Economic challenges this year

"Low private sector investment has resulted in lack of stimulation in economic activity which is normally high in countries recovering from a disastrous period – war or something else."
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By FS

(September 06,Colombo, Sri Lanka Guardian) The end in May of more than 20 years of conflict and uncertainty should have seen an immediate buoyancy in the country’s investment climate and sentiment, but that is far from happening. Of course a few developments here and there could be seen as some level of buoyancy in sectors like tourism are evident but looking at a wider picture, sentiment is still at a low ebb for whatever reason. No doubt there is a strong level of positivism and optimism in the air but that is not being translated into investment terms.

Take private sector credit for example. Credit expansion has been slow and growth in this sector which was around the 20% levels last year at the same time is just around 4-5% now. No one can put a finger on the reason why but one can surmise that it has to do with borrowings costs – interest rates are still high --, repercussions from the international financial crisis and also a wait-and-see attitude on the peace dividend.

Low private sector investment has resulted in lack of stimulation in economic activity which is normally high in countries recovering from a disastrous period – war or something else. The Central Bank has been urging banks to lower its rates but the response has been rather lukewarm.

The stock market despite its occasional outbursts showing heightened activity since May is nowhere near the buoyancy of a market that has left behind a crippling war that plagued the economy and ruined local and foreign investment, not to forget the destruction to people and property.

Global investor Jim Rogers’ unnannounced visit to Sri Lanka two weeks back should have stimulated the stockmarkets but one didn’t see that happening last week. Funds connected to Rogers are also yet to be seen investing in the market although the well-known investor has been frequently quoted in international news media about being bullish on Sri Lanka (after the war) and that this is a better investment option than India or China.

Tax revenues are also an issue and will be a key feature of the 2010 budget due to be presented in parliament in the first/second week of November. The Presidential Tax Commission, appointed by President Mahinda Rajapaksa some weeks back, has been working hard – meeting sometimes twice a week – to finalise a preliminary report by the last week of October in time for the budget. Its final report is due by June 2010.

It is learnt that the Commission is planning to widen the tax base but reduce the number of taxes to a single digit from a range of 25-plus taxes now and make the tax structure more simpler. A more difficult task would be in creating a structure that would ensure more tax revenue, at a time when the consumers pockets are empty with high costs of essential commodities - whatever government figures on inflation may show. The corporate sector has also employed huge cost cutting exercises for employees across the board including in their perks and in other production areas. In an interview carried in this newspaper, Dialog CEO Dr Hans Wijayasuriya says how millions of rupees are being saved through a combination of measures including staff cuts.

Another bolt from the blues is the preliminary report from the European Commission (EC) on the GSP+ scheme where the findings are of a negative nature particularly on human rights concerns and this could jeopardise the prospects of Sri Lanka getting these concessions. A final report however is due in October and no final decision will be taken by the EC until then.

A problem that dogs the government is the reinstatement of former Treasury Secretary P.B. Jayasundera which has been held up in the Supreme Court due to issues over the number of judges that should consider his application to withdraw an affidavit he gave earlier promising not to serve in any public position. A 3-judge bench first heard the petition after which it moved to a 5-judge bench and now seven judges are being constituted for this purpose. Separately, senior officers at the Finance Ministry are agitated over PBJ’s return and are contemplating protesting against the Presidential decision. The former Treasury bigwig is considered ‘haughty and arrogant’ and difficult to work with.

Thus raising tax revenue while providing hand-outs to the masses at the November budget ahead of a series of elections including the presidential poll are the economic and political challenges facing the government – not forgetting the other issues like the lack of private investment and a yet-to-be-seen buzz in the stockmarket.

-Sri Lanka Guardian