SRI LANKA - The New Beginning

By Angelo Ranasinghe and Roshan Madawela

The benchmark All Share Price Index (ASPI) surged seven percent on the 18th May 2009, the day when it was officially declared that the LTTE was a spent force. It was an unprecedented indication of investor confidence in a much brighter future which continued to gather momentum, propelling the market to a 21 percent gain in May, month-on-month (MoM). Since then, the CSE has witnessed tremendous dynamism and proceeded to gain a further 40 percent by October. The market has thus recovered ground lost in 2008, recording a massive 106 percent gain as at 05th October 2009.

Given the change in fortunes for the island this year, we expect the country to adopt a three tier approach to re-building that will include three essential aspects of development;

• Social
• Economic
• Infrastructure

These three elements will interact to form a comprehensive development package for the Northern and Eastern provinces as well as affectively uplift the entire nation, propelling Sri Lanka to developed nation status.


Social development

As an initial step, we can anticipate a rapid social development program in the spheres of housing and sanitation, healthcare, supply of food and education. The prime focus will be to resettle the Internally Displaced People (IDPs) in an environment that will enable them to enjoy basic social needs. A colossal amount of government expenditure and donor funds are expected to be channeled towards these key human development aspects in the Northern and Eastern provinces.

Currently, some 22 percent (2002 est.) of the population live below the poverty line in Sri Lanka whist around 20 percent (2007, DHS survey) of children under five suffer from malnutrition. Due to the conflict, data from some of the affected regions has not been forthcoming. Moreover, with some 300,000 people currently residing in the IDP camps in the North, large areas of the North currently remain un-occupied by any civilian population. Whilst shelter in the camps is only a temporary measure, officials have noted that malnutrition amongst the children and women living in the IDP camps has dropped by 50 per cent between June and September.

Within the next year we can expect to see all of these people re-settled in their former homes according to Ministry officials. In this eventuality, social indicator data will once again start to flow from all areas of the island and we can expect to witness significant reductions in poverty, malnutrition and all types of social and economic disadvantages.

Economic opportunities

For many years during the war, restrictions on fishing activity, physical impediments to farming and the severing of market connectivity with particular reference to the closure of the A9 highway resulted in stifling almost all economic activity in the region. The end of the war is therefore set to extend greater opportunities to the farmers and fishing communities who are now able to go about their business sans any hindrances. In turn, this is expected to boost revenues in the agriculture and fisheries sectors that will eventually enable Sri Lanka to be self sufficient in key commodities.

In recent times, rice, sugarcane, grains, pulses, oilseed, spices, tea, rubber, coconuts, milk, eggs, hides, beef and fish have formed the main stay of agricultural production. However, with new areas now connecting to the market, we can expect a boost in the production of many commodities like rice, potatoes, onions and important dry rations that can now easily be produced domestically. There will also be greater potential to expand the dairy farms across the country which invariably will contribute towards import substitution of dairy products.


The dream of securing a strong rural economy will soon be a reality which eventually will help the treasury to ease enormous amounts of foreign exchange flowing out of the country for un-essential food imports. Likewise, the development of the tourism industry in the North and East is set to generate an increase in foreign exchange earnings. In this scenario, we can expect a reduction in the trade deficit which currently stands at -$4.4Bn (2008 est.).

A strong rural economy would also ensure the development of business interest in the Service and Industrial sectors. Consequently, there will be greater opportunities for banks, finance and insurance companies, telecommunication providers and other service vendors to expand their operations and services in the Northern and Eastern provinces. Companies operating in the food and beverage sectors are also expected to witness a significant rise in consumer demand for their products as the resettlement program progresses and normality returns to the rural economies of the conflict affected areas.


Kicking-off infrastructure

Also in the pipeline are infrastructure development endeavors in the Northern and Eastern provinces. The liberation of the East from the clutches of terror in 2008 saw many infrastructure development projects kick-off. Roads, bridges, housing, electricity, telecommunication, water and irrigation are just some of the major projects initiated in the Eastern province since 2008.

We therefore expect significant capital inflows to meet the infrastructure development needs of the Northern and Eastern Provinces in the medium to long term. These funds will serve to inject the latest technology driven structures following many years of destruction and neglect.

An example of how the conflict stifled the development and utilization of vital economic resources in the North and East can be given with reference to the natural harbor in Trincomalee. Now, with the dawn of peace, the government of Sri Lanka is presented with an opportunity to develop the facility and transform it into an international standard harbor.

Lanka IOC, a subsidiary of petroleum giant IOC, currently has a leasehold right to 90 tank farms and a lubricant blending plant situated in close proximity to Tricomalee harbor. In the new climate of peace, LIOC has a great potential to expand its bunkering facilities by utilizing the un-used capacities of the tank farm on the back of any surge in port operations. A well developed port in the East will encourage large scale industries who are seeking to cater to a rise in demand in the Northern and Eastern provinces, to set up their operations in close proximity to the Eastern harbor.


Political Stability

Many observers have noted that political stability is the key to sustainable development and the absence thereof is one of the key reasons as to why Sri Lanka has failed to achieve its true potential since gaining Independence. However, the current scenario offers an excellent opportunity to build a stable political environment.

Military victory with the security forces facilitating a lasting and just peace will ensure greater political stability in Sri Lanka due to widespread popular support. The ruling party, led by His Excellency, President Mahinda Rajapakse, will be further strengthened and is expected to secure a greater majority at any future general and / or Presidential election.

The people of Sri Lanka clearly endorsed the victory over terror by handing overwhelming victories to the ruling party in a series of Local and Provincial elections. There is also a strong possibility that the main opposition party will back the government on key issues related to Human Rights and the rebuilding process, which would further enhance political stability. Given the fact that a significant number of opposition MPs are already holding key ministerial positions, more opposition members may join hands with the government in its endeavor to re-build the entire nation.


Tourism – A New Life

The tourism industry too envisages a very positive outlook in the post war scenario and several initiatives have already been taken by the key stakeholders of the industry to harness the enormous potential the country could offer to attract many tourists into the island, which was once called the “Pearl of Indian Ocean”. The President of Sri Lanka has set up an ambitious target to attract 2.5 million tourists by 2015. Effective Public Private Partnerships (PPP) will be the way forward and in this endeavor the setting up of the following entities will no doubt be a catalyst towards a sustainable development of the tourism industry in Sri Lanka;

• The Sri Lanka Tourism Development Authority
• The Sri Lanka Tourism Promotions Bureau
• Sri Lanka Institute of Tourism & Hotel Management
• Sri Lanka Convention Bureau.

Several new locations, which are bound to attract wider segments of tourists have been identified for capacity expansion. Some of these locations include Kalpitiya, located in the North Western coastal belt, Arugambay, Pasikuda, Nilaveli and Kuchchaveli all located along the East coast.

The Sri Lanka Tourist Board, under the PPP mechanism, has initiated Kalpitiya Integrated Tourism Development Project, which aims to develop 14 islands in and around Kalpitiya covering an area of 4000 acres. This is believed to be the largest ever tourist development project that the island has ever initiated. The project aims to develop a total of 17 hotels with three five star deluxe hotels and three four star hotels adding 5000 new rooms and 10,000 beds. The reputed international hotel chain, Six Senses has already made plans to invest a colossal amount of Rs.40bn under the Kalpitiya development project to set up a luxury resort comprising of premium leisure, spa club and floating restaurants. Similar development initiatives have been made by the Sri Lanka Tourism Development Authority (SLTDA) in the East Coast as part of the Eastern Development projects initiated by the Government of Sri Lanka. In this endeavor setting up of several luxury resorts in the areas of Pasikuda and Kuchchaveli have already being planned as the first phase of development.


Economic Boom

The series of scenarios outlines above point to a significant heightening of economic activity in all parts of the country which in our opinion would trigger a paradigm shift in the GDP growth rate. Consequently, we expect a double digit figure by 2011.

The downtrend in interest rates is expected to continue through 2010. This would no doubt enhance credit growth in the banking sector invariably leading to higher investments across the services, industry and agriculture sectors. At present the policy rates as depicted by Repo and Reverse Repo had been brought down to eight percent and 10.5 percent respectively from 10.5 percent and 12 percent a year ago. The one year TB rate, which stood at a staggering 19 percent a year ago, currently hovers around 11 percent whilst the average prime lending rate hovers around 15.8 percent after reaching a high of 19 percent a year ago.

The currently low level of inflation would further encourage the monetary board to thereby stick to its policy of lowering interest rates. Inflation is thus expected to remain a single digit in 2009 and gradually increase through 2010 on the back of higher consumption patterns. The Colombo Consumer Price Index (CCPI), the key measure of the country’s inflation, recorded a mere 0.7 percent increase for the month of September 2009 whilst the YTD change amounted to 6.6 percent as compared to a staggering 23 percent recorded for the corresponding period a year ago.

The dramatic shift in foreign investor interest witnessed since the end of the war along with the approval of the IMF facility of US$2.5 billion will no doubt enhance the foreign reserve position of the country. As of 13th October 2009, gross official foreign reserves stood at $4.5 billion, up from $3.89 billion at the end of August. The favorable trend will invariably help maintain the exchange rate in favor of foreign investments. A US Based Hedge Fund recently invested a colossal sum of $800 million in long term government bonds in August 2009. Similar investments are expected to flow in to the country on the back of the development drive carried out by the Government of Sri Lanka.

The current exchange rate as depicted by SLR/USD is 115.61. Whilst the SLR depreciated against the USD to reach 120.50 in April 2009, such fears will no longer exist given the more favorable economic outlook and the greater possibility of attracting foreign capital into the country. We maintain that the SLR will remain stable against the USD in 2010. If at all, the SLR will feel upward pressure to appreciate unless the Central Bank intervenes, as it has done in the past, in order to maintain a targeted exchange rate.

In conclusion, we expect significant improvements in all economic indicators to take place in 2010 despite a slow recovery form the global recession. Expedited measures designed to better utilize all of the island’s natural resources, a boom in the tourism industry, an acceleration in the inflow of foreign direct investment for infrastructure development and a fall in interest rates will be key features of the economy to watch-out for.