Sri Lanka’s Economy Is Doing Well (Theoretically)

The IMF is positive on the Sri Lankan economy. But ask anyone on the street and they will simply give you a thumbs down and say many disparaging things while complaining about the ever rising cost of living. It doesn’t matter that food prices have been dropping for well near a year now, Sri Lankans are always complaining about the cost of living.
But they have good reason to do so now. The fuel prices are up and inflation expectations are on the rise. Inflation has already hit 2.2% in February, up from negative figures a month ago. Rumor has it that the government is not allowing the prices to rise, exerting pressure on suppliers, but people are feeling the press nevertheless. Private transport costs are up and until a little while ago, protests were rampant along with a few deaths.
Getting back to what the IMF thinks. Koshi Mathai the IMF boss in Sri Lanka, last week waxed lyrical about Sri Lanka’s economic prospects at an HSBC power breakfast held at the Hilton Hotel. Mathai was very optimistic about the governments efforts to curtail an impending Balance of Payments crisis and saw nothing but good things for the future of the country.
Mathai also commented on how great it was the we have had several months of low inflation, high GDP growth (8 percent) and an increasing tendency to keep reducing our budget deficit. He also said that our GDP growth was outstripping our debt growth. Meaning that the debt burden progressively becomes less. The problem came, asserts Mathai, when the country’s imports got a little too much. Giving rise to a progressively more alarming trade deficit. Mathai commended the government’s three pronged approaches of tightening monetary policy (i.e. increasing interest rates), floating the rupee and allowing fuel prices to increase.
Along with the measures to combat a trade deficit, the government also needs to now boost the capital account. The capital account is boosted by bringing in foreign investors, and this is where IMF rhetoric in support of the country will help. Investor sentiment is largely a ‘feel-the-pulse’ sort of game. And IMF approval will go a long way in presenting Sri Lanka as a good place to invest in.
He highlighted several areas the country needed to improve on to grow. Things like physical infrastructure such as roads, human capital development (English skills, IT, degrees, developing more middle managers and vocational training). He also mentioned that the financial sector needed to improve in terms of providing SMEs with more financing and bringing about a more corporate bond market. He finished off by saying that Sri Lanka needed to integrate regionally to prosper.
But what Mathai didn’t say is probably just as important as what he did. He didn’t for instance, talk about the recent mixed messages the Central Bank and Treasury have been giving and how that damages the country’s credibility, he didn’t touch on the political uncertainty involved in the current human rights drama being played out in the UN, he didn’t comment about corruption, nepotism and state inefficiency that can potentially swallow any paltry development gains if not controlled, he didn’t talk about the failure of institutions like the justice system, he didn’t talk about white elephants and Chinese loans, about a looming mountain of ill thought out, high interest debt payments. In fact, he presented only one side of the story.
These gaps in Mathai’s assessment of the economy reveal the looming downside risks it faces. And tell us why the man on the street still regards ‘progress’ with a cocked eyebrow. Its easy to get carried away with numerical indicators like GDP, Balance of Payments, Inflation and Exchange rates. Theoretical valuations of the economy are so far removed from reality that sometimes its all a big joke.
But we needn’t get all queasy about the future. Things aren’t really on a precipice. If Sri Lanka can slowly reform its governance and turn the state service into a meritocracy while maintaining the intelligence it has shown so far in the economic sphere then we might just be able to get on the right track in a few years time. But reform needs commitment and not just from the top, it also needs grassroots support and drive. And does Sri Lanka have that yet, or are people still getting the politicians that they deserve?

2 Comments for “Sri Lanka’s Economy Is Doing Well (Theoretically)”

  1. Don

    Lankan economy is certainly doing well for few people. Recently Ex chief justice said that Lanka has lost Rs 100 billion due to bribary and corruption. Lanka is doing so well that govt. was willing to spend Rs 500 billion for commonwealth games no body wanted. Ex president CBK said politics is a lucrative business. How true is it !!!!!!

  2. Dilshan

    Behold!! the new economic indicator……. any tom dick or harry picked off from the streets.

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