Uncertain week ahead for Sri Lanka
View(s):With the country thrown into uncertain gear following widespread political developments, the international community including rating agencies this week weighed in with the negativity of the move while new Prime Minister Mahinda Rajapaksa, who also holds the finance portfolio, announced a set of concessions reaching out to the middle class and lower segments of the population which has faced the brunt of a current economic crisis.
Business leaders and economists, the Business Times spoke to, said there was an element of confusion and chaos. A private sector economist said: “Populist measures are unsustainable on the long run. Also the chaotic situation is not good for business and investor sentiment. It’s likely that the US Government will put on hold its 5-year Millennium Challenge Corporation (MCC) assistance package which was expected to be finalised in the coming weeks.” He said some of the new tax concessions offered require amendments which need to be passed by Parliament; so there was no immediate relief.
The GSP+ concessions offered by the European Union to Sri Lanka also risked being withdrawn if human rights commitments in the agreement between the two sides are not met, he said.
The Central Bank’s Monetary Board met on Tuesday, at its regular twice-a-month meeting, where issues – among other matters – relating to the rapid rise of the US dollar were discussed. A further meeting of the board was scheduled for Friday.
The board’s monthly monetary review which generally comes in the first week of the month will only be issued on November 14, as per a new rule that the review will be issued once in six weeks, not four weeks. “It will be interesting to see what the review will say given the political changes in which pressure is on the Government to intervene more aggressively and bring down the dollar to manageable levels,” one business analyst said.
The dollar which surged to Rs. 177 fell by two rupees on Wednesday and closed in the spot market on Friday at Rs. 174.50. A top Central Bank source confirmed on Friday that the bank has been intervening vigorously in the market over the past three days, resulting in the rupee picking up a bit. “While we have to be careful about dipping into the reserves, we also have to make sure the rupee doesn’t slide as much as it is doing,” he said, adding that at the end of the year, an increase in remittances – an end-of-the-year practice – in December could help in inflows.
In other developments, Moody’s and Fitch warned of a lower credit rating which would make borrowing in the international market more expensive.
The stock market reflected mixed signals, with some days showing positive trends. Market observers said they believed, in addition to some positive sentiment, there was an element of artificially pushing up prices to support the political change.
The US, UK and Canada were among countries that urged the President to resolve the issue through Parliament, while so far there was no attempt to halt any funds coming from these sources. The IMF said it was watching the situation with pressure building to halt the uncomfortable structural reforms.
The country’s foreign reserves are slightly below US$8 billion but this is coming under pressure with possible moves to intervene in the market and lift the rupee value, the analyst said.
A Finance Ministry source said that the MCC has not taken a final decision on continuing the implementation of the programme or to suspend it but it is closely watching the situation in the country. An agreement was signed recently between Sri Lanka and the MCC to provide an additional Rs.413 million ($2.6 million) grant for development work. This amount supplements the Rs. 1.2 billion ($7.4 million) that the MCC provided last July.
Economist Prof. Sirimal Abeyratne from the University of Colombo said that concessions offered on Thursday catered to the masses to whom structural reforms, a market economy, costly government spending and exchange rate meant nothing. These goodies will woo support from the masses but they are unsustainable in the long term. On the other hand, he said, Sri Lanka is losing the confidence of the international community and international investors. “There is an element of confusion and chaos in today’s situation,” he added.