Comment:

A boost for the economy

The conflict in the North and the East, which drained our economic resources to a great extent, is finally over. For the first time in 30 years funds, which could have been otherwise diverted to the war effort are being channelled for development. A good example was the recent cancellation of a US$ 200 million weapons order. It is our understanding that these funds would now be used for development purposes.

Development, especially of the former war-torn areas, has become a priority, along with resettlement of civilians and reconstruction of damaged infrastructure. This is a Herculean task that our Treasury alone cannot handle. Billions of dollars will be needed for this effort.

It is in this context that we should welcome the announcement by the International Monetary Fund (IMF) that it has reached a US$ 2.5 billion loan accord with Sri Lanka, which will be presented to the IMF Board for approval tomorrow. According to the IMF, a disbursement of $ 313 million will immediately be available once the loan is approved.

This has confounded critics here and abroad who ‘predicted’ that Sri Lanka would not get the IMF funds and even urged the IMF not to grant it. They were harping on human rights and other factors to see an end to the loan process. However, the IMF has not been swayed by these factors and considered the loan purely on Sri Lanka’s development and economic imperatives.

The IMF has agreed with the Government’s economic vision in granting this structural adjustment facility. In fact, the final figure is actually more than what even the Government quoted earlier. This is indeed a sign of confidence in Sri Lanka’s economic and repayment capacity.

In IMF parlance, the end of Sri Lanka’s war posed a unique opportunity to undertake economic reforms and rebuild areas damaged by the conflict. “The Government has formulated an ambitious program aimed at restoring fiscal and external viability and addressing the significant reconstruction needs of the conflict-affected areas,” the IMF said.

The IMF is hopeful adding that the program will provide a framework for donors to help fund reconstruction. The Government’s aims of rebuilding reserves, reducing the fiscal deficit to a sustainable level, and strengthening the financial sector will all be served by the IMF facility. It will also encourage more donors in the West and the East to assist Sri Lanka.

Another potential benefit is that the IMF loan to Sri Lanka is expected to improve the country’s credit rating and attractiveness to investors. It will also make borrowing costs cheaper. The benchmark stock index, the Colombo All-Share Index, surged after the announcement, is another sign that the loan would have a significant impact on the local economy.

The Central Bank has already raised its 2009 growth forecast following the victory over the LTTE. The Budget Deficit and inflation should also come down significantly.

This is an ideal time to promote Sri Lanka as an investment destination. Individual and corporate investors’ confidence will no doubt be boosted by the IMF move.

According to agency news reports, Sri Lanka is meeting global investors in New York, Boston and London this week to apprise them about the country’s investment potential. Sri Lankan officials met investors in Hong Kong and Singapore last week, underscoring Asia’s prime position in the Sri Lankan investment scene.

Another exciting possibility is a global bond issue, which could be a great success in the backdrop of the IMF loan. Sri Lanka last tapped the global bond market in 2007, issuing $500 million of five-year bonds at a yield of 8.25 percent.

Sri Lanka’s economy, free of the one major obstacle, is poised for take-off in an unprecedented manner. The IMF funds could not have come at a better time.

Post-conflict, the country faces the enormous challenge of reconciling development and welfare objectives in all areas including the North and the East. The International Community must help this effort in every possible way, not to mention the Sri Lankan Diaspora all over the world. A concerted effort can propel Sri Lanka to the front ranks of Asian economic powerhouses.