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Economic consequences and challenges of the Geneva resolution
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Good governance is good for the nation and people. Irrespective of any economic consequences of the Geneva resolutions, the country must ensure law and order and protect human rights of its citizens. This was the central message left in the minds of those who attended the LBR-LBO CEO forum on Meeting the Challenges of a Resolution on Sri Lanka by UN’s Human Rights Council.
Although the LBO Forum focused on the broader issues and consequences of the UNHRC March resolution rather than only its economic consequences, economic implications figured prominently at the forum.
No economic sanctions
The worst scenario of economic sanctions was ruled out by the British High Commissioner John Rankin. He said that no country was looking towards economic sanctions against Sri Lanka and that the Human Rights Council does not have the power or mandate to impose sanctions. In as far as Britain was concerned, although the UK is one of the key sponsors of the resolution, which calls for improvements in human rights, as well as an external probe into alleged war crimes, it was not in the interests of the UK to impose sanctions as Britain is Sri Lanka’s second largest trading partner (after India) and one of the top five investors in Sri Lanka. However, he reminded us that there had been economic consequences in the past, such as the loss of GSP plus concessions, when Sri Lanka did not comply with conditions to improve her human rights record.
Following the suspension of GSP Plus in 2010, there was a dip in Sri Lanka’s exports to EU markets in 2011 and 2012. Fortunately there has been some revival of exports since mid-2013 due to economic recovery in the major EU countries. Yet, Sri Lanka’s share in total apparel imports to these markets has declined continuously over the past three years, in contrast to significant increases in the market shares of Bangladesh and India.
Since a country does not need UN approval to impose some form of sanctions on its own, a situation similar to the suspension of GSP plus could still be on the cards. It could come from countries other than the UK. Furthermore even though the UK assures us that it would not impose sanctions at present, much depends on the election cycle in countries that have an influential Sri Lankan Diaspora.
Resolutions inconsequential
Central Bank’s Deputy Governor Dr. Nandalal Weerasinghe contended that these resolutions were of no consequence to the economy. His world view was that economics and politics were on parallel tracks with one not influencing the other. This is a pious hope rather than an empirical reality. His argument rested on the basis that the Central Bank had issued sovereign bonds of US$ 1000 million and US$ 500 million that were oversubscribed several fold, the latter even more than the former, and at a lower interest rate of 5.2 per cent, compared to the former at 6 per cent. As the latter was after the Geneva resolution, he argued, that it was clear that what happens on human rights had no effect on decisions of international investors.
This argument has bad financial economics and ignored changes in global financial conditions. It completely overlooks recent developments in global financial markets. The US$ 1 billion sovereign bond issue at a coupon rate of 6 per cent took place at a time of growing worries in financial markets as the US Federal Reserve rolled back its easy monetary policy stance. Over the past few months borrowing costs of emerging market economies have dropped to a record low level against the backdrop of heightened appetite of international investors to diversify their asset portfolios.
Most significant is the fact that both the 6 per cent and the 5.2 per cent paid for the sovereign bonds were one of the highest rates of interest paid by any country. According to ADB data, it was the highest interest rate paid by an Asian Country recently, with the sole exception of the 7.25 percent coupon rate of the recent US$ 2 billion bond issue by Pakistan.
Building buffers
Dr. Weerasinghe was confident that even if debt investors pulled out in the unlikely case of sanctions, the Central Bank had foreign reserves of US$ 8 billion compared to bonds that could be withdrawn of about US$ 3.7 billion. The US$ 8 billion, however, are gross reserves; net reserves (gross reserves net of short-term debt repayment obligations) are much lower and weaken this argument tremendously. According to IMF data, by the end of 2012 net official foreign reserves amounted to only 62 per cent of total gross reserves. Most probably the current net reserves would be much lower than this figure. Also the US$ 3.7 billion figure seems to grossly understate the amount of accumulated volatile capital that could swiftly leave the country in face of any external shock. We need to also take into account massive banking sector and private corporate borrowings as well as foreign investment in treasury bills.
Even if the UNHRC resolution has no impact on Sri Lanka’s borrowing ability, if they are invested in activities that have lower rates of return, such as infrastructure and in the non-tradable sectors, then repayment would become difficult. Besides, the present policy of keeping the exchange rates fixed as much as possible would discourage exports needed to pay off the bond at the end of five years.
Complacent optimism
The view that Sri Lanka’s economic fundamentals are strong, that exports are healthy, that foreign investments are growing is for most part flawed. The higher international interest rates paid is evidence that foreign investors consider Sri Lanka far riskier than most other Asian countries. Foreign direct investment according to the 2013 Central Bank Annual Report is falling, the debt to GDP ratio of 78.3 percent and the fiscal deficit of 5.9 percent are above the safety threshold. The low revenue to GDP ratio with revenue being inadequate to even meet current expenditure is alarming.
A good human rights record can only benefit the economy: a bad one can only affect the economy adversely.