Security situation biggest threat to business confidence

By the Economist

There can be little doubt that the current security situation is the most serious setback to business confidence, This applies to foreign investment as well as to local investment, In an economic climate of high inflation the sense of insecurity only aggravates risk and uncertainty. The quicker the security conditions can be brought under control, the better for the economy. Unfortunately, the sense of insecurity has arisen out of a number of divergent and even unidentifiable sources that make the situation particularly precarious.

If the terrorists succeed in a large business sensitive target it could be much worse, in fact that would be the worst scenario. There is however an assessment that the capacity of the terrorists to mount such an attack has been seriously weakened and smaller targets are the order of the day. These have already reduced travel and activity of the general public that may only have a marginal impact on economic activities for the present. The best scenario would be if the predictions of the armed forces and the government would bring a cessation to the war during the course of the year. This is a much awaited result and the one the business community, as well as the general run of people would hope for and like.

Meanwhile there are contradictory signals that are very different to what would be expected. There is news that large investments are on the sidelines. The Iranians have for instance announced a number of large investments ranging from development of infrastructure projects to financial investments. As announced they are large projects that would have a significant impact on the economy. Similarly there are large investments planned by Indian investors, including the tallest building in Colombo.

How does one reconcile the inhospitable security situation with these announcements of intended large investments? They could be conditional on an improvement of the security situation. Perhaps there is a long period between the announcement of the investments and the actual investment. However, there is no indication that this is so as the investors have given some specific date of commencement and completion. In which case it may be on the conviction that their mega projects will not be directly affected and therefore they could await a turnaround in the security situation. May be these investors have a long term expectation that is very different to the conditions prevailing at present. It may even be that despite their announcements they would adopt a wait and see posture till there is some clarity in the direction of the nation's ethnic problem.

Among the intended foreign interventions is an Iranian proposal to lend money at Iranian interest rates as low as 4 percent. This could be seen as a boon to business that have to borrow at interest rates of over 20 percent. In fact the interest rate would not be as low as this as the borrowing would be in foreign exchange and the rate of deprecation of the currency would have to be taken into account, In a context of a depreciation of the currency by 10 percent during a year, a 4 percent loan would in fact cost 14 percent approximately.

The economy has to find its way betwixt a high trajectory of inflation, on the one hand and a deteriorating security situation on the other. The sooner the security situation is brought under control, than the business community would be able to function on the basis of normal conditions of risk and uncertainty rather than the current excessive risks associated with security conditions.

In an inhospitable global economic scenario as we are experiencing today, some of our economic sectors such as agriculture may be even benefiting from the global developments, but our industrial sector's progress could be even permanently jeopardised. The high rate of inflation is the other factor that is injurious to the production sectors as this is hardly addressed, as fundamental factors require to be addressed. The Central Bank has at last come with a more realistic prediction of a very high rate of inflation for the rest of the year, This was not unexpected.

There is a real danger that both the current security situation and the high rate of inflation could be damaging to the economy. We have to live in the hope that the security situation would be brought under control soon, and that fiscal discipline would be in place soon after.