The Sunday Leader

FDI, So Near, But Yet So Far

That which is needed to give a boost to the real economy is foreign direct investments (FDI).
FDI create jobs and FDI may also increase export earnings.
Enhanced exports in turn may help to stabilize the exchange rate (ER), and going a step further, not only stabilising it, but even possibly strengthening it.
A strong ER may work well for an import dependent economy such as Sri Lanka. Essential imports such as petroleum fuels and iron/steel are needed for development.
Sri Lanka is yet to strike oil, though the contract to explore for such in a block off Mannar basin was given by the Government of Sri Lanka (GoSL) to an Indian oil exploratory company five years ago in 2008.
Oil exploration, particularly offshore oil exploration, such as that which is being conducted in the Mannar basin, however is not magic.
Evidence apparently is there that it may contain oil, but the question is if it’s there, whether it’s available in commercial quantities to make such an attempt feasible?
This apparently is what the oil explorer is looking at, in his next round of development.
However the issue is that at this present juncture Sri Lanka is yet to strike oil.
As such the island is dependent on the importation of costly fossil fuels to keep the wheels of the economy, be it for power generation or for transportation, moving.
However, due to the recent rains, the hydro reservoirs are apparently full, thereby mitigating, at least in part, the need and the requirement to import costly fossil fuels for power generation.
But as experience, time and time again have shown, the country and its officials would be only fooling themselves if they “rest on their laurels” because of the recent rains which have had filled the reservoirs to the “brim” and hence providing the nation with hydro power, as opposed to having the need to fall back on the more expensive imported thermal power.
However, rain water, as fast as it filled such reservoirs, may also as quickly dissipate.
Weather patterns have had drastically changed in recent times, probably due to global warming, the heavy rains and floods experienced in November and in December being but one example.
Traditionally November and December are by no means wet months.
And, usually the nation depended on the two monsoons for its rains: The South-West Monsoons which, at least usually start in May-June and the North-East Monsoons in September-October.
The phrase “at least” was used because, due to global warming, the dates and the days of the onset of those monsoons have had changed.
A senior journalist recently told me that in the “good old days” the monsoons used to set on time.
However that has now changed.
In recent times, there have had been instances on more occasions than one, where not only have had those monsoons been delayed, but they have had actually failed.
This reporter is yet to recall instances of the failure of both of those monsoons on a consecutive basis, failure of one is bad enough, but the failure of both, consecutively, would be catastrophic to say the least.
That will be disastrous not only for power generation, but for agriculture, not least water supply as well.
But due to global warming and ipso facto the changing weather patterns, Sri Lanka, in the worse case scenario may even have to be ready for such a possible eventuality.
People have been talking of “water” wars, ie that in the future wars will not be fought for territorial expansion or for political or for security or “military” purposes, or even for oil or for similar such traditionally rich  resource, but for water.
However that may be, in seasons of drought, where, traditionally, in Sri Lanka’s case, it has been either due to the delay or the failure of one of two monsoons (and not of both on consecutive occasions, at least not up to now), that has had affected power generation, agriculture and water supply.
In the context of power generation, that has resulted in the over-dependence of fossil fuel for power generation.
As Sri Lanka thus far has no fossil fuel resources of its own, it has to be dependent on such-diesel, coal and all that, for its power generation.
And those have to be imported, using Sri Lanka’s scarce foreign exchange (forex) resources.
And how may those scarce resources be augmented? Either by enhanced exports or by foreign direct investments (FDI); or by increased remittances or by grant aid or by commercial or concessional loans, or by a mix of one or more of those inflows.
But according to available data, both exports and FDI are on negative terrain.
Exports in the first 11 months of last year fell by 6.6% year on year (YoY) to US$ ($) 8,991.4 million and FDI by 9.4% to $ 614.7 million (see also The Sunday Leader business pages on its issue of 30.12.12.).
However BoI’s new chief Dr. Lakshman Jayaweera is reported to have had imputed that FDI last year was $ 1.2 billion (see page 35).
Nevertheless the problem is that Sri Lanka is an import dependent economy, underlined by the fact that it runs massive trade deficits YoY.
The trade deficit in the first 11 months of last year was $ 8,583 million; a mere 2.1% YoY decline.
This decline comes in the backdrop of GoSL allowing for the “free float” of the rupee early last year in order to protect its sparse forex reserves, imposing various import taxes on vehicles also as a means to preserve its precious forex , partially liberalizing energy, transport and certain regulated food prices and imposing credit growth ceiling on banks as yet another measure to curb import consumption, followed by the increase of policy rates.
That credit ceiling however was removed this year.
Those curbs and restrictions however came at a cost, a cost to growth.
That may be the reason why Central Bank of Sri Lanka (CBSL)/GoSL removed curbs on bank credit growth this year.
On the issue of uplifting the island’s forex inflows, the only bright spot appears to be remittances, where remittances, according to available CBSL data, increased by 16.8% YoY to $ 4,418.7 million in the first nine months of last year, but not big enough to bridge the trade deficit chasm.
Grant aid in the first nine months of the year has increased, but this increase has been from a low base, from Rs. 9.7 billion to Rs. 14.4 billion ($113 million*).
A figure of $ 113 million in the backdrop of a $ 8,583 million trade deficit is absolute peanuts. The excuse touted by GoSL and its agents, and even by representatives from donor agencies, that the reason behind grant aid and concessional aid being reduced to a trickle was because the island has graduated from a low income country to a low middle income country.
Though that so called graduation may be subjective, there may be reasons other than that which meets the eye which have caused the flow of grant aid to the island to be reduced to a trickle.
Those may revolve round Sri Lanka’s foreign relations with those who matter, particularly the West, its (the island’s) biggest consumer of Sri Lanka’s exports, the country’s largest source of tourism generation and its single biggest source of FDI and portfolio investments (Colombo Stock Exchange’s foray into the Indian market next month may be an attempt to find new avenues of portfolio investments other than the traditional West).
President Mahinda Rajapaksa and his government need to get its act right with the West instead of adopting an aggressive or “there is nothing” wrong posture, under the circumstances.
Civilian casualties during the closing stages of the LTTE war and alleged questions pertaining to some terrorist casualties, ie whether their deaths were caused by the fighting or due to some other reasons were the West’s seeming cause for concern vis-à-vis Sri Lanka and its respect for human rights in that war.
And to add fuel to the fire was the recent impeachment of Chief Justice Dr. (Ms.) Shirani Bandaranayake for allegedly not toeing the line.
There is what is known as economic sanctions that the West in turn may impose on Sri Lanka for allegedly not toeing their line!
Sri Lanka got the first taste of it when it lost the GSP+ duty free facility in 2010 for its exports to the EU, its single biggest regional export destination.
This resulted in both the loss of precious export revenue and also the loss of employment to the people of this island.
There is a saying, if you can’t beat them, join them!
It’s now up to Rajapaksa and his Government to decide which path to choose, in the backdrop of the looming human rights sessions in Geneva due to start within the next couple of weeks, where the island will once again be in the limelight.
Sri Lanka’s position, vis-à-vis its external relations with the economic powers that be, particularly the West, may have gone from bad to worse in the backdrop of Bandaranayake’s impeachment.
That is not a salve to attract greater inflows from the traditional pipelines which have been the cause for Sri Lanka’s sustenance thus far.
If those doors are slowly, but surely shut against the island one by one, the loss of the GSP+ facility will be but mere peanuts.
And when inflows dry up, prices skyrocket, then the stage is set for controls, restrictions and import licenses, similar to the environment that existed in the 1970-77 period, prior to the opening up of the economy.
What does such an environment portend for Sri Lanka? A repeat of shortages, queues, blackmarket, “new” forms of corruption and even starvation.
The biggest source of concessional aid is also the West and Japan.
Though the former has stopped such assistance, except, perhaps, in the event of ‘special” cases, Japan however still continues to provide Sri Lanka with concessional aid.
The other option, accumulating commercial debt from foreign sources may be like falling from the frying pan to the fire, unless of course there are signs that the economy will grow and peoples’ wealth would increase, to accommodate such debt servicing.Otherwise, as an opposition politico said, it would be the case of accumulating more debt to pay back maturing debt.
The new BoI chief said that he and his institution will adopt the “What May I Do For You?” “You Are My Boss!” culture in order to harness more FDI, that may be well and good, but is that enough? *On the basis that 1$=Rs. 127 in interbank spot trading against the $.

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