Lanka’s economic miracle turns sour

Sri Lanka’s president began his second term vowing an economic miracle after decades of conflict, but the post-war boom is already fraying, putting his record on economic management to the test.

Mahinda Rajapakse launched his second six-year term in 2010 promising to turn Sri Lanka into the “wonder of Asia” by doubling GDP per capita income to $4,000 by

2014. After the end of the island’s civil war in 2009, brought about by an army onslaught that is dogged by war crime allegations, Sri Lanka reaped a peace dividend that has seen some of the fastest development in Asia.

But now, less than three years later, the government must tackle a ballooning trade deficit, a falling currency, and discontent about rising living costs after huge hikes in fuel and electricity prices.

“Right now our problem is the trade deficit,” Sri Lanka’s Economic Development Minister Basil Rajapakse, who is the president’s younger brother, said last week. “In fact, I would say it is our only problem.”

The government has allowed the rupee to depreciate and slapped credit ceilings on commercial banks to discourage loans that could fuel further imports.

Last year’s trade deficit hit nearly $10bn, or a fifth of the country’s GDP, imposing a massive strain on the country’s dwindling foreign reserves and hurting the island’s credit-worthiness.

Rajapakse’s former foreign minister Mangala Samaraweera accuses the administration of “mismanagement and corruption” for the economic woes which have seen the currency drop 10% against the dollar this year.

“The looming economic crisis is not something that happened suddenly,” says Samaraweera, an MP from the opposition United National Party. “It’s the result of mismanagement and corruption in the past five to six years.”

The Colombo Stock Exchange, which doubled in value in 2010 and was Asia’s best performer, has slid this year, shedding 10% of its value.

Sri Lankan economist and former central bank deputy governor W A Wijewardena believes the economy is in trouble despite an official 7.2% growth forecast for 2012.

He says the balance of payments problem will have a knock-on effect on Sri Lanka’s ability to service its large commercially raised foreign debt, the value of the local currency and domestic prices. The country needs to borrow heavily to finance the trade deficit and repay debt which could push the country into a vicious debt cycle, experts warn. The government has insisted, however, that it does not risk a sovereign default.

The government raised fuel prices by up to 49% and electricity by 40% last month, blaming the move on surging global crude prices.

Several public demonstrations against the rising living costs in the island’s south last month were brutally put down by police with at least one demonstrator killed during anti-government riots.

“The need for making these changes (increasing prices) had been felt by the economy for a long time and he problem had accumulated to an explosive level,” Wijewardena said.

MP Samaraweera said the government’s failure to improve its human rights record and its anti-Western rhetoric had also dampened foreign interest in the economy which should have increased after the end of the separatist war.

Foreign direct investments fell by 14% to $516mn in 2010, the first full year after government forces crushed ethnic Tamil rebels in the north of the country, according to the central bank.

Since the end of fighting, Sri Lanka has been facing allegations of war crimes and is resisting international calls for an independent probe.

The European Union withdrew concessionary tariffs for imports in 2010, accusing Sri Lanka of failing to meet human rights standards, but the country has managed to maintain its exports at the same level.

Samaraweera said Sri Lanka would not be able to attract bigger and better quality foreign investors by ignoring rights issues raised by the international community. Sri Lanka risks isolation, he warned.

“We will become the new Burma (Myanmar) of Asia unless we do something about improving our human rights record,” Samaraweera said.

The Centre for Policy Alternatives think-tank in Colombo says the government is likely to try to mask domestic economic problems with anti-Western rhetoric.

“The government has already organised anti-Western demonstrations to divert attention,” said the think-tank’s director Paikiasothy Saravanamuttu. “But they won’t be able to do it for long because people are feeling the pinch.”

Gulf Times

 

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