- Recovers from BOP crisis but economy slowing due to imports contracting
- Though LTTE was defeated peace building yet to take off
- Private sector corruption gets exposed
- Stock market buoyant but corporate health in question
- Inflation reported low but brand penetration declines
Being responsible for different facets of the Sri Lankan economic agenda in the last couple of years and having travelled to Jaffna a number of times on military flights together with the soldiers going for war, gave me a very good sense of the ground reality. There are two themes that emerge in my mind that captures Sri Lanka in 2009 — the first being the words of the former World Bank economist Ejaz Gharni who said God is a Sri Lankan.
When I initially heard this I laughed, but when I analysed the economic reality that unfolded in 2009 and the response that Sri Lanka has thrown back to the world, I now agree with the sentiments that God is a Sri Lankan! The second theme that captures my attention is from the Indian Foreign Minister Pranab Mukherjee. He commented that in a country, economics, the corporate sector and politics are interlinked. He went on to say that If people do not understand this reality and want these three areas to work in isolation then, a country’s growth trajectory will be stunted. I fully endorse this when I look back at 2009. Let me now highlight the key events that shook Sri Lanka last year.
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Private sector corruption
After having worked for almost 15 years in a multinational culture where honesty and integrity are required traits, when I decided to work for the government during the time I was pursuing a doctoral study programme the one question that I got bombarded with from my private sector friends was how do I work in a system that is so corrupt. My answer was easy – it is the private sector that corrupts the public sector.
I did not have to explain more as the Golden Key saga unfolded later on where corruption was in excess of Rs. 30 billion. This was the first shock for Sri Lanka in 2009. It was the first time in the history of the country that private sector corruption surfaced with over 10,000 witnesses that ultimately led to the biggest philanthropist in the country being remanded for almost nine months. I strongly believe that this is only the tip of the iceberg.
The sad fact is that the public sector is tainted with a peanut butter approach of being corrupt when the reality is that ninety five percent of the public sector consists of honorable and committed people who have come from the university system after topping their batch. The best case in point is the ‘Upahara’ scheme of Mobitel targeting the public sector which has zero bad debts. Hence the challenge in 2010 is strong reforms in the public sector and ensuring that corruption is curbed.
However, the reverse is currently happening in Sri Lanka with the public sector getting bloated with more recruitment and also consuming over 50% of the tax revenue for salaries and pensions which needs to be corrected in 2010. Public Sector reforms have to come in and curbing of corruption at all levels must take place if we are to drive Sri Lanka to a strong growth. However, a point to note is that this begins with me. Each of us needs to ensure corruption is not resorted to, to get things done in Sri Lanka.
Stock Market Reflection
Post May 18, Sri Lanka’s stock exchange was the golden light that kept Sri Lanka shining in the world stage. In fact when it was ranked as the fourth best performing stock exchange of the world, it did shake little Sri Lanka with this news as we as a nation were yearning for some good news post war. But the key question that needs to be asked is if this is an indicator of strong corporate health based on fundamentals or is it more to do with market sentiment?
Another point that needs our focus in 2010 is that, market capitalisation in Sri Lanka is lower than 30 percent hence the stock market indicator in Sri Lanka is not a real indicator of an upward movement of the economy. Hence in 2010 this needs to be corrected with the big boys in the private sector like Dilmah, Brandix and MAS attracted and listed in the Colombo Stock Exchange. It is only then that we can say the Sri Lanka stock exchange is a reflection of the Sri Lankan economy. If not, we are living in a make believe world that will not get us very far.
The reality of Inflation
Sri Lanka is currently showcasing to the world that inflation is at a low ebb of 3.4%. It may be the reality but when we analyse the panel data either by the trusted consumer panel from LMRB or the Retail Panel data of AC Nielsen we see that in many key consumer categories brand penetration has declined considerably. In fact the only reason that some categories are kept alive is due to the small packs that have been launched.
This fact is shaking Sri Lanka’s private sector as a typical brand health index throws off the brand momentum index declining not only of the brand but in the total industry. The best case in point is Sri Lanka’s banking industry in 2009.
I feel we need to get a grip of this issue in 2010 mainly because the January issue of LMD reports that a top management survey among a representative cross section of organisations reveals that 64% of them stated that the key barrier to growth was inflation. Hence comes the contradiction of how a reported 3.4% inflationary indicator can drive consumer behaviour away from a brand. One argument can be that the 3.4% inflation in 2009 is on top of a 22.6% inflation registered in 2008 in Sri Lanka. But I feel this issue has to be addressed as a priority if we are to support the private sector that accounts for over 75% of Sri Lanka’s economy.
LTTE and world pressure
During the time of the conflict — in my previous responsibility attached to the government — I used to be a frequent traveler to the north-east. Whenever I had to board a Sri Lanka Air Force flight to Jaffna I used to travel with soldiers who were going for war and the thought crossed my mind that I might never see them again. The interaction was so honest and genuine that some used to ask me if the war will really end.
However the unthinkable happened where the total hierarchy was wiped out ending the saga of terror that engulfed our nation for the past 30 years, that costed the country over two hundred billion dollars or more. The political leadership that saw this through ably supported by the strong military sure shook Sri Lanka in 2009.
However sadly post this great victory Sri Lanka has not seen a robust peace building initiative that many envisaged. Even though we are closing on to year I feel it’s not too late to begin this journey. However, the challenge is the political will to actually do this. My worry is that if this is not done fast another group similar to the LTTE can emerge and that has to be avoided at any cost.
Private sector reforms
Focusing on the private sector, when the financial crisis started spinning work economies the sector that was first effected in Sri Lanka was the apparel industry given that over ninety percent of its export markets are in the EU and US. However, this great industry went through some painstaking internal reforms and made itself competitive in the world stage that sure shook Sri Lanka. As we speak it is likely that the industry will taper out to maintain its financial delivery of the previous year. This demonstrated to the world the resilience of the people of Sri Lanka to changing market conditions.
The best names of the industry that came to the country for the first ever Sri Lanka Designer Festival were astonished to see world class manufacturing facilities like the Brandix Green Factory as well as the skill set of the workforce on the ethical tag. I guess the challenge in 2010 is for the telecommunication industry to take a few best practices from the apparel industry and make the industry financially strong. Reports coming in say that the industry is bleeding due to the price war.
Reserve scare
In March 2009, when Sri Lanka’s reserves dwindled down to a dangerously low ebb Sri Lanka was heading towards a BOP crisis which shook Sri Lanka at that time. However, Sri Lanka recovered and exited 2009 at a commanding $5.2 billion in foreign reserves. Even though this achievement was fuelled by foreign inflows through debt instruments and IMF loans, rather than export proceeds, the fact of the matter is that we came through this crisis.
Now the challenge is to strengthen our export marketing strategies in apparel, tea and the BPO business by directing the savings from the war towards these industries. We also need to drive up the R&D investment from the current 0.14% to at least 2% of GDP so that we can give leadership to the world in our exports. Believe it or not the tea industry in Sri Lanka has been operating in the international market without having any protection to the ‘Ceylon Tea’ name. What this means is that any packer in the world in any country can market products under the Ceylon Tea name. If we are to secure legal protection it would cost 25-30 million which has not been done and that explains the R&D gap that exists in the country. The good news is that plans are in place to correct this in 2010 but, the fact of the matter is that this should have happened 100 years ago, before we became a dominant player in the word market.
Political reality
With the war coming to a close and the capture of KP the administration’s popularity reached a peak but the subsequent events that unfolded resulted in a tussle for power where now the country is now bracing for a mega presidential election showdown. It sure shook Sri Lanka that was looking very positively to a stable political environment where the only focus will be economic and business growth. The reality right now is a nation where the productivity of people are at the bottom of the pyramid as the topic at any forum is ‘Who is in the lead?’ The challenge right now is for Sri Lanka’s private sector to focus on business growth and let the politicians do their bit but in reality this becomes a tough task.
Global crisis
Whilst there was much rhetoric that the global economic downturn will not hit Sri Lanka the fact is that no country could be insulated. The first quarter of 2009 saw the Sri Lanka economy contracting to 1.5% and it did shake Sri Lanka. Even though the economy grew by 4.2% in the third quarter of 2009 the latest data reveal that 89,000 people lost their jobs in the industrial sector and another 240,000 in the farming sector which is alarming.
Hence, Sri Lanka needs a new wave of investments in to the country. Latest research reveal that the country’s labour force has increased by only 1% in the period 1990 to 2008 whilst the projection as at end 2020 is that the labour force will grow by only 0.3%. These numbers will not do justice to Sri Lanka as other Asian countries are estimating a 2% increase. This can lead to severe social issues in the future that policy makers must address today.
But in a political economy like today there are bigger issues that push these critical issues into the back burner. This is the challenge for Sri Lanka. We require a change in policy making so that the economic landscape can be changed and if Sri Lanka’s private sector does not drive this together with the public Sri Lanka will get lost once again in the new economic order that is emerging post the financial crisis.
If we take Tamil Nadu for instance their very focused economic reforms have resulted in 27 of the top 100 companies having production facilities in the state and the latest information is that the Tamil Nadu government wants to have its own ranking on the ‘ease of doing business’ in the WTO report. This portrays the opportunity that Sri Lanka is fast losing.
Conclusion
Whilst Sri Lanka’s private sector has withstood the global storm in 2009, we need be cognizant of the fact that the trade deficit contracting is not a very healthy sign for corporate Sri Lanka. The reason being that this indicator means that the country’s performance is not driven by exports increasing but, imports contracting. In other words the Sri Lankan economy is slowing down. This needs to be corrected. A study done recently has revealed that unless 4 billion dollars in new investment come in annually Sri Lanka cannot target 8% GDP growth which tells us the policy reforms required to attract investments and drive growth. For this to happen the public sector reforms become a must which gives us the challenge ahead. If we do not drive for fast track economic growth, every time the world sneezes Sri Lanka will shake.
By Rohantha Athukorala
(The author is a former Chairman of the Sri Lanka Export Development Board and the National Council for Economic Development (NCED) when the country achieved 7.4% GDP growth. He is currently in the international public sector – United Nations Operations (UNOPS) as the National Portfolio Development Manager for Sri Lanka and Maldives. The thoughts are strictly his personal views based on his Doctoral Research Studies.)
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