Two contrasting stories appearing in the dailies this week might have caught the attention of the reading public. They may not have necessarily come as a shock, as very little shocks us in this country, but they were nevertheless a vignette of the state of play in the country’s socio-political-economic life. One story was a [...]


Two sides of the same coin


Two contrasting stories appearing in the dailies this week might have caught the attention of the reading public. They may not have necessarily come as a shock, as very little shocks us in this country, but they were nevertheless a vignette of the state of play in the country’s socio-political-economic life.

One story was a question raised in Parliament by an Opposition MP whether the Government lost Rs. 200 million in revenue by allowing racing cars to be imported for last week’s night races in the capital. The Government responded later to say that it was not so, because these cars were brought down under a special Customs scheme where if they were taken out of the country after the event, there were no taxes involved. The other story was that Sri Lanka was the recipient of Rs. 4.5 billion (US$ 34.7 million) worth of food aid from the UN’s World Food Programme (WFP).

It was as if the country was trying to fly before it could walk properly. Here is a country trying desperately to break the shackles of a stagnant economy since the UPFA took office back in 1994. Mind you, in 2000, Sri Lanka recorded an unprecedented zero growth rate. The debilitating Northern insurgency was both a definite obstacle to economic growth, as well as a convenient excuse for the administrations of the times.
To give the current administration credit, there is every intent of upping economic growth and development.

The goal is to increase the per capita income of its citizenry from the current US$ 2,752 (Rupees 350,000) to US$ 4,000 (Rupees 508,000) by 2016. But are the fundamentals all skewed, and ‘ad-hocism’ ruling the roost? Is the country’s foreign policy based on knee-jerk reactions and reactive directions having an impact on the economy? Will issuing statements of sympathy for shootings in America or condemning the testing of North Korea’s missiles offset the general hostile approach to the West.

There is no doubt an over-eagerness to show that all’s well. Last year, the Central Bank artificially pumped up the falling Sri Lankan rupee to show all was well. The bubble had to burst, and now it is being accused of squandering millions of US dollars from the country’s foreign reserves in the exercise. Unable to maintain this pretence any longer, the Treasury which was in a cold war with the Central Bank pulled the plug and today we have a significant 25 per cent devaluation of the rupee vis-a-vis foreign currencies. It sent the import bill soaring, and consequently meant higher prices for the ordinary citizen on whatever was imported.

Not to be discouraged, the Government maintains the pretence of a gung-ho economy. Yet, on the one side foreign borrowings are rising and on the other, the Balance of Payments (monies from exports vs. imports) wavering. The result – growing foreign debt. How that impacts is seen when the Chinese, Sri Lanka’s biggest investor of current times, show caution over doing business here.

In our front page story last week, it was reported that a Chinese loan of more than US$ 69 million or about Rs 8.9 billion for a hydropower project is on hold until Sri Lanka pays up a fee of more than Rs. 627 million to China’s state owned insurance company – this despite the sovereign guarantees the Sri Lanka Government has offered.

The WFP’s aid to Sri Lanka is negative publicity. The Programme provides assistance to 78 countries around the world needing such aid, and Sri Lanka is unfortunately one of them.

According to the WFP, many people continue to suffer the residual effects of the Northern insurgency and from high food prices. The WFP points out the migration of skilled and semi-skilled persons seeking alternative employment as a negative aspect of Sri Lanka’s nation-building process.

Australia announced recently that the largest number of illegal migrants risking the boat trip in search of opportunities came from Sri Lanka despite the end of the insurgency. Sri Lanka may have been designated a ‘middle income country’ in the global classification of rich and poor countries, but the stark reality is that young people want ‘out’, legally or illegally. Another huge number work under sweltering conditions in West Asia sending a substantial portion of funds back to the economy.

The Government’s eagerness to accelerate economic growth is appreciable. However, the slip is showing.
A team of analysts from the Deutsche Bank in Sri Lanka recently met with officials from the Ministry of Finance, the Central Bank and the International Monetary Fund in Colombo. In their report released this week, they forecast real GDP growth to improve from the slump of 6.2% this year to 7.0% next year (2013), but they say, throughout the discussions they sensed an urgency among Sri Lankan policy makers to return to high growth trajectories, seen in the immediate post-conflict years of 2010 and 2011 (8% growth). Then they say; “This obsession with high growth is in our view a key risk to watch out for in the medium term, as achieving those targets may come at the cost of a host of policy errors, thereby exposing the economy to repeated boom and busts cycles”.

This is what the Government will have to guard itself from; the hype from the reality. The current year was indeed a difficult one with headwinds ranging from high inflation (in the high single digits) to low growth, revenue slippage, falling exports, sharp depreciation of the rupee, and as the Deutsche Bank report adds; ” a highly unsupportive global environment”.

The US embargo (sanctions) on Iran had its impact on Sri Lanka as it went from pillar to post to obtain petroleum. This crisis is going to continue into 2013.

In 2012 the Government had to take tough decisions on imports and prices, because it opted to show artificial gains in 2010 and 2011. The result therefore of trying to reduce the trade deficit, money supply and credit growth was a lower GDP.

Sri Lanka’s economy is very sensitive to global tensions, and it is all the more important that it buckles down to following a proper foreign policy that does not invite the wrath of the country’s trading partners. The West cannot be easily written of, however much in economic difficulty they may be, and we look to China and India as the new economic players who will develop Sri Lanka.

Above all, there is a need to discard the “show”, and the pretence. Instead, there is a need for sense and sensibility in the year ahead.

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