Early this month, the International Monetary Fund (IMF) reduced the growth forecast for Sri Lanka from 5 to 4.5 per cent for 2016 and to 4.8 per cent from 5.5 per cent in 2017. This assessment is based on external environment, which, according to Jaewoo Lee, head of the IMF mission team for Sri Lanka, is “not as favourable as we used to think”. His prescription: Lanka should be ready to tighten the belt.
One of the risks facing Sri Lanka is less capital inflows coupled with outflows. In fact, the capital outflows are pushing down the value of local currency, which depreciated 3.1 percent.
Another indicator of a healthy economy, Foreign Direct Investment is not coming in a big way either. Probably when compared to Lanka, Vietnam and Myanmar are faring better. Officials admit that Lanka is getting a minuscule of what Vietnam ($15 billion) got 2015 and Myanmar ($9.4 billion) attracted in 2015-16, though all the three nations are trying to rebuild their war ravaged infrastructure.
During the eight month period Jan-Aug this year, Sri Lanka received an estimated $ 336 million as Foreign Direct Investment. This is 37.1 percent less than the FDI inflow during the same period last year. If this trend continues the year 2016 may end with FDI falling below the 2015 level of $681 million.
Neither forex reserves nor gold reserves is in a better shape. Exports also are not looking up. According to the IMF, Lanka’s forex reserves registered a steep fall from $5.07 billion to $4.23 billion between October and November. Gold reserves dropped by eight percent to $848 million. In the first eight months of 2016, exports persisted with their declining trend. In value terms, export earnings were down by 4.1 percent to $6.865 billion from the same period 2015.
These statistical indicators point to depreciation of rupee, which in turn will end up in slow growth rate. All this will negatively impact the external debt, as the IMF prognosis of the island nation’s economy shows. Sri Lanka’s public debt accounted for 80.4 percent of GDP at the end of last year. A whopping forty percent of the debt is denominated in foreign currencies.
Naturally therefore the IMF is concerned. “Sri Lanka’s public debt and gross funding needs were high compared with its peers, with the ratio of gross financing needs to GDP being the fifth largest among emerging economies,” the report said.
The soft lender of last resort for developing nations wants Colombo to deepen and broaden economic reforms, saying these are “critical for durable” fiscal consolidation.
The IMF said: “Complementary structural reforms in tax administration, public financial management, and the governance and oversight of state-owned enterprises are critical for durable fiscal consolidation.” It also called for “proactive management” of debt accumulated by state-owned enterprises (SOE).
To tide over the emerging crisis of sorts, Sri Lanka government has negotiated for a $ 1.34 billion aide from the World Bank. Of this, $440 million will come as development assistance at 2 percent interest and the rest defined as “normal assistance” will carry a higher interest.
Finance Minister Ravi Karunanayake has been working overtime to put the economy in shape by trimming public spending. Already education and health budgets have been slashed and fertiliser subsides cut.
He also is initiating a drive to attract more green backs, and has set in motion the process of liberalising exchange controls. “Anyone will be allowed to bring in money as long as it was earned through legitimate means”.
Privatisation of some six government companies, induction of a strategic partner to help the national airline achieve a turnaround, and Hambantota port on the block are some of the, big bang reforms on the cards.
A Chinese company, Merchant Port Holdings Company Limited, is likely to pay $1.1 billion to acquire control over the Hambantota port under a framework agreement signed with the Sri Lankan government, according to local media reports.
– yamarar