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Thursday, 3 May 2012 01:36 - - {{hitsCtrl.values.hits}}
Much has been spoken of the Sri Lankan economy by different bodies including the guardians of the economy (the Central Bank and Government Treasury). There is constant backlash to the Government bringing out historical events while portraying a very bleak future, although the Government has taken corrective action to address any major economic catastrophe.
The country had been at this juncture of accumulating foreign reserve status even a year ago, being in the process of building its reserves to about US$ 8 billion. However there were hardly any adverse comments on this process at that time, despite the way in which the reserves were built up.
On the other hand, the Government has been very optimistic and adventurous in its financial management, maybe even without sufficient respect to global market forces.
One could say that managing an economy is similar to running a public quoted company. Thereby the main difference in ‘Company Sri Lanka’ as opposed to a public quoted company is that its employees are the general public and its predominant customers are also the general public who are directly under the control of ‘Company Sri Lanka’ itself.
This is because through the monetary tools and regulations, demand and supply could be controlled. Having said that, the real issue is synchronising the different stakeholders to be focused towards a single cause or work towards different yet interrelated strategies of ‘Company Sri Lanka’.
The saying goes that ‘top line is vanity, bottom line is sanity, and cash flow is everything’. As it is known. a company can survive even making losses continuously for a considerable period of time so long as the cash flow management is in place. But an organisation where cash flow is poorly managed may collapse within a short period of time even if it had reported substantial profits.
Just compare the Balance of Payment (BOP) as the cash flow statement of ‘Company Sri Lanka’. Generally the bulk of sustainable cash is generated from the main line of business which is referred to as ‘cash generation from operations,’ which can be the equivalent to ‘trading account’ in BOP.
The Sri Lankan economy is somewhat different to other countries since instead of the main business (trade account) the ancillary business (current account, specially the remittance factor) brings in substantial positive cash flows continuously.
The risk profile of the country also different to other nations since nearly 20% of the labour force is employed abroad. Hence, running a trade deficit in isolation should not be perceived as end of the world. But of course in the current context running a US$ 11 b trade deficit as projected by Central Bank Road Map for 2012 is too optimistic due to the global economic situation, and country debt servicing ability.
Therefore, it could be projected if the country runs a trade deficit of about US$ 500 m per month and annual trade deficit of US$ 6 b, the country will have a sustainable economic growth whilst the cash flow is kept under acceptable norms of about five to six months of foreign reserves to back its imports.
Hence, to stabilise the exchange rate and to arrest the escalating interest rate, the Central Bank should intervene to a certain extent by infusing US$ to the market place and also ease the money market liquidity constrains. Reduction in interest rates will not have dramatic demand increase, since the Central Bank had already regulated the credit creation ability of the banking sector.
Another way of managing the cash flow is to lead and lag the infrastructure development in the country. In a normal company, investments are carefully made to generate a positive return or to save costs, which bring in positive net worth to the organisation. Does this happen in ‘Company Sri Lanka’?
For example, the City of Colombo and the Colombo-Kandy roads are the busiest roads in the country apart from the Colombo-Katunayake Road. Had this infrastructure been improved, there could be a saving of 30% of the fuel consumption within the City of Colombo and about 25% of fuel cost to travel to Kandy. Of course the whole country should benefit, but can some of these investments be postponed taking into account the EIRR (Economic Internal Rate of Return without taking the political factor)?
In conclusion, I would like to emphasise the fact that the country must manage its cash flow (BOP) in a prudent manner in order to maintain the sovereign rating. If this is not done, the increasing exposure to the global financial market by the country and especially the banking sector will have ripple effects similar to the Greece economy. Therefore ‘Company Sri Lanka’ is poised to stand out from the rest of the global economies only if we manage our financial and marketing aspects prudently.
IMF loan covenants were indeed timely for a reality check by the Sri Lankan authorities.
(The writer is a banker by profession, with over 22 years of financial sector experience. He is a Fellow of the Chartered Institute of Management Accountants, UK, and a Fellow of the Institute of Bankers of Sri Lanka. He obtained his Masters in marketing from the University of Colombo and is also a Chartered Global Management Accountant and certified investment advisor. The thoughts expressed in this article are his personal views.)