United States Connecticut change
Sri Lanka Breaking News
Sri Lanka parliament
vivalankaSri Lanka newsSri Lanka businessSri Lanka sportsSri Lanka technologySri Lanka travelSri Lanka videosSri Lanka eventssinhala newstamil newsSri Lanka business directory
vivalanka advertising
Stay Connected
Popular Searches
T20 World Cup
Sponsored Links
Sri Lanka Explorer

Rubbing The I.M.F. Oil Lamp

Jul 3, 2010 3:15:23 PM - thesundayleader.lk

With the release of I.M.F.’s third and fourth tranches, Sri Lanka’s economy has immediately begun to see a positive outlook.

The review which was delayed due to unstable macro economic conditions finally took place after the new cabinet was appointed.

IMF Executive Board Deputy Managing Director and Acting Chair Naoyuki Shinohara said that positive macro economic fundamentals indicated by the latest budget like prospective strong economic growth, stable monetary conditions, financial sector reform (and credit expansion) and fiscal control (spending cuts and tax reform) led to a high level of I.M.F. confidence that Sri Lanka was on the right track.

The release of I.M.F. money has already seen prospects of the country’s ratings going up. Standard and Poor ‘s Singapore Director Agost Bernard told Bloomberg that the improvement in external liquidity “means that the most likely outcome in the next move is for the rating going up.”.

Sri Lanka is currently rated ‘B’ as a long term investment prospect by S&P – five levels below its highest investment grade rating of AAA. The buffer on our foreign reserves coupled with better ratings will also mean that more foreign investment will come in. The government will hope for increased F.D.I. flows that will increase the transfer of knowledge and expertise. Good F.D.I. will also be long term and contribute to growth and stability.
As another offshoot benefit, the government can now expect better demand for sovereign bonds. The Central Bank is already lining up yet another dollar bond issue which is due later this year. Past issues in October 2007 and 2009 have been successful, of course, the high yield rate helped.

Domestic Capital

The government is already on a construction binge mainly in partnership with the Chinese. Gross domestic capital formation is known to have a direct positive correlation to a country’s GDP. The more we invest in fixed capital, the greater our chances of long term growth.
The I.M.F. is also happy that the government is on a credit expansion stance and deepening capital market capacity will help bring in new sources of financing for small and medium enterprises (S.M.E.). S.M.E. in Sri Lanka employ a large segment of the country’s population but are yet to see the benefits that its larger counterparts have seen.  Strengthening of regulatory weaknesses and making the country’s business environment  investor friendly will hopefully bring in other sources of capital such as private equity and venture capital for S.M.E. which are currently struggling with bank loans which are the only available funding source.

Concrete Waste and a Mountain of Debt

Most borrowings so far appear to have only the potential of landing the country is massive amounts of debt. The dollar bonds will mature in 2012 and 2015 respectively and will have to be paid for.

The government will need to work hard to ensure that borrowings yield actual revenue enough for Sri Lanka to be able to pay off its debtors as well as boost the nation’s economy into a more debt independent platform in the future. Infrastructure expansion is very well, but without intelligent policy design targeted at using said infrastructure as a holistic part of a long term economic strategy geared to achieve sustainable growth will end up with concrete waste and a mountain of debt.

The Indian Lesson

India started its reforms in the early 1990s.  After it suffered an I.M.F. bailout in ’91 the Narasimha Rao government initiated reforms are paying off now because the policies associated with these reforms were followed diligently by succeeding administrations.

Economic policy cannot be subject to the whims and fancies of changing political parties. The government must have a clear plan and implement it with the intention that it continues into the foreseeable future sans interruption. However, Sri Lanka’s warring political factions have been known for just the opposite Countries who have developed significantly have invariably decided on a set of fundamental macro economic policy stances at some point and then stuck with them without drastic directional changes. India and USA are just two examples.

Five Hubs

The goal of the Five Hub concept is to make Sri Lanka a global Sea, Aviation, Commercial, Energy and Knowledge hub. Current initiatives like the harbour and airport being built in Hambantota, market reform, education reform and energy exploration initiatives are signs that the government is serious.

But making the five hub strategy work is not simply a matter of building relevant infrastructure and initiating specific policy reform like the future depends on it. Doubtless that is relevant, but as Professor Rohan Samarajiva, head of regional think tank Lirneasia in his column on L.B.O. said, a big part of making the approach successful will involve strong steps in the direction of forming international trade agreements, public private partnerships and eradicating the bureaucracy. Although the professor was talking specifically in relation to energy, consensus is that the same is relevant overall.

If effective, the five hubs coupled with the adjustments made to accommodate I.M.F. requirements could presumably carry us into a prosperous economic future if applied without break.

Reliance on Watchdogs

The opposition has said that the government is displaying double standards in agreeing to the I.M.F.conditions in exchange for financial assistance while it snubs the E.U.’s requirements for better governance in exchange for G.S.P.+ benefits.  The government knows that adhering to reasonable levels of  “good governance” will anyway be a prerequisite to maintain good investor relations. But this also raises the ominous possibility that any  “right track” to economic reform as described by the I.M.F. will only last as long as we require I.M.F. help, rendering any other “long term economic direction” an illusion. Optimists will leave such thoughts to cynics who might say that all we can do for now is sit tight and see where things head.