Why an OPEC Deal to Cut Oil Production Matters for Sri Lanka

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Yesterday, after weeks of speculation that it may not happen, members of the Organisation of Petroleum Exporting Countries (OPEC) – a producer cartel – agreed to cut supply by around 700,000 barrels per day (bpd). In overnight trading, oil prices rose sharply by 5-6% and hovered at close to US$ 47 a barrel. By this morning the gains had somewhat tempered.

Under the agreement, OPEC oil production is expected to be reduced to a range of 32.5 to 33 million barrels of oil per day from 33.4 million. This is first time in eight years that OPEC has struck a deal to limit crude output since the downturn in 2008. The deal, including details of actual cuts, will likely be formalised at the next OPEC meeting scheduled to be held in November.

Why does this matter for Sri Lanka? The low oil prices seen throughout 2015 and early 2016 (as low as US$ 26 a barrel in February) has substantially helped oil importers like Sri Lanka. Low oil prices have meant low oil import bills, and at a time of declining export revenues, this has been much needed relief on the external balances side. Sri Lanka’s oil import bill was 41% smaller in 2015 than 2014 (US$4.5 Bn in 2014 compared to $2.6Bn in 2015). Of total imports, oil imports fell from 24% in 2014, down to 14% in 2015. Looking at 2016 (only H1 figures are available),

Oil Imports

– H1 2016 – $1.12 Bn

– H1 2015 – $1.47 Bn

– H1 2014 – $2.5 Bn

% of Total Imports

– H1 2016: 13%

– H1 2015: 18%

– H1 2014: 27%

Y-o-Y Changes

– H1 2016 Vs. H1 2015 : -20%

– H1 2016 Vs. H1 2014 : -52%

– H1 2015 Vs. H1 2014 : -40%

Of course it remains to be seen at what price oil stabilises in Q4 2016 and early 2017. It’s unclear as to whether this OPEC cut in production will be enough to drive sustained higher prices, given that a big new producer Iran (after sanctions on it were lifted) has been granted an exemption from the cut, Nigeria and Libya are also exempt, and there is substantial US shale oil and gas inventory built up that may now be even more profitable than before to come on stream. The OPEC cut could be self-defeating if there is a big drilling response from around the world, particularly from the US.

For Sri Lanka, we squandered an opportunity to reform energy pricing in the country. We didn’t take advantage of the breathing space offered by low oil prices in 2015. Against a backdrop of declining export revenue, a steady increase in the oil import bill certainty doesn’t help. The way forward strategy is to a) reform energy pricing so that its more in line with global prices and consumers and firms price that in in their consumption decisions; and b) boost export competitiveness and market access so that export revenues rise in line to support a higher oil import bill. Of course in the medium to longer term, Sri Lanka needs to strive to move towards more non-conventional renewable energy sources.

19 Notable Quotes of #SLES2016

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The Sri Lanka Economic Summit produced many incisive insights, revealing research, but most of all some memorable and thought-provoking quotes. Here are 19 of my favourites.

1. “The unprecedented concessions granted to favoured enterprises by the previous government have created a nightmare for the present government” – Hon. Ravi Karunanayake, Minister of Finance

2. “Professional advice needs to mix with political realities” – Hon. Ravi Karunanayake, Minister of Finance

3. “Sri Lanka is an island of poverty in an ocean of prosperity” – Hon. Ravi Karunanayake, Minister of Finance (on Sri Lanka needing to latch on to Asian economic growth)

4. “Sri Lanka must move from potential to performance, issues to solutions, rhetoric to action” – Samantha Ranatunga, Chairman, Ceylon Chamber of Commerce

5. “Businesses need to recalibrate their risk and take a long view on investment” – Dr. Indrajit Coomaraswamy, Governor, Central Bank of Sri Lanka

6. “Expectations of the new government have not been met. In fact, they got a kick in the stomach” – Prof. Razeen Sally, Chairman, Institute of Policy Studies

7. “There has been the supreme idiocy of imposing price controls, which I thought was something we had left behind in 1977” – Prof. Razeen Sally, Chairman, Institute of Policy Studies

8. “Sri Lanka needs to tell people the growth story, captivate them, and get on board with reforms” – Dato Sri Idris Jala, CEO of PEMANDU, Malaysia

9. “PPPs are a good option for countries with limited fiscal space and can bring down project costs” – Kamal Dorabawila, Investment Officer, International Finance Corporation

10. “If I was to promote any country outside of Australia, Sri Lanka would be it!” – Andrew Fairley, Deputy Chair of Tourism Australia

11. “Research, taking the temperature of what travellers actually want give a huge impetus to developing strategy. Sri Lanka needs to find out what people actually want in the markets that they are selling” – Andrew Fairley, Deputy Chair of Tourism Australia

12. “Bringing private partnerships will helps improve viability and accountability of public infrastructure projects, and avoid another Mattala” – Hon. Eran Wickramaratne, Deputy Minister of State Enterprise Development

13. “It takes two hands to clap. The government alone cannot eradicate corruption” – Hon. Eran Wickramaratne, Deputy Minister of State Enterprise Development

14. “Sri Lanka cannot become a hub by  building infrastructure alone, liberal trade and investment policies are key” – Dr. Saman Kelegama, Executive Director, IPS

15. “To avoid the low equilibrium trap, Sri Lanka must shift away from debt financed investment-led growth to FDI- and export-led growth” – Dr. Saman Kelegama, Executive Director, IPS

16. “Sri Lanka must attract non-Sri Lankan talent and build regulatory frameworks that make it the hot bed for next generation businesses” – Rajan Anandan, Managing Director, Google India

17. “We should be thrilled that people in this country are not queuing for jobs. But this is tough for business. We must build businesses that can pay higher wages” – Ashroff Omar, CEO, Brandix

18. “On average an Indian start up will work twice as hard as a Sri Lankan start up. We need to create that hunger in the workforce” – Rajan Anandan, Managing Director, Google India

19. “I don’t want to own your land. I want to make money!” – Desmond Sheehy, Duxton Investments (responding to EDB Chairman’s assertion that foreign land ownership would be prohibited)

 

Cover image courtesy Ceylon Chamber of Commerce Facebook page

“වඩා හයියෙන් කෑගහන අයගේ හඬට යට නොවිය යුතුයි” – My comments to Yukthiya on trade liberalisation

Sinhala language current affairs website, යුක්තිය (‘Yukthiya’) asked for my thoughts on trade liberalisation, particularly in the current context of the ETCA. Here’s what I said:

ලංකා වාණිජ මණ්ඩලයේ ප‍්‍රධාන ආර්ථික විද්‍යාඥ අනුෂ්ක විජේසිංහ මහතා කියන්නේ ඉන්දියාව සමග මෙන්ම වෙනත් රටවල් සමගද අන්‍යොන්‍ය වාසිදායක වන වෙළෙඳ ගිවිසුම්වලට ඇතුළත්වීම අවශ්‍ය බවයි. අපේ නිෂ්පාදන ජාත්‍යන්තර තලයට ගෙන යා හැක්කේ එවිට පමණක් බව කියයි. කෙසේ වෙතත් ගිවිසුම් සකස් කරනවිට සියලූ පාර්ශවයන්ගේ අදහස් ලබාගත යුතු බවත්, වඩා හයියෙන් කෑගහන අයගේ හඬට යට නොවිය යුතු බවත් විජේසිංහ මහතා කියයි.

(Sri Lanka must forge mutually-beneficial trade agreements. With India, and with many other countries. It will help gain market access for our products, and attract investors to our country. When crafting these agreements, there must be solid consultations with all relevant stakeholders, and government shouldn’t be overwhelmed by listening to those who shout the loudest.)

Link to the full article written by C J Amaratunga – http://yukthiya.lk/2474-2/

 

The Curionomist Podcasts | #4: A Chat with AirBnB’s Mike Orgill

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My first experience with AirBnB was on a trip to Europe last year – couldn’t have afforded France if not for it, and got insider tips, driving cheats, and great eats because of it.  A year later, it was great to catch up with a top AirBnB official and chat about the platform. Mike Orgill, head of Public Policy for AirBnB Asia-Pacific, was in town for the Sri Lanka Economic Summit 2016 and we did this podcast on the sidelines of the event. We talked about AirBnB and its role in global travel, the public policy tensions the platform has to contend with, whether the sharing economy has led to the emergence of ‘crowd regulation’, and how AirBnB is growing in Sri Lanka. I last met him when he visited Colombo in his previous role at Google and it was a pleasure catching up with him again.

(Skip to the podcast here)

Growth of AirBnB

The platform now has over 1.7 million homes in 34,000 cities and 191 countries. In fact, they are the first American travel brand to enter Cuba after relations were normalised recently, and they are not in only a handful of countries like North Korea and Syria. On a peak night last August around 1 million people across 180 countries stayed in an AirBnB property. Just this week, the company filed papers in Delaware state to raise US$ 850 million on a US$ 30 billion valuation. This would take AirBnB’s equity raise up to US$ 3.2 billion (yet, still only a fraction of Uber’s US$ 68 million valuation).

Regulatory shift

While staying with AirBnB hosts in different cities, I couldn’t help but think about how regulators must be utterly confused as to how to tackle this growing phenomenon. Unlike in traditional hotel regulation, where a country’s tourism authority would set standards and benchmark properties against it before rating them (1 to 5 stars, for instance), with AirBnB the regulators and ratings are by the community itself. It’s a complete shift in how regulation occurs.

The flat is you-clean, but is it me-clean?

I guess a big difference to contend with is that while community regulation can work – with so many people rating and scoring hosts and travellers on various aspects of the stay – each one of us has different standards – particularly on things like cleanliness. While in a traditional hotel model, a room’s cleanliness would be rated against a benchmark set by a single authority, and that would be applied more or less equally across all other hotels with that start-class regulated by that authority. Think about it – do all your friends have the same level of cleanliness or standards of hygiene that you do?

What do we call it?

With AirBnB there isn’t a single authority or regulator. It is large distributed groups of people. There are tens of thousands of regulators, as it were. It has blurred the lines between the users of a platform and regulators of that platform’s product/service offering. Economists are yet to figure out what to call this. I would suggest one of the following – ‘Distributed Regulation’, ‘Crowd Regulation’, ‘Community Regulation’.

Tourism tensions?

Whatever it is called, the fact remains that AirBnB is coming up against tourism incumbents and also confusing traditional regulators. How do you even begin to regulate something that is just an online platform? Something that simply connect micro-entrepreneurs offering a place to stay, with buyers (travellers). An economic service that is blurring the lines between personal and professional in the provision of commercial hospitality services. How do you even begin to think about taxes? In a speech at a World Economic Forum event, AirBnB co-founder welcomed working with regulators. “As we grow we want to partner with cities. The bigger we get the more regulators say Airbnb are partners to us […] the more people learn about airbnb, the more they love us […] we want to be regulated. To regulate AirBnB is to recognise AirBnB”.

I believe that it is in the interests of tourism agencies, like the Sri Lanka Tourism Development Authority, to take genuine interest, to not attempt to squash it or fumble with regulation of it; rather, to foster it, work with it, and use it to promote more visitors to the country.

Listen to the podcast below (or here).

The new fees on businesses hurt entrepreneurship

The government recently imposed an Annual Registration Fee on Private Limited Companies of LKR 60,000 and a LKR 250,000 closing down fee, both of which were announced in Budget 2016 and came in to effect last month. I find these new fees deeply problematic, for many reasons:

  • The fee affects all private limited firms regardless of their size or any other differentiating characteristics. In taxation there is a principle called ability to pay, and expecting a small one person modest revenue operation to pay the same fee as a larger substantially more profitable one does not make sense. Similar here, this ‘fee’ (which is essentially a flat tax) applies to all firms equally. Considering that a large number of private firms are actually SMEs (in fact according to the latest Economic Census, 99% of all establishments are either micro, small or medium), this LKR 60,000 p.a. fee is often a substantial cost on business operations
  • Imposing a fee for closing down a firm is a recipe for greater in formalisation. Who would want to formally register a business, taking a risk, when there is a LKR 250,000 price tag in the event of having to close down, i.e., fail. This new fee essentially acts as a penalty for failure and is a strong dampener on both risk taking as well as formality. This does not sit well with a country’s development objective of encouraging greater formalisation of firms.
  • This then has a knock-on effect on overall firm growth as well as tax compliance and collection. If such a charge discourages firms from becoming formal, it will affect tax collection. The discouragement to formalisation also affects the firm’s ability to borrow from formal sources, access formal support from institutions, and grow, expand into new markets, access technology, etc.
  • I was also told by many entrepreneurs who wanted to pay the annual registration fee and be compliant that for many weeks and months there was uncertainty as to whether this new regulation was confirmed or not; from which date it is being applied; and from who more information can be obtained. This sort of uncertainty, gaps in information, all add to transactions costs for the firm – particularly smaller firms with limited resources to expend on regulatory compliance requirements, unlike larger firms.

These fees need a serious reconsideration. They hurt entrepreneurship. They impose disproportionate costs on smaller firms than larger ones. They discourage risk-taking and put a penalty on failure. They discourage formalisation. They hamper access to finance and firm growth. And they will ultimately affect tax revenue.

Policy Uncertainty, Raising FDI, Promoting Business – Interview in Sinhala to යුක්තිය (‘Yukthiya’)

This is Part 2 of a recent interview I gave to a Sinhala language current affairs website, යුක්තිය (‘Yukthiya’). It is originally published here http://yukthiya.lk/3577-2/

පසුගිය කොටයේ අවසානයෙන් සාකච්ඡාව ආරම්භ කරන්නේ නම් උදාහරණයක් ලෙස මගේ මිතුරෙක් මොබයිල් පේමන්ට් ඇප් එකක් සංවර්ධනය කළේ ය. ලංකාවේ මහ බැංකුවේ දැනට තිබෙන නීති රිති නිසා ඒ ආයතනය අපේ රටේ පිහිටුවන්නට අපහසු විය. ඊට පසු එම මිතුරා සිංගපූර්වට ගොස් ඒ ආයතනය එම රටේ ආරම්භ කළේ ය. ඒ ඒ වෙළඳ ආයතනය මේ රටේ ලියාපදිංචි වි තිබෙන්නේ. නමුත් ඉහත ප්‍රශ්නය නිසා ඒකට බදු ගෙවන්නේ සිංහපුර් රජයට ය. ඒ වගේ වෙළඳ ව්‍යාපාරයක් ලංකාවේ තබාගන්නට නොහැක. ඒ උදාහරණය ගත්තාම අපිට පෙනෙනවා තොරතුරු තාක්ෂණය අංශයේ එවැනි ව්‍යාපාර මේ රටේ බොහෝ ඇති බව. ඒ වාගේ ම ජාත්‍යාන්තර ජංගම ව්‍යාපාර ද මේ රටේ ඕනෑ තරම් තිබේ. මේවා වෙනත් නිෂ්පාදන මෙන් නොව ලෝකයේ වෙනත් රටක ස්ථාපිත කළහැක. නමුත් ඒ ක්ෂේත්‍රයෙන් බදු අය කරන ක්‍රමවේදයන් ඉතාම සුක්ෂම ය. මා පෙර සඳහන් කළ ආකාරයට ලංකාවේ පුළුල් වි තිබෙන්නේ 60%ක්ම සේවා අංශය නම් ඒ ක්ෂේත්‍රයෙන් බදු අයකරන ක්‍රමවේද තවම දියුණු වී නැති බවයි මට පෙනෙන්නේ. ඒක අද මේ බදු දැළ පුළුල් කරන්නට නොහැකි වීමේ ප්‍රශ්නයක් ලෙස පවතී. පෙර මෙන් සෘජු ලෙසම අතට අසුවෙන දේ පමණක් අපි නිෂ්පාදන කළේ නම් මා ඉහතින් සඳහන් කළ ආකාරයට ඒවාට බදු පැනවීම අපහසු නොවේ. දැන් අපේ ආර්ථිකයේ විශාලතම අංශය සේවා අංශය නම්, ඒ අංශයෙන් බදු අය නොකරන්නේ නම් බදු දැල පුලුල් වන්නේ කෙසේ ද? මේ අංශයෙන් බදු එකතු කිරීම අමාරු වන්නට පුළුවන් වන නමුත් වහාම ඒ අංශය මේ බදු දැළට ඇතුල්කරගත යුතු ය.

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Tax Troubles – Interview in Sinhala to යුක්තිය (‘Yukthiya’)

I recently gave an interview on Sri Lanka’s continuing tax troubles, and the impact on the economy, to a Sinhala language current affairs website, යුක්තිය (‘Yukthiya’). I reproduce it in full here (Part 1), with due credit to where it is originally published here – http://yukthiya.lk/ද-දේ-නි-ප්%E2%80%8Dරතිශතයක්-ලෙස-කි/

අප රටේ බදු වැඩි කිරීම පිළිබඳව අප සමාජයේ සාකච්ඡාවක් ඇත. බොහෝ විට මේ සාකච්ඡාවට දේශපාලන අභිලාෂයන් මුසුවීම වැළක්විය නොහැක. එහෙයින් බදු වැඩිකිරීම හා අඩු කිරීම ගැන සාකච්ඡා කරන්නට ප්‍රථම, මා කල්පන් කරන්නේ වෙනත් තැනකින් මේ සාකච්ඡාවට ප්‍රවේශවීම යෝග්‍ය බව ය. ඒ අනුව දළ ජාතික නිෂ්පාදිතය ප්‍රතිශතයක් ලෙස ලංකාවේ බදු ප්‍රතිශතයේ ප්‍රමාණ කොපමණ ද යන්න ප්‍රථමයෙන් අපි ආරම්බ කරමු. කුමන ආකාරයට බදු අඩු වැඩි කළත් ලංකාවේ වසර ගණනාවක් තුළම දළ ජාතික නිෂ්පාදනයට සාපේක්ෂව බදු ප්‍රතිශතය අඩු වී තිබේ. ආර්ථික විශේෂඥයින් කිහිප දෙනෙක්ම පවසා තිබෙන්නේ මෙය ලෝකයේ කිසිම රටක සිදු නොවූ ආකාරයේ අඩුවීමක් බව ය. සාමාන්‍යයෙන් රටක ආර්ථිකයක් නැතිනම් ආර්ථික කටයුතු පුළුල්වන විට ඒ රටේ ආදායම් බදු දෙපාර්තමේන්තුව එකතුකරන බදු වෙන කිසිම රටක නොවන ආකාරයට අඩුවී තිබෙනවා නම් ඒකට හේතුව කුමක් ද යන්න ප්‍රථමයෙන් බැලිය යුතු ය. ඒ අනුව අලුතින් පුළුල් වී ඇති ක්ෂේත්‍රයන් බදු දැළට ඇතුලත් නොවීම මෙයට ප්‍රධාන ලෙස හේතුවක් ලෙස සලකන්නට පුළුවන.

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Brexit Post: Readers’ Views

After my recent post setting out the possible channels of impact of Brexit for the Sri Lankan economy, I had some really excellent and insightful comments from readers who wrote back to me. I thought of sharing some of them here.

(If you need a quick ‘get me smart’ guide to the Brexit and what happened, this post from NYT is great)

On the impact through the exports channel, a friend studying in the UK wrote back,

It would be useful to see what percent of the UK’s overall imports are made up by that 10% of Sri Lanka’s to them (industrywise), and what our industries should be focusing on doing to ensure they retain that hold in order to benefit and grow immediately after the 2 year divorce case the UK is supposed begin after invoking Article 50? To me that seems the only thing we can do now, depending on the terms of exit negotiated by the UK-EU?

He also noted the polarisation of views across the country, particularly ‘London versus the rest’,

“…the overall sentiment in this part of the country (South West of England) was pretty interesting over the last few weeks. Particularly an anti-London/anti-expert bent among small business owners, which is the polar opposite of those who have/are working in or with the City. Interesting too were the dynamics among age groups that I noted here. I can’t speak for the rest of the country, but the (admittedly small) sample group I had access to surprisingly did not seem to consider immigration their number one concern (perhaps because those older folks in the immediate area here are generally of the upper income bracket, whilst the small business owners that I spoke to such as plumbing shops, some builders, real estate companies etc. don’t directly employ much EU labour). The farmers will be hit by a potential pull out of EU subsidies, unless a post-Brexit govt continues it, so they almost certainly voted to remain. In some ways, it just seemed those around here voting out wanted to say a big F U to Cameron, to the City bankers telling them what to do, and the perceived oligarchy – although not the ideal way to set about these things. Today, the sentiment seems to be one of disbelief – among the Brexiters just as much as the Remainers. 

Another reader (an economist in an international lender) wrote back with a substantial set of new questions that arise from all this,

I agree with the views expressed by you. Given that all countries now need to negotiate trade agreements with Britain where would we stand?  How would the priorities assigned by the British government.  Would Sri Lankan ministers role publicized role in the Referendum have any adverse impact on the negotiations.  Should Sri Lanka given so much publicity to Sri Lanka’s role? ……This might be something the Government needs to look into in their future strategy.  Looks like there will be other referendums in the future in other countries such as the Netherlands, France etc. Are all exports to EU (especially to Britain) under GSP plus? In any case the GSP plus is still not in operation, isn’t it? Probably the fish exports will have a more serious impact but given its early stages may need to take immediate action  and the GOSL can immediately negotiate with Britain on the  concessions. Immediately with the collapse in the Sterling pound the imports will be cheaper in UK and the demand might be more to offset the concessions. That might give the GOSL time to negotiate.  However as you pointed out raising funds for the Government in the short term would be a problem. BREXIT might have a ripple effect in EU countries and therefore it might be better for the Government to strat preparing for it if certain countries are major trading partners.

In my original post, I had not highlighted the impact of Brexit (and a sharp fall in the Sterling) on remittances to Sri Lanka, as another reader (an economist at a local think tank) pointed out,

Another way Sri Lanka will be affected by the Brexit is through our expatriates in England. If the pound remains weak the remittances they send will be low.  A large number of Sri Lankan expatriates also visit the country yearly as tourists. These flows will also get affected.

Another reader’s comments (an apparel exporter) really captured the continued uncertainty of it all and the need for Sri Lanka to brace itself,

I guess the problem is the great unknown. By most reckoning it will take the full 2 years for the UK to negotiate the exit, and given that they don’t look like invoking the infamous Article 50 until Cameron’s successor is appointed in October, we should be able to continue on the status quo until then? 2 key things to push would be a) to independently negotiate a trade agreement with the UK – this should be “relatively” easy as the current political relationship is good, and b) as you say aggressively pursue new markets. That unfortunately has been a call for some time now, but there doesn’t really seem to be much progress there. Overall 2016 will be extremely challenging from an apparel perspective. Both the EU and the US markets are down and the uncertainty over the process and implications of Brexit together with the upcoming US elections and all that chaos will continue to restrict demand for our product.

Meanwhile, renown economics Professor at ANU, Premachandra Athukorala, wrote back with a different perspective to mine on the potential trade impacts,

I am not sure that trade impact of  Brexit  (on Britain and her trading partners)  is going to be that significant.  The bulk of trade (over 70%) between Britain and the EU countries takes place within global production networks.  Tariff rate differentials are not a sigficant determinant of locational decisions of firms within production networks (such as Japanese automakers assembling cars in England for the other European countries). 

Another relevant point is that Britain’s bilateral trade with some major non-EU countries has been glowing at comparable or at even higher rates in rent year.   (The role of tariff (and tariff reductions under FTAs has been vastly exaggerated in the recent trade policy debate in Sri Lanka. Frankly I do not any reason for any hasty response on our part to diversify export market or to get into the costly business of signing FTA with other countries.

He also shared this paper that looks at ‘Global production sharing and the measurement of price elasticity in international trade’

I will keep updating this post as new views come in.