The loss of the EU’s GSP+ scheme will not have a sharp impact on the Sri Lankan economy, said a rating industry expert last Friday, just before the duty free export scheme was suspended two days later - Sunday, August 15, 2010.
“The risk from the GSP+ loss may be lower than previously thought. The authorities say measures have already been put in place to cope with the GSP+ loss. So we think the impact is unlikely to be as sharp as previously thought,” said the Head of Asia Pacific Sovereign Ratings of Fitch Ratings, Andrew Colquhoun, at a forum last week.
However, while, the GSP+ loss is not expected to make a large dent in the overall economy, the rating agency noted that Sri Lanka has been losing international market share over the past decade, anyway.
“Sri Lanka’s share of world exports has reduced. It has been reducing since the mid 1990s. This raises the question of whether there is a competitiveness problem in the economy,” said Mr Colquhoun.
While Sri Lanka’s share of the world market has been reducing, competitor countries like Vietnam and Bangladesh have increased their share of the pie.
“More recently, Sri Lanka’s export share has been reducing with the increased competition from the region. At this point, with the end of war, we need to see what other problems remain. For instance, government bureaucracy can be an obstacle to exports,” said Mr Colquhoun.
However, the rating agency noted that macro indicators have strengthened since the end of war and said the current low inflation environment was conducive for business prospects. The country is also no longer in any danger of a balance of payment crisis.
Despite these improvements, the rating agency said government revenues need to be boosted as a matter of priority. The budget deficit and government debt, are also seen as prominent weaknesses. Managing public debt is seen as critical to keep costs down, as over 40% of government revenues are already going into servicing general government interest payments.
“Interest payments remain a big burden. If inflation increases, the governments cost of financing will also increase,” said Mr Colquhoun.
The agency noted that growth and investment is currently largely debt financed in Sri Lanka and while foreign capital inflows have increased since the end of war, foreign direct investments have still not reached required levels.
“The increase in debt tends to be viewed negatively. Historically growth is associated with increased investments but this has not happened yet in Sri Lanka,” said Mr Colquhoun.
The agency said confidence in public finances would improve if the government can cut the deficit down to its target.