Continuous growth despite global downturn:

Accolades for Lanka’s economy

By Shirajiv SIRIMANE

Growth in exports

Urban development in Colombo

Development project in Hambantota

Foreign cable news services carried many stories recently that Asian governments and businessmen were making strong inroads to European businesses. India was planning to provide credit to European states while China kept on ‘loaning’ European economies and even the USA.

This clearly shows that the Euro zone crisis is still not over and that Europeans and Americans are not managing it well while the Asian countries including Sri Lanka are maintaining high GDP levels and are surging ahead to become strong nations within the next few years.

Unfavourable developments in Sri Lanka’s export destinations, in terms of political and economic uncertainties, could hamper the island in reaching its growth projection. The slower recovery in advanced economies and the increase in global fiscal and financial uncertainties could also pose a risk.

These factors would also have a negative impact on Sri Lanka and its GDP growth is expected to be lower at 7.2 percent compared to the original target of eight percent set in 2012.

However the agriculture, industry and services sectors are expected to grow by 6.9 percent, 8.4 percent, and 6.7 percent respectively.

Rise in imports

Although imports have been on the rise till February they are expected to moderate significantly from May and be limited to US$ 20.9 billion.

Central Bank Governor Ajith Nivard Cabraal, as per the road map spelt out recently, said a reasonable increase in reserves over the next several months seems to be very likely, based on projected inflows.

Targeted inflows as per the revised road map are:-

• Exports: US$ 11.7 billion

• Tourism: US$ 1.2 billion

• Workers’ remittances: US$ 6.5 billion

• FDI: US$ 2 billion

• Net stock market inflows: US$ 0.5 billion

• Commercial banks’ tier II capital: US$ 1 billion

• Major corporates’ capital from abroad: US$ 0.5 billion

• Long-term currency swaps: US$ 0.5 billion

• Net Treasury bills and bond inflows: US$ 0.5 billion

• International bonds – US$ 1 billion Likely outflows as per revised road map are:

• Imports: US$ 20.9 billion

• Govt. loan repayments: US$ 1.4 billion

• Sri Lankan investments abroad: US$ 0.5 billion

Sri Lanka’s reserve levels in the recent past never reached critical levels, and even today are at comfortable levels, he said.

Workers’ remittances increased

The exchange rate behaviour in the recent past has been highly speculative and current depreciated value is not in line with fundamentals. “Although the revision of the intervention policy from “price based” to “quantity based” led to a rather rapid depreciation of the Rupee, it is expected to stabilise with the realisation of foreign inflows in the coming months.” he said.The dollar is already trading under the Rs. 128 mark from a recent high of Rs. 133.

Workers’ remittances will be a key area of the positive trend. They increased by 17.2 percent to US$ 1,493 million in the first quarter of 2012 over the corresponding period of the previous year.

Construction project in Colombo

The estimated target for 2012 is US$ 6.5 billion which is expected to be realised as remittances are seasonally higher towards the latter part of the year. Despite some negative publicity, stock market inflows this year have been positive and are on target.

Positive sentiments

“With the growing positive investor sentiments, cumulative net inflows in 2012 up to May 2, amounted to US$ 172 million, compared to the annual target of US$ 500 million. In 2011, net outflows amounted to US$ 172 million.

Emerging pressures for Sri Lanka for this year include the higher trade deficit in 2011.

In addition the motor vehicles which increased by over 86 percent to US$ 1.9 billion, gold that increased over six fold to US$ 604 million, petroleum which saw a rise of 58 percent to US$ 4.8 billion, price of crude oil increased by 37 percent to US$ 109 per barrel, investment goods which increased by 55 percent to US$ 4.3 billion, higher current account deficit: 7.8 percent of GDP and BoP deficit of US$ 1 billion are likely to be challenges for Sri Lanka.

Port, aviation and other professional services are expected to be a major foreign earning source in the medium term with an expansion in port and aviation services on which the Government has promoted investments by both private and public sectors.

The new port terminals in Colombo and Hambantota are expected to attract significant global trade-based activities to Sri Lanka.

Despite the global recession, tourist arrivals increased by 21.3 percent in March year-on-year to 91,102 from the corresponding period in 2011.

The arrivals for the first quarter of 2012 increased by 21.1 percent to 260,525 and earnings from tourism increased by 28.6 percent to US$ 268.3 million over that of 2011.Given the performance of the first quarter the annual targets of tourist arrivals of one million and earnings of US$ 1.2 billion appear to be on course.

With the graduation of Sri Lanka’s status to a middle income country the Government has paid further attention to develop education and urban development sectors to meet the new challenges of the 21st century.

In this context, it was decided to expedite development programs which have already been formulated pertaining to the above sectors with foreign assistance.

In response to the request made by the Government, the World Bank has agreed to provide financial assistance of US$ 314 million (Rs. 37 billion) for these development initiatives, having considered the importance and expected long-term benefits.

Accolades

Globally Sri Lanka received several positive accolades and the views of the International Monetary Fund of (IMF), rating agencies and international banks have been encouraging. Here are some of the accolades:

• IMF: “The authorities have recently introduced a broad package of measures to rein in the current account deficit, stem the reserve loss, and bolster fiscal performance…

The adjustment measures implemented by the authorities have placed the economy on a more sustainable trajectory”.

• Moody’s Rating Agency: “The reactivated IMF support programs are a tacit endorsement of Sri Lanka’s policy initiatives since February 2012.”

• Fitch Rating:

“The authorities have taken the appropriate action to correct recent pressure on the BoP and place it on a more sustainable trajectory” (Fitch affirmed its BB (Stable) rating).

• JP Morgon: “Sri Lanka enacts a bold package of measures to stave off BoP pressures”.

• Standard Chartered Bank: “SriLanka-positive steps to improve BoP”.

• HSBC: “Policy rates increase will help cool credit growth and thereby contain inflation and external balances”.