The head of Sri Lanka’s Central Bank has admitted that the country confronts significant economic problems and hoped the long anticipated military victory in the decade’s long ethnic conflict would improve the fortunes of the island’s economy.
Presenting the 2008 Central Bank Report, on Monday, April 6, Central Bank of Sri Lanka governor, Nivard Cabraal, said the country’s economic woes were the direct result of three economic catastrophes faced by Sri Lanka, the unprecedented escalation of global oil prices, global food crisis and the global economic meltdown.
However, economists blame the ever increasing cost of military operations against the Liberation Tigers of Tamil Eelam (LTTE) which Sri Lanka has been waging for the past three years, poor fiscal policies and mismanagement as the real reasons behind the island faring far worse than other South Asian countries affected by the global downturn.
All key economic indicators including Gross Domestic Product (GDP) growth, value of the local currency and foreign currency reserves were down as the spiralling cost of war, revenue drop in tourism and garment exports and a fall in remittance from Sri Lankans working overseas hit the economy hard.
Realising the gravity of the situation, the Sri Lankan government had given up borrowing from other countries at high interest, and had approached the IMF for a $ 3.2 billion loan.
Growth down
Acccording to the central bank economic expansion could fall below three percent this year.
"If things get worse, we expect economic growth to slow down to between 2.5 percent to 3.5 percent this year," Cabraal said.
"At best, it will grow to between 4.5 percent and 5.0 percent, but that is being a bit too optimistic," he added.
Sri Lanka's economy posted 6.0 percent growth in 2008, down from 6.8 percent in 2007.
Exports down
Foreign revenue from key exports including tea and garment has dropped as the global financial downturn has led to poor demand. Also, tens of thousands of Sri Lankans working in Middle East have lost their jobs as the host countries tighten expenses.
According to Dushani Weerakoon, Deputy Director of the Institute of Policy Studies, export growth has fallen from 12.2 per cent in 2007 to 6.8 per cent in 2008. Trade deficit had been growing and stood at $ 5.8 billion.
The global recession has led to the closure of many garment factories in Sri Lanka and the laying off of thousands of workers.
According to Wasantha Samarasinghe, President of the Inter Company Employees Union, 50,000 workers have lost their jobs in the last three months. Palitha Athukorala of the Progressive Union said that out of the 832 factories set up in 2004, only 403 survive now.
Rupee down
Meanwhile, Sri Lanka's rupee hit a life low of 116.00/10 versus the dollar on Wednesday, April 8, on import demand for the U.S. currency.
The central bank's chief economist Nandalal Weerasinghe said the rupee has lost seven percent of its value against the US dollar since last September, despite the bank pumping in millions of dollars to prop up the currency.
Reserves down
Sri Lanka's foreign currency reserves are also at a dangerously low level. Foreign currency reserves fell from 3.5 billion dollars last August to 1.7 billion dollars by December as the central bank battled to defend the rupee, make loan repayments and pay out investors pulling out.
Cabraal commenting on the foreign reserves said the Central Bank had adopted several short and long term strategies to strengthen the foreign reserves which have been depleted in the recent past and that there was a drain of 50 per cent of the country’s foreign reserves.
Sri Lanka's ballooning foreign debt repayments is a major concern with the country expected to pay out 900 million dollars to service its loans, from about 500 million dollars paid in 2008, the analyst said.
In addition, further draining the foreign reserves, the central bank has paid out 506 million dollars to foreigners who withdrew from rupee-denominated treasury bonds, according to an economist.
"At the peak, foreigners had invested 527 million dollars in treasury bonds by last September. Since the crisis they have been withdrawing and now the foreign investment in bonds stands at 19 million dollars," he said.
He went on to say the bank was now looking at issuing dollar-denominated debt and seeking concessional loans to build up foreign reserves.
End of war
Economists say the cost of the government's military campaign against the LTTE has hurt the economy, with the defence budget taking up 1.6 billion dollars this year.
Cabraal expressed hope that the end of the war would boost economic growth as foreign investments would be more forthcoming.
"The end of the war will be looked at positively by foreign investors," he said.
"We are at a crossroads, notwithstanding global developments."
