Sri Lanka reaping peace dividend: HSBC report

• Says infrastructure development is greater than many of its neighbours
• Suggests structural reforms to ensure sustainability of strong infrastructure growth in the future

Sri Lanka is reaping the peace dividend with impressive development especially in infrastructure, according to the global banking giant HSBC.

“Despite being one of the smaller economies in emerging Asia at US$ 60 b in 2012, Sri Lanka’s infrastructure development is greater than many of its neighbours, as measured by the AIM (Asia Infrastructure Measure),” said HSBC Global Research in a latest Asia macro economics report titled ‘Bridging the gap: Asia needs to invest over US$ 1 trillion in urban infrastructure’.

In the chapter on Sri Lanka titled ‘Peace dividend,’ the report said that development has been sustained since 2007, with the AIM climbing through the years.

The HSBC report has categorised Sri Lanka among three ‘Take off’ economies with the other two being China and Malaysia.

It said Malaysia and China recorded the largest growth in urbanisation since 2000 within emerging Asia. Urbanisation is a key driver of infrastructure investment, and HSBC believes it will likely remain so over the medium term.



“Meanwhile, the urbanisation rate for Sri Lanka – the other economy in this group – declined slightly over the same period. This was probably related to the three-decade long civil war that ended in 2009,” HSBC report added.

HSBC has created a new benchmark – the HSBC Asia Infrastructure Measure (AIM) – that looks at how Asian countries stack up against each other and the US.

It said the rise (in Sri Lanka) was driven by public policy promoting infrastructure development from 2006, when the country was still racked by civil war. The focus was on roads, especially in the Northern and Eastern Provinces, where the fighting with separatists was concentrated. That said, the strength of its road system also contributed to the decline of its rail structure given the two transport modes are close substitutes, the HSBC report said.

Recent policy has shifted towards trying to turn the country into a transport hub. In the process, Sri Lanka’s links with China have strengthened as more ports have been built by the Chinese. In March 2013, Sri Lanka announced that China will build the Hambantota Port – set to be the country’s largest, with a price-tag of US$ 1.5 b.

The petroleum industry may provide an extra boost to the country’s infrastructure. On 1 March 2013, Sri Lanka offered bids for licences on 13 blocks in the Cauvery and Mannar Basins, which have high petroleum potential. Assuming the potential of its hydrocarbons proves to be viable, the subsequent commercial production may provide a boost to demand for energy-related infrastructure facilities (note the country’s low energy AIM score) as well as a domestic source of oil to reduce the country’s import bill.

However the HSBC report said Sri Lanka may need to implement structural reforms to ensure the sustainability of strong infrastructure growth over the coming years. In particular, this may involve further pricing reforms to ensure state-owned enterprises that participate in the infrastructure projects are financially stable and reduce their reliance on government. From this perspective, progress is being made: in February 2013, fuel prices were raised to record levels in local currency terms, with the cost of gasoline and diesel increasing by 1.9% and 5.2%, respectively, the HSBC report added.