Inflation, high interest and debt recovery key in 2008

Political instability, high inflation, low investments, increasing lawlessness and possible strikes by JVP-led unions in 2008 are the main concerns of Sri Lankan businessmen and economists.

Commerce chambers are hoping against hope that the situation would improve in 2008 compared to 2007 when the conflict hurt business and investments. A few remain optimistic however about the New Year.

President of the National Chamber of Exporters of Sri Lanka Kulatunga Rajapakse said he hopes that the country will be on the right path in 2008. His chamber is concentrating on the development of exports and Rajapakse said the export of industrial products is the only way the country can develop. He said he has been working closely with authorities and negotiating to solve the three main points of contention for exporters, those being cargo space, bank interest charges and the high cost of electricity. "We have been working on this repeatedly," he said. "This is purely for sustainability. The balance of trade has to be improved."

President of the Ceylon National Chamber of Industries A.K. Ratnarajah is concerned about inflation and the impact it will have on the public, in particular employees who will face serious problems with the escalating cost of living and the ability to cope and be productive. He said the war has to end and a solution to the problem must be found by both parties. "It is far too costly on the country," Ratnarajah continued. "Terrorism has to be wiped out but at the same time, it is too costly." He said it not possible to make progress in bringing down the cost of living, interest rates, increasing investment and tourism in the country if the conflict continues.

Lead economist at Lirneasia, Dr. Harsha de Silva said 2008 will bring greater political instability with the Janatha Vimukthi Peramuna (JVP) wanting to assert themselves and the President attempting to balance the situation between them and the rest. "I foresee increased trade union action, strikes and the like," he said. "The JVP will go overboard to show the country that they are most unhappy with the government with respect to economic management now that they got egg on their face after the budget vote." Tax expert N.R. Gajendran believes the biggest challenge is how the government will be able to raise the billion of rupees targetted from taxes next year.

Among the challenges are high interest rates of over 20 % compared to 10%, 18 months back; businesses run on borrowed money and four months credit (in reality) against two months earlier; and difficulty in recovery. “This is besides other things being normal,” he said, adding that an escalation of the war would further aggravate the situation. Asked how listed companies and banks still show huge profits despite ‘dismal’ economic conditions, he said one of the reasons was that these were not ‘fair valuation profits’ which is slowly coming into the books now. “Once fair value is used in the computation of profits, then the numbers would be different,” he said.

Economist de Silva said that unless the Central Bank of Sri Lanka (CB) tightens monetary policy by increasing rates, which are already the highest in Asia, and engage in sustained mopping up of liquidity in the market, inflation will continue to remain high, ridiculing CB Governor Nivard Cabraal's undertaking to bring inflation to single digits by end 2007 as per the ‘monetary policy road map.' De Silva feels that there is no question that the CB has been 'captured by the President's men and monetary policy has become a tool of fiscal policy.

He said the recent statement made by Minister of Trade, Marketing and Consumer Affairs, Bandula Gunawardena, that there is no option but to print money shows how bankrupt the government is, not only in terms of cash but more importantly, in terms of 'plans to get out of the mess we have been put in by them.'

He feels that changing the Colombo Consumer Price Index (CCPI) to show a lower level of inflation will only drive a wedge between the trade unions and the government and sooner than later, the credibility of the CB and the Department of Census and Statistics inflation number will be seriously eroded.

"Interest rates will continue to be sky high until inflation is brought down," de Silva forecasted. "The rupee appreciation will not continue unless further short term bonds are raised or limits on foreign purchases in treasury bonds are increased. However, this is absolutely disastrous, like a reverse bungee," he continued. "We saw the rupee appreciate after the massive US dollar inflow after the tsunami aid which did not have to be repaid but in this case, we are adding on unsustainable short term US dollar debt. We will suddenly come to a point where our repayment will just inundate us."

Laugfs Holdings Managing Director Thilak De Silva is however positive about 2008 in which the group expects to expand. “We are in a very positive frame of mind for 2008 and also optimistic that all political parties will shed their differences at least for the sake of finding a solution for ethnic problem and also to strengthen further, democracy, freedom of expression, human and fundamental rights,” he said.

Professor M. T. A. Furkhan, Chairman Confifi Group, said that while the tourism industry still lives in hope it is also distinctly aware of the challenges in 2008. “There will not be much investments in tourism, but we have some hope,” he said. He noted that it is a positive development that the Ministry officials are working closely with the industry stakeholders. “They are putting a special effort and it is an encouraging change in the right direction,” he added. Hiran Cooray, Managing Director, Jetwing Hotels had the same sentiments. “It is a testing year for tourism and our wish is that peace will dawn. Till there is a cessation to the hostilities we will not have a good year.”

However he said that the company is going ahead with their plans. “We are going ahead with our plans such as product development and marketing strategies but we will not start any new investments,” he said.

Ramal Jasinghe, CEO Asian Alliance Insurance said that 2008, while being seen as a challenging year will also present opportunities in the light of those challenges that are thrown. “The economy will be very challenging for insurance companies in terms of the regulatory environment, the budgets and the economic backdrop that we are going into in 2008,” he noted. He reiterated that the industry will have to innovate in order to survive in 2008.

Another insurance industry expert said that it will be a difficult year in 2008 as consumer spending power has shrunk considerably. “Any business for that matter including the insurance sector will thrive on consumer spending power. We are entering 2008 when the consumer spending has deteriorated due to escalating inflation and this will affect companies in a negative manner,” he added. He noted that the ‘confidence issue’ will prevent companies from venturing into new businesses.