Macroeconomics and Private Sector Performance

Macroeconomics and Private Sector Performance

My dear Seekers, 

I bring you great news! Knight Sky and I have decided to start a new series of blog articles by popular demand! This time we will be discussing topics related to Sri Lanka’s monetary policy and real estate.

I thank you for trusting me to enlighten you on these subjects. When I was wondering how to start off this blog, I decided that we should first look at macroeconomics.

Take a moment to look at Sri Lanka’s macroeconomics for the years 2015-2020. Knight Sky made a table to make things easy for you to understand. I will share it with you below.

GDP USD Billion GDP Growth Rate Inflation Tax Revenue USD Billions Tax Revenue % of GDP Average Exchange Rate Standing Lending Facility Rates (SLFR) Average Weighted Prime Lending Rate (AWPLR) Standing Deposit Facility Rate (SDFR) Average Weighted Fixed Deposit Rates (AWFDR)
2015 80.60 5.01% 3.77% 9.978 12.38% Rs. 135.94 7.50% 7.40% 6.00% 7.57%
2016 82.40 4.49% 3.96% 10.439 12.20% Rs. 145.6 8.50% 11.73% 7.00% 10.46%
2017 87.42 3.58% 7.70% 10.958 12.53% Rs. 152.46 8.25% 11.33% 7.25% 11.48%
2018 87.95 3.27% 2.10% 10.536 11.98% Rs. 162.54 9% 11.94% 8% 10.85%
2019 83.98 2.55% 3.53% 9.715 11.55% Rs 178.65 8% 10% 7.00% 10.05%
2020 80.71 -3.57% 6.15% 6.565 8.13% Rs. 185.43 5.50% 5.74% 4.50% 7.14%

Yes, I know. Not all of us understand the jargon. So I am going to give you a little summary of definitions to make this easier for you. 

GDP : This measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time.

Inflation: This is a measure of the rate of rising prices of goods and services in an economy.

Average Exchange Rate: This is the average value over a year of  Sri Lanka’s Rupee vs USD.

Standing Lending Facility Rate (SLFR) : This is the lending interest  rate healthy banks in Sri Lanka are allowed to borrow from the Central Bank of Sri Lanka.

Average Weighted Prime Lending Rate (AWPLR): This is the lending rate the commercial banks in Sri Lanka provide to their prime customers.

Standing Deposit Facility Rate (SDFR) : This is a tool for absorbing liquidity to control inflation. The rate Central Bank offers to commercial banks for their reserves. 

Average Weighted Fixed Deposit Rates (AWFDR) :This is the average FD rate customers receive as interest income from commercial banks in Sri Lanka. 

Notice how the GDP growth rate reduced over the years and the exchange rate increased? Now take a look at the years 2018 through 2022.

Check the table below!

Allow me to explain. The prime lending rate dropped from double digits to single digits. Increased money printing from 2019, reduction in both direct and indirect taxes resulted in a large supply of money, thus leading to higher levels of inflation.

Sad, isn’t it? The reduction in fixed deposit rates also provided a platform for businesses and individuals to withdraw such deposits and re-direct towards investments which guaranteed a better rate of return. COVID-19 lockdowns had a significant impact on tourism and related industries leading to a severe erosion in foreign reserves leading to a BOP Crisis.

Chemical fertilizer ban affected the economy in two levels namely, agriculture based export companies suffered with low yields, their business models also changed and domestic supply was heavily reduced.

In short, the Modern Monetary Theory did not work for Sri Lanka, as we could not attract sufficient FDI’s, and dollar income in general to convert rupees to dollars.

Our reserves started shrinking to unsafe levels that resulted in being unable to pay for essential imports such as fuel and medicine, and finally we had to temporarily default on foreign debt. 

Now, you may know this has been very bad news for companies and businesses. So, how did the private sector fare during this time? Take a look at this table that Knight Sky prepared.

Commercial Bank of Ceylon PLC (Bank) Sampath Bank PLC (Bank)
Gross income in Rs. Billions Profit after Tax (PAT) Rs. Billions Gross income in Rs. Billions Profit after Tax (PAT) Rs. Billions
2015 77.868 11.903 47.032 6.134
2016 93.143 14.513 67.585 9.125
2017 114.357 16.581 92.59 12.104
2018 138.049 17.544 115.31 12.143
2019 148.706 17.025 118.855 11.151
2020 149.711 16.373 102.339 8.025
2021 160.886 23.606 104.57 12.457

 

Year Hayleys PLC (Group) John Keells Holdings PLC (Group) Dialog Axiata PLC (Group) Cargills Ceylon PLC (Group) Melstacorp PLC (Group)
Gross income in Rs. Billions Profit after Tax (PAT) Rs. Billions Gross income in Rs. Billions Profit after Tax (PAT) Rs. Billions Gross income in Rs. Billions Profit after Tax (PAT) Rs. Billions Gross income in Rs. Billions Profit after Tax (PAT) Rs. Billions Gross income in Rs. Billions Profit after Tax (PAT) Rs. Billions
2015 92.562 4.886 91.852 15.746 73.93 5.188 61.631 0.247
2016 92.275 5.06 93.282 15.792 86.745 9.041 71.441 1.69 88.865 5.67
2017 111.383 5.048 106.273 18.117 94.2 10.759 84.19 2.284 108.999 6.8
2018 163.249 3.272 121.215 23.12 109.2 7.774 91.293 3.33 109.957 6.25
2019 219.182 2.75 135.456 15.001 116.8 10.726 94.662 2.033 155.931 8.875
2020 210.307 2.895 140.043 9.741 120.1 12.002 107.051 2.761 154.475 4.425
2021 241.276 14.046 127.676 3.951 112.607 3.483 143.901 2.494

Surprising, isn’t it? The private sector thrived and did well! How so, you ask. Here’s what I think. Firstly, they had low lending rates. So, businesses utilized these funds to grow. Also low taxes! This is one of the reasons why most companies’ PAT grew phenomenally during these tough times.

Efficiency is also a huge factor for their success. They’ve somehow found out-of-the-box methods to survive during difficult times. Also, they integrated technology and low cost communication methods to continue and expand their businesses. Another factor is high consumption.

The high volume of rupees in the market also resulted in high consumption. Which helped companies sell their products. Import bans had a negative impact on companies as they struggled to import raw materials for production etc. But on the whole the net impact has been positive as these companies engage in both imports and exports. 

So, there you have it, my friends. My analysis on Sri Lanka’s macroeconomics and the private sector performance. I hope you have been enlightened. Stay tuned for more informative articles from Knight Sky and myself, and as always, keep those questions coming in.

Yours Truly,

Jupiter Sebastian.

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