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Economic reforms begin to bite Six months into its term, the euphoria over the election of a pro-business government has long since evaporated and the cold, hard reality of the economic difficulties ahead is beginning to sink in with a series of price hikes that have hit companies and consumers alike. Economists and
business leaders have given mixed reviews about the United National
Party-led government's economic performance. They welcome action
to put the economy back on the rails but warn that reforms demanded
by foreign aid donors and unprecedented increases in prices of fuel,
electricity, water, telephone calls and in transport costs could
turn out to be landmines on the road to recovery. "The government
is trying to balance political reality with its economic imperatives,"
said Dushyanth Wijayasingha, head of research at Asia Capital. The success
of the peace effort would be critical to this effort, along with
the economic reforms and privatisation of state enterprises. "As long
as the public feels the peace process is on track they will put
up with a bit of pain, hoping that the economic gains of the peace
initiative would make things better," Wijayasingha said. The government
has laid the foundation to stabilise the economy and revive growth,
he added. The economy contracted last year for the first time in
50 years under the impact of internal and external shocks. But many businessmen
complain that the economic recovery has still not gathered momentum
although costs have increased virtually across the board, said Patrick
Amarasinghe, the outspoken businessman who once headed the Federation
of Chambers of Commerce and Industry of Sri Lanka (FCCISL). "We understand
the government's difficulties," he said. "But the government
must genuinely show the people that it is cutting down on unnecessary
waste." Given last
year's slump, the economy is bound to bounce back and show some
improvement this year, said Dushni Weerakoon, an economist at the
Institute of Policy Studies (IPS). But, she warned,
despite the policies outlined in the budget that have created "a
sense of confidence and optimism in the private sector, we have
yet to see the implementation of a credible policy package." The reforms
and moves to further de-regulate and open up the economy have hit
small industries particularly hard. "Cheap
imports from India and China, and under-invoicing and smuggling
are making it difficult for local industries to survive," said
Amarasinghe. "There is a lot of agitation by local industry against cheap, sub-standard imports," he added. "It is important to impose standards on imports. Now, any junk can come in." Exporters too
were suffering because of the slowdown in demand caused by the global
economic downturn, Amarasinghe said. "There
was no relief for exporters in the last budget," he said. "The
depreciation of the rupee against the dollar was expected to help
exporters, but it didn't because internal costs are also spiralling." K.U. Sumanasena,
vice president of the Chamber of Small Industries, said that interest
rates were still too high for small businesses. "We pay 23
percent, some banks charge as much as 28 percent." Productivity
went down because power cuts, which began last year, affected industrial
production and exporters lost markets as they failed to honour orders,
he said. Nevertheless,
the private sector acknowledges the importance of getting the economic
fundamentals right, given the damage caused by the previous People's
Alliance regime's reckless spending spree in its desperate bid to
cling on to power last year. "If corrective
action is not taken now, things could be disastrous in future,"
warned Nihal Abeysekera, vice president of the FCCISL. The private
sector expected quicker results but understands that this was not
possible because of the difficulties faced by the government, he
added. Garment exports,
slowed down in the first quarter because of the affects of recession
in the United States, the biggest market, but now show signs of
picking up, he said. Weerakoon from
the IPS said government might not be able to contain the budget
deficit as planned since revenue targets are not likely to be met. "Privatisation
proceeds are likely to be lower than anticipated because six months
have already passed and nothing has happened while there appears
to be transitional problems in the shift to a value-added tax system,"
she said. "So the
additional revenue expected might not be generated," she added.
"If there's a shortfall in government revenue, then the deficit
could exceed what was forecast and that would place extra burdens
on government borrowings." The government
has promised not to borrow from the domestic market and to restrict
the budget deficit to 8.5 percent of Gross Domestic Product. Asia Capital's
Wijayasingha said the price hikes, especially in electricity and
petroleum products, would raise costs for businesses. "There's
no quick fix to bring them under control," he said. "The
government can't continue to subsidise them because it is already
heavily indebted. So the short-term way out is to face the pain." He said he
thinks it a "creditable achievement" for the government
to have been able to keep prices from rising further. "We're still paying for our past sins," he said. "When you spend beyond your means, you pay for it in the future." Sri
Lankan economy shows modest growth The marginal
improvement, which comes after two successive quarters of negative
growth, was enough for the Central Bank of Sri Lanka (CBSL) to declare
that the worst of the economic crisis was over and that the economy
was on track to achieve the bank's projected 3.5 percent GDP growth
for the year. The announcement
on Friday came just one day after cabinet spokesman G.L. Peiris
provided a three percent growth estimate for the first six months
of the year - even though that period still had three days to run. But the CBSL's
head of statistics, Dr. Anila Bandaranaike, said she was not prepared
to comment on Peiris' prediction as the bank had not yet collected
the necessary information for the second quarter. "Very
clearly we see the signs of recovery but as to how fast it will
happen is hard to say. The Central Bank is always conservative in
giving a final number before we have the economic data," she
said. Peiris' forecast caused surprise among economists, who noted
that the economy grew, albeit modestly, in the first half of 2002,
making an improvement over the same period this year more difficult
given the economy's recent woes. "I think
that's a bit on the optimistic side," said Dushni Weerakoon,
an economist at the Institute of Policy Studies. "You expect
it to do better, but there's no evidence of an acceleration." Bandaranaike
said the achievement of the 3.5 percent annual growth estimate would
depend on the extent of the global economic recovery, favourable
weather conditions and enhanced domestic demand driven by recovery
in the north and east. "So I
don't think you can call that [the annual estimate] a Herculean
task." The estimate
was a "very, very, very conservative figure" which did
not include the effects of a peace dividend, she said. While there
were not yet any signs of increased activity in the north and east,
Bandaranaike said the upcoming harvest could provide an indication. "The first
quarter data is not going to reflect it," she said. "There
is a certain lag as the economic activity comes through." But she said
the opening up of the A9 road to Jaffna and the increased demand
of the estimated one million people in the region should have a
positive effect on the economy. Encouraging
signs during the first four months of the year led the CBSL to increase
its forecast for foreign direct investment this year from $ 190
million to $ 240 million. The recovery
in the first quarter was underpinned by 2.4 percent growth in the
agriculture sector and 1.4 per cent growth in services. But these gains
were largely negated by a 4.2 percent contraction in the industry
sector. Large-scale
manufacturing continued to be hurt by the weak global economy and
increased international competition, which led to a fall in the
production of exports goods such as apparel and textiles, processed
diamonds and ceramic products. The turnaround
in agriculture was founded on an improved performance in the domestic
sector, while plantations continued to suffer the effects of drought. One of the
best performing areas in the services sector was telecommunications,
which grew 20 percent in the first quarter as Sri Lankans flocked
to the new technologies revolutionising the industry. The provision of cellular phones surged 41 percent, while Internet and email services rose 27 percent. Insuring
against dengue SLIC has awarded
grants for two projects to be conducted through the Sri Lankan Association
for the Advancement of Science. The insurer is among some companies that are supporting dengue-eradication programmes after a dramatic rise in the number of cases in recent months of the mosquito-borne virus. Changing
face of the stock market The new players
are also far from passive investors with some of them getting on
the boards of their target companies as our story on page 8 reveals.
Another important change in the share market is the gradual increase in the number of smaller investors - a critical step for a maturing market. Super
team to drive Lankan IT policy The proposal,
described by World Bank Vice President and Chief Information Officer
(CIO) Mohamed V. Muhsin as another Mahaweli "with much less
cost but a far wider reach", envisages hiring top class professionals
with outside expertise to chart the country's ICT programme. This came after
Muhsin, the only Sri Lankan to become a World Bank VP, and a six-member
bank team recently concluded a two-week review of IT in the country
and made a series of recommendations to Prime Minister Ranil Wickremesinghe
and Economic Reforms and IT Minister Milinda Moragoda. "If you
want ICT to transform Sri Lanka then you need a power team that
will drive it," the senior bank executive told The Sunday Times
Business in an exclusive interview on the proposed plan. The bank has
recommended that the team should also have external advisors. "We
want some of the members of the team to be fulltime - be paid high
salaries according to their status and make it worthwhile. At the
moment it is happening through the goodwill of young professionals
but that's not sustainable," Muhsin said. The World Bank, he
said, was prepared to fund the setting up of this team. The bank team
led by Muhsin spent two weeks reviewing dozens of studies on IT
and prepared a set of recommendations based on this research. The
team, which met and discussed with some 200 to 300 professionals
and non-professionals, has in a report to the government recommended
a structure based on five programmes which include building implementation
capacities, infrastructure, creating world class IT professionals
and human resources and deliver services to the people. "Ideally
we need to build a system where citizens in any part of Sri Lanka
are able to communicate with government services like what happens
in some parts of India," Mushin said. In some Indian states
including Andhra Pradesh where chief minister Chandrababu Naido
is considered the father of the IT revolution in the country, citizens
are able to communicate with government officials through a computer. He said IT could be used for instance in agriculture where information is available on crops, weather and prices. The team has together with the government agreed to 50 actionable recommendations and goals with implementation dates and the time frame. Muhsin said
donors would be happy to fund a credible IT project if there was
a proper implementation mechanism, adding that Sri Lanka has had
a dismal record of implementation with the annual disbursement rate
of foreign aid for projects being about eight percent when it should
be 20 percent. He praised Moragoda as a visionary who should be able to put together a pragmatic IT policy. (FS) |
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