Not A Big Issue

• Temporary slowdown

By Dinuk Samarasinghe

Although Sri Lanka’s economy in general and the Colombo Bourse in particular were faced with a temporary slowdown¸ the country would not experience a big issue if we have a stable government and good policy framework in place following August 17 General Elections, opine market and economic analysts.

Analysts said that although January 8 Presidential Election created an unprecedented regime change, the economy failed to take off with the lack of stability within the minority United National Party (UNP) government.

“Due to this year being an election year we can’t expect the political establishment to bring about changes that favour long-term economic policy. This period is an interim situation with nothing to excite investors and the business community. My conclusion is that this is a temporary slowdown and not a big issue if we have a stable government and good policy framework in place after August 17,” said Waruna Singappuli, a former Head of Research at a leading stockbroker firm in Colombo.

Another political and economic analyst was of the view that political instability, which the business community do not anticipate after polls, was the main cause of the economic lull.

“Unfortunately stoppage of some projects and politicians criticizing the modus operandi of the previous regime scared away investors, whilst lack of consistent policies and contradictory statements worked as a dangerous combination adding to the vicious cycle of instability,” an economic analyst told the Sunday Leader on grounds of anonymity.

However, Singappuli added that in future Sri Lanka would not experience high growth, which the Indian Ocean Island economy recorded from the conclusion of the thirty year-old bloody civil war.

“Seven percent GDP (Gross domestic product) growth is good rate. However such growth to continue consistently in the long-run we need to have sound long-term policies and a stable government, coming back to my earlier point. This is how countries such as China maintained eight to 10% long term growth,” he emphasized.

On June 14, Sunday Leader reported that Sri Lanka was faced with a  Prosper or perish’ situation (See http://www.thesundayleader.lk/2015/06/14/prosper-or-perish/)

Although GDP growth in South Asia is expected to remain firm at just over seven percent during 2015, Sri Lanka’s growth will slow down in the next few years with a possible chance of deteriorating, economists warned.

“It’s unfortunately a ‘Prosper or perish’ situation,” said Senior Lecturer of the Department of Economics of Colombo University, Prof. Sirimal Abeyratne.

Prof. Abeyratne said that although we recorded high economic growth, it cannot be sustained due to drawbacks in three main macroeconomic factors.

“First is increasing productive capacity, second is developing of human resources and third is investing in technological development. None of these three happened, let’s say, after the end of the war. What sustained the high growth all this time was the utilization of unutilized and underutilized capacity and the expansion of government expenses. This high growth momentum, as we all knew and cautioned against,  was temporary. As such we will see the growth rate gradually coming down. This coupled with the investor uncertainty and halt of infrastructure development – which was the most dynamic sector hitherto; would be a vicious combination dampening economic growth.

“These limitations will cause a contraction in several sectors. My understanding is that it’s a ‘Prosper or perish’ situation. All this time we were in the middle path- neither prospering nor perishing. On one hand if we take the right measures even now, our economy can take off with a high growth trajectory; higher than 10% as we have reached the limits of negative factors such as balance of payment (BoP) and budgetary requirement. We can mark a complete turnaround. However if we don’t, the complete opposite will happen. We need to urgently fasten our belts, go ahead with policy reforms we have been dreading and postponing for all these years. It’s a total overhaul. It’s a hard political decision and may be politically difficult at this moment, compared to times earlier; but it has to be taken now or we would definitely deteriorate,” cautioned the well-renowned academic.

Global Economic Prospects 2015- the latest economic report released by the World Bank, too reveals that Sri Lanka’s growth will slow in the next few years.

“Growth in Sri Lanka is expected to decelerate gradually to its potential growth rate, as the government reassesses the investment-led growth model, partially offset by increases in consumption, and strong tourism and remittance inflows,” cautioned GEP.

Sri Lanka which reigned supreme amongst SAARC countries peaking with an incredible 8.2% growth in 2011; posted 7.4% in 2014 beating its next contender India (which recorded 7.1%) by 0.3%. However due to change of government policy to move away from infrastructure-led development, amongst other factors, is likely compel its growth to dip to 6.9% in 2015, during which Bhutan and India will bypass Sri Lanka with growth rates of 7.9% and 7.4%, respectively. During 2016, however, Bangladesh too is projected to join the bandwagon recording a growth of 6.7% whilst Bhutan and India will again beat Sri Lanka’s mediocre 6.6% growth with rates of 8.4% and 7.8%, respectively. By the end of 2017, Sri Lanka’s growth is to further dip and somewhat stabilize around 6.5% whilst India would continue to boost its growth trajectory to an impressive eight per cent. Banking on India’s spillover effect, Pakistan (4.5%) and Nepal (5.5%) too are anticipated to record increases in GDP growth whilst Bangladesh is likely to maintain 6.7% growth recorded in the previous year.

Other key risks and policy challenges in South Asia include complacency in maintain fiscal discipline, it added.

Furthermore the Report cautioned about investor uncertainty created with the change of regime in Sri Lanka.

“In Sri Lanka, policy actions by the newly-elected government include a one-off tax increase for large corporates, a cut in infrastructure spending, and a substantial increase in public sector salaries. These actions have added to investor uncertainty ahead of upcoming parliamentary elections…”