INTELLIGENCE & INSIGHT FROM CA SRI LANKA
DECEMBER 2017 | WWW.CASRILANKA.COM
EMERGING OPPORTUNITIES FOR SMPS ISSN 2279-3860 9 772279 386000 AD THE ABACUS | DECEMBER 2017 1 CONTENTS DECEMBER 2017
Features 20
COVER STORY 20 | Emerging opportunities for SMPs CA Sri Lanka President Lasantha Wickremasinghe outlines how small and medium practitioners can overcome challenges to reap the dividends of a growing economy
12 | Changes to SLFRSs The annual publication of Sri Lanka Accounting Standards (SLFRSs) 2017 includes the below amendments to the previous version of SLFRSs effective from the financial periods beginning on or after 1 January 2017.
16 | Efficient borders critical for development Clearing goods quickly at the port and transparent Customs will boost exports and attract FDI, a global trade expert says
16 23 19 | The trials of a new chartered accountant A top accounting professional shares insights on how newly qualified professionals can succeed in a tough world
23 | GSP Plus: Unlocking the gains Duty-free access is beneficial, but not enough to grow exports to europe 2 THE ABACUS | DECEMBER 2017 CONTENTS DECEMBER 2017
26 | Sri Lankan fintechs’ mantra of collaboration 26 Financial tech ventures are challenging legacy banks and insurance companies everywhere, but in Sri Lanka, these businesses have a different strategy
30 | Apps that get stuff done There are countless productivity apps and tools out there today — we help you choose the best
32 | Five trends to watch out for in Sri Lanka’s condo market
34 | What you need to know about Cryptocurrency
36 | Dealing with the Dragon The only regional trade block Sri Lanka is part of is the pathetic one covering South Asia
40 | New Inland Revenue Act: FAQs
62 | Ethics and Disciplinary Committees
64 | The old world charm of the Italian Riveria’s Cinque Terre Cinque Terre’s ‘five lands’ or villages, with its terraced hillsides and centuries-old vineyards, have the effect of transporting travellers back in time 64 THE ABACUS | DECEMBER 2017 3
INTELLIGENCE & INSIGHT FROM CA SRI LANKA
Seize the moment
ri Lanka has made significant policy gains in 2017. Despite being laggardly, inconsistent and inefficient in implementing policy reforms, the government is slowly laying the foundation for accelerated, sustainable economic growth. In this light, the Colombo International Financial Centre, the Hambantota Port Sdeal with the Chinese, the new Inland Revenue Act and the Foreign Exchange Act have Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) is one of the largest found acclaim for being steps in the right direction for the most part. There are more professional organizations in Sri Lanka in which reforms to come in areas like finance, trade, Customs and state-owned enterprises. 5,400 chartered accountants have obtained Influencing public opinion and implementation are two challenges the government membership. The Institute provides insight and must overcome to propel the economy forward. leadership to the accountancy and finance profession in Sri Lanka as well as globally. Our In this issue of Abacus, we look at emerging opportunities for small and medium well-qualified members are trained to provide practitioners (SMPs) as the economy transitions into a period of high growth. There’ll financial knowledge and guidance based on be opportunities in forensic accounting, business process outsourcing, management the highest professional, technical and ethical consultancy and even IT. SMPs also have an opportunity to develop capacity and standards, thereby assisting communities grow their businesses by merging with each another, enabling them to acquire larger and organisations gain long-term sustainable economic growth. corporate clients. But, there are challenges they need to overcome. One challenge is developing the ability to quickly adapt to local and global dynamics. Globally, markets, laws and regulations are becoming difficult to unravel. IT is increasingly disrupting the accounting profession. But, there are more opportunities than threats, even for SMPs. This issue also brings out some recent developments in Sri Lanka in the areas of accounting standards, real estate, taxation, trade and online financial services.
CONTRIBUTORS DESIGN & LAYOUT CA SRI LANKA © 2017 CA SRI LANKA. All rights reserved. No Avanti Samarasekera Leyanvi Mirando 30A, Malalasekera Mawatha, part of this publication may be reproduced Devan Daniel Diloshan Leon Colombo 7, Sri Lanka or distributed in any form without the prior Devin Jayasundera Yomal Vajrajith Payagala T : 0094-11-2352000 written permission of the publisher. The views Shamindra Kulamannage F : 0094-11-2352060 and opinions expressed by contributors and E : [email protected] persons featured in Abacus are not those of CA Sri Lanka or the CA Sri Lanka Council CA JOURNAL’S publications con- sultant is Capital Media (Pvt) Ltd., 22, Flower Terrace, Colombo 7. Phone 0112577387 4 THE ABACUS | DECEMBER 2017
PRESIDENT’S MESSAGE
It’s time to re-strategize
ri Lanka has great potential to achieves sustainable success, which be a global player; but to reach will ultimately reflect on the long-term this goal, our county needs development of the country, and thus vision, commitment and most help Sri Lanka enjoy its rightful place Simportantly hard work, by not only on the world map. policymakers but corporate leaders This is why professional bodies and professionals including account- such as CA Sri Lanka must take on the ants, who are the gatekeepers of responsibility to give leadership to this organisations. change by helping its members develop Companies and professionals not only the important components who were more accustomed to doing such as technical skills and professional business the traditional way are today competencies, but by helping members running the risk of slipping downhill, embrace the importance of thinking while some have already faded from out of the box, while highlighting the corporate map. This situation has leadership qualities, and upholding also led to an increasing debate on why local and international standards and it’s important for companies and their regulations. leadership to re-strategize, embrace At the end of the day, we want our change and be flexible when doing CAs to stay ahead of the game, lead the business. change and drive Sri Lanka’s future The broader spectrum also expects journey to success. accountants, including CAs, to embrace and be a part of this change, because if there is one profession that is inher- ently synonymous with progression Lasantha Wickremasinghe Increasing risks and developing with the ever-evolving President times, it has been the accounting pro- CA Sri Lanka also spell out the need fession. Hence, in the current context, to develop a new there is an increasing need for account- ants to embrace this change and be generation of leaders part of this growing trend if they are who are not only to survive in today’s technologically revolutionized world. capable of driving The accelerating rate of volatility, uncertainty and complexity has also change, but can had its toll on not only organisations, also minimize risks but professionals as well. Today, the world operates amid increased risks of and threats facing a corruption and bribery, monies change hands at the blink of an eye, and ac- company countants have to take on new roles if they are to command the respect they enjoyed during the past few decades. Increasing risks also spell out the need to develop a new generation of leaders who are not only capable of driving change, but can also minimize risks and threats facing a company, and ensure that the organisation THE ABACUS | DECEMBER 2017 5 PERISCOPE Sri Lanka not to tax bonds China relaxes currency retrospectively: Eran controls ccording to State Minister for Finance markets have been in limbo. According to Eran Wickramaratne, Sri Lanka’s tax- Fitch Ratings, about Rs30 billion of Afree listed bonds issued in the past corporate bonds that were issued prelimi- are likely to be treated the same way until nary ratings did not go ahead. Before 2016, they are redeemed, and the principle is tens of billions of listed bonds were issued that there will be no retrospective taxes. with interest tax-free in a bid to boost the Since new taxes were announced in the market and popularise them among budget for 2017, Sri Lanka’s corporate bond small investors.
s the renminbi strength- Moody's: Sri Lankan ens, China has relaxed Acurrency controls. Chi- na’s central bank has scrapped two rules that were intended to bank profits under strengthen the renminbi. This step indicates that the official nervousness about currency pressure depreciation and capital flight has somewhat eased. ccording to Moody's Investors weak fiscal position and deteriorating bank China’s foreign exchange Service, the outlook for Sri Lanka's asset quality underpin negative outlook”. reserves have risen for seven Abanking system is negative, with both Moody's outlook assesses five key factors: months since hitting a three- asset quality and profitability under pres- operating environment, stable; asset risk year low in January. The ren- sure. Srikanth Vadlamani, a Moody's Vice and capital, deteriorating/stable; profitabili- minbi has gained 6.9%, thereby President and Senior Credit Officer, has stat- ty and efficiency, deteriorating; funding and reversing last year’s record ed that the economy will only see a modest liquidity, stable; and government support, loss of 6.5%. It has also put the growth rebound as the government's fiscal deteriorating. However, the rating agency currency on pace for its best constraints continue to limit public invest- said that, at the same time, capital will re- year ever. ment and private spending despite stronger main stable as banks are raising capital and goods and services exports. In a statement, reducing dividends to comply with Basel III he further said credit growth was very high requirements, though execution and market 6.9% over the last two years, with the credit mul- risks could derail fundraising efforts. rise of the renminbi tiplier (credit growth/GDP growth) shooting up to an average of 2x over 2015 and 2016, According to reports, in a up from 1x in 2014. notice sent to banks recently, Vadlamani states that, as the loans the People’s Bank of China made over this period start seasoning, asset (PBoC) has dropped a require- quality will deteriorate. Rising interest rates ment that raised the cost of also add to repayment burdens. However, using currency forwards, a type increased loan loss reserves are expected to of foreign exchange derivative, provide some comfort. In addition, profits to bet on renminbi deprecia- will come under pressure as higher funding tion. Separately, the PBoC has costs offset the benefits from higher loan also eliminated a requirement rates, while credit costs move higher. that banks hold reserves Moody's conclusions are contained in its against renminbi deposits recently released “Banking System Out- held in Hong Kong and other look: Sri Lanka, Macroeconomic risks from offshore centers. 6 THE ABACUS | DECEMBER 2017
PERISCOPE Bitcoin, virtual currency The economic cost deals below $600 could of Hurricane Irma become tax exempt
he Internal Revenue Service (IRS) ties and interest. In extreme cases, the IRS of the US is hunting digital currency could even pursue tax scofflaws criminally. users because very few people seem However, a bill titled ‘The CryptoCur- $300 bn T Cost of Hurricane Irma to be reporting their transactions. The IRS rency Tax Fairness Act’ was recently intro- is using what is known as John Doe sum- duced in the House, and it calls for a tax mons to obtain data on bitcoin and other exemption for transactions under $600. digital currency users. It is even searching If it passes, it might be similar to foreign for bitcoin user identities with software. bank accounts that, in the aggregate, have This IRS scrutiny is causing many people less than $10,000 at all times during the to worry that they may owe taxes, penal- year. n the United States, the economic cost of Hurricane Irma could rise to as high Ias $300 billion as the storm damaged homes, businesses and key crops includ- ing orange groves in the state of Florida. Approximately $2 trillion in property lay in the storm’s path, and it’s expected to have a potential impact on US food prices in the aftermath. Florida is the second-largest produce grower in the US and the world’s second-largest produc- er of orange juice. The state also grows other important crops such as grapefruit, tomatoe, watermelon and sugarcane. It is also believed that Irma could wipe out as much as 20% of the state’s citrus crop, a significant part of its economy. The hurricane has already unsettled financial markets, sending insurance stocks falling and orange juice futures surging. Sri Lankans can invest up to $200,000 overseas
ri Lanka’s new forex law has could buy shares, units, debt securities, invest any amount to set up offices or allowed an individual to invest and sovereign bonds. subsidiary with specific central bank S200,000 dollars outside the A partnership or company setting up approval. country, in their lifetime, a partnership an office overseas could also take out Sri Lanka has exchange controls 300,000 dollars, but an unlisted com- 300,000 US dollars a year. because a currency board was replaced pany could invest 500,000 US dollars a The funds have to be remitted from an in 1951 with a soft-pegged central bank year. outward investment account. The limits which printed money and generated for- A listed company in the Colombo Stock could be exceeded by the use of capital eign exchange shortages, high inflation Exchange could invest up to 2.0 million gains. and currency collapses. dollars a year. The outward investors Sri Lankan firms could in general (EconomyNext.com) THE ABACUS | DECEMBER 2017 7
Sri Lanka’s EPF IMF warns Sri Lanka on contributions to be taxed the same way forex policy conflicts with alaries of workers paying Em- ployees Provident Fund will Scontinue to be taxed with no inflation targeting change, State Minister of Finance Eran Wickramaratne said. “The he International Monetary Fund has target an exchange rate (de facto peg), the status quo will remain,” he stated. warned that Sri Lanka's exchange policy monetary policy conflicts with the exchange Ex-President Mahinda Rajapaksa is inconsistent with inflation targeting, rate policy. To maintain a policy rate, such had warned that, under a new In- T land Revenue Act, the taxable gross and it has to stop interventions if it wants interventions have to be ‘sterilised’. Buying to move to a successful inflation targeting dollars and withdrawing rupees that are gener- salary of a person will be raised regime. ated (sterilised forex purchases), which can be by 12% to include the employers' “While the CBSL can retain a role for done when credit moderates, leads to higher contribution to the Employees smoothening excessive exchange rate forex reserves and exchange rate stability. Provident Fund. If there is no volatility, it should adopt FX intervention But, selling dollars and printing money change, only the 8% deduction will policies consistent with greater exchange rate (sterilised forex sales) when credit demand be taxed. The new administration flexibility under flexible inflation targeting,” is high leads to balance of payments crises, is also taking away a Rs35,000- an IMF report said. A technical memorandum where more and more forex reserves are sold, 50,000 a month transport or car added that the “roadmap for flexible inflation and more and more treasuries are bought to allowance that was made tax-free targeting will be completed by October 2017 print money and keeps rates down, driving by Rajapaksa. to establish inflation as the nominal anchor credit ever higher. Avoiding interventions moving away from using the exchange rate as (floating) generates temporary volatility of the the de-facto anchor”. An inflation targeting exchange rate, but no liquidity injections have arrangement works when an exchange rate to be made to offset sales. “The authorities Is Bitcoin floats and new money is added or withdrawn also pledged to avoid an overvalued exchange to maintain a policy rate (monetary policy) rate at the expense of reserves and a shift heading into through the sale of domestic assets like Treas- towards an inflation targeting regime in their ury bills, and only an inflation index is target- 2017 roadmap, but have yet to demonstrate ed. When new money is added (through the the commitment to sufficient exchange rate classic bubble purchase of dollars) or withdrawn (through flexibility under external shocks,” the IMF the sale of dollars to defend a currency) to report said. territory?
US senate aid Salary of the chairman of the Public 350% to get a $670,000/yr Company Accounting increase in Bitcoin’s value in 2017 job overseeing Oversight Board $670,000 anging from asset price bubbles such as tulips in the auditors Rearly 1600s, internet stocks in the late 1990s, to US house prices lesser-known Republican Senate aide before 2008, there have been nu- William Duhnke is believed to be on track merous incidents of price bubbles in the history of financial markets. to be selected to become chairman of the Salary of the A The virtual currency bitcoin, the Public Company Accounting Oversight Board of president of the US the US. The position is considered to be one of most well-known cryptocurrency, the most attractive regulatory roles in Washing- $400,000 recently neared $5,000 and has ton with a salary of $670,000 per year, which is risen about 350% this year. It has even well above the American president’s salary so far defied skeptics and delighted of $400,000. its growing ranks of proponents. 8 THE ABACUS | DECEMBER 2017
PERISCOPE
Sri Lanka to get $5 billion Sri Lanka mulls relaxing from ADB up to 2022 domestic
he Asian Development are earmarked. About $8 market curbs Bank has unveiled a million a year of technical on BOI firms Tfinancing plan that will assistance is planned. The provide up to $5.0 billion to ADB said its 2018-2022 CPS The Sri Lankan gov- Sri Lanka in the five years aims to diversify economic ernment is considering up to 2022 in a bid help the $5 bn activities, boost productivity relaxing restrictions on country reach upper-middle Total ADB assistance to and improve inclusivity. domestic sales of mainly income status. Sri Lanka until 2022 The financing will go to export-oriented companies “In its new country part- transport, energy, urban under its Board of Invest- nership strategy (CPS), the infrastructure (roads water, ment, which gives incen- ADB aims to respond flexibly operations will also promote sewage), finance an econom- tives like tax breaks. State to evolving demands of the inclusiveness; strengthen en- ic corridor from Colombo Minister of International government,” ADB Country vironment, climate change to Trincomalee, and boost Trade Sujeewa Senasinghe Director in Sri Lanka Sri and disaster risk manage- human capital. This includes said the government is Widowati said. The ADB ment; and promote gender money for wind and solar committed to liberalising will continue to invest in equality. To boost inclusiv- energy. The ADB will help the economy further and programmes and projects in ity, the funding will go to government efforts to giving consumers a better sectors where it has strong commercialise agriculture, strengthen the legal system, choice. operational experience, improve rural infrastructure develop capital markets and while exploring new areas and service delivery, and ex- establish a credit guarantee that will push the country pand finance to boost small institution for small and me- further towards reaching up- and medium-sized enterpris- dium-sized enterprises. 20-30% per-middle income country es. Each year, programmes It will also help public-pri- Output of BOI companies that may be sold to status. In the process, ADB of $800 million to a billion vate partnerships. the local market
At present, companies Sri Lankan president to pay registered under BOI rules Sri Lanka to charge a income tax: Finance Minister can sell only 10% of their 10% capital gains tax output in the local market, with 90% having to be Sri Lanka's president will pay exported, BOI Chairman income tax under a new law, than two years, will be Dumindra Ratnayaka said. Finance Minister Mangala exempt. The cost of the But, at a news conference, Samaraweera said. The draft investment would be the State Minister Senasinghe law contained a provision to market value on Septem- said the government might exempt President Maithripala 10% ber 2017. loosen the restrictions. Capital Gains Tax Sirisena from income tax, Capital gains of below “We might make it 20-30% continuing a provision that Rs50,000 per transaction (local sales),” he said. “Sri existed in the old law that ri Lanka will charge a and Rs600,000 a year Lankans also need to be exempted ex-President Ma- 10% capital gains tax would be exempt. An able to buy original prod- hinda Rajapaksa from paying on investments other existing 10% withholding ucts at good prices. For S income tax. than listed shares, under tax on government securi- example, if they (foreign “We have deleted it. The a new inland revenue bill ties has been withdrawn. investors) make a good request came from none other to be effective from April Royalties will be charged a fridge or microwave oven than President Maithripala 2018. 14% withholding tax, and (in Sri Lanka), Sri Lankans Sirisena himself,” Finance Min- The principle residence management and technical should also have the ben- ister Samaraweera told par- of a person, which has fees will be charged 14% for efit of buying it at a lower liament. The tax law passed been owned for more than non-residents only. Fees cost. The public should on September 07 comes into three years and in which a for other services will be benefit.” person has lived for more charged 5%. effect from April 2018. THE ABACUS | DECEMBER 2017 9
10% tax from Sri Lanka's top personal Sri Lanka draws more Amer- Sri Lanka treasury ican investors with New York income tax rate lower bonds removed Forum
than region Sri Lanka held an investor forum in New York on 16 0% October to attract more insti- Highest Personal Income Tax Rates Withholding tax on government securities tutional investors in the United States, who are ranked the ri Lanka will end the top investors in the Colombo 24% ri Lanka's highest person- practice of charging a bourse this year. al tax rate at 24% is lower S10% withholding tax on The “Invest Sri Lanka Inves- Sri Lanka Sthan most South and East government securities under tor Forum” was organised by Asian nations, though some a new Inland Revenue Act to the Colombo Stock Exchange countries had lower corporate be effective from April 2018. (CSE) and the Securities and 27.5% tax rates, State Minister for During the ‘committee Exchange Commission of Sri Finance Eran Wickramaratne stage’ of legislating the new Lanka (SEC), in association Brazil said in parliament recently. bill, Finance Minister Man- with CSE member firms and Sri Lanka's highest personal gala Samaraweera moved leading listed companies. 28% income tax was 24%, com- changes to clause 84 of the The Invest SL Forum hosted pared to 30% for Bangladesh, proposed bill. The new in New York in 2014 drew over Malaysia 27.5% in Brazil, India’s 35%, section d) of clause 84 adds 200 investment professionals, Malaysia’s 28%, Mexico’s 35%, the exemption that ‘discount and helped that year to record South Africa’s 35%, and 35% in interest or paid to a person the highest annual purchases 35% Thailand, Vietnam and Turkey, on security of treasury bond in the Sri Lankan stock market he said. under the Registered Stock from the US. This year’s forum Mexico But, the corporate tax rate and Securities Ordinance included a series of pre-sched- is 28%, vs Bangladesh’s 35%, (Chapter 420) or Treasury uled one-on-one and group Brazil’s 34% and India’s 30%. bills under the Local Treas- discussions between fund 35% The rate in Malaysia, Vietnam ury Bills Ordinance (Chapter managers and Sri Lankan list- and Turkey is lower than in 417)’. ed companies. It was held on South Africa Sri Lanka. Minister Wickra- At the moment, a 10% 16th and 17th October 2017. maratne said, while the basic withholding tax is in effect 35% tax rate for corporates is 28%, for Treasury bills. Interest the lower rate is 14%, which is quoted in the market net Vietnam applies to areas like exports. of tax. Sri Lanka to buy 300,000 MT of LPG from Shell The Euro rises 14% against the dollar
ue to optimism about economic growth and fewer political risks, the Euro has Drisen more than 14% against the dollar so far this year. Market analysts expect this rise to continue. Another reason for the Euro's strength Sri Lanka's state-run Litro is that other major world currencies are looking Gas has struck a deal to buy less popular. The common currency is currently 300,000 metric tonnes of the best performer among developed market liquefied petroleum gas from currencies, and has traded between $1 and $1.40 Shell International Eastern over the past few years. Trading Company, according Europe's improving growth contrasts with Source: https://www.cnbc.com/2017/08/29/euro-is-up-14- to a cabinet decision. Litro percent-to-the-dollar-and-this-bull-run-looks-set-to-carry- Gas will pay the Saudi Aramco the UK, which is losing economic momentum on-say-analysts.html as it continues to deal with Brexit negotiations. contract price plus $47.50 per This contrast has also helped the Euro to rise 9% metric tonne of LPG. against the Sterling Pound so far this year. (EcnomyNext.com) 10 THE ABACUS | DECEMBER 2017
PERISCOPE
modernise the agriculture sector, and introduce effi- EU countries PPP in agriculture cient and stable modern value chains through mod- try to raise tech logistics network els such as trader-farmer firms' taxes contracts, contract grower by targeting systems and agriculture mooted mega zones,” it said. revenue It further stated, “We will introduce an Agricul- he finance ministers ture Logistics Network of France, Germany, (ALN) through a PPP that TItaly and Spain have incorporates state-of-the- written a joint letter to art solutions for storage the European Union's and transportation, ICT presidency and commis- to improve informa- sion calling for taxes on tion asymmetries, and tech giants' revenues, real-time monitoring for not just their profits. The effectiveness.” four nations want the According to the doc- Commission to produce ument, the government an ‘equalization tax’ that will undertake agricultural would make companies reforms to minimise food pay the equivalent of insecurity and create in- the corporate tax in the clusive growth by develop- countries where they ing underserved districts. earn revenue. ri Lanka’s government The network is among propos- An estimated 4.7 million of The presidency has aims to set up an ‘Agricul- als in the coalition government’s the island’s 20 million peo- already scheduled a talk Sture Logistics Network’ ‘Vision 2025’ policy document ple were undernourished about making it possible through a public–private part- called ‘Country Enriched’ in 2015, with high regional to tax companies wher- nership (PPP) to improve the launched by President Maithri- disparities in malnutri- ever they produce value. storage and transportation of pala Sirisena and Prime Minister tion, it said. Malnutrition Google recently avoided food, and reduce existing high Ranil Wickremesinghe. “We will was especially high in the tax in France because its wastage. encourage the private sector to estate sector. operations are based in Ireland. Governments want to eliminate that employment to be hit by any free trade technicality going for- agreements,” Minister of Industry and ward. China FTA soon Commerce Rishad Bathiudeen told indus- Google, Amazon, trialists at a meeting on the forthcoming Apple and other simi- The government government budget. Industrialists from larly large companies has said the FTA with footwear, electrical and electronic prod- will put up a fight if the China would give ucts, pharmaceuticals, cosmetics, rubber, letter turns into definitive exporters access to wood, automotive components, boat action. These tech firms the world’s biggest 67% building, processed food, and packaging frequently base their op- market, and that it growth in Chinese were represented at the forum, along with Imports over five years erations in countries with wants to liberalise the to 2016 business chambers. strong tax incentives, like economy by removing According to Sri Lanka’s Department Ireland, to dramatically import cess that gives of Commerce, in the five-year period of reduce the taxes they pay undue protection to China is designed 2012 to 2016, Chinese imports to Sri Lanka in Europe and beyond. local industries at the with local industry surged 67%, from 2012’s $2.56 billion. Chi- If they had to pay more expense of consumers. concerns in mind, and nese imports in 2016 increased 15% to $4.27 typical taxes in all EU The Ministry of In- that they would be billion from 2015’s $3.73 billion. These member states, they dustry and Commerce, briefed on the deal’s figures included light vessels and dredgers might pay billions more in a statement, assured progress. Chinese companies had imported for the every year. industrialists that the “We will not allow huge port city reclamation project next to forthcoming FTA with local industries and the Colombo port. THE ABACUS | DECEMBER 2017 11
Technology to replace Sri Lanka mulls rules for electric vehicle auditors? charging licensing, 94% 97% 98% 99% tariffs accountants and payroll and bookkeepers/bookkeeping, tax preparers ri Lanka’s electricity auditors timekeeping clerks accounting and sector regulator has auditing clerks Sstarted taking public ccording to a research report comments on proposed rules from the University of Oxford for electric vehicle charging titled “The Future of Employ- stations (EVCS) and its users A as the need for widely dis- ment: How susceptible are jobs to computerisation?”, technology could tributed, publicly accessible potentially replace 94% of account- charging stations grows with ants and auditors; 97% of payroll and more electric vehicles being timekeeping clerks; 98% of book- imported. keepers/bookkeeping, accounting The Public Utilities Com- and auditing clerks; and 99% of mission of Sri Lanka (PUCSL) tax preparers. said comments on proposed regulatory tools for EVCS and the protection of consumer rights would be open till 4 Oc- Sri Lanka to Audit firm tober 2017. It seeks comments on stakeholders and concerns export cannabis rotation gets on a range of issues including the determination of end-user the nod in tariffs, safety and other tech- nical standards for EVCS and South Africa issues related to residential charging facilities. The South African parliament’s The registration of electric finance committee has decided motor cars in Sri Lanka has to support the Independent increased from 90 in 2014 to Regulatory Board for Auditors’ 3,238 in 2015. Total registra- (IRBA) decision to introduce tion of electric motor cars over 2011-2016 is about 4,349. ri Lanka's government will be- mandatory audit firm rotation. gin farming cannabis to ensure Although it’s not convinced Registration of electric cars Shigh-quality supplies for the indig- that the introduction of audit enous medicine industry, as well as for firm rotation will advance the lucrative exports to the US market, Health transformation of the account- Minister Rajitha Senaratne said. ing profession as claimed, the A 100-acre farm will be set up at Ingiri- 90 committee believes the case 2014 ya, in the minister’s home constituency for it is stronger than the case of Kalutara, to cultivate weed, which is against it. currently illegal, the minister said, adding that the decision was fueled by a severe The country’s Finance Minister shortage of the narcotic that is also used Malusi Gigaba has endorsed the as medicine. IRBA’s decision, despite it being 3238 The farm could produce over 25 tonnes strongly opposed by the chief 2015 a year, and would be under military pro- financial officers of the top 100 tection, the minister said. companies listed on the coun- (EconomyNext.com) try’s stock exchange. 12 THE ABACUS | DECEMBER 2017
Focus On - Technical Changes to SLFRSs The annual publication of Sri Lanka Accounting Standards (SLFRSs) 2017 includes the below-mentioned amendments to the previous version of SLFRSs effective from the financial periods beginning on or after 1 January 2017
AMENDMENTS TO LKAS 7
he objective is to clarify LKAS 7 to improve information • Changes from financing cash flows provided to users of financial statements about an enti- • Changes arising from obtaining or losing control of subsidiaries ty’s financing activities. It requires companies to provide T or other businesses information about changes in their financing liabilities arising from financing activities, and includes the following: • The effect of changes in foreign exchange rates • Changes in fair values • Other changes THE ABACUS | DECEMBER 2017 13
It also suggests providing reconciliation between AMENDMENTS TO THE SRI LANKA the opening and closing balances in the statement of ACCOUNTING STANDARD FOR SMALL AND financial position for liabilities arising from financing activities. MEDIUM-SIZED ENTITIES (SLFRS FOR SMES) The amendments would help investors evaluate changes in liabilities arising from financing activities, in- ost of the amendments to the SLFRS for SMEs are minor cluding changes from cash flows and non-cash changes and only affect one of two paragraphs in the standard (such as foreign exchange gains or losses) in order for Mitself, with clarifications being provided to assist the pre- them to get a better understand of changes in a compa- parers and other users of this standard. However, the following ny’s debt position. three aspects may be considered the biggest amendments made: The Disclosure Initiative (Amendments to LKAS 7), issued in September 2016, has added paragraphs 44A-44E to LKAS 7. These amendments are effective for • Allowing an option to use the revaluation model for annual periods beginning on or after 1 January 2017, property, plant and equipment (PPE) in Section 17 Property, with earlier application being permitted. Plant and Equipment. However, the revaluation option has been permitted in Sri Lanka with the issuance of the AMENDMENTS Statement of Alternative Treatment (SoAT) on Revaluation TO LKAS 12 Option for PPE for entities adopting SLFRS for SMEs in August 2014. he objective of the amendments to LKAS 12 Recogni- tion of Deferred Tax Assets for Uunrealised Losses is • Aligning the main recognition and measurement require- Tto clarify the accounting for deferred tax assets for ments for deferred income tax with LKAS 12 Income Taxes. unrealised losses on debt instruments measured at fair A more conceptual approach is followed for recognising value. and measuring deferred tax as against the previous The amendments clarify that an entity needs to step approach to determine the amount of deferred tax. consider whether the tax law restricts the sources of Besides, there are few differences in the recognition and taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Ad- measurement of deferred tax as well. ditionally, the amendments provide guidance on how an entity should determine future taxable profits and explain • Aligning the main recognition and measurement require- the circumstances in which taxable profits may include ments for exploration and evaluation assets with SLFRS the recovery of some assets for more than their carrying 6 Exploration for and Evaluation of Mineral Resources. amount. The amendments to LKAS 12 were issued in As this is a specialised activity, it might not be relevant to September 2016, and are effective for annual periods be- ginning on or after 1 January 2017, with earlier application many entities in Sri Lanka. being permitted. Another important amendment relates to the exemption AMENDMENTS due to “undue cost or effort” in applying the requirements of SLFRS for SMEs, providing guidance on what is meant by the TO SLFRS 12 undue cost or effort exemption that are referred to in specific sections of the standard. Entities that are currently using this he amendments to SLFRS 12 provide clarification to exemption or those considering it should ensure that they fully the scope by specifying that the disclosure require- understand what it entails, and when it could be used or not. Tments of SLFRS 12 (except for those in paragraphs A new requirement for disclosing management’s reasoning for B10–B16) apply to an entity’s interests that are classified as using such an exemption has also been added. Other amend- held for sale, as held for distribution or as discontinued ments can merely be considered as clarification guidance of the operations in accordance with SLFRS 5 Non-current Assets accounting requirements in the case of specified circumstances. Held for Sale and Discontinued Operations as well. Amendments to SLFRS for SMEs 2015 were issued on June As part of the annual improvements to SLFRS’s 2014- 2015. Entities reporting using SLFRS for SMEs are required to 2016 cycle, the amendments to SLFRS are effective for apply the amendments for annual periods beginning on or after annual periods beginning on or after 1 January 2017. 1 January 2017, with earlier application being permitted. 14 THE ABACUS | DECEMBER 2017
Focus On - Technical Recent Developments in Auditing Requirements
n the backdrop of rising challenges with the global financial Restructuring the Audit Report: The “opinion” crisis and complexities of capital markets, the need for en- section is required to be presented first, followed by the “basis Ihanced transparency in financial reporting has been consist- for opinion” section. ently highlighted. As a result, recent developments in auditing such as the improved Auditor’s Report aims to improve the Responsibilities of the Auditor, Management credibility and quality of financial statements. Key enhance- and Those Charged with Governance: An en- ments to the Auditor’s Report are as follows: hanced description of the responsibilities of the auditor and key features of an audit. An improved description of the re- sponsibilities of the management and those charged with gov- Key Audit Matters: For audits of listed entities, a new ernance, particularly relating to Going Concern. Furthermore, section in the Auditor’s Report called Key Audit Matters (KAM) the auditor is now permitted to present these descriptions in will highlight those matters that, in the auditor’s professional an appendix to the Auditor’s Report, or where law, regulation judgment, were of most significance in the audit. These are or national auditing standards expressly permit, refer to a included in a separate section of the Auditor’s Report explain- website of an appropriate authority. ing the nature and intent of KAM. Disclose the CA Sri Lanka membership number of the engagement partner responsible for signing the independent Going Concern: Enhanced auditor’s reporting on the auditor’s report. following: Auditor’s Report - A comparison of contents and their sequences • Description of the respective responsibilities of management and the auditor for GC. Para Existing Auditor’s Para Enhanced Auditor’s Report • A separate section when a material uncertainty exists and is No report No adequately disclosed, under the heading “Material Uncertainty 1 Directors’ responsibility 1 Opinion Related to Going Concern”. Previously, such reporting would have 2 Auditors’ responsibility 2 Basis of opinion been under the header “Emphasis of Matter”. 3 Opinion 3 Material uncertainty related to Going • A new requirement to challenge adequacy of disclosures for Concern (if any) “close calls” in view of the applicable financial reporting framework 4 Report on other legal 4 Key Audit Matters when events or conditions are identified that may cast significant and regulatory require- (only for auditors of listed entities) doubt over an entity’s ability to continue as a ‘Going Concern’. ments 5 Information other than the financial Other Information: statements and auditor’s report • Management’s responsibility for other information. thereon • Identifies other information obtained or expected to be obtained. 6 Responsibilities of the director • Explains the auditor’s responsibilities. 7 Auditor’s responsibilities • Work effort in relation to other information. 8 Report on other legal regulatory • A statement on whether there is something to report with regard requirements to other information, or not. 9 CA Sri Lanka membership number of • A statement describing any uncorrected material misstatements. the engagement partner (only for auditors of listed entities)
Other Information is financial or non-financial information (other than financial statements and the auditors’ report Recent developments in the Auditor’s Report are expected to thereon) included in an entity’s annual report: for example, achieve increased transparency in financial reporting, which Management Discussion and Analysis Statement, or a Corpo- will positively impact the effective functioning of capital mar- rate Governance Statement. ket operations and the economy at large. THE ABACUS | DECEMBER 2017 15
AD 16 THE ABACUS | DECEMBER 2017
Efficient borders critical for development
Clearing goods quickly at the port and transparent Customs will boost exports and attract FDI, a global trade expert says
mproving processes at ports to quick- According to GATF, terproductive. ly clear goods can boost Sri Lanka’s delaying cargo at “Trade facilitation is the plumbing of exports and attract foreign investments, the global economy. It determines whether says Eric Miller, an advisor to the Global ports amounts to a a country is competitive or not. The prom- Alliance for Trade Facilitation (GATF), a cost equal to a 0.8% ise of a free trade agreement between two multilateral organisation specialising in duty per day countries hinges on what happens at the trade reforms. border,” Miller argues. IThe alliance was invited by the govern- According to GATF, delaying cargo at ment to develop a trade reforms pro- ports amounts to a cost equal to a 0.8% gramme to comply with the new trade facili- duty per day. “If a good is stuck at the port tation rules of the World Trade Organisation for 10 days, it is equal to adding an 8% tariff. (WTO) — of which Sri Lanka is a member This is a huge cost, tempting traders to — that became effective in 2017. The WTO circumvent the system. This risks breeding rules aim to fast-trawck the movement, corruption,” he says. inspection and clearance of goods across The goal of the WTO Trade Facilita- borders. It also aims to establish coopera- tion Agreement is to end these problems, tion between customs agencies the world- but developing countries don’t have the over. Miller visited Sri Lanka in April 2017 resources to make the necessary chang- to explore opportunities for the alliance es. Global trade is forecast to grow by $1 to engage in a trade facilitation reforms trillion each year and trading costs decline programme here. by 14.3%, all due to the Trade Facilitation Trade facilitation reforms typically aim Agreement. It’s forecast to create over 20 to fix three challenges. First, delays in clear- million new jobs. ing cargo at ports lead to huge costs, forcing The WTO adopted the Trade Facility traders to circumvent the system and Agreement in 2013. Soon after, the gov- bribe Customs officials. Second, exports ernments of Australia, Canada, Germany, won’t reach markets fast enough, losing the UK and the US established GATF. Its competitiveness in a world where speed is mandate was to help developing countries everything. Third, Sri Lanka’s export bias adopt the new WTO convention. Its man- discourages imports, and is therefore coun- agement comprises representatives from THE ABACUS | DECEMBER 2017 17
Perspective 18 THE ABACUS | DECEMBER 2017
Perspective the World Economic Forum, International A crucial programme. Nor is the alliance interested Chamber of Commerce and the Centre for component of in introducing unproven concepts and International Private Enterprise. The board impossible targets. Each country’s unique includes representatives from DHL, Maersk, improving trade political and economic reality gets due con- Fiat Chrysler and Walmart. “This reflects facilitation in Sri sideration. “What the alliance does here will the private sector’s critical role in trade Lanka is reforming depend on what Sri Lanka wants to achieve. facilitation reforms. The alliance co-creates the archaic We’re still in the first crucial stage of trying strategies with developing countries in a Customs code. to identify what’ll work in Sri Lanka. Once collaborative effort. This requires building the governing board makes a decision to en- consensus among public officials, think Influential customs gage Sri Lanka with a reforms programme, tanks and businesses,” Miller says. unions are blocking the alliance can help by consulting stake- Vietnam is among the first countries im- the passage of the holders here to develop a workable reforms plementing a trade facilitation strategy de- new Customs bill strategy. The alliance will also plug knowl- veloped by the alliance. Projects in Colum- edge and technical gaps here,” Miller says. bia, Ghana and Kenya are in various stages He says the alliance will have no condi- of development. “We are selecting the next tions, except to work on an agreed pathway. group of countries to engage, and Sri Lanka “In this regard, we’re not like the IMF. The is at the top of this list,” Miller says. alliance does not provide loans, nor are the Trade facilitation is expected to improve costs of our programmes recovered.” despite rising protectionism. “Despite even A crucial component of improving trade Trump and Brexit, the Trade Facilitation facilitation in Sri Lanka is reforming the Agreement came into force in early 2017,” archaic Customs code. Influential customs Miller points out. unions are blocking the passage of the new Clearly, many countries are concerned Customs bill. They’re also making it difficult about improving conditions at the border, to deploy surveillance technology. If GATF as it enhances market access for their ex- engages in a trade facilitation project here, ports in a competitive, protectionist world. the alliance could expect opposition from Sri Lanka ratified the agreement in 2016. Customs unions. According to Miller, Sri Lanka’s internal “The alliance is familiar with Customs market complexities are well-documented. unions. Even in the United States, Customs There are delays at ports, and Customs unions make reforms difficult. The key is procedures are complex and opaque. There listening to what people have to say,” Miller is a need for technology, where traders can says. “However, it’s important to articulate submit documentation online in advance. what the reforms aim to achieve. Speed Currently, they are running around with is a fact of life in the global supply chain. tons of paperwork to different border Moving goods into and out of a country fast agencies. Protectionism is another issue. Sri enough is critical. Sri Lanka is not going to Lanka has a certain structural preference reach a higher level of ambition without for exports. “Every politician loves exports, that. I’m sure everybody can appreciate this but you can’t grow exports without imports. fact, even the unions.” The global market tends to work through Fixing problems at the border is a good supply chains, so imports are a crucial com- thing. It stamps out corruption, inefficiency ponent,” Miller argues. An estimated one- and opaque policy making. It also removes third of world trade is intra-firm: companies complex and archaic systems that breed selling within the group. Without efficient corruption. “Political realism has to be at borders, few multinationals will invest here. the core of any programme the alliance Miller is optimistic about Sri Lanka’s designs. If special interest groups stonewall ability to improve trade facilitation. “The the reforms, the alliance will find alterna- government seems committed to improv- tive solutions. There will always be diverse ing the competitiveness of the economy. and opposing views. The alliance aims Sri Lanka is home to some competitive to work around them towards a solution businesses and a skilled, educated work- most people can agree with. We strive to force. They will understand and support the always deliver significant results with this reforms,” he says. approach,” Miller says. GATF doesn’t have a one-size-fits-all The trials of a new chartered accountant A top accounting professional shares insights on how newly qualified professionals can succeed in a tough world
oft skills are necessary to propel are extremely busy people and are not throws spanners in the works. You have careers of young chartered account- going to indulge 10-15 minutes of their to be able to adapt to situations fast,” Sants sounds clichéd, but according time reading your CV unless you grab Athukorala says. to Lakshman Athukorala, advisor to the their attention and convince them that Building character Institute of Chartered Accountants of Sri you deserve to be called for an interview,” Lanka (CA Sri Lanka), it’s not emphasized Athukorala says. ll these skills are not something forcefully enough. The next challenge is the interview. the accounting qualification “What will take you here, won’t take Facing an interview effectively is a skill Aequips you with. “This is why it’s you there; accounting students need to the chartered accountancy qualification so important that CA Sri Lanka students pay heed to this mantra,” says Athukorala, does not provide. To be successful at an engage in social activities or join clubs like who sits on the audit advisory committee interview requires the right soft skills, like the Rotary Club or Toastmasters, read the of the United Nations Industrial Develop- grooming, posture, articulation, a firm best global newspapers and magazines, ment Organization. “Qualified chartered handshake, mild manners and eye-con- and find inspiration and insights from accountants may have mastery over a tact. At this stage, one should be able to biographies of famous people,” he says. complex and technical subject, but getting convince the employer that you deserve a It takes time to hone these skills, so you a job and building a successful career shot at being the office newbie. have to be diligent, especially in develop- requires a host of other skills the qualifica- “When they ask ‘Why should we hire ing communication skills. tion simply cannot impart,” he says. you’, the wrong answer is ‘Because I’m This approach helps students develop a chartered accountant’,” Athukorala global perspectives and a keen aware- The challenges quips. “I’ve sat on many interview panels, ness of contemporary society. It builds newly qualified accountant is and young chartered accountants often character. It also gives them a glimpse of definitely technically competent, struggle with this question; most get their just how complex regulations can be, how Avibrant and raring to run. But, tongues in a tangle.” fickle markets behave or even how tech- do they know how to achieve their goals? Decision makers are not interested nology is changing their very profession. How many of them are aware of the chal- in your qualification at this point, it’s Although lacking deep understanding in lenges and expectations of their future everything else you bring to their table. any of these, being aware of the challeng- employers? You need to show them that you under- es ahead makes a world of a difference: The very first challenge they face stand even a little about their business or their passion for accounting will drive once they become a qualified chartered industry, and that you are passionate to them to be prepared, to adapt. accountant is marketing their skills and grow by serving a common interest. You “Unfortunately, not enough students gaining employment. Accounting students must be convincing, but don’t overdo it, devote time to develop their soft skills, be- dedicate their lives to mastering a highly people quickly see through acts, especial- cause they’re so focused on gaining mas- technical subject, spending most of their ly seasoned professionals and business tery of the technical aspects of accounting time at lectures and studying. However, leaders. and auditing. They fail to realize that it’s they have little understanding of the word The next challenges come after you the soft skills that will take them to where outside, and therefore are not fully pre- get the job. People management skills are they want to go in life,” Athukorala says. pared for the challenges that lie ahead. critical for discharging one’s duties effi- CA Sri Lanka incorporates some man- Most young chartered accountants ciently, where leadership and teamwork agement techniques in its curricular, and think the first challenge is gaining employ- are important. You also need to develop a organizes various leadership and social ment. different set of skills to manage crises that events, but it’s not nearly enough. “I “But, the first challenge starts much can come from within an organization. believe we can do much more to institu- earlier. It starts with the curriculum vitae, “You must be able to handle any situa- tionalise soft skills development within CA or the CV. Decision makers in companies tion, especially when a volatile economy Sri Lanka,” Athukorala says. 20 THE ABACUS | DECEMBER 2017 EMERGING OPPORT UNITIES CA SRI LANKA PRESIDENT LASANTHA WICKREMASINGHE OUTLINES HOW SMALL AND MEDIUM-SIZED PRACTITIONERS CAN OVERCOME CHALLENGES TO REAP THE DIVIDENDS OF A GROWING ECONOMY THE ABACUS | DECEMBER 2017 21 OPPORT UNITIES FOR SMPs
ri Lanka transitioning into backbone of the economy—small and me- an upper-middle income dium-sized businesses account for more economy is opening new than 50% of Sri Lanka’s GDP and create opportunities for small and the most jobs. However, the small size Smedium-sized practitioners of SMP firms poses several challenges (SMPs), however, exploiting these could around scale, finding talent, and keeping be challenging, says Lasantha Wick- abreast with rapid developments in remasinghe, president of the Institute of accounting and auditing standards, regu- Chartered Accountants of Sri Lanka (CA lations and technology that is shaping the Sri Lanka). future of the profession worldwide. SMPs play a critical role in serving the Wickremasinghe, a partner at B.R. De 22 THE ABACUS | DECEMBER 2017
Silva & Co. Chartered Accountants, a management consultancy services acquire larger corporate clients. We’re reputed SMP, says that despite facing including business planning, and also encouraging them to enter into many challenges, SMPs can still avail consultancy on tax compliance and strategic partnerships with internation- themselves to the emerging oppor- information technology (IT) control al affiliations, so they can stay abreast tunities by taking the time to update audits would be emerging areas that with the latest developments in the themselves content-wise by merging have great potential for SMPs. There’ll profession. with other firms and joining global be several non-audit services that SMPs professional affiliations. can diversify into such as review, com- What challenges do SMPs face Excerpts from the interview are as pilation and agreed-upon procedure today? follows: (AUP) engagements.CA Sri Lanka has already co-branded and made available SMPs need to possess up-to-date Why are SMPs so important? the IFAC’s brochure titled “Choosing knowledge on accounting and auditing Over 50% of GDP is generated by the Right Service: Comparing Audit, standards and related pronouncements. small and medium-sized enterprises, Review, Compilation and Agreed-Upon This can be challenging for several which also create most of the jobs in Procedure Services” for the benefit of reasons: First, small and medium-sized our economy. If these SMEs grow, it SMPs. The audit manual published by businesses may find it a challenge to lifts the entire economy. Small and CA Sri Lanka for SME audits and the meet some of the requirements expect- medium-sized enterprises typically series of two-day workshops on how to ed of them since the harmonization of rely on SMPs for advice and services use the manual and templates will be Sri Lanka’s technical standards with they can trust. This is why it’s crucial of immense value for SMPs to upgrade international standards, so it’s critical that SMPs provide credible services to their audit programmes. Furthermore, that SMPs adopt these standards as their clients. This could lead to many having identified practical difficulties seamlessly as possible without dis- benefits, but let me touch on two: in complying with the requirements rupting their clients’ normal business operations. Second, SMPs may not have the resources or processes in place to SMPs need to price their services absorb and adopt new developments to technical standards in a timely manner, appropriately, taking into consideration which leads me to the third challenge: the risks that the practitioner undertakes time management. It’s critical that SMPs allocate sufficient time to update in providing services to clients in a highly themselves on changes that affect the accounting profession as and when they regulated business environment, and other happen. risk considerations like fraud. SMPs also face several administrative challenges. Recruiting and retaining talent is probably the biggest challenge SMPs have today. Most SMPs are single First, the professionalism exuded by of Sri Lanka Auditing Standards in practicing member firms and may even SMPs during the course of their work conducting SME audits, scalability and experience times without qualified can spill over or rub off on small and proportionality have been duly con- assistants, resulting in ineffective time medium-sized businesses. They will be sidered in drafting a new Sri Lanka Au- utilization of partners. Pricing is anoth- encouraged to be more professional diting Standard that could be applied er challenge due to tough competition and adopt better processes, controls to non-specified business enterprises and increasing costs, and results in and governance, which will contribute in the pipeline. CA Sri Lanka is also pressure towards the lowering of audit to business growth. Second, a credible considering a minimum fee guideline fees. SMPs need to price their services SMP practice builds trust and will min- to ensure appropriate pricing, so SMPs appropriately, taking into consideration imize the expectations gap of clients can cover costs and value of services. the risks that the practitioner under- who can then focus more on their We feel this will benefit practicing takes in providing services to clients in a businesses and growth. members and uplift the chartered ac- highly regulated business environment, countancy profession. The institute has and other risk considerations like fraud. What new opportunities do you a help desk dedicated to serving SMPs Attracting new clients and the retention see emerging for SMPs? to clarify, interpret and implement of existing clients could also be per- The economy is transitioning into a technical standards on accounting and ceived as a big challenge for SMPs. period of high growth, and there’ll be auditing. I believe SMP firms have an The way forward is to ensure that several emerging opportunities for opportunity to develop capacity and SMPs are trusted service providers SMPs. Forensic accounting, business grow their businesses by merging with of SMEs in order to survive in the process outsourcing (BPO), business each another. This will enable them to long run. THE ABACUS | DECEMBER 2017 23
GSP PLUS: UNLOCKING THE GAINS DUTY-FREE ACCESS IS BENEFICIAL, BUT NOT ENOUGH TO GROW EXPORTS TO EUROPE
SP Plus duty-free concessions will benefit The immediate impact of duty-free access to Europe Sri Lankan exports to Europe, but the will likely be a 15% increase in exports to $3.8 billion, immediate impact will be limited — only or a $480 million gain, according to the Institute of large clothing exporters are likely to gain Policy Studies (IPS), an economic policy think tank. G— and growth will be subdued because But, this is not a transformational impact, with export manufacturers aren’t ready to meet rising demand and earnings as a share of GDP declining for over a decade. comply with stringent EU quality standards and safety According to IPS, clothing exports dominated by a rules. few family controlled firms will account for 90% of the Clothing, coconut oil, fish, fruits and vegetables are $480 million immediate gain. Clothing accounts for some of the exports to Europe likely to make immedi- 60% of Sri Lanka’s total exports to Europe and is the ate gains from GSP Plus with EU import duties down highest earner at $1.9 billion in 2016. The second-high- to zero from an earlier 9-18%. In 2016, Sri Lankan est export to Europe is rubber tyres, at only $0.2 exports to the EU amounted to $3.3 billion (31% of total billion, a tenth of clothing exports. This highlights the exports). dominance and success of the clothing industry. Apart 24 THE ABACUS | DECEMBER 2017
TOP EXPORTS TO EUROPE IN 2016 These exports are likely to enjoy immediate gains from the reinstatement of GSP Plus
Annual 3% 8% 1% 9% 6% 0% 15% 19% 8% growth (2010-16)
Apparel Rubber tyres Tea Tobacco Rubber Electronic Processed Processed fruit Coconut fibre and tubes gloves components food and vegetables
$ million 1,942 178 114 88 72 46 46 41 40
from clothing, the rest will collectively gain just $55 Virgin coconut oil is another booming export to million immediately from GSP Plus, according to IPS. Europe, growing 138% annually over 2010-16 (to $33 Most exporters are not in a position to reap the million) even without GSP Plus. “Demand for virgin benefits of GSP Plus. “Duty-free concession is just one coconut oil is growing,” Malwatte says. However, co- aspect of growing exports. We haven’t ticked the other conut production here is inadequate. The government boxes for export growth, like capacity and quality,” wants to allow coconut imports to be processed here says Indira Malwatte, chairperson of the Export De- for export. This will present opportunities for new en- velopment Board. Duty-free access will not guarantee trants, but quality is critical. “The Japanese loved our new orders or better prices. Any immediate gains will virgin coconut oil, but they suddenly stopped buying,” depend on exporters’ ability to negotiate better terms, Malwatte says. “Why? Because unscrupulous exporters she says. Large clothing exporters are better placed were selling them white coconut oil!” Virgin coconut than anyone else to negotiate better terms, but it will oil is golden. be tough because the industry is margins-driven. Fish exporters are the biggest beneficiaries of GSP The challenge for the rest is two-fold: Firms already Plus. Earlier, fish exports were subject to 18.5% duty at exporting to Europe are not prepared to meet addition- European ports. The duty is now down to zero. “The al demand, and those firms aspiring to enter European sad news is, there’s no fish,” says Channa Weerathun- markets to benefit from zero duty will have to deal with ga, general manager at Global Fisheries. Over-fishing in costly compliance. Processed and fresh food exports to Sri Lankan waters has taken a toll on fish stocks. Europe have grown 15% each year over 2010-16 (to $87 Fish farms account for more than 50% of the global million). That’s five times faster than apparel. Demand commercial stock, Weerathunga says. “In Sri Lanka, is growing even without GSP Plus. “Europeans will buy it’s less than 0.1%,” he says. A public-private project for all the fresh fruit like pineapples that we can sell them. a 3,000-acre fish farm in Mannar, on the west coast of But, we can’t grow enough. There’s not enough land,” Sri Lanka, is on the drawing board. “The government says Dawn Austin, managing director of Nidro Supply, wants fish exports to grow five-fold to $1.5 billion over an exporter. the next few years. To do this, we will need at least 10 Large firms, like listed Hayleys, are buying land in fish farms like this. But, finding land is an issue,” Weer- Bangladesh and Myanmar to grow fruits and vegetables athunga says. Tourism and conservation needs already for processing here. Small and medium-sized firms compete for limited coastal land. don’t have the money to do this. For exporters aspiring The fish export business is a good example of what to enter European markets, the certification process is can go wrong with GSP Plus. Fish exports to Europe long and expensive. So is compliance. Exporters need grew 24% annually to $115 million over 2005-10 when to maintain records of their produce at every stage of Sri Lanka first enjoyed GSP Plus status. Exports fell to production, from soil preparation to final delivery. Min- $85 million by 2012 when Sri Lanka lost GSP Plus, but ute details need recording, like who picked what fruit recovered quickly. However, since then, exports grad- from which patch and when. The Export Development ually declined to $36 million by 2016 because of an EU Board has promised to part-finance the certification for ban on Sri Lankan fish exports. This was due to illegal small and medium-sized businesses. fishing methods like bottom trawling, mostly by foreign THE ABACUS | DECEMBER 2017 25
5% -11% 138% 22% -8% -26% 28% 12% 11% 5%
Toys & sports Fisheries Coconut oil Edible fruits Bicycles Diamonds Essential oils Footwear Activated Leather requisites and herbal carbon products extracts 38 35 33 32 26 20 19 17 17 16
Source: Trademap.org
vessels, in Sri Lankan waters. The EU lifted the ban in nually, slowing to 3% over 2010-16. Had it maintained 2016 after Sri Lanka changed its maritime laws to deal the faster growth rate, apparel exports to the EU would with illegal fishing and depleting stocks. have amounted to $4.1 billion in 2016, and not $1.9 “When we first enjoyed GSP Plus, we didn’t think billion that it actually made that year. much about EU requirements and conditions around Large clothing exporters like Brandix, Hirdaramani fishing. We let foreign vessels poach unhindered. Had and MAS have moved on. They invested in Bangladesh, we taken action back then, we could have sustained ex- India, Vietnam and Africa for scale, cheap labour and ports even after we lost GSP Plus,” Weerathunga says. proximity to raw materials. In Sri Lanka, they invested in talent, innovation, research and development. Sri Time is running out… Lanka remains the innovation hub for these firms who Sri Lanka is not the only country enjoying duty-free specialise in sophisticated clothing mostly for mid-to- access to Europe. Eight other countries (Armenia, high-end consumers in Europe and the US. The rein- Bolivia, Cape Verde, Kyrgyzstan, Mongolia, Pakistan, statement of GSP Plus promises exciting times ahead. Paraguay, the Philippines) enjoy GSP Plus duty-free According to JAAF, the clothing industry will have to concessions for over 6,000 goods. Forty nine other invest up to $1 billion to expand capacity to meet new countries enjoy duty-free access for everything except demand arising from GSP Plus. arms, under a separate scheme for poor countries. Sri Lankan exports clearly have to deliver a distinct “Exporters have a lot to learn from the apparel sec- value proposition to compete in Europe, but there is tor,” Malwatte says. However, small and medium-sized not enough time. clothing makers worry that they’ll miss an opportunity. Sri Lanka’s GDP per head at $3,800 in 2016 could Clothing stitched from Chinese fabrics don’t get duty reach $4,100 by 2018 if annual economic growth concessions under GSP Plus. “This our biggest chal- is around 5%. This will place Sri Lanka among the lenge. Since we lost GSP Plus in 2010, the fabric import upper-middle income category of countries. The EU base moved to the far East,” says Yohan Lawrence, withdraws GSP Plus three years after a country reaches deputy chairman of JAAF. The cost dynamics of im- this stage. So, Sri Lanka may lose GSP Plus around porting fabrics from South Asia, which the EU allows, is 2021, according to the Joint Apparel Association Forum not compelling. Also, investors are not likely to invest ( JAAF), the clothing exporters body. The Export in a fabric mill here, given that Sri Lanka will no longer Development Board estimates that GSP Plus could be be eligible for GSP Plus in a few years, Lawrence says. withdrawn in 2024. “Either way, we have a lot of work For most exporters, GSP Plus is more a lifeline rather to do, and we don’t have a lot of time,” Malwatte says. than an opportunity to grow. “It’s all about survival,” “Forget GSP Plus. Improving competitiveness is the says Ranmal Jayasinghe, president of the National best way forward. If we can do that, exports will grow Chamber of Exporters. He concedes that the duty-free with or without trade concessions,” she says. concession is only one aspect of many that need to fall Sri Lanka first enjoyed GSP Plus concessions in into place for sustainable exports growth. “Capacity, 2005-10 before the European Commission withdrew it, sourcing raw materials, branding, marketing, research dissatisfied with the human rights record here. During and development are challenges we continued to grap- this period, clothing exports to Europe grew 11% an- ple with,” he says. 26 THE ABACUS | DECEMBER 2017
Sri Lankan fintechs’ mantra of collaboration
Financial tech ventures are challenging legacy banks and insurance companies everywhere, but in Sri Lanka, these businesses have a different strategy
he rapid development in of millennials believe they will not need financial technology services a bank in the near future. is threatening to make retail Global investments in fintechs have and consumer banking irrel- soared from $4 billion in 2013 to $12 Tevant and large investment billion in 2014, with growth rocketing to banks redundant. Financial technology 200% in 2014 from 63% in 2013, global ventures, called Fintechs, are also mak- consulting firm Accenture said in a 2015 ing in-roads into the insurance industry. report. A fintech called Lending Club, In the retail banking front, a recent an online lending service provider, Viacom study reported by Forbes raised $865 million on the New York magazine found that 73% of millennials Stock Exchange in 2014. It was valued (people born after 1984) would rather at $8.5 billion, and its IPO was the handle their financial services needs biggest for a technology company that with Google, Amazon, Apple, PayPal year. Companies like these are raising or Square than with a bank. Goldman questions for banks and insurance com- Sachs Global Investment Research’s panies. In India, Coverfox, an online Future of Finance report says that 33% insurance aggregator, has raised more THE ABACUS | DECEMBER 2017 27
than $16 million in funding, selling insurance companies. Here are four over 500 policies a month in 2015, and fintechs in Sri Lanka that emerged over venture capital investors gave US-based the last few years: PolicyGenius more than $20 million. It had 800,000 users by 2015. MoneyWorkz Analysts are unclear whether this presents more of a challenge or an his is Sri Lanka’s first online opportunity, but established financial banking aggregator, and services players are starting to take aims to grow the market by Global bold steps to engage with emerging making it easier for a large investments innovations. Big global banks like Bank Tunbanked population to of America, Barclays, Citi Bank, Credit make sense of complicated, intimidat- in fintechs Suisse, Deutsche Bank, Goldman Sachs, ing and over-branched banks. have soared HSBC, Intesa Sanpaolo, JP Morgan, According to Central Bank data, there Lloyds Banking Group, Morgan Stanley, are 30 bank branches per 100,000 peo- from Nationwide, RBS, Santander and UBS ple in the population—add the branches $4 billion in have invested in fintechs in order to maintained by finance companies, and adapt to new technologies. the number increases to 37. Either way, 2013 to Fintech is a nascent business in Sri the number of branches is higher than Lanka. There are a few fintechs here 24 in the OECD, a club of mostly rich $12 billion whose modus-operandi is to collaborate countries. According to World Bank in 2014 with, not disrupt, legacy banks and data for 2014, in high-income countries, 28 THE ABACUS | DECEMBER 2017
nearly 50% of the adult population months’ salary. But, does everyone saves money in a bank. In Sri Lanka, make use of it that way?” it’s at 30%. Low penetration of banking MoneyWorkz will also host a custom- is fundamentally a matching problem. ised deal discovery platform, curated Banking is too complicated. from all banks’ credit card offers. Despite the wide range of banking According to him, banks spend around products available, people are not Rs500 million annually to text-bomb discovering the financial products that customers about their offers. best suit their needs. Many seek family Globally, banks are losing business or acquaintances’ advice on where and to fintechs. But, MoneyWorkz is not how to bank. Often, their employers competing with banks. “We will reduce decide for them. Information is also banks’ acquisition costs per new cus- difficult to gather and compare. tomer by more than half, and reduce “We’re not a bank aggregator,” the the lending risk as well,” he says. startup’s founding CEO Jayamin Pelpola “Banks have an opportunity to be more is quick to point out. “We are about efficient in capital adequacy because enabling smart money decisions by us- they won’t have to allocate capital to The online ing data analytics to pick out products attract customers.” that best suit lifestyles and incomes.” Banks were also concerned that the platform will MoneyWorkz has completed a seed online aggregator would merely shift allow people to funding round, but Pelpola declined to existing customers around. “Banks divulge the investment. MoneyWorkz will only pay the platform fee for new compare credit will go online in the fourth quarter of accounts that we generate. What we’re card features, 2017, starting with credit cards—savings also trying to do is increase the size of and lending products will be included the pie by improving financial product offers and fees in stages, followed by non-banking penetration, so banks won’t be chasing of different financial products such as mutual funds those who are already banked,” Pelpola and real estate. says. issuing banks. The online platform will allow people But, people will to compare credit card features, offers PAYable and fees of different issuing banks. But, not be able to people will not be able to compare AYable is a free mobile app compare every every credit card product. A Money- paired with a free Bluetooth Workz algorithm will analyse basic card reader that enables credit card information provided by an applicant merchants to accept credit product. — where they work, salary range and Pand debit card payments what they’re most likely to spend on — from their customers. PAYable, recently to show only those options that best fit valued at Rs1 billion, can be paired with their profile. any Android or iOS smartphone or tab- Banks peddle credit cards with high let to effectively convert it into a secure, limits or personal loans on people who flexible and simple-to-use mobile Point- don’t really need them. Around 80% of of-Sales (POS) solution. active credit card users in Sri Lanka ei- “We are committed to driving a revo- ther settle only the minimum payment lution in cashless payments. We believe each month or pay an amount less than the future includes a balance between their monthly credit card bill, piling up older methods of payment such as cash more interest on unpaid dues. Some- and cheques, rapidly evolving forms times, people learn about financial of well-accepted methods like cards, products the hard way. MoneyWorkz and emerging methods like e-wallets has a feature that lets people convert and other modes of peer-to-peer online their outstanding credit card balances (cardless) payments. Our technolo- to a low-interest bank loan. “We’re gy and business strategy encompass doing this so people don’t lose sight thoughtful considerations of all these of the usefulness of financial products factors, as well as what top fintechs are like credit cards. Our research shows doing to digitally transform banking that the smart use of a credit card is and payments,” says CEO Yohan Wije- equivalent to earning an additional two siriwardane. THE ABACUS | DECEMBER 2017 29
PAYable launched its first devices in missions can differ from the insurance lower premiums on InsureMe. “This is June 2016, has since grown the number company to the type of insurance. The probably only because it brings down of Sri Lankan merchants accepting industry regulator, Insurance Board of their acquisition costs,” he says. card payments by 25% in just over a Sri Lanka, has capped the commission During its first three months, In- year, and has directly facilitated trans- rate at 15% for motor, property and fire sureMe chalked up over 50,000 online actions in excess of Rs750 million. insurance. visitors. In May, the startup was report- Having partnered with three of Sri InsureMe was co-founded by Vipula ing over 500 daily visits, mostly those Lanka’s largest private sector commer- Dharmapala, a former CFO of an in- comparing health insurance policies. cial banks and backed by substantial surance company, and his two friends The company is not disclosing how investments from Clarkeview Invest- Dilshan Perera and Indika Prematunga, many of these visits converted into ments Limited, PAYable is expected also a former CFO. genuine sales. Non-disclosure agree- to expand its network of merchants “We realised what was missing in ments signed with potential investors to 20,000 by the end of 2018 and Sri Lanka’s insurance market,” Perera prevent the company from doing so. 100,000 by 2020. says. “People need an unbiased inde- That’s an indication that the startup is PAYable uses security protocols like pendent explanation about insurance being taken seriously. the PCI DSS Guidelines, a global securi- and the options available to them,” he ty standard developed by VISA, Master- explains. Save Your Monkey Card and other major card providers. Insurance penetration is low in Sri Lanka compared to other countries in aveyourmonkey.com allows InsureMe.lk Asia. The industry here makes up 1% of consumers to compare GDP. In India, insurance accounts for multiple insurance quota- nsureMe.lk allows buyers to 4% of GDP, and more than 5% in Thai- tions and procure a policy compare motor insurance policies land. However, demand for insurance Simmediately, while SYM offered by insurance companies will grow as the economy develops, Insurance Brokers facilitates the entire online. people become savvier and incomes process. The service offered by Save I After filling in the vehicle’s esti- rise. InsureMe is sitting on a gold mine. Your Monkey doesn’t just involve mated market value, make and model, The insurance industry here is helping customers to compare and buy fuel type, year of manufacture, usage small, with less than 5% of Rs10.6 insurance, but extends to the point (personal, hire or rent), and no-claim trillion banking sector assets. Twenty of delivering policy documents to the bonus record, the platform lists the nine insurance firms operate here: doorstep of the customer. premiums that each of the insurance 14 offer only general insurance, 12 The startup currently provides com- companies charge. InsureMe also firms specialise in life insurance and 3 parisons for vehicle and travel policies provides other details like types of firms sell both types. General insur- online. It will offer comparisons on a accidents the policy covers, the value ance premiums amounted to nearly number of other insurances offline, of third-party property damage it will Rs70 billion in 2017. Motor insurance while migrating other general insur- pay for, and additional benefits like made up 78% of this, or Rs55 billion. ances, such as housing, to the online reimbursing towing costs, and airbag- If InsureMe acquires 10% of the motor platform in the near term. and accident-related personal injuries. insurance business, it could potentially As part of the company’s value-en- InsureMe will include other general earn around Rs825 million, generously hancing proposition, Save Your insurance policies like home, fire and assuming that they’re paid commis- Monkey has partnered with a number health insurance by the end of 2017, sions at 15%. There’s more. Private of leading third-party service providers and add more insurance vendors to hospitals earn Rs48 billion annually. If like Laugfs Car Care, Autodrome and the list. Life insurance will be included InsureMe channels 10% of this, that’s Uber to provide these value additions later. It’s another species that requires Rs720 million in revenue. Including to the company’s clientele. a different approach. For one thing, motor insurance, that’s Rs1.5 billion in A second initiative that is expected buyers have to undergo a medical revenue—and the startup employs just to be launched by the company is the exam. 20 people, and the founders say they Save Your Monkey Roadside Assis- The startup was launched in 2017. don’t need to expand staff to grow. tance application that will give added The insurance industry raised over InsureMe will benefit insurance assurance to customers by providing Rs130 billion in premiums in 2016. companies as well. vital services during a time of crisis. That’s the size of InsureMe’s potential For insurance companies, large This application will allow vehicle market, and its growing. branch networks and staff come at a users to receive help when met with an The startup is a licensed insurance cost. The industry deploys over 45,000 accident or faced with vehicle failure at broker and can sell insurance policies people from over 1,800 branches the simple click of a button. Addition- online. InsureMe will earn commis- to sell insurance directly to clients, ally, the company will also maintain an sions from insurance companies for bypassing brokers. Dharmapala says in-house call centre that customers can selling their products. Broker com- some insurance companies quote access around the clock. 30 THE ABACUS | DECEMBER 2017
APPS A productivity essential CCLEANER (formerly called Crap Cleaner)
o matter how many productivity apps you may have, unwanted THAT files saved on your devices will Ncause lags and generally render any gadget unproductive. CCleaner is a must-have app that is as synonymous with system cleaning as Google is with search. One of the oldest system cleaners in the app world, first launched in 2005, GET CCleaner can delete temporary or potentially unwanted files left by certain programs, as well as browsing history, cookies, recycle bin, memory dumps, file fragments, log files, system caches and various other data. CCleaner will make sure your device runs smoothly to STUFF ensure greater productivity. DONE
The whiteboard There are countless productivity apps Replacement - ASANA and tools out there today — we help sana is the whiteboard of yes- teryear. The app, which is more you choose the best “productive” when used on a Adesktop, helps teams keep track of what needs to get done day-to-day, while maintaining visibility and account- t’s no longer in doubt that the smartphones and tablets ability. that we carry everywhere we go can be powerful personal Companies use Asana to optimise assistants and productivity aids. In the past, companies their work day, with designated tasks that frowned on employees accessing official data on and the project’s status visible to the private devices now understand that teams collaborate entire team. Asana also eliminates the Ibetter this way. From note taking apps, to-do lists and office need for email, with file sharing possible suites to calendars, plenty of cloud-based apps can help on the platform. improve productivity at a modern office. Alternative: Trello, Basecamp THE ABACUS | DECEMBER 2017 31
SPECIAL MENTIONS
The granddaddy of them all Email is outdated GoodReader EVERNOTE SLACK This is an app available on iOS that lets you view documents in different formats, ne of the world’s most widely mails are out; Slack is in! including .doc, .pdf and .xls. used productivity apps, Evernote Slack is a messaging platform is a customizable app that lets created for businesses, to facili- Oyou take notes, and organize Etate conversations (and banter, and archive important information. The as we use it for as of late) and discuss ‘notes’ on the platform can be in the ideas among team members who may form of text, a webpage, photograph, not always sit in the same office. Slack voice memo, etc. The notes can also can be used to chat in real time, so you have file attachments. Evernote will don’t have to shout across rooms, or act archive the information for you to draw as a reminder of a task that has been Wunderlist up as and when required – it’s all your assigned to you. The app, which works on a variety of important information at your fingertips! Slack can also be integrated with a platforms, lets you share your to-do lists Special mention must be made to host of other productivity apps and with others, letting you keep track of what Evernote Scannable, which can scan services, like Asana, to provide you or your team need to get done. through stacks of pages and turn seamless integration throughout them into collated PDFs. It also works your organisation. wonders on business cards. Scannable Alternative: Azendoo, Bitrix24 auto-detects edges and produces quality images, and connects with Evernote for easy storage.
SwiftKey This app is a custom keyboard for Android in particular, but is also available on iOS. To-do lists SwiftKey lets you save time typing by Mass social media updates REMEMBER THE MILK swiping your finger around the keyboard HOOTSUITE instead of hitting each individual letter. emember the Milk is an online f your company is ‘going digital’, you to-do list and task management would want to maintain a consistent system. Created in 2004, the app presence on all forms of social media. Rwas re-launched this year with IUnless you have a designated team added features to improve productivity. to handle this for you (and even then), Remember the Milk allows you to Hootsuite is the platform for you. create multiple task lists, which can be Hootsuite is the one-stop shop to edited at any time, so keeping track is manage all your social media accounts. efficient and hassle-free. The app can be It allows you to update Facebook, Twit- synchronised on multiple devices, allow- Dropbox ter, LinkedIn, YouTube and Instagram ing you to remain on top of your work This is a web-based file hosting service all at once, in real time. It also lets you on-the-go. It can also be integrated with that lets you create a special folder on your schedule updates, and monitors replies Gmail, Google Maps, Microsoft Outlook computer, which can then be synchronised and feedback. and other such services. to be accessible on all your devices and the Alternative: buffer, tweetdeck Alternative: TODOIST, Any.do Dropbox website. 32 THE ABACUS | DECEMBER 2017
FIVE TRENDS TO WATCH OUT FOR IN SRI LANKA’S
Lanka’s real estate CONDO market has given way to a theatre of speculation and opinion. In the MARKET initial years of the allure for real estate is post-war economy, understandable. After condominium Sri Lanka’s condo all, it’s a popular and projects were rife market is booming, reliable asset class that despite the low making some has little price volatility. interest regime and question if it is market opportunity. Here are some heading for a bust. But, things have major trends real Here’s what you changed. Interest estate consultants, need to know… rates have risen, leading agents and Real estate is a and now, more and property developers prophetic exercise. more developers think deserve to be The ongoing are focusing on watched in Sri Lanka’s Cambrian shift in Sri projects that cater condo market. to the burgeoning middle class. The THE ABACUS | DECEMBER 2017 33
Luxury apartments may face a 1 the commute to work, school demand-supply and amenities. Prime Lands, imbalance: Cashing in the the country’s largest middle Contradictory views of the Cen- middle: income-focused real estate tral Bank and condo developers 2 developer, forecasts demand for about the viability of prices in Real estate developers at least 5,000 condos per year. the expensive condo market are shifting lanes to cash in Recently, Krishan Balendra, renewed the debate on whether on the growing middle class’s an executive director at John Sri Lanka’s luxury condomini- demand for well-located condos Keells Holdings who oversees um market is inching towards a close to the commercial capital. the group’s leisure and property bubble. “There is no established JLL, a real estate consultancy sector, said the country’s annual ‘slowdown’ in the luxury real firm, says demand for up- condo sales at 2,000 units was estate market,” says Jones Lang per-middle and middle-income a ‘small number’, indicating LaSalle (JLL) Lanka Managing apartments – classified as ones that there is greater potential Director Steven Mayes. ranging from Rs26,000 to for growth in the sector, similar A concern is the pace at which Rs35,000 per square foot – is to the experience in cities like new apartments are being growing. Bangkok and Kuala Lumpur over completed, and the possible Rising land prices in Colom- the last decade. mismatch with short-term bo and its suburbs have made demand. Apartments could end condos an attractive option for up unsold for longer. “This can middle class families who can’t be corrected by a slower pace afford land to build houses, says of construction that allows de- real estate agent Chandaka de mand to catch up,” says Mayes. Soysa of Acquest. Apartments JLL estimates 3,740 condos due offer ease of access to schools, Port City to sling- to be completed over the next entertainment venues and 5 shot Sri Lanka as a two to three years. Premium central road networks, which premier real estate condo developments by Altair are key concerns for middle- destination: and Shangri-La have sold more class homebuyers who consider The Port City, a new down- than two-thirds of town or Colombo built by available units. reclaiming an area of land the size of Monaco from the Increasing foreign Indian Ocean, is expected to inflows to real estate: 4 add 21,000 apartment units Currently, residents and upon its completion. “It’s go- expatriate Sri Lankans buy 90% ing to be a game-changer for Prices will rise at a of condos. Developers are seek- Colombo,” says Mayes. slower rate: 3 ing to sell more new apartments The 269 hectares of Low interest rates to buyers from overseas, taking reclaimed land is expected after the war ended spurred re- advantage of Colombo’s growing to attract $15-20 billion in newed interest in real estate as attraction as South Asia’s most investment. High-net-worth an investment asset class. For cosmopolitan city. individuals from the region, the first time in four years, the To attract more foreign including India, Pakistan Central Bank increased interest buyers, the government’s 2017 and Bangladesh, will be the rates in mid-2016, and followed budget proposed allowing main target for real estate it with three more hikes in the foreign buyers to borrow from investments in the Port City, subsequent months. a local bank up to 40% of the according to industry experts. Construction costs have apartment’s value. According to “It will be a catalyst to propel risen, but demand remains Mayes, the relaxation of barriers Sri Lanka up global real strong. “In the middle market has already garnered interest estate indices.” sector, demand continues to from India, China and others in outpace supply,” says Mayes. East Asia. “So, prices will continue to rise, but at a slower rate than over the past 12 months.” 34 THE ABACUS | DECEMBER 2017
What you need to know about Cryptocurrency Cryptocurrency has become a global phenomenon; and despite their complexity, banks, accounting firms, software companies and governments are getting increasingly interested in them
What is cryptocurrency? How does cryptocurrency work? Cryptocurrency is a form of digital money Cryptocurrency lets users make secure pay- that is designed to be secure and anony- ments and store money without the need mous. It is a currency associated with the to use their name or go through a bank. internet that uses cryptography, the process They run on a distributed public ledger of converting legible information into an called blockchain, which is a record of all almost uncrackable code, to track purchas- transactions updated and held by currency es and transfers. It is created and stored holders. electronically in the blockchain. Encryption controls the creation of monetary units and Why use cryptocurrency? verifies the transfer of funds. Cryptocurrency is known for being secure THE ABACUS | DECEMBER 2017 35
and allowing anonymity. Transactions As a new Ripple: Ripple is another distributed ledger in cryptocurrency cannot be faked or system that was founded in 2012. Ripple reversed, and there tends to be low fees, form of cash, can be used to track more kinds of transac- making it more reliable than conventional cryptocurrency tions, not just of the cryptocurrency. It has currency. Its decentralised nature means it’s markets have been been used by banks including Santander available to everyone, whereas banks can known to “take and UBS, and has a market capitalisation of be exclusive in who they will allow to open off”, meaning a around $6.3 billion. accounts. small investment Litecoin: This currency is most similar in As a new form of cash, cryptocurrency form to bitcoin, but has moved more quick- markets have been known to “take off”, can become a large ly to develop new innovations, including meaning a small investment can become a sum overnight, but faster payments and processes to allow large sum overnight, but it also works the it also works the more transactions. The total value of all other way. Therefore, those who are consid- other way. Litecoin is around $2.1 billion. ering investing in cryptocurrency should be aware of the volatility of the market and the How it works risks they take when buying. Because of the level of anonymity it Someone requests a transaction offers, cryptocurrencies are often associat- ed with illegal activities, particularly on the The requested transaction is dark web. Therefore, users should be care- broadcast to a P2P network ful about the connotations when choosing consisting of computers known to buy these currencies as well. as nodes
What is the future of cryptocur- The network of nodes validates rency? the transaction and the status of the user using known algorithms The market of cryptocurrencies is fast and wild. Nearly every day, new cryptocurren- A verified transaction can involve cies emerge, the old die, early adopters get cryptocurrency, contracts, records wealthy and investors lose money. Every or other information cryptocurrency comes with a promise, mostly a big story to turn the world around. Once verified, the transaction is Few survive the first months, and most are combined with other transactions pumped and dumped by speculators and to create a new block of data for live on as zombie coins until the last bag the ledger holder loses hope ever to see a return on his investment. The new block is then added to the existing blockchain in a way Some of the most common cryptocur- that is permanent and unalterable rencies include the following: The transaction is then complete Bitcoin: Bitcoin was the first and to-date Source: https://blockgeeks.com/guides/ the most commonly traded cryptocurrency. what-is-cryptocurrency/ It was developed by Satoshi Nakamoto, a mysterious figure who developed its block- chain in 2009. It has a market capitalisation Cryptocurrency of around $45 billion as of July 2017. - Has no intrinsic value, in that Ethereum: Developed in 2015, ethereum it is not redeemable for another commodity such as gold is the currency token used in the ethereum blockchain, the second most popular and - Has no physical form, and exists valuable cryptocurrency. Ethereum has a only in the network market capitalisation of around $18 billion - Its supply is not determined by as of July 2017. However, ethereum has had a central bank, and the network is a turbulent journey. After a major hack in completely decentralised 2016, it split into two currencies, while its Sources: http://www.telegraph.co.uk, https://block- value has, in recent months, reached as geeks.com high as $400, but crashed briefly to as low as 10 cents. 36 THE ABACUS | DECEMBER 2017
Dealing with the Dragon The only regional trade block Sri Lanka is part
of is the pathetic one he Sinhalese capital’s covering South Asia fourteenth century Tdefensive shift to the West coast offered only a brief respite. It had been intermittently warring the expansionist northern Tamil kingdom that sought the riches of cinnamon, the island’s then main export. However by the early fifteenth century, geopoli- tics took a major shift and the threat to the Southern kingdom came not from its pesky Northern enemy but from distant China, which under early Ming emperors sailed great fleets of junk to Indian Ocean ports de- manding tribute and obedi- ence to the emperor. Chinese admiral Zheng He was after the dalada, the tooth relic of the Buddha, to take back as a tribute in his first visit to the island in 1405. Failure to seize the relic and the treatment he received aggrieved the admiral who on his return five years later seized and took back to China the Sinhalese king, Vira Alakesvara, his queen and some THE ABACUS | DECEMBER 2017 37 38 THE ABACUS | DECEMBER 2017
of the kingdom’s notables as prisoners. glaring. For Sri Lanka, which in 2013 China’s ascent – now as in the fifteenth imported $3 billion in Chinese goods, it’s century – can leave kingdoms and nations an important trade partner. However, that cross its path intimidated or worse. for China, the small island is insignifi- Now, Chinese expectations of tribute and cant, absorbing just 0.15% of its over two obedience are subtle though still central trillion dollars of annual exports. China to its economic aims for its vast popula- won’t worry about being swamped by Sri tion. A trade boosting $40 billion Mari- Lankan products. Sri Lankan consumers time Silk Road to link ports, raw material seem to already prefer value-for-money supply chains and economic zones in Asia Chinese imports. Sri Lanka’s only concern and Africa with China was announced in will be that import tariff revenue will 2013. Sri Lanka’s Hambantota port built decline if Chinese imports yielded less with Chinese aid – located by the main revenue. East-West shipping route and a Chinese- The evidence of small economies that owned container terminal at Colombo’s have FTAs with China is encouraging. Pa- kistan and New Zealand increased exports to China by four times as a percentage China offers Sri Lanka a far bigger of total exports in less than eight years after signing an FTA. Imports from China opportunity than the short term gains of as a percentage of total imports also in- exporting more readymade clothes and tea. creased, but by far less. Sri Lanka should also be able to replicate their success. A free trade deal between unequal part- ners can work because small nations tend to complement rather than compete with hub port – are key links of this silk route. large economies. Sri Lanka is now a point on the Chinese China also offers for Sri Lanka a far big- maritime Silk Road that brings raw ger opportunity than the short-term gains material and commodities to China from of exporting more readymade clothes Africa, the Middle East and the West. For and tea under an FTA. It is these other, China – the world’s factory – the route is bigger opportunities that must motivate the way out for manufactured goods to Sri Lanka. Rising labour costs and skills the world. shortages are hampering the ascendency China asserting itself in the world isn’t of Chinese firms up the value chain, and as brusque as in the fifteenth century and this is the second opportunity. This has presents an opportunity for Sri Lanka’s resulted in Chinese companies relocat- economic advancement. In September ing some parts of their supply chains to 2014, before the government change, Sri lower-cost locations and countries with Lanka signed an MOU, launching techni- higher-skilled workforces, creating benefi- cal-level negotiations for a Sri Lanka-Chi- cial terms of trade all-around. Parts made na Free Trade Agreement. For Sri Lanka in various countries are combined – often which is an economy 150th the size of in China – as final products for export. China, freer trade should be particularly The electronics, textiles (for readymade attractive. There are a number of reasons clothes) and ICT sectors have some of the for this. widest supply chains in the Asian region. First and immediately, China offers Sri Bilateral trade deals drive specialization, Lanka’s export industries – particularly and Sri Lanka may suddenly now find that tea and readymade clothes – a signifi- it can build an electronics and high-tech cant new market. Sri Lanka exports $22 related industry here after all. million in tea (1.5% of tea exports) and an For the most part, in Asia, trade bar- equal value in readymade clothes (0.5% of riers (import tariffs) are relatively low. readymade clothes exports) to China. Tea The enthusiasm in Asia for bilateral trade and readymade clothes are taxed at 15% deals is not driven by the motivation to to 17%, respectively, by China. reduce these further but by the opportu- Not only are the two economies dissim- nity to integrate with world-class supply ilar in size but their relative importance chains that already exist in the region. It to each other as trade partners is also would be narrow-minded to negotiate an THE ABACUS | DECEMBER 2017 39
FTA with China because Sri Lanka can Every sixth person on earth is Chinese. export more clothes and tea there. So it should not be surprising if closer ties Third, China is slated to join two re- lead to more Chinese tourists, FDI and gional trade deals – the Regional Compre- foreign aid. hensive Economic Partnership, covering But, trade relationships aren’t governed Asian countries and Free Trade Area of by commercial interest alone; geopolitics Asia and Pacific which would also include matter. This is the fifth reason why China the US, Russia and most of South East would care about Sri Lanka. China has in Asia’s most dynamic economies. In addi- play with Sri Lanka a political relationship tion, the Trans Pacific Partnership (TPP) – as one of its close allies in South Asia dominated by the US and Japan, and – and economic priorities, because the excluding China, is also taking shape fast. island is a key point in its string of pearls The only regional trade block Sri Lanka maritime route. Sri Lankan industries is part of is the pathetic one covering aren’t competitive against Chinese ones, South Asia that hasn’t boosted any and an FTA will worry some industries regional trading activity. Bilateral deals fearing Chinese market dominance here. – like the proposed FTA with China –will However, Sri Lanka has a remarkable op- allow Sri Lanka a leg in to benefit from portunity to craft a firm economic model. the increased trade volumes due to these Engagement with China will improve the deals. Policymakers here claim they want competitiveness of the economy and the to make a case for Sri Lanka to negoti- private sector. ate with the nations planning the Trans A regime change in Colombo has stalled Pacific Partnership (TPP), which China is the proposed FTA for now. Getting it back not a part of. Being a member of dynamic on the agenda soon makes both economic bilateral and multilateral deals can be and political sense, forces which have game changing for Sri Lanka. The world’s second-largest economy is asserting itself as an investor, lender Engagement with China will improve the and trading partner. Sri Lanka’s strategic competitiveness of the economy and the position, at the crossroads of interna- tional trade, has aligned Sri Lanka to private sector. Chinese interest despite its unappealing size as a trading partner. This is the fourth opportunity that can be cemented with deeper trade ties. Already, China is the second-largest source of tourists to Sri driven the engagement between the two Lanka, accounting for over 10 percent of nations for over half a millennium. arrivals. It is also the fastest growing with Apart from political and religious arrivals to July 2015 up 77% over the same objectives, Zheng He’s expeditions had period last year. Chinese (including Hong commercial aims too. That reflects the Kong) foreign direct investment into Sri importance attached by the Chinese to Sri Lanka in 2013 touched $400 million, but Lanka as a central place for inter-Asian still only accounted for a mere 0.2% of and international trade. Chinese outflows that year. Many Chinese Vira Alakesvara was eventually released projects have broken ground, and if Sri and returned to the island, but there was Lanka wins the confidence of private never any serious hope of his recovering firms, there could be a massive boost to the throne after the humiliation of foreign FDI flows here. In 2013, China accounted captivity. In 1414, the captives returned for seven percent of global FDI. to the island – including a nominee of the Also by 2013, the Chinese government Chinese emperor to the Sinhalese throne. had emerged as one of the largest lenders But, they came back to a more settled to build infrastructure in Sri Lanka. The and tranquil political atmosphere here. In tourism, foreign investment and infra- 1415, Parakramabahu VI began what was structure finance all boost economic to be a very long reign of 55 years, having growth here. It ties in with a free trade speedily eliminated the protégé of the deal because Sri Lanka can solidify these Chinese emperor and founded what came partnerships with higher trade volumes. to be called the Kotte kingdom. 40 THE ABACUS | DECEMBER 2017
NEW INLAND REVENUE ACT: FAQS