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Friday, 3 February 2017 00:00 - - {{hitsCtrl.values.hits}}
Some leading members of the present ‘Yahapalana’ Government have recently claimed that they took over an economy that was in the Intensive Care Unit (ICU) on 8 January 2015 and that during the past two years, they have brought the economy to a stable level.
In that regard, the basic analysis of Sri Lanka’s macro- fundamentals (as per Central Bank and other data published after January 2015) is set out below, so that all Sri Lankans could see for themselves the true position about our economy, then and now.
December 2014 (then): Economic growth for the five years 2010 to 2014, was at an average rate of 6.8% p.a., and the investment outlook was steady and robust. On 29 July 2014, the IMF stated: “Sri Lanka’s economic growth has been one of the fastest among Asia’s developing economies in recent years.”
December 2016 (now): Economic growth is stagnating, and dropped to 4.8% in 2015, and is expected to be less than 4% in 2016. Investment is slack, and new jobs are not being created. Agriculture production and Telecom services are at risk.
December 2014 (then): GDP in 2014 was at a robust $ 80 billion, up from $ 24 billion in 2005. Rating Agency Fitch said in May 2014: “Big public infrastructure projects are part of a larger development strategy, and lead to roads and ports that compare well with regional infrastructure.”
December 2016 (now): December 2016 (Now): GDP grew marginally to $ 82.3 billion by 2015, and expanded even more slowly in 2016. Hence, GDP may have reached only about $ 84.0 billion by end 2016.
December 2014 (then): By end 2014, LKR was at around Rs. 131 per USD, and had depreciated by a mere 2.8% per year from 2006 to 2014. Foreign Reserves were at a healthy level of $ 8,208 million by end 2014, up 300% from $ 2,735 million at end 2005. Foreign Reserves liquidity cover for short-term debt was at a comfortable 124%.
December 2016 (now): LKR had depreciated rapidly at 7% per annum during 2015 and 2016, to Rs. 150 per USD. Foreign Reserves were at a level of $ 6,063 million by end 2016; a drop of 26%. Further, Foreign Reserves liquidity cover has now plummeted to a dangerous level of 75%, indicating a serious Forex crisis.
December 2014 (then): FDIs were on an increasing trend, from 2006 onwards, reaching its highest ever level in 2014, at $ 1,635 million, from $ 287 million in 2005. Many foreign funded projects were in the pipeline, and were in progress as at end 2014.
December 2016 (now): FDIs decelerated to $ 1,161 million in 2015, and crashed to a mere $ 450 million in 2016, the lowest in 11 years. FDIs seem likely to further decrease in the foreseeable future.Colombo Stock Exchange (CSE)December 2014 (then): The CSE had been steadily growing and the ASPI was at 7,299 by end 2014. Market cap was Rs. 3.1 trillion. Average daily turnover was at Rs. 1,414 million in 2014. December 2016 (now): The CSE had lost value and ASPI was 6,288 and Market cap dropped to LKR at 2.7 trillion by end 2016. Average daily turnover was down to Rs. 1,059 million in 2015, and decreased further to Rs. 737 million in 2016, or just about one- half of that in 2014.
December 2014 (then): Inflation had been in the mid-single digits for six years up to 2014, by far the longest ever continuous period of low inflation in Sri Lanka. Average inflation in 2014 was 3.3% and inflation expectations were benign.
December 2016 (now): Inflation in 2015 was down to 0.9% because of the significant global oil price drop in 2015. But, inflation rose to 4.5% in 2016. Now, inflation seems poised to rise rapidly after the imposition of VAT and the massive depreciation of the LKR.
December 2014 (then): The debt to GDP ratio for 2014 was 71%, significantly down from 91% in 2005, and 106% in 2002. Debt servicing cost was receding with the gradual reduction in interest rates. Total Debt as at 2014 was Rs. 7,391 billion, up from Rs. 4,590 billion as at end 2010, an increase of Rs. 2,801 billion in four years, during which period, major ports, airports, power plants, irrigation works, roads, highways, and schools had been constructed and massive reconstruction carried out in the north and east.
December 2016 (now): During 2015 and 2016, Government borrowing has been increasing at a rapid pace in volume and price, with the debt to GDP ratio rising sharply to 76% in 2015, with the ratio expected to reach 82% in 2016. Accordingly, in the 21 months up to 30 September 2016 the debt had increased from Rs. 7,391 billion to Rs. 9,402 billion; an unprecedented increase of Rs. 2,011 billion without any significant visible development on the ground. Therefore, the Finance Minister has rightly stated on 26 January 2017, that the country is now “embroiled in a gigantic debt trap”.
December 2014 (then): Interest rates were at comparatively low and stable levels, and in a reducing trend. All Treasury bill and bond interest rates from three months to 30 year instruments were in single digits, ranging from 5.7% to 9.3%. As a result, the Government enjoyed substantial savings in its interest cost, while the interest cost of businesses also reduced significantly.
December 2016 (now): Interest rates have been steadily rising during 2015 and 2016, adding to business risk and threatening the sustainability of organisations, including these in the financial sector. Almost all Treasury bills and bond interest rates are now in double digits, and almost all rates have increased by about 60%, from those prevailing as at end 2014.
December 2014 (then): Foreign investment in Treasury bills and bonds as at end 2014 was at a healthy level of around $ 3 billion, accounting for 11.4% of the total Treasury bills and bonds in issue.
December 2016 (now): Foreign investment in Treasury bills and bonds had been flowing out regularly during 2015 and 2016, causing serious pressure in the external sector. By end 2016, the foreign investments had reduced to around $ 1.6 billion; an outflow of about $ 1.4 billion, or 47%, The foreign holdings are now only 5.5% of the total Treasury bills and bonds in issue: less than one-half of the 2014 level.
December 2014 (then): The fiscal deficit had been on a decreasing trend, with the deficit reduced to 5.7% in 2014. In July 2014, the IMF stated: “Fiscal consolidation has continued with the overall fiscal deficit falling.”
December 2016 (now): The fiscal deficit rose steeply to 7.4% in 2015, causing tremendous upheaval and uncertainty in the economy. The deficit is likely to be over 6.0% in 2016 too. Many economists have regularly expressed alarm over this situation.
December 2014 (then): The trade balance had been slowly widening, but well compensated by substantial increases in worker remittances, tourism, IT earnings and financial inflows. As a result, the Balance of Payments (BOP) in 2014 was a surplus of $ 1,369 million, the second highest BOP surplus in Sri Lanka’s history.
December 2016 (now): The trade balance has been widening further, with exports reducing. At the same time, with worker remittances remaining flat and financial inflows drying up, the BOP in 2015 recorded Sri Lanka’s highest-ever deficit of $ 1,489 million. The BOP in 2016 is also likely to be a deficit.
December 2014 (then): Sri Lanka’s Credit Rating was at BB- with a “Positive” outlook, as per Fitch Rating Agency. Discussions were ongoing towards an upgrade of the credit rating, in line with the improving macro-fundamentals.
December 2016 (now): Fitch Rating Agency had downgraded Sri Lanka in 2016 to B+, and revised the outlook to “Negative”. In the aftermath of the bond scam and other weaknesses, a further downgrade in 2017 is likely.
Based on the above information, it is now becoming increasingly clear to all stakeholders that the Sri Lankan economy has been very badly managed over the past two years, and that the country is now on the brink of a massive economic catastrophe. In fact, just last week, Bloomberg listed Sri Lanka as a high investment risk country, and placed it at 67 out of 80 countries(20 slots behind Greece!), in their ‘Global Risk Briefing’. In other related developments, the rankings of the country suffered embarrassing setbacks in the ‘Doing Business Index’ and the ‘Corruption Perception Index’ as well.
Consequently, the desperate claims that the economy is robust by a few Ministers who have lost their credibility, is hardly likely to change the gloomy business sentiment or the pathetic situation. Accordingly, is now time for those who are responsible for the economy to cease uttering blatant falsehoods, desist from trotting out lame excuses, and stop accusing the previous administration for their own mismanagement and incapability.
At the same time, the present administration must immediately acknowledge the gravity of the situation and take the necessary remedial measures to avoid the impending disaster. Unless that happens, this self-made “perfect storm” that has been thrust upon our once-robust economy by the present administration will engulf our country with disastrous consequences.
