• Food for thought

    The IMF recently praised Sri Lanka for bringing inflation under control. But on the streets, the price of food has been rising relentlessly.

    Increases are seen in the price of wheat flour, bread, rice, vegetables, coconut, coconut oil, big onions  and red onions.

    The cause? A combination exposure to global prices in the wake of IMF reforms, and the Sri Lankan state's ham-fisted efforts to fix prices in favour Sinhala producers and consumers at the same time. 

    A few months ago the Sri Lankan Government responded to complaints about the soaring price of wheat (which is imported) by encouraging people to eat rice.

    The argument is made that bread ‘is not Sri Lankan'. One recent newspaper article argued bread is not only a ‘Western’ food, but that it is damaging to one’s pancreas and explaining what alternatives to wheat flour can be used!

    Now the Government has gone a step further and has started banning wheat products at government canteens. Health Minister Maithripala Sirisena has reportedly taken this decision to discourage the use of wheat products and 'wean' the population off bread and bakery goods.

    In the meantime efforts are under way to encourage rice cultivation and reduce the dependency on wheat products. The Government has reportedly set aside $22m (Rs 2.5 billion) to invest in this program.

    Economic Development Minister Basil Rajapakse claims that the country can be self sufficient in rice production by the end of the year.

    But even the much promoted humble rice grain is moving beyond the reach of many ordinary people.

    The government has traditionally kept rice imports low to aid Sinhala landowners, but the current crisis, and IMF emphasis on liberalised markets, has forced it to relax import regulations, which in turn is likely to affect farmers and rural workers dependant on rice production.

    The government has now increased investment in the local rice industry to avoid the looming scenario in which  the Sinhala population cannot afford to buy neither bread nor rice.

    But it gets worse. Prices of poultry have seen sharp rises due to artificially high prices for grain (which is used as feed).

    The Sri Lankan Government is now forced to import chicken and eggs, whilst imposing price controls.

    Loans are being given through state banks for breeding farms and small farmers.

    Sri Lanka pushed up import duties on maize to 'protect' Sinhala grain farmers, which in turn raised the price of feed, driving many chicken farmers out of business last year.

    A protein substitute for chicken would be fish but fish prices have also increased greatly.

    Tourists are even being blamed – they reportedly consume larger volumes of protein, driving prices up.

    Even coconuts are being imported because of high prices due to trade protection for cultivators.

    However there are some good news. If you like onions, that is.

    President Mahinda Rajapakse has ordered measures to reduce the cost of living. So Secretary of the Ministry of Cooperatives and Internal Trade Anura Sriwardena has announced a relaxation of import taxes on onion and potatoes.

    However, the import taxes were imposed by the government to sustain prices during the harvesting period of the local potato and big onion farmers.

    A managed economy, indeed.

  • FDI slow despite war end
    While Sri Lanka makes much of a ‘post-conflict economy’ foreign direct investment actually fell in the first six months of 2010 compared with the same period last year, the Central Bank reported in August.
     
    FDI dropped to $208 million, compared to $250 million in the first half of 2009, logged amid the final stages of the war, Reuters reported.
     
    And the reason? Uncertainty and government policies.
     
    "War was only part of a problem. Uncertainties are still there, and the economic policies are not favourable to foreign investments," said Sirimal Abeyratne, a senior economics lecturer at the University of Colombo.
     
    "(Foreigners) are not certain about the macro economy in the long run. The reform process has not yet started, and the government policy document itself is against foreign investments, blaming the open economic policies," he told Reuters.
     
    Interestingly, according to HSBC Private Bank Managing Director Arjun Mahendran, telecommunications, not manufacturing, accounted for most of the surge in FDI in 2005-2008.
     
    Mr. Mahendran speculated that manufacturing FDI is on a downswing because of Sri Lanka’s over-reliance on textiles, The Island reported.
     
    According to provisional government figures on FDI quoted by Reuters, $124 million was invested in infrastructure sectors, $56 million in manufacturing, $26 million in agriculture, and $2 million in the service sector, including tourism.
     
    Meanwhile, Indian mobile operator Bharti Airtel’s Sri Lanka arm recently announced it had completed expanding its coverage in the Tamil areas.
     
    Indicating full availability of services in Jaffna, Vavuniya and Mannar, the mobile operator said expansion of its network's meant that it had achieved island-wide coverage in just two years. However, this was at a cost to its 5-year investment pledge: the $200 million has been spent in the last two years.
  • Tears and tractors: delivering aid in Sri Lanka

    Just the other day, this newspaper raised doubts as to who India’s aid intended for the Tamil areas will actually go. As if on cue, the point was made. In Sri Lanka it seems not even the International Committee of the Red Cross can guarantee aid will be delivered to the right beneficiaries.

    An ICRC staffer was reduced to tears by when her organisation's aid was 'distributed' Sri Lankan-style, according to a recent article in the Sunday Times.

    “Maryse Limonar, head of the International Committee of the Red Cross (ICRC) sub delegation in Vavuniya couldn't hide her feelings at a ceremony where her organization was distributing 400 two-wheel tractors to villagers in the Mullaitivu and Vavuniya districts,” the paper reported.

    “She walked to the rear of an ICRC vehicle and cried after a minister allegedly overruled the list of beneficiaries the ICRC had chosen. ICRC officials allege that the minister distributed the tractors to people of his choice.”

  • Swearing in to be ‘beautiful’

    As the date for President Mahinda Rajapaksa to be sworn in for his second term approaches, the public service has been called upon to undertake a new task – making the country beautiful. Thus the police are instructing residents in their areas to keep the streets clean, to prune branches and to put flower beds outside their homes, reported the Sunday Times. The paper added that soldiers are engaging in development projects and the military is also doing the work of the Health Department to warn against infectious diseases. Maybe Sri Lanka can convince the IMF that a large military is essential because most other departments are not effective and the military is doing their work?

  • Where will India's aid go?

    A 65 acre industrial estate in Atchuvely is to be developed bilaterally through a partnership between the Sri Lankan government and the Indian government, the Daily Mirror reported .

    This is part of a range of activities Delhi is initiating to develop the war-shattered Tamil areas of the island.

    India is supplying 500 four-wheel tractors to promote agriculture in the Northern Province, Sri Lankan state media reported.

    Indian High Commissioner Ashok K Kantha said Delhi also plans to assist in setting up an Agriculture Research Training Centre and Agriculture Faculty in the Northern Province.

    While India’s assistance is desperately needed and would be welcomed by the Tamils, it very much remains to be seen if this latest Indian largess goes the way of previous foreign aid intended for the Northeast: diverted either to the Sinhala south or appropriated by vested interests, including ruling politicians.

    For example, the first batch of India's donated tractors was handed over Monday, not to people in the Northeast, but to Sri Lanka's Economic Development Minister Basil Rajapaksa.

    There are as yet no details on whether it will be Jaffna based businesses which are invited to the industrial estate or whether Sinhalese companies from the south will be well placed in the Atchuvely compound.

  • Nationalization by stealth

    The current Sri Lankan government made it clear from the start that it was opposed to the privatization of government owned enterprises. “The policy of the government was to retain ownership and management of ‘strategic’ enterprises such as state banks, electricity and utilities and make them profitable”, reported the Sunday Times, commenting on the government stance.

    That making public enterprises profitable has been a difficult – if not impossible – task in the past has not stopped the government trying. As the Sunday Times report noted, “losses in public enterprises reached a record level last year and this year’s losses are likely to be larger”. But now the government has extended the policy further, moving from holding on to state enterprises to actively acquiring (privatizing) other ‘strategic’ enterprises to ‘manage them in the national interest’.

    Thus, the buyback of 51% of Shell Gas Sri Lanka, which makes the Sri Lankan government 100% owners of the former, hopelessly inefficient, Colombo Gas Co, and the reacquisition of shares in the national airline SriLankan.

    But the government has not stopped with buying shares in companies where current owners are looking to get out of the market. There has also “been a process of government gaining control of several key institutions through purchases of shareholdings and obtaining a controlling interest in them,” reported the Sunday Times.

    “A notable example was the purchase of shares of the NDB Bank by several public institutions to become the main combined shareholder. This, despite the Banking Act that prohibits any one company or group holding more than 25 per cent of the shares of a bank. Government institutions as a group probably now hold about 40 per cent of the shareholding of NDB Bank. The ownership is by state banks, EPF, ETF and Insurance Corporation. This led to a dispute about representation on the Board. In effect this amounts to the re-nationalization of the NDB Bank that was privatized more than a decade ago,” the paper reported.

    Similarly, the paper reports on the renationalization of the Insurance Corporation, through which the former Apollo Hospital was acquired by the Sri Lankan government and has been rebranded Lanka Hospital.

    “The government has recently purchased large shareholdings of private banks as well,” reported the Sunday Times, adding, that these moves “indicate that the government intends to own many key business enterprises.”

    This reversal of a privatization policy begun in the 1970s has a number of implications for the country, as the Sunday Times points out.

    Firstly, the cost of the operations put a strain on the financial resources of a country already stretched after the huge debts accumulated during the war against the Liberation Tigers. As the Sunday Times notes: “It may have to borrow domestically as well as use borrowed foreign funds. In either case it would increase the public debt.” Keeping in mind that debt servicing in 2009 was greater than the total revenue of the government, and that the government has just brought debt servicing to expensive, but affordable levels, this could be a significant strain.  This is not to mention the strain on the balance of payments of purchasing foreign shareholdings, as is the case with both Shell and Sri Lankan.

    The Sunday Times also points to the adverse effects such nationalization schemes have on foreign investment, noting “there could once again be some uncertainty about the government’s policies towards the private sector,” which could lead to foreign investors being wary and preferring to invest in other countries where the nationalization risk is not as great. 

    Many see the nationalization drive as an extension of the Sinhala nationalist vision, with the government seeing itself as a benevolent ruler acting as a shield between the people and the big bad capitalistic world. But even those who do not accept this interpretation, preferring to see this as a government consolidating political power by commanding a larger share of economic enterprises, agree that these moves will have an adverse impact on private investment in general and on foreign investment in particular.

  • Shell quits Sri Lanka gas business amid state price control

    Sri Lanka’s government is buying back Royal Dutch Shell's stake in the part privatized gas company, Shell Gas Lanka. Shell’s decision to sell follows long running quarrels with the Government over the price at which the company could sell gas in the country. The $63 million sale returns the LP gas business in Sri Lanka to 100% state ownership.

    President Mahinda Rajapakse’s populist government had been at loggerheads with the oil and gas giant over the price at which gas is sold: the government has been insisting gas be sold at less than international market prices.

    The wrangling culminated in a recent directive by the Supreme Court of Sri Lanka that gas should be re-priced bi-monthly for the local market.

    "We had so many issues with the company," Minister Rambukwella said of Shell.

    "The Trade Ministry had no control in pricing and had to go to court several times on price changes. So in that backdrop, this is a good move," he said of the decision.

    Mr. Rambukwella said after the take-over the government will ensure that gas will be sold at a "reasonable price", noting that it would be cheaper in the coming months.

    He also stressed that the government now holds management and decision making powers with this purchase, mentioning that the government has begun taking over State properties privatized by past successive governments for the benefit of the people of the country.

    More generally, the buyback of Shell Gas Lanka is in line with the ultranationalist and protectionist agenda laid out in Mahinda Rajapakse's election manifesto, in which he pledged that the government would be the guardian of the rural Sinhala people, protecting them against hardships.

    Sri Lanka's state-run Ceylon Petroleum Corporation, Ceylon Electricity Board and even the Indian-owned Lanka Indian Oil Corporation are running losses due to state price controls.

    In effect, the government can again force gas prices to stay below the market price, making it affordable for the Sinhala electorate who earlier this year returned President Rajapakse to a second term, as well giving him a majority in parliament.

    However, while the Government feels this policy of price-setting and reversing privatisation - nationalisation - is the best way to protect the Sinhala electorate, it flies in the face of the IMF’s free market demands.

    The IMF has long argued that the best way for a country to enhance economic growth is for the markets to operate completely free of state interference, allowing demand and supply alone to set prices.

    The role of government, in the view of the IMF, should be absolutely minimal in order to allow markets to function at their most optimum and grow efficiently.

    The Rajapakse regime however is adamant the Sinhala population is protected from global prices, the difference between these and local prices being subsidies by the state.

    It remains to be seen how the IMF will react to the purchase, especially given that the government has suggested it may place the loss-making company back on the market.

    Sri Lanka is currently benefiting from an IMF loan that is released in installments, providing the government continues to withdraw from price controls and undertakes other economic reforms to stimulate the private sector. The bail-out package, worth $2.6 billion, was granted to Sri Lanka shortly after the violent and bloody climax of the island’s ethnic war in early 2009.

  • Corrupt or not?
    Transparency International (TI) has released its report for 2010. With a score of 3.2 points Sri Lanka is ranked 91 out of 178 countries, up from 97th position last year. Of interest is how the news was reported. The government Sunday Observer interpreted this to mean that Sri Lanka was “low in corruption”, while ColomboPage reported a “marginal” improvement in tackling corruption but noted that “based on the criteria used by the TI Sri Lanka is not among the countries shown improvement from 2009 to 2010”. The Sri Lanka Guardian on the other hand pointed out that “Sri Lanka continues to be among the world's most corrupt nations”, going on to note that “even countries like Rwanda (66), Ghana(62), Namibia (56) and Botswana (33) are ahead of Sri Lanka in terms of transparency”.
  • Profiting from Northeast disinvestment

    The Sri Lankan mobile operator Dialog Axiata made a net profit of 1.69 billion rupees in the September 2010 quarter compared with a loss of 439 million rupees a year ago, Lanka Business Online reported.  While this was partially due to cost cutting, the main driver was a huge increase in sales (16.2% or 10.56 billion rupees) and the main area in which sales have increased is mobile – both phones and broadband, according to the report.

    Tamils across the Northeast, lacking the infrastructure for fixed line access to telephones and internet, have been turning in increasing numbers to mobile technology to allow them to maintain contact with their friends and relatives overseas. While this might place these Tamil consumers at the forefront of telephonic and broadband technology, they are often also paying the higher prices associated with these newer means of communication.

  • PR and development

    Sri Lanka’s fees for UK public relations firm Bell Pottinger (£3m) is greater than the amount pledged for development in Jaffna (£2.85m), the Sri Lanka Guardian reported today. The amount pledged for Jaffna, moreover, is uncertain to be followed through.

  • Stocks: foreign investors sell, state buys

    Whilst Sri Lanka makes much of Colombo’s soaring stock market, trading figures show foreign investors are systematically exiting the island's market. Foreign investors have so far this year sold a net 23 billion rupees' ($200m) worth of shares, Reuters reported Monday.

    Moreover, the main stock index (CSE) is being pushed up by state-owned funds.

    The Sunday Times reported this week that the government has directed government agencies such as the EPF (Employees' Provident Fund), ETF (Employees' Trust Fund), state banks and other government controlled institutions to invest in the stock market.

  • Watts passes to Indian group
    An Indian conglomerate has  completed the acquisition of Watts Lanka PvT, a solid industrial tyres manufacturing company in Sri Lanka owned by European partners, trade press reported. Sun Tyre & Wheel Systems, part of the $6 billion TVS Group of India bought Watts Lanka (which will be renamed shortly), which was a joint venture between Watts Tyres Limited of Britain and KVK Invest JSC of Bulgaria.
  • Sri Lanka's military budget is 100 times that of resettlement

    A year and a half since declaring victory over the Liberation Tigers, Sri Lanka’s proposed military expenditure for next year (almost $2bn) is an increase of 20% over 2009's and will dwarf the proposed budget for resettlement ($16m).

    Meanwhile, the development budget is $680m, according to figures reported in the state media.

    The government will unveil the budget in Parliament on Nov 22.

    Sri Lanka’s armed forces, including police, number 500,000 and are overwhelmingly Sinhala.

    Meanwhile, hundreds of thousands of Tamils remain displaced from large tracts of territory occupied by the armed forces during war-time offensives and now enclosed in High Security Zones (HSZs).

    Even when the Norwegian peace process began, the number of internally displaced Tamils stood at 800,000,international donors said at a landmark conference in Tokyo in 2003.

    The government has said the HSZs will not be dismantled, despite the end of the war.

  • Problem in Houston
  • Bye bye undies?
    The Sri Lankan government is  apparently abandoning the garment sector if press reports pver the weekend are to be believed. Given that the EU has withdrawn its GSP+ concession and the US is investigating its version of GSP, this is perhaps just the government accepting that garments are going to be hard to sell if the country's human rights record is not improved. But given that garments remain Sri Lanka's top export earner (despite a 13% fall in the first quarter of 2010 alone) the repercussions for foreign exchange will be significant.
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