Thursday Dec 12, 2024
Thursday Dec 12, 2024
Wednesday, 25 January 2017 00:00 - - {{hitsCtrl.values.hits}}
As Sri Lanka nears the celebration of its 69th year of Independence, the country now ponders on a fresh start to become the central hub of South Asia. The most part of the past 69 years have witnessed incidents and situations that have pushed Sri Lanka behind many Asian countries. A brutal conflict, social uprisings, unsavoury policies, corrupt politicians, debt mountain and politicised social welfare schemes have led the country to forfeit many fertile opportunities.
The year 2017 has dawned in the wake of numerous global stress factors that will hinder the progress of Sri Lanka. The country may be at the brink of severe drought, stark to any witnessed in the past 40 years. This may lead to a potential interest rate hike if inflation begins to grow with the resulting supply side shortfall amidst private sector credit remaining high in absolute terms. The country will also feel the aftereffects of the external shocks such as Brexit, America First policies of Donald. J. Trump, the potential of a further rate hike by the Fed and rise in oil prices with OPEC restricting supply.
Abandoning popular policies has to a certain extent been set aside despite protests and strikes. However, there remains continuous resistance towards downsizing the State sector and minimising social welfare schemes from fractions even within the Government. A cloud of uncertainty and a lack of transparency hangs over the joint foreign investment projects involving national infrastructure establishments. The stability of the currency is a growing concern with the Central Bank resorting to a free market price determination. Despite the Central Bank resorting to such policies, it is certain that the Central Bank will be subject to severe political pressure in the event of a notable devaluation in the currency.
It is evident that Sri Lanka’s progress is going to be under an unfavourable global environment amidst an uncertain national setting. Can the country proceed with minor steps towards generating some growth momentum and will this be the turning point for Sri Lanka? Let us analyse recent developments.
The rulers of the ‘Yahapalanaya’ Government realised the change of direction required at the start of the second year of their term of rule and carried out the required fiscal consolidations. It can be argued that they were forced to make a deviation on their popular policies to secure the $ 1.5 billion International Monetary Fund (IMF) loan program that the country needed to avoid a balance of payments crisis. Either way you see it, the outcome is certainly in favour of the country with the budget deficit dropping from 7% in January 2015 to 5.4% in 2016, below the targeted expectations of 5.6%.
Government revenue grew from Rs. 1,205 b in 2014 to Rs. 1,461 b in 2015. Tax revenue rose from Rs. 1,050 b to Rs. 1,356 b in the same period. This is crucial for Sri Lanka, which has a very low tax revenue-to-gross domestic product ratio. Even the tax records have grown from having 700,000 files in January 2015 to having 1.4 million. Neither the fiscal consolidations through the rise in VAT from 11% to 15% nor the IMF loan are favourable for the people or business; however, it is the certainly the most pertinent move when you consider the financial impediments the country faces in the short term.
The key achievement of the current Government is the abandonment of hate policies towards the West and favourable polies 
towards particular nations. There has also been a strong drive towards reconciliation with the ambitious quest to find a permanent solution through a new constitution entrenched with progressive devolution of power.
The degree of triumph of these two deviations in policies from the previous regime will be the main cornerstone that unifies the nation towards prosperity. However, forming a consensus will be an arduous achievement given the strong appetite for rejection amongst the power hungry opposition lawmakers and imprudent minority parties.
The rewards of positive international relations has been felt lately with the European Commission’s recommendation towards granting Sri Lanka the GSP+ concession. This is a key plus point to the growing apparel sector of Sri Lanka. This will certainly create more jobs in the economy and drive the rebirth of small scale apparel manufacturers. In addition, the country was able withdraw the EU fish ban that hindered fish exports to the EU.
Sri Lanka will soon have access to four major markets. This means that there is more on offer for local and international investors venturing in to Sri Lanka. The proposed Free Trade Arrangements (FTA) with India, China and Singapore, would potentially give investors access to three billion people. This will allow companies to export their final product to alternative markets easily without limiting their sales operations within the country of operation.
The Chinese investments in the South and the Port City is also favourable when you consider the broader scope the national economy, however caution must be drawn to the nature and motives of the investment. The lack of transparency of the Agreements in both the Port City and South Harbour is leaving many to ponder on the framework of the project. Further, no official is still clear on the structure of the financial hub that is to be created with the Port City Project.
Given the less likelihood that there would not be many people that will want to invest $ 5 b in a country and promise to build an industrial zone, the whole project needs to be witnessed from the long term perspective of our nation and the regions integrity despite the many positive impacts the project brings.
Sri Lanka’s FDI performance in 2016 has been very pathetic. The FDI inflow was a meagre $ 300+ million. Sri Lanka’s Foreign Direct Investment (FDI) has dropped 45.6% to a very low level of slightly over $ 300 million in 2016 from $ 658 million in 2015. The main reason for this outcome has been that fact that Sri Lanka still lacks policy consistency that will create more sustainable FDI. This is despite many measures that have been initiated to enhance and build skills, soft and hard infrastructure, sound taxation policy, legal framework and improve the level of security on intellectual property. A stable political environment has also been created with the coalition of the main two parties, but the clash in policies have left implementation frameworks in a stalemate.
The country presently enjoys a 90%+ literacy rate. However, qualified professional’s remains low with limited degree and post graduate qualification holders. Around 7-10% of the population resorts to working in overseas countries and their remittances are a crucial part of the countries inward remittances. This has prompted the upgrading of the level of education, training and skills to create a human resource base which supports a competitive and rapidly modernising economy through a digitisation framework.
A key development project of the present Government is the Western Province Megapolis Project. This development will cover several cities in the area around Colombo. There will be a financial district, as well as regions dedicated to logistics, industry, IT and entertainment. The project area is expected to have a population of 8.5 million people and per capita income of $ 30,000 by 2030.
There will be a major role for the private sector as well as public private partnerships in implementing many projects that lays the groundwork for the future of the economy. Industrialisation and urbanisation will be the key drivers towards modernisation and such the contribution of the private sector remain pivotal. The Government will aim to create 45 new Industrial Parks around the country which will be developed and managed by the private sector. Five second-tier cities will also be developed, as part of the programme to promote urbanisation.
All signals indicate that 2017 will witness many positive developments that could transcend to a turning point for Sri Lanka from a development perspective. This is in the wake of numerous global challenges. However, as in the past many such positive progresses were witnessed but only to see it subside with the change of Government. In addition, many factors, some of which are perennial issues unique to Sri Lanka, have to materialise for this growth to sustain. These include stringent legislation to punish corrupt politicians and state officials, good governance, media freedom, stable long term policies, liberal trade, poverty reduction and lifestyle improvements of the people.
Given the Government’s financial situation, the dependence on FDI remains an essential component in the drive towards sustained growth and in that aspect crafting a favourable environment towards foreign investors will be paramount. The Government has certainly drawn its attention towards that aspect with plans to sign FTAs with India, Singapore and China to facilitate more trade between Sri Lankan companies with the rest of the world and measures taken to enhance the investment environment, regulatory framework, honest officials and minimise political risks.
[The writer is the Managing Director at LTC Ltd., a financial and investment banking services firm operating in Sri Lanka. He has a BEng (Hons) in Chemical Engineering degree from the University of Nottingham, United Kingdom and a MBA from the University of Colombo. He is also a Chartered Financial Analyst and a thought leader in the investment sphere. He can be reached via email on [email protected] or www.ltcsl.com.]
