Economic impact of LTTE defeat

The capture of Paranthan and Kilinochchi confirms that remaining strongholds of the LTTE Elephant pass and Mullaithivu would fall within a short period. This assessment also confirmed by many experts following events in the security section.

It is widely believed this may lead to the collapse of the LTTE as a fighting force after 25 years. Unprecedented rains in the North have delayed military advance by nearly 1 1/2 months and with improved weather conditions the above would be a reality.

It is important to discuss wider implications from above positions economically, socially, which may lead to golden era in the country.

G.D.P. growth

Country’s G.D.P. grew 6.5 in the 3 quarters in 2008 and despite very adverse factors globally in the last quarter, the growth for 2008 is expected to be six per cent which only few countries in the world can boast of.

It should be noted the Government even curtailed production of tea, rubber to protect prices in the 4th quarter. According to Government estimates G.D.P. growth is expected at six per cent for this year and IMF which is generally very conservative expects 5.8 per cent growth at a time when most of the developed and developing countries would show negative growth in 2009.

However with the collapse of the LTTE and relative peace in the country may result in the GDP growth at 7-8 per cent in 2009 and the country’s GDP for next two years may even record double digits growth.

Important sectors of growth

A. Agriculture

It is expected major agricultural crops would record bumper harvest and the country would have surplus for export such as rice, potatoes, onions, big onions and chilies.

This is due to the fact large acreage presently not in use in the North would be cultivated. Further with the rehabilitation of many tanks in North more land would come under cultivation. Case in point is country recorded an increase over 50% in rice production in the last Yala as a result of liberation of East.

Similarly production of vegetables would jump which may lead to cultivation of some categories for export. In effect it would be an agriculture revolution in the country.

B. Livestock and Fisheries

We expect a huge improvement since fishing is presently restricted. Similarly vast tracts of land would be available for livestock farming resulting in specially reduced import of powdered milk.

Prawn farming is another area that can be exploited. Construction of several fishing harbours, storage facilities etc., would be an added boost to marine production.

C. Industries

It is estimated that Jaffna Peninsula has high quality lime which is the major raw material for cement manufacture, to the tine of 350 M tons which would ensure that our country would be self sufficient in cement for at least 50 years.

Apart from reviving 2 abandoned cement factories in Kankasanthurai arrangements may be made to produce additional clinkers to meet the demand of cement factories in Galle and Trincomalee. At present huge amount is being spent for importation of clinkers.

There is a huge potential to increase salt production and related chemical industry.

Further our North Eastern coastal belt is rich in valuable minerals such as illmanite etc, that needs to be exploited in a systematic way.

Similarly huge potential is available for agro based industries.

It is possible long abandoned Paranthan Chemical Factory may be revived.

D. Infrastructure development

It is expected unprecedented growth could be expected during first five years in North due to 25 years of neglect of roads, bridges, schools, hospitals, houses, tanks, water supply etc., It is possible that major funding would come foreign aid agencies and friendly countries.

Inflation

Inflation which climbed to 28.10 in June has drastically reduced to 16.3 in November and further reduced to 14.4% in December mainly due to the burst of commodity bubble. It is expected 2009 would have a single digits inflation according to Government estimate.

This would lead to a reduction in Treasury Bill rates which would favourably impact stock market. It is very significant that inflation has dropped 50% during the period of only 7 months.

Improvement of balance of payments

Our import bill is expected to come down drastically in 2009 due to crash of commodity bubble. For instance price of oil which account for substantial part has dropped 78% and Merrill Lynch estimates average price to remain at US$ 50 in 2009.

Despite reduction in income from tea, rubber and garments due to the large disparity in imports and exports and foreign remittance at a steady growth meeting 45% of gap, it is expected our balance of payment would improve in 2009.

Government stimulus package

Apart from reduction in prices of diesel and furnace oil which would have a direct impact on economy several measures have been taken to encourage textile and leather industry with a production subsidy of 15% and removal of 15% surcharge on electricity.

Tourist industry too have been granted several concessions. Similarly in order to support price levels and liquidity many incentives have been approved for tea, rubber and cinnamon industries. It is evident these measures would contribute to G.D.P. growth in 2009.

Risk in investment in informal and unregulated sectors

The country has witnessed how thousands of gullible investors have lost their entire investments in above sectors by expecting unrealistic returns. It would appear they have foolishly placed confidence in individuals who were not even suitable to function as a bank clerk.

What is more tragic is sophisticated investors such as accountants, lawyers etc., have invested in institutions not regulated by Central Bank and not authorised to mobilise deposits. There is no doubt they had no access to financial statements to ascertain financial strength etc., of the respective companies.

In comparison investment in stock market have several distinct advantages. An investor if properly guided, would be buying shares of companies with values and the quantum of the shares purchased would represent ownership of the respective companies.

Even in very rare case of liquidation the investor may claim his share. Those who invested in above category would not have this luxury.

Further investors in quoted companies would have access to all the financial data and research reports published by stock brokering companies.

It is observed our stock market lost 40.8% in 2008. Although specially in the medium term even if value drops to say 50% to 60% value would bounce back in the long term to give even a good return provided funds were fully owned by them.

The author feels that most of the stock brokering companies had not exploited these advantages with a proper focus specially in educating the investors.

Similarly unlike in interest capital gains are totally tax free. It should be stressed it is not due to lack of funds but huge amounts have been directed towards undesirable areas and stock brokering companies should devise strategies to attract more funds to the stock market.

One strategy adopted by unregulated institutions is to employ competent agents to visit homes to canvas business with attractive commissions paid for their efforts and this could be followed by the stock brokering companies too.

Expectation of bullish sentiment in the Colombo stock market

It is an undisputed fact despite above average growths and bull runs witnessed specially 93/94 unsettled security concern had prevented exploitation of real potential of the country in achieving a higher growth. Substantial improvements to the peace consequent to the collapse of the LTTE would have immediate very favourable impact on the stock market and real estate values.

The investors should pay special attention to hotel and land sector shares which would obviously give highest returns.

Stock market which dropped 40.8% in 2008 with ASI declining 1037 may record at least 50% growth during 2009. It is likely many shares would record increase over 100% and investors should not miss the opportunity to gain far above the rates applicable to other instruments.

Accordingly our market and country as a whole be in for a golden age. The writer is senior member of the executive management of a state bank with 35 years experience and presently a senior consultant in banking, finance, investment, restructuring investment and industrial projects. A graduate, an associate member of Institution of Bankers, London.