Economic Capsule January 2010

Research & Development Unit

January 2011

ECONOMIC CAPSULE

ComBank News

Proposed Policies for Financial System Stability in 2011 and Beyond…

CBSL Cuts Policy Rates

Movements in Monetary Aggregates and the Rate of Inflation

Sri Lanka to Set up Domestic ATM Switch

Share Market News

Economic & Business News

Financial Sector News>

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Sri Lanka Moves up in the Economic Freedom Index

Macroeconomic Outlook and the Monetary Policy Strategy for 2011 and Beyond: CBSL - Road Map, January 20

Sri Lanka: Up Coming Hotel Projects

Latest IMF Projections

News from the Globe

Snippets

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Financial Sector News > >

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ComBank News…

Commercial Bank was No: 05 in Business Today Top 20, for 2009-10.

ComBank achieved yet another milestone with the addition of the 400th

ATM to its extensive, island-wide 24-hour cash dispensing system which includes on site as well as off site ATMs, and is the single largest in the country.

ComBank, LOLC Partner to Boost Customer Service

Lanka Orix Finance Company a member of the LOLC group & Commercial Bank have signed an agreement to install CBC’s ATM at identified branches of the LOLC Group.

ComBank, LOLC Partner to Boost Customer Service

ComBank No: 05 in Business Today Top 20 - 2009/10

ComBank Reaches Milestone 400th ATM

ComBank’s 188th branch was opened @ Dankotuwa

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Proposed Policies for Financial System Stability in 2011 and Beyond…

Guidelines will be issued to banks on integrated risk management Integrated risk management techniques will be developed to: Closely monitor and manage risks Ensure availability of adequate capital within banks and other financial institutions to meet unforeseen risks Direction on margin trading of shares by banks to mitigate exposure to equity market and to introduce a risk management system.

Risk management will be given top priority

Implement Internal Capital Adequacy Assessment Process (ICAAP) and Supervisory Review Process (SRP) under Basel II Pillar 2. This will entail:

Capital allocation enhancement for risks not captured under Pillar 1 Identification of explicit responsibilities of the banks’ directors and supervisors Move towards advanced approaches of Basel II Carry out appropriate reforms in line with Basel III

A robust and effective supervisory mechanism in line with the basel framework will be implemented

Cont…

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Proposed Policies for Financial System Stability in 2011 and Beyond…(cont…)

Adopt Sri Lanka Accounting Standards (SLAS) 44 and 45 on financial instruments by January 2012 (corresponding IAS 32 and 39).

Adoption of the Sri Lanka Accounting Standards (SLAS) 46 on related disclosures (corresponding IFRS 7) will also be facilitated.

The adoption of international accounting standards will be facilitated

All registered finance companies will be required to list on the CSE by June 2011: Facilitate mobilisation of capital funds Broad based ownership Enhance governance standards and disclosure requirements

RFCs will be classified into two groups: Those which are in full compliance with all applicable laws, regulations and directions and those which are not The separate groups will be published in the newspapers on a quarterly basis, commencing 1st July 2011.

Finance company sector will be monitored even more closely

Cont…

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New mechanisms will be devised to monitor and supervise diversified groups with financial interest.

Foreign collaboration will be increased.

“Access To finance” will be considered as a “basic need” and given special attention.

Public awareness campaigns on unauthorized finance activity will be continued.

Further improvements will be effected in payment systems to safeguard public interest:

Develop higher level of supervision of service providers Issue guidelines to regulate internet banking services and mobile payments Move towards a common ATM Switch Move towards a common Debit Card Switch Provide for online-encryption security for payment cards

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Strengthen the AML/CFT framework

Steps to improve the efficiency of banks to lower intermediation cost

Global and regional financial links will be strengthened

Source: CBSL - Road Map, January 2011

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CBSL Cuts Policy Rates

Central Bank of Sri Lanka (CBSL) in a surprise move cut its Repo rate

by 25 basis points & the RRepo rate by 50 basis points w.e.f. 11.01.11.

REPO RREPO

Previous Rate 7.25 % 9.00 %

Rate Effective from 11.01.11 7.00 % 8.50 %

In support of the move the Central Bank stated, the encouragement of substantial and sustained private sector participation in economic activity in the years ahead, would be vital.

Towards that end, a reasonable relaxation of the Central Bank’s monetary policy stance would be appropriate and timely. Such a policy stance would result in a further reduction in market interest rates, which would reflect the lower risk premia that is expected to prevail in the period ahead, without increasing inflationary pressures in the economy.

By November 2010, year-on-year growth in credit granted to the private sector by commercial banks was 23 %, partly due to the base effect, given that a negative growth of around 6 % was recorded for November 2009.

The central bank governor in an interview with the Reuters has signaled that more policy rates reductions are possible in the near term depending on the quality of credit growth and a better supply-side response.

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Movements in Monetary Aggregates and the Rate of Inflation

Despite a significant increase in Credit to Private sector beginning from Apr, 2010, the growth in Broad Money (M2B) has been below 15% in recent times.

The government is planning to maintain the growth in Broad Money (M2B) at around 14.5% in 2011.

This will be a challenging goal particularly in view of the increasing trend of Credit to the Private Sector.

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Sri Lanka to Set up Domestic ATM Switch

Sri Lanka is to set up a common automated teller machine and payment card switch that will process transactions locally, eliminating the need for international routing of transactions between different banks.

LankaClear, Sri Lanka's national clearing house, has called for expressions of interests from vendors to supply 'Common ATM & Payment Card Switch'.

With a local switch transactions will be routed domestically instead of going through international service providers.

At the moment different local banks allow their ATMs to be used by customers of other banks, but the transactions are cleared internationally by providers such as Mastercard.

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The Colombo Stock Exchange (CSE) in 2010 saw a record 57,093 new Central Depository System (CDS) accounts opened (up by 27% from 2009).

Year 2010 figure beat the previous highest of 56,465 achieved in 2005.

Interestingly the 2010 figure nearly equaled the total number of new accounts opened between 2006 and 2009.

Between 2001 and 2010 the number of CDS accounts had increased by 70% from 361,643 to 554,000.

CSE has been the world’s consistently best performing market for the past two years with 96% return in 2010 and 125% in 2009. This year so far with 9.5% return CSE remains Asia’s best performing, a fete it has enjoyed for two consecutive years as well.

The country also saw 10 new IPOs in 2010 including the popular ones such as Singer Finance Plc (which created the highest ever oversubscription of 135 times), thereby beating the previous record established by Odel in recent years.

Despite the massive flowing only 13% of the accounts (72,000) were traded at least once in 2010. However this percentage is more or less equal to previous years. According to the Securities and Exchange Commission (SEC) approximately 7,000 account holders trade on a daily basis.

Analysts as well as the CSE and SEC agree that the number of new investors as well as active trading will swell this year with an estimated over 50 IPOs scheduled for the year.

Source: Daily FT

Vallibel One Private Placement Draws Rs. 7.5 bn The biggest ever private placement worth Rs. 4.9 bn by Vallibel One Ltd., (VOL) has drawn applications worth Rs. 7.5 bn. VOL via a private placement was issuing 196 mn shares at Rs. 25 each.

VOL is planning its IPO (offering around 21.3 mn shares) at the same price of Rs. 25 per share in March, 2010. Post private placement and IPO, public holding in VOL will be 20% with Chairman and Managing Director Dhammika Perera holding 80% stake.

VOL is a diversified holding company with strategic investments in financial services, tile and sanitary ware manufacturing, and leisure. Sector specific operations are carried out through its subsidiaries, namely LB Finance Plc, Royal Ceramics Lanka Plc and Greener Waters Ltd., the leisure venture arm of the company. Further, the company holds 15% of Sampath Bank, which is treated as a strategic long term investment.

The Finance share issue draws Rs. 815 mnThe Rs. 1.6 bn share issue of The Finance Plc has so far drawn applications worth only Rs. 815 mn.The company issued 40 mn shares at Rs. 40 each to boost its capital to fund growing business.

HVA IPO Oversubscribed by 23.6 times The Rs. 319 mn worth Initial Public Offering of HVA Foods Ltd., had been oversubscribed by 23.6 times, drawing applications worth Rs. 7.5 bn. HVA Foods offered a 30% stake or 19.928 mn shares at Rs. 16 each.

Commercial Credit Ltd., a registered finance company, has announced that it will list on the Colombo Stock Exchange (CSE) in June, 2011.

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Economic & Business News > >

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Sri Lanka Moves up in the Economic Freedom Index

The country’s overall economic freedom score was 57.1 which is an improvement of 2.5 from the 2010 figure of 54.6, reflecting major gains in trade, monetary, and investment freedom.

Sri Lanka is ranked 19th out of 41 countries in the Asia–Pacific region, and its score improvement is one of the 10 largest in the 2011 Index.

Sri Lanka has moved up considerably in the “2011 Index of Economic Freedom” released by The World Heritage Foundation and the Wall Street Journal. Sri Lanka has been ranked as the world’s 107 th (from 183 economies) freest economy in 2011, higher in comparison to the 120 th place in 2010.

Hong Kong and Singapore topped the ratings, finishing one and two, respectively, for the 17th straight year.

But Singapore cut into Hong Kong’s lead significantly, mainly on the strength of a better score in anti-corruption and a significant gain in financial freedom.

The third and fourth place finishers also remained the same: Australia and New Zealand, respectively.

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Macroeconomic Outlook and the Monetary Policy Strategy for 2011 and Beyond: CBSL - Road Map, January 2011

The Monetary Programme For 2011

Anticipated GDP growth of around 8.5%GDP deflator of 6%BOP surplus in 2011 of around USD 350 mnNet credit to the government to be about Rs.42 bnCredit to the private sector to expand by about 16%Broad money and reserve money growth to be at around 14.5%

Cont…


Macroeconomic Outlook and the Monetary Policy Strategy for 2011 and Beyond: CBSL - Road Map, January 2011 (cont…)

Economic growth to be 8% to 9% over the next few years, with all sectors contributing to this growth.

Economic Growth:

Key Developments Expected in the Medium Term

Investments:

Investments to reach above 30% of GDP in the medium term.

External Sector:

Earnings from services, particularly Tourism, Ports, ICT, as well as external and internal trade expected to record significant increases. Remittances expected to increase further from the current level of 8% of GDP in the upcoming years. Higher FDI inflows to reach around 2% of GDP, due to more conducive environment. Domestic savings to rise and to be at least 22% of GDP. BOP surplus likely to be around 1.5% of GDP. International reserves to be at a comfortable level of around 5 to 6 months of imports in the medium term.

Cont…

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Macroeconomic Outlook and the Monetary Policy Strategy for 2011 and Beyond: CBSL - Road Map, January 2011 (cont…)Key Developments Expected in the Medium Term (cont…)

External Sector: (cont…)

Accordingly, Gross Official Reserves are projected to increase to around US$ 10 bn by 2013 Exchange rate to remain largely stable with a tendency to gently appreciate.

Foreign Inflows: Long term foreign inflows to the government projected to be around USD 1.7 bn in 2011 FDIs and inflows to the private sector expected to reach USD 1.5 bn in 2011.

Overall budget deficit is expected to decline further to 6.8% of GDP and to around 5% of GDP in the medium term. Government revenue and grants are expected to increase to 15.6% of GDP. Expenditure and net lending is expected to decrease to 22.4% of GDP. Government recurrent expenditure is estimated to decrease to 16.1% of GDP. Public investment is expected to be maintained at 6.5% of GDP.

Fiscal Sector:

Cont…

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Macroeconomic Outlook and the Monetary Policy Strategy for 2011 and Beyond: CBSL - Road Map, January 2011 (cont…)Key Developments Expected in the Medium Term (cont…)

New CCPI (Based On 2006/07 Survey) to come into Force: More representative price index that reflects most recent changes in consumption patterns. More realistic index to assess current inflationary pressures as well as inflationary outlook. Need to rebase the CCPI every 5 years as consumption patterns change rapidly.

Projected Expansion in Broad Money (% change over previous year)

2010 2011 2012 2013

GDP Growth 8.0 8.5 9.0 9.5

GDP Deflator 7.0 6.0 5.5 5.0

Broad Money-M2b (Annual Average) 15.0 14.5 14.5 14.5

Cont…

Six Senses Resorts & Spas (SSR) together with the Favourite Group, Auro Holdings and Timex Garments signed an agreement with Aitken Spence Hotel Holdings PLC, in September 2010 to establish its first Six Senses project in Sri Lanka.

This is a Board of Investment approved venture worth USD 45 mn. In addition, SSR intends to make Sri Lanka its Indian Ocean Regional Headquarters in the near future, overseeing new and existing Six Senses properties in the Maldives and Indian Ocean region.

The dual project includes, Six Senses Ahungalla, a resort and spa, including residential villas, on a 10.5-acre plot, adjoining Heritance Ahungalla on the Southern coast; and Six Senses Meeraladuaa, an ecological, environmentally very low impact site, of semi tented structures, on a 27-acre island nearby.

The proposed opening date is late 2012. Six Senses expects an average room rate in the range of USD 400-450.


Sri Lanka: Up Coming Hotel Projects

Shangri-La has already acquired state land by the capital's 'Galle Face' beachfront to build a USD 500 mn multi-use complex with high-end retail facilities, deluxe apartments and a 500-key luxury hotel to open in early 2014.

Shangri-La is also planning to develop a second property, a 300-key city resort on approximately 100 acres of land in Hambantota, on the southern coast of Sri Lanka, to open in 2013.

Shangri-La to open two hotels

China National Aero Technology Import & Export Corporation (CATIC) intends to build a multifunction complex, comprising a five star hotel and a shopping mall with direct investment of nearly USD 500 mn. in Colombo's main beachfront

USD 500mn hotel from China aviation firm

Six Senses Ahungalle & Meeraladuaa to open in late 2012

Swiss-based Mővenpick Hotels and Resorts, which is to manage a city hotel in Sri Lanka's capital Colombo is also looking for opportunities to run a resort elsewhere in the island.

Movenpick has struck a management deal with Sri Lanka's Softlogic group which is planning to build a 24-floor tower hotel in Colombo which will have 224 rooms. The group has a 12-year deal with options to extend another 10 years with Softlogic

Second hotel Scouted by Swiss Leisure Group

According to economic development minister Mr. Basil Rajapaksa, investors connected to Taj Samudra hotel in Sri Lanka's capital Colombo may build another hotel in the same premises.

The Taj group had stated in late 2010 that the existing 5-star Taj Samudra may go through a USD 60 mn upgrade. The group manages a 4-star hotel near Sri Lanka's main international airport and also has a beach resort in the Southwest coast.

Taj owners may build another hotel

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Cont…


Sri Lanka: Up Coming Hotel Projects (cont…)

Jetwing Hotels is getting into what is called as ‘mixed use development’ at a Colombo property it owns – combining an, exquisite boutique hotel with apartments for rent. At Ward Place, the company is hiring a Singapore architect to create a 60-room boutique and 25 apartments. According to Jetwing Hotels Chairman Hiran Cooray, the company is planning boutique hotels in many other parts as Sri Lanka takes off in the post-war era.

Citrus Leisure aims to build a four-star resort with 150 rooms and 28 villas in Kalpitiya. The villas which will have individual pontoons giving access to the sea are to be leased out on 99-year leases to high-net-worth individuals..

Jetwing Hotels

Citrus Leisure PLC (Hotel Reefcomber PLC)

Eleven leisure firms have submitted proposals worth USD 500 mn to build hotels and other leisure facilities in 10 islets off Sri Lanka's North Western coast. According to Chairman of Sri Lanka's tourism development authority Mr. Nalaka Godahewa, the islands off the coast of Kalpitiya will be given on 30 to 50 year leases, and investors could engage in 40 approved areas including building, hotels, golf course and boat services.

Sri Lanka gets US$ 500 mn worth tourism proposals for 10 islets

Domestic business groups, John Keells Holdings and Amaya too are either planning and/or started building new properties, expanding / upgrading their properties.

The leisure sector of the Vallibel One Ltd - Greener Water Ltd is to build a five star luxury hotel in Kochchikade, Negombo at a cost of USD 38 mn, according to the private placement prospectus of the company.

The company has already invested Rs. 268 mn on a 14 acre land in Kochchikade for this purpose and hopes to build mega 382 luxury rooms which will be offered to customers at an average rate of between USD 136-165. Apart from the luxury 382 rooms, the hotel will include 42 suites, a spa and fitness centre, 600 seating capacity banquet hall, restaurants, retail arcade, a 1500 square metre outdoor pool, and many other modern amenities.

The construction of the hotel is estimated to take 2 years with commercial operations expected to commence in 2013.

Vallibel One goes for USD 38 mn five star resort hotel

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Latest IMF Projections

World Still Needs to Fix Key Economic, Financial ProblemsGlobal output forecast to expand by about 4½ % in 2011, slight upward revision.Advanced economies' growth to slow to 2.5 % from 3.0 % last year.Emerging markets to see average 6.6 % growth, down from 7.1 % in 2010.Global financial stability still at risk, needs urgent and comprehensive response.

The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally. These need to be complemented with policies that keep overheating pressures in check and facilitate external rebalancing in key emerging economies


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Toyota ends 2010 as world's top automaker despite recallsToyota Motor group sales in 2010 rose despite a global recall that damaged its brand image, enabling the company to retain its position as the world's biggest automaker.

Toyota's global sales rose 8% on-year to 8.418 mn vehicles, beating the company's own expectation of 8.37 mn units.

The Japanese group also remained the world's biggest automaker, with the latest figure beating the 8.39 mn vehicles sold by General Motors in 2010.

AFP

NEWS FROM THE GLOBE

Opec may raise oil output Saudi Arabia's oil minister has

stated that the Opec producers' group may hike output to meet rising demand for crude oil in 2011.

Ali al-Naimi stated during a conference in Saudi ,that oil demand could rise by about 2% in 2011.

With the cost of crude nearing $100 a barrel, any output increase could help rein back further price rises.

BBC

COMMODITIES are partying like it is 2008. The oil price stands at its highest since October of that year, just shy of $100 per barrel.

World food prices as measured by The Economist’s index are back at their peak of July 2008.

Copper prices, which have jumped by 17% since the start of November, are at an all-time high.

China leads list of biggest U.S. creditorsBelow are the top 10 holders of U.S. debt as at end October, 2010.

Lenders USD Bn

China, mainland 906.8

Japan 877.4

United Kingdom 477.6*

Oil exporters, which include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria

213.9

Brazil 177.6

Hong Kong 139.2

Caribbean banking centers, which include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama

133.7

Russia 131.6

Taiwan 131.2

Canada 125.2

•UK figure may include government debt bought by other countries through London intermediaries

Reuters

Commodity prices and global growth

The worry is that rampant commodity prices may cause another wobble in the world economy. Higher commodity prices act like a consumption tax, transferring income from households and companies which use the resources to companies and countries that produce them. As the producers tend to save more of their income than the consumers, more expensive commodities bear down on global demand.

The Economist

Foreign Direct Investments

According to the UN Conference on Trade and Development (UNCTAD), global inflows of foreign direct investment (FDI) in 2010 totaled $1.12 trillion, a shade more than the $1.11 trillion recorded during 2009.

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The Economist

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The number of vehicles imported by Sri Lanka continued to surge after a sharp import duty reduction, with new registrations up 74 % to 284,991 in January - October 2010 from a year ago, according to latest Central Bank data.In October alone, the number of vehicle registrations shot up 61 % to 34,183 from a year ago, driven mainly by imports of cars which zoomed 914 % to 3,753.

Item 2009 2010 % Change

January - October 163,931 284,991 73.8

Busses 567 1,914 237.6

Motor Cars 5,017 13,976 178.6

Three Wheelers 29,167 69,472 138.2

Dual Purpose Vehicles 1,039 1,821 75.3

Motor Cycles 109,738 166,527 51.7

Goods Transport Vehicles 6,090 9,564 57.0

Land Vehicles 12,313 15,072 22.4

Other 0 6,645 100.0

Sri Lanka Tourist Arrivals up 46.1% in 2010Sri Lanka's tourist arrivals in December 2010 rose 48.8 % to 84,627 from a year earlier, driven by sharp increases from traditional European markets seen due to the winter season. For the full year 2010, arrivals were up 46.1 % to 654,476. Tourist arrivals from Western Europe shot up by 54 % in December 2010 to 30,855 after travel warnings in many countries were relaxed or removed after the end of war. Earnings from Tourism for the period of Jan-Nov 2010 increased by 64.3% to USD 501.5.

Project Completion ByPower projects Norochcholai Coal Power Plant Phase 1: Completed, Phase 2 : 2013Upper Kothmale Hydro Power Plant Completion by 2011Uma Oya Hydro Power Project Completion by 2015Moragahakanda and Kaluganga Reservoir Project CommencedRoad development projects The Southern Highway Project Completion by 2011The Colombo - Katunayake Expressway Completion by 2012The Colombo Outer Circular Road Project Completion by 2013Port development projects The South Colombo Harbour Project Phase 1 Completion by 2012The Hambantota Port Development Project Phase 1 : Completed The Oluwil Port Development Project Completion by 2011

Sri Lanka Credit Bureau to send Text AlertsSri Lanka's credit information office is planning a text message alert service by mobile phone for borrowers who forget to make credit card payments.According to officials, the service is likely to be available by April, 2011. Sri Lanka has about four million borrowers.

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Fuel: Import tax reduced to keep prices stableThe Government has reduced the import tax on petroleum to 5% from 10% to keep retail fuel prices intact.The move follows Lanka IOC renewing its appeal for a hike on account of rising prices globally. LIOC had asked for a Rs. 15 hike on petrol and Rs. 5 increase on diesel.

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Athurugiriya Kalapaluwawa L. Plaza PanaduraAttidiya Kandana Mahabage PelawatteBorella Kandy Malabe PeliyagodaCapital Mall Kandy Marine Drive PepeliyanaCrescat Kandy II Moratuwa PiliyandalaEthul Kotte Kiribathgoda Mt. Lavinia St TilakarathnaGalle Kohuwala Narahenpita Super KGampaha Kotahena Nawala Templers RoadHendala Kotigawatte Negambo Union PlaceJa-ela Kottawa Negombo WattalaKadawatha Kurunegala Nugegoda WijeramaKaduwala Kzone Moratuwa Nuwereliya

Keells Super Outlets

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC

The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information, it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence of using such information for whatever purpose.

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Economic Capsule January 2010

Economy & Finance