Archives

The ceasefire agreement between Sri Lanka's government and the LTTE last year ended two decades of bitter civil war. The peace accord has held so far, and certain areas of the economy are starting to feel the benefits, writes Shanthikumar Sadanandan - but there is a long way to go.

'English cricket fans planning to visit Sri Lanka in November this year for the test and one-day series between the two countries are going to be hard pressed to find accommodation.' So pronounced the newsreader of a popular radio station recently in Colombo, quoting a BBC report on England's forthcoming winter tour.

The future of tourism certainly is looking bright in Sri Lanka, with arrivals this year expected to reach record levels. The boom has also been helped by the relaxation of visa requirements for visitors from neighbouring countries. As a result, the number of visitors from India alone doubled during 2002.

Since January this year the Colombo stock market has seen bullish activity. The All Share Price Index has risen by over 35 per cent during the period and investors are riding the surge in the local market. The Central Bank of Sri Lanka announced that during the first half of the year the country's real GDP grew by 5.3 per cent (annualised).

Tourism boom

The tourism boom, stock market resurgence and the economic growth have followed an 18-month period during which the country experienced a lull in hostilities between government forces and the Liberation Tigers of Tamil Eelam (LTTE). The rebel group has been fighting for independence for over 20 years in the north-east of the island and the conflict has cost Sri Lanka dearly.

Tens of thousands of lives have been lost and families have been left displaced and destitute. The country saw a major exodus of intellectuals, incurred a huge defence bill and missed many development opportunities.

The ruling pro-business United National Front (UNF) government was elected in December 2001 and its priority since then has been to revive an economy hugely hampered by the conflict. Prime Minister, Ranil Wickremesinghe, said that there could be no sustainable economic development and improvement in the quality of life for Sri Lankans if the war continued.

He therefore staked his political future on an all-out bid for peace as a necessary foundation for social stability and growth. In February 2002 the LTTE formally agreed to cease hostilities and start talking - a process that has enjoyed unprecedented international support. And, although there have been problems restoring normality and thrashing out a negotiated settlement, the peace accord has largely held.

So what, apart from sociopolitical stability, are the current economic imperatives from a business perspective? The table below provides a range of key indicators. It shows, for example, that the per capita income of Sri Lankans has barely changed in the past five years.

Near double-digit growth will be required soon to remedy this. Given the limited local market, encouragement for value-added exports, service-oriented businesses and foreign investment are the keys for development. Fewer than 3 per cent of people of university age in Sri Lanka enter higher education, compared with 8 per cent in South Asia as a whole, even though 25 per cent meet the entrance requirements, according to research by the Asian Development Bank.

The bank is now helping with a $45 million distance-learning modernisation project covering 1.4 million more students, which is welcome news for the private sector. As Sri Lanka moves away from low-cost manufacturing, the country's businesses will increasingly need well-educated employees.

The economy is based on agriculture/manufacturing and services more or less equally, although the influence of the latter has increased lately. Exports of tea and textiles contribute significantly to the former. Although Sri Lanka accounts for a fifth of the world's tea exports, it's widely known that so-called Ceylon tea is marketed overseas by unscrupulous traders even when the product isn't grown in Sri Lanka. Local firms such as Dilmah have sought to establish themselves as high-quality Ceylon tea producers and thereby command higher margins.

Their efforts in establishing the brand internationally included the sponsorship of the national cricket team. Other local firms are being encouraged to follow Dilmah's lead. Their success will depend on their tenacity and focus in an intensely competitive market.

Textile industry

The textile industry - now at a crossroads with the end of quotas in sight - is also a major contributor in terms of employment and foreign exchange. China, which recently became a member of the World Trade Organisation, is seen as a major threat to local exporters with its low production costs. Sri Lanka's preferential access to the otherwise heavily protected clothing and textile markets of the US and EU is being diluted as free-trade arrangements and concessions allow more developing countries quota - and tariff-free privileges.

Industry experts believe that since only 32 per cent of textile exports are subject to quotas, and the larger producers (accounting for 85 per cent of total exports) have been adjusting their operations to this free-market environment, the industry need not fear any great changes. But smaller firms are likely to be forced out of business - and they account for 3 per cent of employment in the industry.

The private sector has been calling for supportive employment regulations for years and the government has eventually delivered them, despite the associated political risks. Until recently, it was almost impossible for companies to make job cuts to facilitate organisational restructuring. Changes to key labour laws, including provisions for a new redundancy compensation formula, were enacted this year.

Fiscal challenges

Some of the greatest fiscal challenges facing the country have often resulted from past economic mismanagement, which has fuelled huge budget deficits. Governments have systematically borrowed from public resources at high cost to fund these deficits, and this has served to crowd out private-sector companies.

High borrowing costs have cramped their growth strategies - so much so that public debt now exceeds even GDP, raising serious sustainability concerns. The UNF administration is now trying to minimise non-concessionary borrowing. The peace accord certainly helps on this front, because far too much has been spent on defence over the past two decades. In a further bid to support private-sector growth, the Central Bank has systematically reduced interest rates.

Source: Central Bank of Sri Lanka

Although several state enterprises - including SriLankan Airlines, Sri Lanka Telecom and the Sri Lanka Insurance Corporation - have been privatised in the effort to trim the budget deficit, many more are billed for restructuring. These include the beleaguered People's Bank (which has a huge portfolio of bad debts), the Ceylon Petroleum Corporation and the Ceylon Electricity Board.

In order to improve tax revenues, the government introduced controversial legislation earlier this year.

It offered "immunity from liability, investigation and prosecution" to all income-earners who registered with the Department of Inland Revenue by 31 August. In terms of this reprieve, all registered tax-payers will have their tax files accepted as filed, with no questions asked, up to March 2000. Those who registered and made a declaration under the law - whether or not they were previously registered taxpayers - were granted immunity up to March 2002. Although official figures on the take-up rate have yet to be published, the public response to this concession has been tremendous.

The government's view is that any tax revenues lost in respect of previous years will be more than compensated for by the wider coverage in future. Inland Revenue officials will now be able to focus on current and future collection issues, although businesses fear that they may now receive more attention than they would really like.

Sri Lanka is bravely facing its challenges on many fronts, and it's clear that the country is on the threshold of an economic boom, but continued sociopolitical stability is crucial for sound progress.

(S. R. Sadanandan is a Director of the Maritime Holdings Group and a Fellow member of the CIMA).

This article first appeared in Financial Management, the magazine for CIMA)

www.crescat.com

News | Business | Features | Editorial | Security
Politics | World | Letters | Sports | Obituaries

Produced by Lake House
Copyright © 2003 The Associated Newspapers of Ceylon Ltd.
Comments and suggestions to :Web Manager