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Tread Softly..

Jul 31, 2010 3:10:27 PM - thesundayleader.lk

By Paneetha Ameresekere – Business Editor

With the Government of Sri Lanka (GoSL) lowering import taxes on vehicles, that sector, together with its associated services are now looking up, with spin off benefits being enjoyed by related sectors such as leasing.
But there is still a lot more to be done, like giving a thrust to the manufacturing sector, so that a wider section of the economy would also benefit. Of course, for this sector to take off, there need to be markets, either internal or external or both. And the world seems to be just recovering from a recession which hit it some two years ago, and is said to be the worst since the Great Depression of 1929, an incident that took place some 81 years ago, a reflection of the gravity of the situation.
So, what is needed is to nurture existing markets, not to lose them at this critical juncture, but when considering the GSP + imbroglio, GoSL appears to be doing just the opposite.
The IMF’s US$ 2.5 billion standby arrangement signed in July of last year and still on board despite a few hiccups was expected to give a sign of confidence on the economy, and more importantly, to attract foreign direct investment (FDI), but one year has passed since the approval of the IMF loan, but nothing much, in the form of FDI, appear to be happening.
If the performance of the money markets is anything to go by, that merely endorses this state of affairs that investments are slow to take off.
Banks are swollen with liquidity, but there are no takers, or more appropriately no good borrowers.  So they invest  their excess liquidity in GoSL securities, a safe haven, as it’s risk free, at 9.00%, ie the weighted average yield that was fetched at Wednesday’s primary Treasury Bill auction for yields of a year’s (364 day) maturity.  There are however no borrowers, or there may be borrowers, but banks appear to prefer to park their cash in GoSL Securities rather than lend to the market, even though they may get double that amount if they restart their lending activities. Banks appear to be risk averse. Last year, due to the global and local economic downturn, local banks saw a high rise in non performing loans. As a result they concentrated more on recoveries rather than on lending. This resulted in banks showing a negative credit growth last year.
Credit to the private sector appears to be slowly growing this year, at 3.5% year on year in May, but not as fast as GoSL would like it to happen. The dilemma that GoSL has been caught up with is how to push investments in the real economy and not investments in GoSL securities, ie to make banks start to lend, or, on the other side of the coin, for good borrowers to once again seek bank credit, for the purposes of building factories, factory expansion, buy raw material for the purposes of manufacture and sale of value added products, to build hotels to cater to expected increases in tourist arrivals and so on. Those activities will create employment, much needed, in a country where thousands of youth enter the job market annually. Regrettably, such activities are slow to take-off, with possibly the only sign visible being that the tourist industry is getting ready for a boom, but may be not as rapidly as GoSL or the country would like to see.
It’s the economic theory of supply and demand that is at play. And if there are no markets, no investments will take place. And if no investments take place, bank credit to the private sector would be slow to grow. And if investments in the form of FDI do not flow in, the story is the same, it’s back to square one, no investments, no jobs.
It’s the confidence factor, or lack of confidence in GoSL that makes investors to adopt a “wait and see” attitude before chancing their arm on investments. If they were to invest, from where is that demand for goods and services emanating? Is the demand emanating locally or from abroad?
Markets, either local or foreign have to be there for investments to take place, to supply those markets with the necessary goods and services they seek. With the war end Sri Lanka sees a market for tourism. That’s the chief reason why there is focus on this sector. But probably investments are not taking place as fast as GoSL would like. But then there are approvals to be got, at times approvals from umpteen number of agencies, those naturally take time. So if GoSL finds ways and means to short circuit such approval processes, then they may get more investors pouring into this sector. But building hotels is not only costly, it’s also time consuming, taking one or two years to build. The war was over nearly 15 months ago, but yet that expected impetus to the economy is still to take place, a reflection of how delicate the global economy still is, which is the market.