal has grown making the country the third highest buyer of Sri Lanka goods after the US and EU, critics have pointed to the large volumes of imports – some of which are taxed heavily such as cars to criticize it.


Sri Lanka free trade agreements generate three times more exports than imports

An FTA with Singapore by the last administration was strongly resisted by the current ruling Sri Lanka Podujana Peremuna (SLPP) when it was in the opposition.

Government officials have said that some political parties resist such agreements without any knowledge but just to make sure it is not implemented under their rival government.

They also say international intervention and some perceived exploitation also had been reasons for FTAs negotiations ending in failure.

“I learnt from the history that Sri Lanka was taken advantage by some countries’ economy because of the FTA in the past,” Qi Zhenhong.

“I can assure you that all the countries, including medium and small countries, that had established free trade agreements with China, got benefits.”

China has overtaken India as the top importer since 2019, the official data showed.

Sri Lanka imported $3.5 billion worth of Chinese goods in 2020 which is 22 percent of the total imports, mostly raw materials for garments, machines and electronics, metals, transport equipment and chemicals, followed by India which accounted for 19.2 percent of the total imports in the same year. (Colombo/Jan08/2021)

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Sri Lanka rupee closes at 310.00/15 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 310.00/15 to the US dollar Wednesday, from 310.25/50 on Tuesday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.02.2026 closed at 10.60/80 percent from 10.60/75 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.00 percent up from 11.80/95 percent.

A bond maturing on 15.03.2028 closed stable at 12.00/15 percent.

A bond maturing on 15.07.2029 closed at 12.20/50 percent from 12.25/50 percent.

A bond maturing on 15.05.2030 closed stable at 12.25/40 percent.

A bond maturing on 15.05.2031 closed at 12.55/75 percent down from 12.60/80 percent.

A bond maturing on 01.07.2032 closed at 12.50/90 percent down from 12.55/13.00 percent. (Colombo/Feb28/2024)

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Sri Lanka Treasuries yields edge up after steep fall

ECONOMYNEXT – Sri Lanka’s Treasury bill yields edged up across maturities at Wednesday’s auction with the 3-month yield up 09 basis points to 9.87 percent, data from state debt office showed.

The debt office sold 27.5 billion rupees of 3-month bills after offering 35 billion rupees.

The 6-month yield rose 09 basis points to 9.95 percent with 37.23 billion rupees of bills sold, after offering 47.5 billion rupees.

The 12-month yield went up 03 bis points to 10.05 percent, with 39.5 billion rupees of bills sold and 40 billion rupees offered.

Sri Lanka’s Treasuries yield have come down sharply in recent weeks.

The trend was partly helped by some banks which were earlier not buying into bills, starting to buy them.

Deposit in the central banks overnight window (private sector sterilization) has come down from around 200 billion to around 130 billion rupees in recent weeks.

Sri Lanka’s central bank in the past have triggered currency crises and eventual high corrective rates by not allowing Treasury bill yields to move when up private credit picks up and buying them into the balance sheet.

The resulting forex problems are then blamed on budget deficits (politicians) and current account deficits (mainly imports of the public usually petroleum, gold or cars).

The central bank can still buy Treasury bills outright from banks, term or overnight to inject money, alter rupee reserves of banks and encourage them to overtrade and trigger forex shortages, confidence shocks, capital flight and a second default, critics say.

The central bank recently lifted counterparty limits of standing facilities, which are given at the policy rate without a penalty unlike in countries with greater monetary stability.

In recent weeks the central bank has oversold bills outright and injected money long term and short term, though so far overall net injections have been deflationary. (Colombo/Feb28/2024)

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Sri Lanka stocks close up, retail activity coming in

ECONOMYNEXT – The Colombo Stock Exchange closed up on Wednesday, data on its site showed.

The broader All Share Index closed up 55.29 points, or 0.52 percent at 10,678; while the S&P SL20 Index closed up at 3,056 points, up 0.06 percent, or 1.73 points.

Turnover was at 1.2 billion.

Market participants said that “retail activity is also picking up.”

Hemas Holdings Plc saw large volumes being traded, contributing 90 million to the day’s turnover. The share closed up at 75.00.

Kapruka Holdings Plc announced that it had purchased 197,015 ordinary voting shares of its subsidiary Kapruka e-Commerce (Pvt) Ltd for 13.2 million rupees at 67 a share. The proceeds will be used by Kapruka e-Commerce “to fulfill the IPO objective of launching Kapruka Partner Central, the company said. The share closed down at 6.80.

E B Creasy and Company Plc announced a disposal of investment in its subsidiary, Lanka Special Steels Limited (LSSL) in accordance with the restructuring process of the E B Creasy Group. The Board resolved “to divest its 100% stake represented by 2,138,657 shares in its subsidiary Lanka Special Steels Limited (LSSL), to subsidiary company Laxapana Batteries PLC (Laxapana) for a total consideration of Rs694mn which will be settled in installments. Shares of E B Creasy and Company Plc closed up at 22.00.

Sectors that attracted investor interest were Capital Goods (376mn), Food, Beverage and Tobacco (181mn), and Banks (166mn).

Positive contributors to the indices in the day included Hayleys Plc (up at 82.00), Chevron Lubricants Lanka Plc (up at 104.00), Vallibel One Plc (43.30), and Cargills (Ceylon) Plc (up at 349.75) whose Chairman Ranjith Paige donated 3 million rupees to the ‘Children of Gaza Fund’ earlier today. (Colombo/Feb28/2024).

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