Lack Of Confidence Puts Brakes On Investments
The market is heavily liquid, but, paradoxically no borrowers or investors to mop up this excess, virtually forcing the Central Bank of Sri Lanka (CBSL) to drain this excess liquidity though a combination of its overnight open market operations, selling CBSL securities and by US dollar-rupee swaps in order to control inflation caused by this excess.
Such high liquidity levels on a daily basis are in the region of between Rs. 40-50 billion, no small amount by any long chalk. This excess liquidity is caused mainly by exporters encashing their dollars to rupees as the rate of interest charged on dollar and such like foreign exchange accounts like the euro, is very low, making such currencies unattractive for investments.
The perception of inflows into the island also causes pressure on the exchange to appreciate due to actual inflows taking place as a result, because of which CBSL has to intervene in the market, if not the exchange rate may even strengthen to the Rs. 104 per dollar levels, thereby paying rupees in lieu, in order to buy the dollar inflows, further bolstering liquidity.
As such banks are literally floating on rupees with no takers for the asking.
No bank borrowers or investors may translate to the fact that investors are averse to taking risks or not having confidence in the real economy or a mix of both.
Last year bank credit was on negative terrain with banks more intent on debt collection rather than on lending due to a rise in non performing loans. But now the wheel has apparently turned full circle with banks wanting to lend, but finding no borrowers, or more precisely good borrowers.
Part of the problem as to why investors may be averse to risk taking or not having confidence on the economy or on the Government of Sri Lanka (GoSL) could be because of the negative signals given by the latter.
GoSL’s mishandling of the GSP plus issue is a case in point, as a result of which the country would lose the benefit of exporting to the EU on a duty free basis from August 15.
Garments, ceramics, fish, cables and leatherwear are some of the export items that will be affected by the loss of the GSP + trade concession. Behind such industries there are also thousands whose jobs may be at stake as a result of the loss of this facility.
GoSL needs to negate these confidence destructive mechanisms bedevilling investors.
It has to give the right signals to attract investments.
Seventeen months have passed since the end of the 26 year old war and it’s upto GoSL to make the correct moves to woo investors, local or foreign.
Thirty two years after the end of World War 2, Japan which was ravaged by that war, however became Sri Lanka’s single biggest donor. Sixty years after independence and 33 years after opening up the economy, Sri Lanka is still a beggar country, a crying shame. (See also page 35)
