Economy: Game of snakes and ladders
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Like a lifeline, the defeat of the anti-Sri Lanka resolution at the European Parliament on Thursday is certain to be heralded as a victory for the government. While government politicians will gloat over the ‘win’, opposition politicians – who see danger lurking in everything that the government does and often grabbing at straws – will come up with ‘the good, the bad and the ugly’ side of the resolution.A typical to-and-fro argument would go like this:
Government: This proves we have the unconditional support of the EU.
Opposition: But wait, the fact that a large group of EU Parliamentarians proposed the resolution means there is some opposition towards GSP+ concessions to Sri Lanka.
The unexpected resolution by a group of European Parliamentarians to reject Sri Lanka’s request for GSP+ concessions, which drew initial shock from government quarters and led to a flurry of activity including urgent moves by the Cabinet to accede to some of the demands (that were raised in the resolution), would have put Sri Lanka in a difficult position, if passed. Until then, attention was focused on Sri Lanka’s application which was expected to get an EU verdict in mid-May. While government planners would heave a sigh of relief over Thursday’s development, Sri Lanka is still not out of the woods – economically-speaking.
“Prashna thavama thiyanava Mahattaya,” interjected Kussi Amma Sera, who was seated under a tree in the garden, unable to bear the sweltering heat in the steaming kitchen, “thavama thiyanawa, ara Wijewardena mahattaya kiyanawa.”
She was referring to former Central Bank Deputy Governor W.A. Wijewardena’s recent comments on TV that the economy is in bad shape. “Anyone who has access to Central Bank reports and has some knowledge of the economy would know it is in bad shape,” the outspoken economist was quoted as saying.
His comments came in the backdrop of a simmering debate over GDP growth and who did better (this government or the previous government) with economist and government politician Harsha de Silva strongly opposing opposition arguments (including comments by former Securities and Exchange Commission Chairman Nalaka Godahewa) that the Rajapaksa regime’s performance was better.
Figures and statistics don’t lie and thus one glance at Central Bank data reveals the true state of the economy. Even gaining GSP+ will not pull Sri Lanka out of the economic crisis – apart from some short-term benefits – for the simple reason that foreign investment is down, exports as a percentage of the GDP has come down to 15 per cent against 34 per cent in 2000-2001 and the balance of trade is widening, rather than contracting.
According to the latest Central Bank data, economic growth in 2016 was 4.4 per cent compared to 4.8 per cent, while the gross foreign reserves were estimated at US$5.6 billion by end February 2017 compared to $6 billion at the end of 2016 which was equivalent to 3.7 months of imports. This compares unfavourably with the gross official reserves of $7.3 billion (equivalent to 4.6 months of imports) as at end December 2015. On the other hand, growing foreign reserves particularly during the previous regime gave wrong signals of a ‘doing-well-economy’ as most of the time it was buffeted by borrowed cash (foreign borrowings through bonds and loans) and not earned cash (exports and trade). The Yahapalana regime has been forced to borrow externally and prop up reserves to settle debt as and when payments are due.
In other negatives, the rupee has been depreciating against the US dollar, inflation is high and the cumulative trade deficit during 2016 increased to $9,090 million from $8,388 million in 2015. Export earnings dropped by 2.2 per cent in 2016 (however an improvement from a 5.6 per cent drop in 2015). Import costs increased by 2.5 per cent in 2016 after a 2.2 per cent contraction in the previous year.
The positives in the economy have been tourism which the Government can’t take too much credit as investments and tourism flows have been a natural progression since the war ended in 2009 with the advent of hotel chains like Shangri-La, Marriot, Sheraton and Grand Hyatt. Tourism revenue rose by 18 per cent to $3,518.5 million in 2016 from $2,980.7 million in 2015. Marginal gains were seen in worker remittances at $7,241.5 million in 2016 from $6,980.3 million in 2015 and $7,017.8 million fetched in 2014.
Another benefit has been tea prices which have been rising but there again this is due to lower supply in the market. There were loud yawns coming from KAS in the garden as I discussed these figures over the phone with my economist-friend ‘Athayrole’. KAS’s indifference in essence reflects public apathy to data and statistics which to the working class doesn’t reflect a true picture of the economy. “Econo-mee hondai kiyanawa … habai badu mila hamadama naginawa,” she said, grunting under her breath.
Undeterred by her rumblings of discontent, the conversation with ‘Athayrole’ continued.
Athayrole: Regaining GSP+ will just plaster some cracks in the economic wall. It would however not resolve deeper issues in the economy.
Me: Like what?
Athayrole: We need to improve our exports base. There has been a steady decline in export growth and this is the fundamental problem with our foreign exchange. Even with GSP+ in the pre-2010 period these problems were there.
Me: The Government says it is confident of foreign investment to propel the economy.
Athayrole: Investors are unlikely to come in hordes (which we need) because the business environment is not conducive and there is no stability apart from policy inconsistencies. No one can deny this. We need large-scale foreign investment as local investments are too small to invigorate the economy.
Foreign investment has been on the low side in recent times, in fact, much below the $900 million reached a couple of years back. Sri Lankan planners are struggling to reach $1-2 billion, what they perceive as ‘magical figures’ when emerging countries in the region including Vietnam are seeing billions of dollars of investment in double-digit figures.
Furthermore, whatever investment coming in now is mostly in the tourism sector, the only bright spark in the economy as new hotels spring up and arrivals grow. However, a powerful debate is emerging on the viability of chasing after numbers (mass market tourism) as against quality travellers who spend more which, in a sustainability context, is far more beneficial. Furthermore large hotel groups are seeing revenue numbers drop as more visitors opt for cheaper accommodation.
In parting, ‘Athayrole’ said that he doesn’t see anything much happening in the next few months, in fact in the next two years as the country heads for another round of uncertain elections with handouts and political goodies outweighing whatever benefits the economy would accrue. “Look at the large posters of politicians and election-type billboards for May Day…. election fever has begun.” I was inclined to agree. So get ready tomorrow for May Day and the hallowed workers’ cry: “Sa dukin pelena un, dan ithin nagitiyaw, anthima satanata sarasiyaw” (This is a wake up call for all who are suffering from hunger and prepare for the final flight).