Sri Lanka’s economy onwards and upwards
By R M Cutler
MONTREAL - The continuity inherent in incumbent President Mahinda Rajapaksa's
election victory, based on early returns, is likely to further strengthen
confidence in Sri Lanka's economic revival after decades of civil war.
Indeed, such is the present strength of the economy, which is forecast to grow
as much as 6% this year, that few observers believed even a surprise victory by
his chief rival, former army chief Sarath Fonseka, would have had a significant
negative impact on the present boom.
In the eight months since the end of the civil war, the Sri Lanka Stock Market
Colombo All-Share Index (CSEALL) has nearly doubled, reaching 3,591 the day
before the presidential election
on Monday. Over and above the natural peace dividend, the economy has been
boosted by an US$141 million economic stimulus package, announced at the end of
2008, which helped to drive up the index about 25% between then and the
official end of fighting last May.
Confidence has also been boosted by International Monetary Fund (IMF) approval
of a $329 million loan to Sri Lanka, in addition to $322 million immediately
lent in July 2009, part of the $2.6 billion stand-by arrangement approved at
that time. That approval gave foreign investors firmer grounds for believing
economic reforms and liberalization would continue on the basis of eased
concerns over current account balances and the financing of external debt.
Even the arrest in mid-October in the United States of Raj Rajaratnam, one of
the country's biggest investors, on insider trading charges, did little to dent
the stock-price charge, with the benchmark index overcoming chart resistance in
November-December last year from its then all-time high in mid-February 2007 of
just above 3,000.
The share value of John Keells Holdings, the country's largest business group,
has tripled since May 2009. With investments in transportation, hotels and
food, the company typifies the national economy, slightly over half of which is
usually driven by the service sector, with a quarter from manufacturing and the
remainder from agriculture.
That balance changed during the third quarter of 2009 due to reduced
agricultural production, so that services contributed nearly 60% of the economy
and industry nearly 30%. Even so, gross domestic product (GDP) increased 4.2%
year-on-year in the period, double the rate of the previous quarter and nearly
triple the rate of the year's first half.
Fourth-quarter statistics are expected to show similar growth, in view of
several large development projects being initiated on parts of the island most
damaged by the civil war. Rajapaksa has said he will spend $4 billion, or
almost 10% of GDP, building roads, railways and power plants in the north.
In an interview with Bloomberg Television, central bank governor N A L Cabraal
predicted that the economy would expand more than 6% this calendar year,
specifically saying that interest rates should be "sufficient to ... ensure
that any risk of inflation is also curtailed".
Inflation is a considerable concern, given the various cash infusions and
increased spending on the various new development projects. Inflation fears
have historically been a preoccupation of foreign capital, as the country's
inflation fate has often exceeded 20%, weakening the Sri Lankan rupee and
deterring investment. Monetary policy is therefore exceptionally important in
the near term.
Cabraal announced a week before the election that benchmark interest rates
would remain unchanged at a five-year low to motivate investment aimed as
post-war reconstruction.
Reconstruction of areas affected by the civil war is one of the four conditions
of the IMF loan. (International assistance from various Asian and Group of
Seven countries will also assist in post-war rebuilding.) Other IMF conditions
are reduction of the fiscal deficit, augmentation of foreign exchange reserves
and amelioration of the system of banking and financial supervision.
In October, Fitch Ratings maintained the country's ratings at B+ while revising
the sovereign outlook rating to stable from negative. Fitch's revision was
motivated by the expectation that the record high level of $4.3 billion in
foreign exchange reserves at the end of September 2009 would rise to more than
$5 billion by the end of the year. Standard & Poor's in October revised the
country's "B" sovereign rating outlook to positive from stable.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and The University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
