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Economic outlook

The GDP growth for the 3rd quarter of this year is expected to be around 4.0%-4.5%, from a negative growth for the same period last year. The GDP growth for the 1st two quarters of this year was 0.3% (revised from 0.1% as earlier figures released) and 2.5% respectively bringing the GDP growth for the 1st half of the year to 1.4%. Thus it is evident from these figures that the country is on its way for a healthy recovery.

However, the fear of delay in global recovery is still on the cards with US and the EU revising their growth rates lower for year 2002 which would somewhat dampen the domestic economy. Nevertheless it is important to note that the Sri Lankan economy has been relatively resilient to global economy ups and downs.

Sri Lanka recorded a sustained 5% GDP growth (in the past 2 decades) even in the midst of a world's most intensified guerrilla wars eating into most of its resources.

Sri Lanka's inherited strengths which outshines it from the rest of the Asian countries such as natural resources, tourist destinations, unmatched human capital and preferred geographical positioning is a gateway to India and the rest of Asia.

Sri Lanka has been named as the best country in South Asia in terms of inflow and the potential to attract foreign direct investments by UNCTAD. Last year as per BOI data, FDI inflows to Sri Lanka were around US $ 80 million while forecasts for 2002 is US $ 300 million. Meanwhile, a host of inflows from donor agencies are on the cards given the improved image of the country emerging after a 19-year old ethnic-war.

* Government has given the mandate to raise the US $ 350 million long-term fund, part of the 2002-borrowing program).

* Expected long-term loan from the IMF under the PRGF (Poverty reduction and growth facility) program amounting to roughly US $ 500 million out of which a first tranche of US $ 100.0 million likely to be released during the beginning of next year.

Interest rates and the Sri Lanka rupee

Thus expected privatisation proceeds, loans from donor countries, and revival of exports apart from savings on military hardware should keep interest rates as measured by the 12-month Treasury-Bill rates in the range of 10.5% - 12% in 2002. So far the Government has raised Rs. 2.4 billion through privatisation of the Government held share of the two plantations (Malwatte Valley and Talawakelle), Sevanagala and Pelwatte Sugar Plantations, Lanka Marine Services and National Insurance Corporation.

The estimated inflow from the Sri Lanka Insurance Corporation amounts to approximately US $ 100.0 million while the privatisation of the 15% stake of the Sri Lanka Telecom and privatisation of oil storage in Trincomalee and Muturajawela coupled with privatisation of 100 filling stations to Indian Oil is expected to contribute to Rs. 21.0 billion estimated. However, in the event of delay in privatisation of the Sri Lanka Insurance Corporation, the estimated proceeds would fall short. For the week-ended October 25 yield from 3-months and 6-months Treasury bills remained static at 10.78% and 11.12% respectively while the yield on 12-month bills edged up marginally by 5 basis points to 11.28%.

Meanwhile, we witnessed an amazingly stable rupee this year with the Year-to-date depreciation being only 3%. We expect this trend to continue in the short-term on the back of strong inflows on the BOP and we maintain our year-end target of Rs. 96.0.

Point of View

In a rare gesture of cooperation President Chandrika Bandaranaike Kumaratunga last Thursday in her address to the nation very clearly stated the importance of cohabitation for the greater benefit of the country.

The Government also indicated the possibility of agreeing to the cohabitation process with Prof. G. L. Pieris stating at the Cabinet briefing that "Elections are not a mandatory requirement".

The possibility of snap elections dying away and both parties forging way for a better working relationship, we finally witness an unclouded outlook in the political arena. With the second round of peace-talks expected to go ahead on October 31, as scheduled with the inclusion of a military commander for the first time since the peace process began, is a healthy sign that there are no frictions in the group (between the political wing and the military wing) regarding the peace process. However, investors would be eagerly watching the news flow from Thailand, and peace talks would be the driving factor of the market next week.

The current upward movement in the wake of positive news from the political arena and the peace process could breach the 800 level of ASPI. A breakthrough 820-825 in ASPI would be very significant and would pave-way for a substantial buying spree that could take the market back towards recent highs. However, if the political stability of the current government and the co-habitation does not proceed as it seems to appear, the market can once again shed off substantial gains made recently.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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