Sri Lanka Will Never Achieve The Projected 7.5% GDP Growth For 2013
By Hema Senanayake -
Hema Senanayake
Hema Senanayake
This refers to RMB Senanayake’s response to Chandra Jayaratne. Chandra Jayaratne requested professional economists to explain whether Sri Lanka can achieve per capita GDP of $ 10,000/= by 2022 as claimed by Minister S.B Dissanayake. RMB Senanayake concluded as follows:
“So the growth rate projected by the Central Bank of 7.5% is possible but is it desirable for it risks a larger current account deficit which if there are not adequate foreign capital inflows could cause a serious balance of Payments crisis.”
I do not agree with this conclusion since it intimates that if the government takes the risk to have a larger current account deficit that Sri Lanka will achieve 7.5% growth for 2013. On the contrary my conclusion is that the country will never achieve a GDP growth of 7.5% for this year under the proposals made in the budget. Why I am saying this?
A fundamental principle in modern science is that “nothing will happen without the presence of necessary conditions.” The same principle applies in economics. The government has made the presence of necessary conditions to create a virtual balance of payment crisis in this year too. As a result we will never achieve the projected GDP growth of 7.5%.
Firstly, the government proposed in the budget for 2013 to reduce borrowing from foreign sources to Rs.86 billion which roughly amounts to $675 million from Rs.205.6 billion in 2012, which roughly amounted to $1.6 billion. This means that the government borrowed 2.5 times more in 2012, in U.S. dollar terms than the amount what is proposed to borrow for 2013. Still with such a higher amount of foreign loans, it has now been estimated that final GDP for 2012 came down to 6.5% from the estimated 8%. The whole dynamic and the high expectation for higher GDP growth changed with the balance of payment crisis triggered in the first half of last year. Finally the year 2012 ended up with heavily depreciated rupee and a GDP growth of around 6.5%. The reduction of foreign borrowing to $675 million is very unrealistic given the fact that foreign debt service payments amounts to $ 1.54 billion. So, by proposing to reduce foreign borrowings dramatically the government has now set the presence of the first necessary condition to create a balance of payment crisis.
But the government can avoid a balance of payment crisis if foreign direct investments (FDIs) are increased. But treasury secretary Dr. Jayasundera already admitted that FDIs down by 50% in 2012. The U.S. has already warned that foreign investors would be away from Sri Lanka if the independence of judiciary is not ensured. Apart from that the government killed the entrepreneurial enthusiasm by bringing the Expropriation Act in 2011. Foreign investors usually work with local partners and the capable local entrepreneurs are now downhearted. Given these factors there will not be a dramatic increase in FDIs in 2013. So, we now have the second necessary condition set in motion to create a balance of payment crisis.
Also if export sector does well, it helps to avoid a balance of payment crisis, as exports bring in dollars. Sri Lanka lost GSP facility granted by EU; this means potential exports to euro area cannot be realized than otherwise. Still major western economies are struggling to recover after the Great Recession of 2008. Increase of exports significantly to these main trading partners is not a possibility. So exports would remain stagnant or grow mildly. So we set the third necessary condition.
However, Sri Lanka can avoid a balance of payment crisis if expatriate workers increase their remittances hugely. Foreign remittances are still steady and likely to grow by around 20%. This is the only favorable factor that the government can rely upon. But this increase will not offset the reduction of borrowings, the reduced inflow of FDIs and stagnant exports.
Also if foreign purchases of stocks are more than the foreign sales then the country will have a net inflow of dollars; but this is limited to a couple of hundred million dollars in the best case scenario.
Apart from the above sources, banks’ foreign borrowings will bring in dollars to the country. My guess is that this year bank borrowing from foreign sources will be less than the previous year. Some times BOI companies do borrow in dollars. This also helps to bring in a couple of million dollars.
Those are the main factors that affect the balance of payment of the country. Out of these you see that government foreign borrowings play a huge role. If government did not increase foreign borrowings by 2 to 3 times than the proposed limit in the budget for 2013 then the government has to contain the private sector credit growth to an unprecedented low level to prevent a balance of payment crisis. In the event, it reduces the private sector economic activity and the resultant effect is the drastic reduction of GDP growth, probably below 5%. If credit growth is not reduced then there will be a balance of payment crisis that too will reduce the growth.
That is why I conclusively say that the government already risks a balance of payment crisis for 2013. The only way to avoid such a crisis is to borrow more, from foreign sources. Deviating from the approved budget for 2013, it has already been reported that Dr. P.B. Jayasundera is going to ask IMF to grant a new loan of $1 billion; compare this amount with the amount mentioned in the approved budget which is nearly $675 million.
Luckily for the government IMF is not weighing the independence of judiciary when approving loans. Let us assume that IMF would approve a loan of $1 billion, still I guarantee that this amount will not be sufficient to avoid a full scale rupee crisis. The government will have to borrow from the international commercial market too. Please note that the government did not propose to borrow from international commercial market this year; a promise that the government cannot keep if it wants to avoid a financial crisis.
Hence the predicted GDP growth of 7.5% for this year will depend on the government’s ability to borrow heavily in USD terms, beyond the limit specified in the approved budget, period. I kindly request readers to keep an eye on my above prediction.
Alternate strategy is to get GSP facility to increase exports, increase FDIs, facilitate expatriate remittances and expatriate worker investments, to have non-manipulative stock market etc.; none of these are possible without us returning back to a functioning democracy; post war euphoria of economic growth prematurely ended due to bad governance.
A very good analysis by Hema Senanayake. Although it is painful
say this, balance of payment crisis might be the only way to open
the eyes of large majority of Srilankans to see what Rajapaksha
lunacy is doing to Sri Lanka.
Avi - January 26, 2013
6:42 pm
Thanks for this analysis! Meanwhile as the Times reports today, 15 billion is to be allocated the Namal Rajapassa and the corrupt Minister of Sports for white elephant infrastructure and fun and games in Hambantota for the Asian Games in 2017 and no doubt a racing track for the Lambughinis for the Rajapakse morons!
These borrowed funds for fun and games in Hambantota will go to the corrupt minister of Sports and into NAMAL RAJAPAKSE – the sports czar pockets!
When will the Sinhalaya Modaya learn to read the writing on the wall – the crash of the rupees resulting from the hollowing out of the real economy to fund Rajapakse’s megalomania?!
Dinuk - January 27, 2013
4:25 am
As GDP for 2012 was 6.5% it is most likely that 2013 will be 5-6%. Govt has committed the biggest blunder with the impeachment. After the oncoming UN session and Commonwealth meet they will not be able do much.
International factors such as europe, oil, syria, iran can play up along with climatic factors to make 2013 a very difficult year for any country leave alone a bumbling kleptocracy.
Safa - January 27, 2013
11:14 am
I think this 15 billion to be allocated to for sports complex in Hambantota for the Asian games yes maybe but it is totally the wrong location. Yes we need a new international airport, a new harbour, cricket stadium and even maybe a sports complex but to build these very near our wildlife reserves of Yala, Bunadala, Kalametiya is a total disaster for our wildlife reserves. We need these projects but nearer population centres like Colombo, Kandy and Kurunegala not Hambantota for god’s sake there is nobody there I mean people. Imagine how popular the cricket stadium or this sports complex would be in Colombo, Kandy, Kurunegala. The harbour should have been built in Galle. So the govt is making a big mistake in building these in the wrong location which would be a disaster for our wild environment nearer Yala and beyond.
I urge the govt to protect our wildlife reserves and ensure no roads or any kind of buildings are built within them, ensure strict penalties for anyone caught cutting trees, anyone including farmers caught using devices like haka patas should be fined at least ten lakhs on the spot and thrown in jail for twenty years. Anyone caught snaring wild animals should also be fined heavy fines and thrown in jail. Farmers should be moved away from wildlife corridors and where wildlife resides and given alternative lands to farm. The animal rights bill should take into account cruel treatment of wild animals as well. The law should be strengthened to protect wildlife. The law should also be strengthened to protect all our wildlife reserves. The govt can also create new wildlife reserves especially in the wet zone. As the govt may know, sri lanka is a biodiversity hotspot and there are many species endemic to sri lanka and there are many threats to their extinction. So any barren wild land, new wildlife reserves can be created especially in the wet zone.
The people in the sri lanka are backward and ignorant when it comes to humane treatment of wild and domesticated animals. People children, especially farmers should be educated through schools programmes about humane treatment of animals. Farmers should be told that if they kill any wild animals that there will be heavy penalties. There should be a compensation scheme for farmers loss of crop due to encroachment by elephants. Wherever possible farmers should be moved away from elephant corridors and given alternative land to farm.
Sri Lanka is known the world over for it’s elephants and wildlife. This is what the tourists come to see in Sri Lanka. Our tourist industry will suffer immensely if our wildlife reserves including Yala, Bundala and Kalametiya are not protected.
monkey - January 27, 2013
3:32 pm
baboon, s**t lanka will always be a third world slum. it can only produce new breed of slaves.
Rama - January 27, 2013
5:56 pm
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monkey - January 27, 2013
4:52 pm
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monkey - January 27, 2013
5:05 pm
This article is not about “the animal rights bill” – CT
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monkey - January 27, 2013
5:11 pm
look like chandra jayaranthna ..
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kalani puttha - January 28, 2013
3:19 am
Mr. Hema Senanayake,
Thank you for your analysis of forecasting Sri Lanka’s 2013 GDP Growth.
According CB Governor who is a mere Charted Accountant and a Rajapakse goon always gives bogus economic forecasts.
He was more sure of winning the 2018 commonwealth games bid and spent 800 million rupees for that bid. But finally it was a mere flop and we lost all that money after he had a big tamasha in Caribbean island.
Even before I talk about CB’s 2013 7.5% GDP forecast I must write this first.
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It is time to Audit Central Bank Gold and Foreign Currency reserve.
Also to Audit all CB holding of Foreign International Bonds and other Assets.
The reason is after Colombo Museum robbery theft, which British Govt.preserved for so long and gave us with the Museum Building when they gave us independence …..…..and now after 65 years suddenly the swards, coins, Rings and precious stones got stolen….. anything is possible with President and CB Governer by his side.
I hope not that these lost items will appear in China Museum one day, but anything can be possible in a Banana republic and Alibaba in power.
Also It’s time to keep an eye on all our assets to safeguard from Alibaba and the 85 billion Divineguma jackopt clan.
According to my Analysis We are going have between 0.5% to 1.5% GDP Growth this year……..and the reasons are follows.
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1) The first IMF US$ 2.6 Billion loan payment due in March 2013.
http://www.imf.org/external/pubs/ft/survey/so/2009/int073009a.htm
2) The first phase of China Hambanthota harbour project of US$361 million loan payment is due in the first quarter 2013.
http://www.slpa.lk/port_hambantota.asp?chk=4
http://www.ft.lk/2012/08/24/rs-100-b-chinese-loans-for-hambantota-port-phase-2/
http://www.sundayobserver.lk/2013/01/13/new24.asp
3) CB Heading deal payment (US $400 million premium payable to banks + US $200 million Interest + US $400 million attorney fee payment, with a total of US dollars One Billion ) is to be paid now.
The more we delay payment the more we have to pay as interest to these Banks and Attorney fee.
4)We already lost 6000 Jobs and Closed down 200 factories during last three months due to loss of GSP, and this trend will continue in the coming months. Most of those factories were taken to Bangladesh, Myanmar and Vietnam who have GSP status and less OH cost,operational cost and utility cost compared to Sri Lanka and easy to operate businesses in these countries.
5)Less and less House Maids will seek ME employment after Rizana Rafique’s murder and many are planning to return to Sri Lanka.
6)Recent Floods effected and lost over 300,000 acres of Agriculturel land including Paddy, vegetables, poultry and cows effecting over 200,000 families and businesses. Reconstruction of roads, houses, bridges, dams and culverts will cost Govt. Billions of rupees.
7)Additional 5000 University students to universities with boarding, logistic and university facilities.
http://www.lonelyplanet.com/thorntree/thread.jspa?threadID=2293108
9) Hacking BOI investment web and obtaining over 2000 invester information will nervous foreign investors to invest in BOI projects in Sri Lanka.
http://www.google.com/search?q=hacking+Sri+Lanka+websites&oq=hacking+Sri+Lanka+websites&sourceid=chrome&ie=UTF-8
10)Weak economic foreacst well make investers to dump their stocks in the CSE.
11) According to JVP MP Anura Dissanayake Govt. have money to run the country only for six months…….and has to borrow from outside to run the other six months.
12)Therefore due to spiraling of Cost of living and with no proper economic Progress forecast in sight for 2013…….and after taking the above points into consideration…….
MY 2013 GDP FORECAST WILL BE BETWEEN 0.5% to 1.5% for Sri Lanka.
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Please let me have your views on the above forecast….
The 15 Billion Allocation For Sport complex is an utter waste….due to Following reasons.
1)Hambantota is the least sport friendly environment due to very high humidity and the dry weather heat and its constant variable wind.
2)Due to high heat, humidity and unpredictable wind an athlete has to spend twice the Calories and strength to compete and event.Specially when it comes to 1500M, 3000steeple chase, 5000M, 10000M, Marathon, Penthathelon and Decathelon events coulb be an endurance killing for athletes.Better be prepared with a lot of First Aid for Cramps, exhauston and Muscle sprain injuries.
Therefore many of these events would have to be held after dark under Flood Light.
3)Main attraction for any event is the spectators…….and Hambanthota is the least Spectator friendly place…..due to the High heat and unbearable sun, not enough trees for shelter and natural cool the dry sea wind makes spectators uncomfortable.
Also unavailability of Restaurants, Low cost hotels and night stay could deprive spectators coming all the way to hambantota.
4)In addition Games….there’s not much to attract spectators like…museums, malls, recreation games, facilities, parks etc..which will reduce Municilpal income.
5)Also unavailability of sufficient restaurants and rest areas and isolation from town it makes one a boring and a lonely place. Remember track and field is a longer time taken and people want to relax the rest of the day.
6)Non of our single Athlete won any medal during last Commonwealth or Asian Games.
Therefore Sports Ministry should focus moreand spend more on Creating better Sri Lankan sportsmen and sportswomen as a priority than to hold this youth Games spending such a colossal amount.
7)All this projects anr built at the expense of our wild life……and due to land grab by state now elephants are dying or been killed at the rate of one a day. What are the tourists going to see in Sri Lanka in future…..other than animal skeletons and a hambantota ghost town with concrete structures……
8)The ideal sportsmen friendly environment, climatic condition and spectator friendly towns are Kandy district, Colombo and Galle.
9)It’s time to re-think building a monster project wasting 15 Billion rupees in Hambanthota.
10) Also better wait until GOSL hear on the outcome of Commonwealth Counsil on holding CHOGM 2013 conference in Hambanthota.
Jayantha - January 28, 2013
5:55 am
Jayantha
If govt spends at least a fraction of 15 Bn to sponsor and train our talented sportsmen and women we may be able to win a few golds. This sports village is like that film village, a sheer waste of money. First improve our schools and sports at school level. Why this obsession with Hambantota?
Safa - January 28, 2013
11:23 am
Isn’t 5 % better than 0 %???
K.A Sumanasekera - January 28, 2013
10:23 am
Sumanasekara,
Certainly. Problem is government has budgeted it’s
expenditure acording to this kind of unrealistic GDP growth forecast. Then
GOSL will go and borrow money @ 5-6% interest to make the
cash shortfall. It might give an opportunity for Rajapakshas family to get
another $8 million commission cheque from China. People of SL
will be the ultimate losers as usual.
Avi - January 28, 2013
7:00 pm