Sri Lanka's Economy is Poised to Take Off

What matter in the coming future of Sri Lanka is not so much of politics but economics. President Mahinda Rajapaksa has given a realistic pledge to lift the per capita income of the people during the next tenure of office from the present $ 2,000 to at least 4,000 and if everything goes well, this might be achieved well before that period.

The guarantee that the people have from the government on this score is the economic performance of the country during the last four years, despite the humanitarian war that it had to wage against the most ruthless terrorist organization in the world, the LTTE. While the per capita level of the people was below $ 1,000 by the end of 2005, when the present President was first elected to that position, it reached to the present level of 100 percent increase not by accident but by conscious macro-economic policies.

Political Leadership

When I asked some officials how this could be the case when some opposition leaders claim that the economy is mismanaged for political and others reasons, they assured me that both the Central Bank and the Treasury experts are given full liberty and respect in taking and proposing policies, with of course necessary political wetting and weighing by the President himself as the Minister of Finance.

This was apparently the same policy when it came to the armed forces during the last three yeas of the humanitarian war against terrorism where the President chaired the Security Council, as the Commander in Chief, and almost all important decisions were taken thereof. The President apparently has given full authority to the respective armed force chiefs and the Defense Secretary while weighing and prudently managing the political factors, both internal and external, which were necessary for the expedient execution of the operations.

Now the presidential election is concluded with a resounding victory for the incumbent with almost 58 percent of votes, and Parliamentary election is scheduled for the 8th April in two weeks time, it is like the pilot asking the people to elect the best crew members for him to take the plane, off the ground, for the second time. At the first time, it was with some difficulties that the plane took off, the governing party (UPFA) even failing to appoint its own Speaker for Parliament.

As the full term of the present Parliament is supposed to conclude by next month, the governing party has grown into the fullest possible extent, many of the former opposition members are now sitting with the government. What the coming parliamentary election would further ensure is more stability to the government which is undoubtedly a necessary precondition for economic progress perhaps with or nearly two thirds majority. It is apparently a rare skill on the part of the President to obtain support from various sections of the political community including a fair portion of the minority communities.

Favorable Conditions

However, the simile about the ‘plane taking off’ referred here is not primarily about politics but about economics. It was the famous economist, WW Rostow, who used this simile to highlight the necessary drive (with the required speed) that an economy should take in order that it is lifted to a higher level, like a plane taking off to the higher skies with necessary speed and control.

Sri Lanka obviously has all the necessary conditions for a take-off that Rostow talked about. Its economic fundamentals are now in good shape. Fortunately, Sri Lanka was not directly affected by the current international economic and financial crisis. While the economy is open to the outside world, the capital account is prudently managed to cushion out any adverse effect from bad weather changes in the international markets.

In terms of external environment, Sri Lanka is located next to the fast growing economy of India with excellent trade and political relations and bound to mutually benefit from each other in the coming future. Sri Lanka’s relations with China is also most beneficial, the latter heavily assisting the country in developing massive infrastructural ventures. China in addition may consider Sri Lanka as its main ‘stopover point’ in navigation as it expands its trade and commerce in Africa, the Middle East and beyond.

A main deficit for Sri Lanka’s development is the lack of natural energy resources (except hydro), and oil in particular. While she would in the near future explore the possibilities of exploiting offshore oil resources, the relations she maintains with countries such as Iran are geared by pragmatic reasons to overcome this deficit, apart from political support for the aspirations that these countries express on international matters.

There was a time when Sri Lanka was highly depressed and followed whatever formulations that came from outside. That period is fairly over except that some reverberations are still to be seen among oppositional politicians and economists alike. The main breakthrough in this respect has come about through politics, a rational strand of patriotism dominating the political scene calling for economic and social change beneficial to the ‘greatest good of the greatest number,’ defeating the economic strategies that catered in the past to a small group of elite.

Sri Lanka has no squabble with any country or particular region when it comes to development or economic relations, except that the country wants to take its own decisions for the best interests of its people. Economic rationalism would be its main guide in dealing with countries or companies without attaching any preconceived judgments or notions.

The President has invited cooperation and assistance from the Western countries without being merely bigoting on partial human rights issues as they do at present. The main focus, however, has been given to neighbors and new friends who are not interfering in Sri Lanka’s internal matters. Sri Lanka strongly believes that development is the only way forward for both human rights and reconciliation issues, while both issues are prudently handled through its existing internal democratic mechanisms.

Economic Fundamentals

Sri Lankan economy is around a 40 billion dollar enterprise with substantial hidden assets and values in the non monetary economic sectors. The above figure more or less is the assessed GDP value. During the last five years, the GDP growth has averaged over six percent, irrespective of slight ebb in the year 2009 due to the final preoccupations in the separatist war and repercussions in the international markets. It was 3.5 percent in 2009.

With the defeat of terrorism, the war affected areas are now connected to the main economy, and as a result, the additional GDP contribution would amount to around 3 percent net. The growth rate in 2010 is predicted to be around or over 7 percent, and this is irrespective of the presidential and parliamentary elections during the first quarter of the year which undoubtedly retarded some economic activity. There are prospects that the average growth rate rising up to 9 or 10 percent. A double digit growth rate is what is required for a take-off as Rostow discussed.

Judging from the East Asian experience, a country requires something like 30 to 35 percent investment of the GDP to achieve a double digit growth rate. This is where Sri Lanka has to make an extra effort in achieving this objective. As at present, the investment rate is around 27 percent. The gap obviously has to be filled by new investments and that means local and foreign.

Sri Lanka is increasingly becoming an attractive place for foreign direct investments FDI and the situation might improve further in the coming future. The domestic investment situation is still problematic, hampered by the low domestic savings (17 percent) and the low government factor income or savings (5 percent). All in all the national savings level is 23 percent of the GDP supplemented by something like 4 percent from foreign sources.

To promote private sector domestic investments, the government has recently brought the bank interest rates down from 20 percent to around 10 percent for borrowings. Although the measures might not encourage individuals or institutions to save/invest in the banking sector, the Sri Lankan banks are lending quite below the allowed or optimum capacity and there is so much room to expand lending in the investment direction. The banks are also quite capable of sustaining until the intended results are reaped. The banking sector is undoubtedly commendable compared to very many countries even economically ahead of Sri Lanka.

Alternatively, the stock market has become quite vibrant and booming even without much conscious effort, particularly as a result of the end of the war. The overall growth in 2009 was 125 percent and this has happened only in the second half of the year aftermath of the defeat of terrorism. Although the market is little lull at the moment, given the upcoming parliamentary elections, it is sure to rise after the results. During the first two months of this year, the growth has been something like 10 percent.

Two new companies made their public offerings this week and both were oversubscribed during the first day. There is considerable demand for company shares in the market and apparently no matching supply from the companies. The rate of company listing in the stock market is quite low in Sri Lanka. This is largely due to certain conservatism and lack of understanding about the stock market as a means of capital formation. Policies are now in place to rectify the situation, and the stock market would become one of the main dynamics of the economic take off of Sri Lanka in the coming period.

Other Fundamentals

The present government apparently has not followed some of the archaic monetarist policies advocated by some international institutions. Primary among them are the role of the public sector and spending on welfare measures. During the first tenure of office, the President has encouraged recruitment to the public sector quite liberally and as a result the number of public sector employees has increased from around 700,000 to over 1,100,000.

There is a mistaken impression that most of the public sector employees are underemployed if not potentially redundant. This is actually not the case although it might be correct to assert that some of them could be better utilized for productive tasks with reorganization of the present public sector. It should also be noted that around 100,000 were recruited to the armed forces during the last three years in the final campaign to defeat terrorism. Among the other new recruits to the public sector were doctors, nurses, engineers, teachers and those who were necessary to man the much needed welfare services such as education, health etc.

It is through the ‘non-monetarist’ policies that the country has managed to lower the unemployment rate from around 16 percent in 1990 to around 6 percent in 2009. This has eased the social unrest which was characteristic of Sri Lanka previously, also strengthening the purchasing power of the people in the market. While the inflation was an offshoot, through other - again ‘non-monetarist’ - measures the government has excellently managed to curtail the inflation. The inflation rate has come down from almost 22 percent in 1990 to around 4 percent at present, thanks to these policies. The policies did not limit to subsidies, but to development initiatives in the agriculture and other productive sectors addressing basic needs of the population. Of course another factor for this improvement is the reduction of oil prices in the world market.

Some of the spending polices have undoubtedly resulted in a high budget deficit. This has however come to be a necessary evil. The government sector has been a ‘big spender.’ More to the point is its limited capability so far to generate public revenue. While this might remain the case for the time being, the country has been lucky to entertain substantial foreign revenue through expatriate workers now amounting to over 1.8 million. They are in the Middle East.

There are several criticisms about the present government’s economic policies or performance. One of them is about debt. While it is true that the debt rate increased from 96.6 percent in 1990 to 102.3 percent in 2004, when opposite economic policies were in operation, it has annually come down to 90.6; 87.8; 85.0 and 81.1 during 2005 and 2008 respectively, while trend may be the same for 2009. (Exact figure is not available for 2009 yet).

This is not basically because Sri Lanka was not borrowing, but borrowing from an increased strength of a growing economy. Sri Lanka’s situation is well below what the former IMF Chief Economist, Kenneth Rogoff, considered as the critical point. That is 90 percent of the GDP. There are several developed economies that have exceeding debt rates; 200 percent being for Japan for instance. It also should be noted that the menace of terrorism was one major reason why the government had to borrow money for its domestic or country’s foreign expenses.

It is not so much the foreign debt that constitutes Sri Lanka’s present debt rate but, domestic borrowings. As a rate, there is a faster reduction of foreign debt from 47.6 percent in 2004 to 32.8 percent in 2008. The reason is Sri Lanka’s positive foreign exchange situation throughout the last half a decade of growth.

Another criticism is about corruption. Corruption is only tagged to the public sector. The motive is political or vested interest. Apart from that, most of the figures produced by the opposition are unsubstantiated or conflated with other figures of misuse, mismanagement or loss. What is apparent is creating a mountain out of a molehill. There is no question that Sri Lanka is not free from corruption. However, when issues of corruption are raised for political reasons, the end result seems to be to distract the public eye or the law enforcement from actual corruption issues or cases. It is also a necessary observation to note that most of the present audit procedures are superficial or even ‘corrupt,’ coming up with erroneous figures of misuse or loss. Then they are added up to corruption by politicians.

Conclusion

Sri Lanka is undoubtedly poised to take off. Political stability will be there for at least the next six to seven years. The stock exchange, as an indicator, speaks for the economy’s health and prospects for the local and foreign investors. The development path that the government is carving out is almost all embracing which would cater to the different segments of the economy and society. It is not merely the growth that the country is aiming at, but development in economic, social and even moral sense.

There are undoubtedly political factors that need to be addressed. Reconciliation between different ethnic communities, battered and poisoned by the terrorist war is one. Sri Lanka needs to be pragmatic as well as principled in dealing with these and other issues in the political scene. Nevertheless, the primary focus of the government and the people needs to be placed on economic factors and prospects which would undoubtedly facilitate the resolution of the other seemingly intractable political issues.

The growth and development in the agricultural sector have already created conducive conditions for the growth and development in the others sectors. These are the industries and the services. As Sri Lanka is strong in manpower and education, the prospects in the service industries would be the most upcoming and promising in the short run. This should be followed by hardy industries.

A strategy for investment is the crucial. There is an obvious deficit in this respect to generate a double digit growth to raise Sri Lanka from the third world to the ‘first world’ in economic development. The investment rate needs to be uplifted form its present 27 percent of the GDP to around 30 percent in the immediate run and to 35 percent in the medium run to long run. This requires efforts on the part of the government, the private sector and the people.

- Asian Tribune -