Even though the Central Bank’s economic roadmap for 2011shows a lot of promise and prosperity in the years ahead, Sri Lanka’s economy is faced with daunting challenges this year. Oil prices are rising, inflation is gradually moving upwards and the reliance on remittances is too much – at a time when the dollar is weakening.
On the bright side a weakened dollar –moving from Rs 113 at the beginning of 2010 to Rs 110 by end December and seen moving in the range of Rs 106-108 by end 2011 – has led exporters to bring back their proceeds rather than holding it back overseas.
Among the major challenges are the fluctuation of the US dollar, rising oil prices and the usage of a large amount of funds in the banking sector.
Exchange rates and its movement is a source of concern and was on the minds of bankers and exporters when Central Bank Governor Ajith Nivard Cabraal explained the CB’s Roadmap for 2011 at a breakfast meeting organised by HSBC on Thursday. Exporters want a stronger dollar while imports demand a weaker US currency.
Asked whether the CB has any exchange rate targets, the Governor said the regulator will follow the policy it has enunciated and practiced over the past year of intervening in the market only when necessary. He said the CB will ensure there is the least amount of volatility to ease decision-making by companies exposed to foreign currencies.
Banks are flushed with cash to the extent that any fall in deposits due to low interest rates doesn’t matter at the moment. “We have enough funds but no good projects,” one banker grumbled.
Low margins by banks owing to lower interest rates has also heightened the competition among financial institutions.
On the external front, petroleum prices are rising with crude oil inching towards the $100 per barrel level while refined crude (petrol, diesel and other oil) has gone over $100 per barrel.
Would that impact on local fuel prices which has been unchanged for a while now? It may be so … given the Government’s need for cash and more revenue particularly with fresh demands for subsidies from coconut and other local produce which has fallen in output and sent prices up.
On the positive side, tea prices are surging and reaching an all time high while production is also heading for record levels. In its annual report for 2010 and outlook for 2011, broker Forbes and Walker Ltd said production in 2010 is expected to reach an all time high of over 320 million kgs, up from the previous highest crop of 318.6 million kgs in 2008. It said export revenue would reach a new record in 2010 and possibly touch the $1.5 billion mark against $1.1 billion in 2009.
Tea prices peaked at a Colombo auction, all time, average of Rs.370.61 per kg in 2010 against the previous all time high of Rs.360.45 per kg in 2009. Textiles and Garments is Sri Lanka’s biggest export earner with $3.2 billion in 2009 followed by tea but garments has a large imported component. In some cases, the value-addition in this sector is over 50 % which means tea – which is a totally Sri Lankan product from the field to the shelf – is catching up. Tea was the biggest export earner in the 1970s until garments, following the introduction of garments quotas in the US and Europe, saw the industry grow substantially to become the biggest earner.
The same buoyancy applies to rubber where the best quality Latex Crepe No 1X has risen sharply to Rs 569.63 per kilo in end December 2010 from Rs 117.25 per kilo in end December 2008.
Migrant remittances has exceeded $4 billion in 2010, according to the CB, to be the highest foreign exchange earner. The regulator is banking on increased remittances this year too, to enhance foreign exchange reserves.
The CB Roadmap says economic growth will be 8-9 % in the next few years while foreign investment is expected to be much higher than the $500 million received in 2010. Much of the investment is now coming only from tourism with large local conglomerates like Aitken Spence, John Keells, Hayleys, Hemas and Jetwing investing a lot of money in this sector.
Economists say investment growth is necessary in other sectors too where old issues like respect for human rights and worker rights however, are sources of concern amongst potential, Western investors.
Also how the lapsing of the US GSP trade concessions on December 31, 2010 as it was not renewed by the US Congress, will impact on the Sri Lankan economy in the first few months, remains to be seen. Until the new Congress (legislature) meets and decides to approve it, Sri Lankan exports to the US will be subject to the normal taxes. Trade unions in Sri Lanka are hopeful that it would be renewed and say this is a formality.
Thus while Sri Lanka is hoping for double-digit growth and increasing per capita income, it is also faced with a multitude of challenges, particularly in ensuring cost of living doesn’t rise sharply.