WHITHER SRI LANKA ECONOMY

Part I

The GDP growth recorded by the Central Bank in 1917 shows that there is a deceleration further to 3.1% from the growth of 4.5% (corrected from previous figures) recorded in 2016. Given below is the per capita GDP at net market prices in US$ as follows:

See Table I

It can be seen that the GDP growth has decelerated to 3.1% and the annual average value for the US$ has increased from Rs. 145.60 to Rs. 152.46. It has since depreciated to around Rs 160.00. The declining GDP growth rate over last three years has continued.

Agriculture was adversely affected and contracted by 0.8% against the backdrop of adverse weather conditions that continued from 2016, while a slowdown in economic activity in both services and industrial sectors were observed.

Foreign Direct Investment

Quoting from the Central Bank Annual Report 2017 “Foreign Direct Investment” which includes foreign borrowings of Board of Investment (BOI Companies), recorded the highest inflows in history in 2017. Accordingly total FDI inflows, including foreign loans received by companies registered with the BOI, amounted to US$.1,913 Mn in 2017 in comparison to US$.1,078 Mn in 2016. Major inflows of FDI included receipts to Hambantota Port project and the Colombo Port City project. Both projects are expected to attract a significant amount of FDI in 2018 and beyond. Based on the origin of the immediate investor, China, Hong Kong, India, Malaysia and Singapore was the top 5 sourced countries of FDI in 2017.

See Table II

Portfolio Investment in equity, through non FDI Investment in the CSE recorded a notable increase in 2017. On this basis FDI shows an increasing trend but far below the levels of countries like Vietnam, Cambodia, Laos and even Burma.

Balance of payments

Primary income

Quoting from the Central Bank Annual Report 2017, ”In line with the trend observed in recent years the deficit in the primary income account widened, with increased reinvested earnings by direct investment enterprises (DIE’S) and increased interest payments on ISB’S and project loans of the Government. Accordingly the deficit in the primary income widened to US$.2355 Mn in 2017 from US$ 2202 Mn in 2016”.

Secondary income

The secondary income account with consists of private and government transfers remained subdued during 2017 with modest performance in workers’ remittances. Workers’ remittances which account for the majority of inflows to the secondary income account declined by 1.1% to US$.7164 Mn in 2017 as opposed to the growth of 3.7% in 2016”.

However a positive trend is noted in the first quarter 2018 with workers’ remittances of US$.678 Mn when compared with US$.643 Mn an increase of 5.4% over 2017. It was reported that workers’ remittances continued to increase in April with US$.541 being 11% over the April 2017 figure. Furthermore, S P Liyanage the Sri Lankan Ambassador in Qatar has stated that the employment opportunities in Qatar will double and it will be a substantial source of workers’ remittances.

Current Account balance

Despite the gradual pick up in export earnings since March 2017 the trade balance deteriorated substantially as increased export earnings were insufficient to offset the notable increase in import expenditure mainly driven by weather related imports such as rice and also fuel.

Capital Account balance

Capital transfers to both the Government and the Private sector recorded a marginal decline during 2017. Accordingly the surplus in the capital account amounted to US$ 11 Mn in 2017 compared with US$ 25 Mn in 2016.

Financial Account

Higher inflows to the financial account as against outflows witnessed during 2017 resulted in a significant increase in net incurrence of liabilities in 2017. Further a significant accumulation of gross official reserves resulted in a notable increase in the net acquisition of assets during the year.

Reserve Assets position

Quoting from the Central Bank Accounts Report 2017 “In line with the increase in reserve assets position, transactions related to reserve assets recorded a significant increase during 2017. The net increase in reserve asset transactions of US$.2,771 Mn was a significant contrast to the net decline in reserve assets transactions of US$. 472 Mn in 2016”.

Overall balance

Reflecting improvements in the financial account the overall balance recorded a surplus in 2017, after recording deficits for two consecutive years. The net International Reserves thereby increased to US$.6,597 Mn by end 2017 increasing from US$.4,529 Mn at end 2016.

International Investment position

In terms of the International terms of position (IIP) which shows the value and composition of the country’s position in external assets and liabilities with the rest of the world, Sri Lanka’s external liability position as well as the asset position increased as at end 2017 compared to that of 2016. The total foreign assets increased to US$.12,366 Mn primarily due to the increase in the reserve asset position, while the asset position of direct investment, trade credits and advances and currency and deposits also contributed to this increase. Meanwhile the total foreign liability position increased from US$.54,857 Mn at end 2016 to US$.60,721 Mn at end 2017 primarily due to the increase in direct investment, port folio investment, outstanding loan liabilities and trade credit positions. The net liability position of the IIP increased to US$.48,355 Mn at end 2017 from US$.44,591 Mn at end 2016 with the increase of foreign liability position out weighing the increase of the foreign asset position. Despite Sri Lanka’s net IIP continuing to be negative inflows in the form of direct investment and other non debt creating inflows to the financial account has shown an improvement during the year.

The depreciation of the Sri Lankan rupee against several major currencies increased the total debt stock in rupee terms by Rs.225.2 Bn at end 2017. The Sri Lankan rupee depreciated by 2.0%, 5.1%, 7.5%, 10.5% and 13.5% respectively against the US$, the Japanese Yen, the Indian Rupee, Special Drawing Rights (SDR), the Pound Sterling and the Euro during the year. The debt stock in rupee terms has increased further with the continuing devaluation of the currency.

General economic performance

Although the Government has initiated steps in an attempt to restructure the economy, political constraints have stifled the process. The SOEs continue to be a huge burden on the economy with some 230 billion total losses incurred in 2017. SriLankan Airline is one of the biggest problems with a continuing debt burden and no partner being identified despite various attempts. CEB and CPC continue to run at a loss and very little appears to be done other than the introduction of the price based formula for fuel. Hereto the Government has delayed the introduction of this formula which should have been introduced much earlier so that the impact would have been gradual with the gradual increase in OECD fuel prices. The percentage increases are very high specially in kerosene the fuel most used by poor people for cooking purposes, on the excuse that kerosene is being used to dilute diesel for use in diesel vehicles. There have been numerous protests specially by the fisher folk and once again the Government has backed tracked and it is stated that the kerosene price will come down to Rs.70 a litre. If such a price was possible I wonder why the price was fixed at a much higher level.

The overall economy performance in 2017 has been far from satisfactory although the first quarter of 2018 has recorded an increase in export income though but accompanied by a similar increase in import expenditure.

When considering the overall picture the general economic performance could perhaps be assessed to have improved although GDP per capita growth has gone up by only 3.1% the lowest in the period under consideration.

Exports

Quoting from the report, “Export performance which was affected adversely during the past 2 years rebounded strongly in 2017, recording the historically highest the value for earnings. The strong growth in export earnings was underpinned by the restoration of the EU-GSP+ facility, recovering external demand, expansion in investment in export related industries, increased commodity prices in the International market, conducive external trade policies, together with strong institutional support and the flexible rate policy maintained by the Central Bank. Export earnings increased by 10.2% to US$.11,360 Mn in 2017 from US$.10,310 Mn in 2016”.

It is noteworthy to mention that the total exports in the first quarter 2018 reached US$.1,107 Mn. a 6.3% increase in March and for the 1st quarter increase to US$.2988 Mn or 7.7% growth.

The EDB has projected exports to increase to around US$.18 Bn in 2018 which will be the highest on record. However import values could also increase thereby negating to an extent the growth in exports.

Import performance

Expenditure on imports rose considerably by 9.4% to US$.20,980 Mn in 2017 recording the historically highest value for imports, mainly due to higher fuel imports. Meanwhile expenditure on non fuel imports increased by 5.1% to US$.17,552 Mn.

Inflation

The CCPI moved up from 116.1 in January 2017 to 122.9 in December 2017. Headline inflation as measured by year on year change in the NCPI exhibited an increasing trend. The annual average NCPI inflation gradually increased from 4.6% in January 2017 to 7.7% in December 2017. The CCPI inflation which was 5.5% in January 2017 peaked at 7.8% in October 2017. The annual average CCPI inflation increased from 4.3% in January in 2017 to 6.6% in December 2017. So it is apparent that inflationary trends were on the up.

Employment

The number employed increased by 3.3% to 8208 Mn in 2017 compared to 7948 Mn in 2016. The services continued to be the foremost employment generating sector contributing a share of 45.5% of the total employment in 2017.

The overall unemployment declined to 4.2% from 4.5% in 2016 with a notable decline in the female unemployment rate. The unemployment among the youth, educationally qualified and females continued to remain high despite the low overall unemployment rate.

A large gap has been created between the requirements of job creators and the expectations of job seekers leading to labour shortages in the domestic market. The total number of departures for foreign employment in 2017 declined by 12.6% compared to 2016. In terms of skill levels departures for foreign employment have declined across all categories. It should be noted that the dependence of the Sri Lanka economy on worker remittances needs to be reduced. Socio economic developments such as high youth unemployment have led several Middle Eastern countries to implement national policies to create jobs for the locals and restrict migrant labor. Such scenarios raise significant threats to the ability of the Sri Lankan migrant workers in securing jobs in these markets.

Tourism

The tourism industry remained the 3rd largest foreign exchange earner to the country despite recording a moderate growth of tourist arrivals in 2017. Although it recorded the highest annual arrivals of 2,116,407 in 2017 the year on year growth moderated to 3.2%. Flight cancellations and delays at BIA till April 2017 due to the upgrading of the runway, as well as break out of the dengue in mid 2017 partly contributed to the sluggish performance.

Despite a lower than expected in growth in tourist arrivals earnings from tourism remained healthy with increase average spending and duration of stay by tourists during 2017. Earnings from tourism increased by 11.6% to US$.3,925 Mn from 3518 Mn in 2016. The salutary feature was that the average spending per tourist rose to US$.171 per day from US$.168.2 per day in 2016. Further the average duration was estimated to be 10.9 days in comparison in 10.2 days in 2017.

I am glad to note that one of the recommendations made by me in the earlier report that is to implement the tourist master plan without further delay appears to have been achieved with Sri Lanka being featured on CNN although fleetingly for a few seconds only. Unfortunately the other recommendations made have not been considered. Quoting from the Central Bank report “although the tourism sector remains a promising foreign exchange earner, Sri Lanka has not yet tapped its full potential in the global market. Sri Lanka attracted over 2 Mn tourist in 2016 and 2017 but countries smaller than Sri Lanka in the South East Asian regions such as Singapore, Taiwan and Hong Kong attract over 10 Mn tourists a year. Therefore to reap the benefit of the untapped potential of the Sri Lanka Tourism industry, it is vital to expedite the implementation of a strategic approach addressed through the TSP 2017 – 2020. A coordinated effort is needed between the Government and tourism industry stakeholders, through PPP ventures to achieve sustainable tourism targets of the TSP by 2020. In addition Sri Lanka needs to explore potential areas of water related tourism activities such as cruise tourism, whale and dolphin watching, diving and snorkeling, kite surfing as well as pilgrimage tourism, culinary tourism, bird watching, wedding tourism, film tourism and MICE (Meeting, Incentives, Conferences and events) tourism in order to thrive as the country’s key foreign exchange earner”.

Most of the strategies mentioned in the Central Bank report were included in my article. In addition I mentioned my concerns about the total number of tourists our tourist infrastructure can absorb without considerable strengthening of the facilities. As it stands there has been an adverse impact under Flora and Fauna of the Wildlife Sanctuaries and the wear and tear on other environmental factors. I commented on the Prime Minister targeting 5 Mn visitors in 2025 and wondered on what basis this target had been fixed because I had concerns as to whether Sri Lanka can sustain such a high level of tourists.

I also highlighted the time taken for tourists to travel from the airport to the popular destinations mainly because, despite the improved road infrastructure as a result of constructing the Airport Expressway and the Southern Expressway, the time taken to go to and from the entrance to the express ways is far too long. The other day leaving Fife Road Colombo at 5 pm on Friday, I entered the Airport Expressway only at 7 pm. I had a similar experience on a previous flight. So it looks as if we have to leave more than 2 hours before departure in order to enter the expressway. Add to this another 2 hours required by the airline to be at the gates could result in 4 hours to be set aside for a flight from Colombo. This is simply unacceptable.

I expressed the view that without spending enormous sums of money and getting further into debt by building express ways we should develop the domestic air routes by developing domestic airports at Katukurunda for Bentota tourist complex, Koggala for Galle, Weeraketiya for the deep South and airport at the Cultural Triangle and an airport for the Passekuda Kalkuda complex. These could be easily developed on a PPP basis with the local private sector involvement or on a BOT basis with foreign investment. I also suggested building golf courses to attract the Golf tourists and building Marinas for the Yachting enthusiasts. No progress appears to be made in this context.

There is tremendous potential for development in tourism in our beautiful island which is situated very strategically in the Indian Ocean which in the future will be the centre of development activities. As such it could be an ideal place for MICE (Meetings, Incentives, Conferencing and Exhibitions) tourism. As mentioned before, this requires large conferencing facilities which can accommodate around 10,000 people with additional break up facilities and for smaller conferences. A location in the coconut triangle accessible from the Airport Expressway would be ideal as it would be between the Airport and Colombo.

The tourist industry needs a far more dynamic approach than at present. There can be a serious problem in the future with a surplus of rooms when the new hotels such as Hyatt (which appears to be delayed due to disputes with a contractor). ITC which is fast coming up being available for occupancy. In addition John Keells is involved in a massive water front development which will include a 5 star hotel plus conferencing facilities. For some time we had only the Hilton which has now been partly refurbished, the Cinnamon Grand which in my opinion is totally out of date requires a fundamental refurbishment, Galadari which is somewhat neglected, Taj which has been refurbished but not up to 5 Star standard and the Kingsbury, the former Intercontinental refurbished after Dhammika Perera took over but with limitations as the small room size can hardly be changed.

The Shangri-la is in operation but does not appear to be bringing in his own clientele and is competing with the other 5 star hotels, the Movenpick and Cinnamon Red which are budget hotels. The Galle Face has also being refurbished. As a result a large number of new rooms have being created in Colombo. Unless the tourist arrivals increase dramatically it will be difficult to find clientele even for the Colombo hotels.

I am told that in the Galle City and adjoining areas 800 new rooms have been added increasing the competition which has become very fierce. Trincomalee and Nilaweli also appears to have many new rooms. In the Eastern province Passikudah has added a large number of rooms which are occupied only on a seasonal basis.

A large number of new boutique hotels have commenced operations and also estate bungalows converted to tourist hotels providing excellent accommodation at reasonable prices.

In this scenario unless arrivals increased both in quantity and quality we will soon have a situation of surplus rooms.

(The writer is former Chairman, Commercial Bank Plc., United Motors Lanka Ltd., Deputy Chairman - Hayleys Plc., Employment Federation of Ceylon., & Planters Association of Ceylon.)