Financial Times

Economy 2005 in retrospect and hopes for the future
By Sunil Karunanayake
Our regular columnist on corporate and macro-economic issues argues that while the country is getting over the tsunami shock, big challenges lie ahead with the Tigers stepping up attacks and a looming power crisis which could be handled only with good, honest political and economic management.

If 2005 dawned on a grim note with loss of human lives, damage to property and displacement of many causing irreparable damage to a nation grappling with many man made disasters for the last few decades, the ending of 2005 seems no different with escalating violence on the north threatening the peace and stability of the nation. This most disturbing news has shocked the business and investment community and a bear run has pushed the Colombo stock market on a downward slope.

These signals clearly indicate peace is a necessary ingredient for economic activity and we need foreign and local investor confidence in a highly networked globalized environment. It is the investors who create productive capacity for goods and services and generate employment. This brings us back to square one - whether Governments have understood the gravity of the main problems threatening our very survival.

The country benefiting from worldwide sympathy and the large-scale inflow of funds fared reasonably well to project a good economic performance. The rupee strengthened, balance of payments turned positive, trade deficit narrowed with sound performance for the export sector, though the tsunami affected fisheries and tourism adversely. Paddy harvest reached record heights, tea exports were steady, rubber prices improved and the private remittances showed a steady increase. Colombo stock market enjoyed a boom with IPOs registering record subscriptions and the indices reaching highest levels. Corporate earnings soared with good performance from the financial sector.

During the year the Central Bank pursued an aggressive open market policy to curb the rising money supply and was also forced to raise the policy rates three times. The Central Bank also raised the minimum capital requirements for licensed commercial banks and specialized commercial banks and carried out a financial stability review to enhance the confidence in the financial sector.
The 2006 budget recently passed in the Parliament focused on resurgence of the rural economy and the growth of the SME sector with many incentives and subsidies being proposed in this direction. Government was also emphatic that they will not be pursuing a privatization policy.

To be in line with the expectations of this policy framework of non-privatization and to fulfill its commitment to the public it is the duty of the Government to appoint competent people to run state enterprises and not reward party loyalists and confidantes with high positions in the state sector. We have seen nearly a half a century of state driven economy and also the effects of privatization since the 80s.

No one would grudge state ownership as observed in the Singaporean model but the issue lies with the appointees. Some years after the nationalization the CTB did emerge as a efficient organization with some of the best public sector officials being at the helm.

Sadly this was short lived and politicization and trade union interference made them depend on government revenue coming mainly from the tax paying public. Plantations were no different with long term adverse repercussions on an industry producing a global product for a global market. On the other hand state pioneered ventures in tourism and shipping turned out to be success stories.

The other major crisis is the power crisis. With demand increasing year by year and cost of fuel rising sharply even at this moment we do not have a clear programme to enhance alternate power generation. It is well known that the Ceylon Electricity Board is incurring heavy losses and these losses are financed by state banks adding more pressure on the monetary expansion threatening inflationary trends.

Today cost of electricity is exorbitant thus making our industrial goods uncompetitive. Some industrialists have been forced to tie up their capital in high cost power generators thus retarding investment in productive sectors.
(The writer could be reached at - suvink@eureka.lk)

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