Economists while agreeing with the Central Bank of Sri Lanka (CBSL) Governor Indrajit Coomaraswamy’s proposed options for debt servicing and the resurrection of the economy, say that there was little done in the way of improving investment climate and investor confidence.
Professor of Economics at the Department of Economics of the Faculty of Arts of the University of Colombo, Prof. Sirimal Abeyratne said that the government would face a largely uphill task in relation to implementing much needed reforms of outdated regulatory frameworks.
Coomaraswamy last week said Cabinet approval was to be sought to raise $ 1.5 billion via sovereign bonds and syndicated loan capped at $ 1 billion.
The Governor during a press briefing last week said Sri Lanka was faced with a challenge of increasing non-debt creating foreign inflows.
Further, he also said that the CBSL aimed for US$ 7.5 billion reserves by December strengthened by an additional US$ 2 billion expected from public asset sales.
Coomaraswamy stated that the Central Bank’s projected earnings from the sale of non-strategic State assets including Hyatt, Hilton, Waters Edge and Grand Oriental Hotel along with Lanka Hospitals and Mattala Airport could be US$ 1 billion and added that the government expected about $ 1.12 billion from the sale of the Hambantota Port to China Merchant Holdings.
Abeyratne commenting on the proposals said that the way out of the economic crisis was to improve the investment climate and the confidence of business investors as well as to reform the processes and systems of the regulatory framework.
“The latter involves unilateral liberalization, regulatory reforms, law and order, public sector reforms and reforms in and of State-owned public enterprises such as the Hambantota Port and the Mattala airport,” Abeyratne said.
“While there are laws governing nearly every aspect, there are weaknesses in law enforcement,” he added.
According to analysts, a stronger regulator regime in the relevant sectors should complement the divestiture of underperforming assets.
Abeyratne further noted that the country was already quite late in undertaking the reforms and the next few years would prove politically difficult for reforms to be brought about.
“Until and unless Sri Lanka generates an export income and foreign direct investment inflows, aspects which have been lacking or not taking place for many years while managing the liabilities and exchange rates, the CBSL will be compelled to rely on borrowings. This is a serious problem, yet unavoidable under the present circumstances,” Abeyratne explained.
It must be noted however that in the case of FDI generation and export promotion, there is very little that can be done by the CBSL.
Abeyratne further added that the matter was a question of general policy and the political environment and whether it resulted in building investor confidence. The rest of the institutions must generate foreign exchange. “The CBSL is in trouble as they have to manage without the fundamentals of foreign exchange generation,” he pointed out.
Addressing the question of restructuring public enterprises which were loss making and operating on circular debt, where a company borrows from company and then the second company borrows from a third and vice versa, he was of the view that it was always better to privatize or sell.
“The country has made some investments and managed public enterprises in a manner which placed the burden on the taxpayers. This has been done continuously. The big enterprises have been borrowing in this manner. We don’t know how to get out of this problem. Thus the sale of assets is recommended,” Abeyratne further pointed out.
According to Prof. Abeyratne, the results would be two-fold. One would be that it would take away the burden on the taxpayer and release funds for other productive activities and the other is that the public enterprises once sold would operate on market principles, bearing the profit and loss on their own.
Thus, it would result in the creation of a situation of improved competition and efficiency. “For an example, if the Hambantota harbour is sold, the Colombo port will have to compete with the Hambantota port”, Abeyratne said.
However, with regard to selling assets, Abeyratne pointed out that Sri Lanka did not have the bargaining power as the country is in the worst situation in this regard.
“We are selling when the process is at the weak end. We have no bargaining power,” he said.
Abeyratne further noted that the investment climate had to be improved, and a more stable product- base had to be looked at as it would help address the problem of inflation. The current aggregate demand issue had to be addressed and monetary policy measures had to be used and improved.
“Investments have not been rising significantly. When analyzing why this is the case, the reasons emerge as being the non-improvement of the investment climate and the non-improvement of business investor confidence. Only interim measures have been taken with regard to addressing this critical problem,” he said.
“We must go back to the reforms process, which since the early 1990s has been at a standstill. Ad-hoc policy measures were essential during the war and they have been taken. The environment now however is messy. There is no direction and the direction is not clear. Overall reforms are needed. The regulatory framework is outdated. The key areas include reforming including the public sector. It is easy at the beginning but not at the end. We are halfway through the present regime.”