Turning the economic tide

SRI LANKA’S fabled post-war window of opportunity seems to be closing, with the Central Bank following the International Monetary Fund (IMF) in reducing growth rates for 2012. But does that mean only gloom awaits Sri Lanka or can we ride out the tide and reach the golden shores?

The Central Bank had originally forecast this year’s growth at eight per cent, slowing from an estimated 8.3 per cent expansion in 2011. If it had come to pass, it would have been a record three consecutive years that Sri Lanka posed eight per cent or more growth – a historic achievement, especially given the unhelpful global scenario.

 The International Monetary Fund (IMF), which has given a $ 2.6 billion loan program to Sri Lanka, has said the economic growth would be less than 7.5 per cent. Other forecasters have also reduced growth rates to the seven per cent range and it seems that the Central Bank will be following suit this week.

There have been several reasons for this change of heart. A record trade gap and a growing current account deficit forced the Central Bank to raise its policy rates for the first time since 2007. The Central Bank last month halted its defence of the rupee at a specific price against the dollar, having spent more than $ 2.7 billion of its foreign exchange reserves last year to stave off depreciation. That removed a point of friction with the IMF and relieved pressure on its fast-dwindling reserves.

Market interest rates have risen by 115-143 basis points since the bank raised its main policy rates by 50 basis points to 7.5 and 9.0 per cent respectively on 3 February. The rupee has also depreciated more than 5.7 per cent since the Central Bank stopped defending it on 9 February. The country is expected to have recorded a balance-of-payments deficit in 2011, although the official figures have not been released yet.

Rising fuel prices and loss of Iran supplies have also raised strong fears, with the Government scrambling to get stocks directly from governments rather than through private tenders. Saudi Arabia and Oman have been approached, but no positive results have been posted yet. This, together with the rising cost of living, is placing immense pressure on the Government.

There is also growing concern that the billions of dollars in loans that the Government has been enthusiastically taking may be too much for the country to bear. Such circumstances clearly call for a change of focus where development projects are evaluated clearly and implemented sorely for the benefit of the people rather than in the interests of corruption.

Kickbacks and corrosive political influence have consistently undermined law and order as well as good governance in Sri Lanka. As the country heads towards a tougher economic climate, surely it is time for better principles to take over and direct the course of the country? This would not only minimise the impact of the crisis, but also help mitigate socioeconomic and environmental concerns.

Long postponed efforts like cleaning up the Ceylon Petroleum Corporation (CPC) and other State agencies, strengthening mechanisms to fight bribery and corruption and severely limiting political power so that justice is served are a few avenues that need to be looked at urgently.

Considering loans from a pragmatic and transparent viewpoint as well as ensuring that what is implemented is done at high standard is essential. This will mean that Sri Lanka will not be shackled with debt from coal power plants that do not work properly or airports and roads that make no economic sense. It’s time to use our heads to protect our wallets.