‘Attracting global capital outflows, a challenge for Lanka’

by Lalin Fernandopulle

Despite a gloomy global economic outlook with many developed economies still facing constraints, there is a silver lining for Sri Lanka due to global capital outflows from advanced countries, said Senior Lecturer, Department of Economics, University of Colombo, Prof. Sirimal Abeyratne said.

He said capital outflows from advanced economies will continue to take place due to the recession in those countries and Sri Lanka stands to gain.

Therefore, in theory Sri Lanka should not have a problem in finding private investment funds. However, the issue is, we have not benefited from global capital outflows to attract even one percent of the world’s Foreign Direct Investments (FDIs) which amounts to around US$ 15 billion. Sri Lanka has been unable to attract over US$ 1 billion so far and this is a major challenge this year.

The challenge for policy makers is how are they going to make Sri Lanka an investment-friendly and competitive country to enhance foreign direct investments.Foreign direct investment inflows grew year-on-year to $1.45 tn in 2013. However, FDI inflows declined by 8% to US$1.26 trillion due to the fragility of the global economy, policy uncertainty and geopolitical risks. Inflows was estimated to be $1.75 tn in 2015 and is anticipated to be $1.85 tn in 2016.The problem is that the 2016 Budget is a conditional budget which means its delivery is subject to vital improvements in macro economic conditions such as sound economic reforms, better policy environment, higher trade performance, more private investments and high economic growth, Prof. Abeyratne said.

These targets cannot be achieved in a year. We are expecting short term delivery of Budget outcomes subject to medium term economic performance.

The other major issue for the country this year is the unprecedented number of Budget revisions which either reduces revenue or increases government expenditure which means the budgetary outcome will be different from the estimated outcome at the end of the year.

He said as far as the foreign exchange market is concerned Sri Lanka has a bigger challenge.

The sluggish export performance due to lack of reforms in the export sector calls for the urgent attention of stakeholders.

A another issue is the trade deficit. Although we sustained it with private remittances it is a growing challenge especially due to the security issues in the Middle East. Thus in this scenario Sri Lanka cannot maintain a flexible exchange rate.

The government will have to resort to foreign borrowings or go for a stand-by agreement with the International Monetary Fund.

Prof. Abeyratne said even though this issue is solved through foreign borrowing it will be only a temporary measure which will add up to the foreign exchange crisis in the medium term.

Therefore, the need for export growth is inevitable and it needs improvements in the business environment.

With regard to the recent reports of a drop in the unemployment rate, he said Sri Lanka’s unemployment rate as shown in statistics does not reflect the reality. The unemployment rate dropped in the recent past mainly due to the increase in public sector jobs and government expenditure. This is unsustainable as expansion should come from the private sector which is not the case. Therefore, if the public sector is constraining itself looking for macro economic stability unemployment is due to rise.

The unemployment rate in the third quarter of last year increased to five percent from 4.5 percent in the second quarter of 2015.According to Labour Force Survey estimates of the Census and Statistics Department, the number of unemployed people estimated during 3Q15 was 453,956. Underemployment is an issue which is not properly reflected in the unemployment rate.

According to statistics many are employed but their productivity or contribution to the economy remains below standard, Prof. Abeyratne said.