Present Economic Situation in Sri Lanka

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Curretn economic situation of Sri Lanka


<p>The present economic condition in Sri lanka.</p> <p>1. Abstract Crisis is the most powerful word which makes a horrible feeling for any individual in any country at present. Because of nearly all the people in the world become the victims of the great economic crisis with knowing or unknowing. As a country which is reaching the border of the development Sri Lanka also is facing this economical problem. This research paper is used to present the facts that the current economical background of the Sri Lanka, what are the social and political factors which are affect to the Sri Lankan economy, why government got a loan from IMF( International Monitory Fund) , what are the factors concerned by IMF to grant this and predication of the economical future of Sri Lanka. 2. Economical Review of Sri Lanka In mainly Sri Lanka economy is developing by largely on agriculture, services, and light industry. Agriculture accounts for approximately 21% of the gross domestic product (GDP) and employs 38% of the workforce. Agricultural output is divided into two categories, cash crops from plantation agriculture and food crops from subsistence agriculture. Cash crops like tea, rubber, and coconuts are largely grown on plantations. Rice is the principal food crop and the staple food for over 70 % of Sri Lanka's rural population. Manufacturing industries include textiles, ceramics, petroleum products, vegetable oils, fertilizers and cement etc. Manufacturing industries accounts for approximately 19% of the GDP and employ about 17% of the workforce. The service sector which consist Tourism, banking, finance, and retail of is the largest of the Sri Lanka economy, employing 45% of the workforce and contributing roughly 60%. Because of Sri Lanka is a developing country, some citizens who are in below the poverty level try to live with many financial difficulties. Over 45% of the population depends on benefits under the income supplement programs initiated by the government like samurdi. The balance of payments problem remains unresolved. The persistent trade deficit has led to increased reliance on foreign aid to meet the country's import requirements, leading to an inevitably mounting foreign debt.</p> <p>3. The Financial Crisis In the end of 2007, the world economy was heading towards a recession. The collapse of the US housing market, the financial system and international banks caused to create a financial storm in all over the world. The financial specialists said that this crisis created by the wrong decisions of American government. Several US presidents granted the housing loans to the citizens who dont have own house, to fulfill the election promises. When those people unable to pay their installments, it affects directly to the banks, then the companies related with banks. That is how this crisis began. The declining economic growth and rising inflation in most countries have resulted in lesser demand for certain commodities. With these developments and stiff global competition, the local apparel industry which is one of countrys main foreign exchange earner recorded a less than expected growth. Moreover, the entire industrial sector growth was also affected due to difficulties with increased cost of production, stemming from high oil prices and the consequent increases in electricity, transportation costs etc.</p> <p>4. Role of IMF in Sri Lanka</p> <p>The IMF (International Monetary Fund) was established, along with the World Bank, at a conference in Bretton Woods, New Hampshire, USA, in the closing stages of World War II. They were concerned about the rebuilding of Europe and of the global economic system after a devastating war. The IMF and World Bank were both created at the end of World War II in a political climate is very different from that of today. The original purpose of the World Bank was to lend money to Western European governments to help them rebuild their countries after the war. In later years, the World Bank shifted its attention towards development loans to third world countries. After 1977, Sri Lanka embraced economic reforms and a free market much ahead of India and the rest of South Asia. Sri Lanka became a member of the Fund in 1950. The IMF is controlled by the powerful western nations. The IMF delayed the final decision on the Sri Lankan loan owing to pressure from USA and some EU countries. The reasons were political and not economic. Western countries disapproved some aspects of governance in Sri Lanka, most notably, the government ignoring western pressure to stop the war against the LTTE and commence negotiation, the holding of about 275,000 refugees in camps in the north and the culture of impunity that prevails in the country undermining the</p> <p>rule of law. When the IMF Executive Board eventually took up the loan application for review in July, USA, UK and France abstained from voting on it. This was a clear signal to the country from the west that in the coming months their donor assistance, GSP+ and other trade and investment decisions will be influenced by governance issues as much as economic issues. But actually, the outside people can't understand the behavior of IMF. Because of IMF closed its Colombo office in 2007 by saying that they wouldnt like to deal with Sri Lankan economy, but economists and civil activists said the Fund is still expected to keep a watch over these war actions. The IMF left Sri Lanka because it had nothing to do with them here to help Sri Lanka by doing some programs. Also the other nations from Western countries wish to help Sri Lanka by donating &amp; still there are many countries out there to aid the help of IMF. So they left Sri Lanka as the situation is not bad for the development of the country. 5. IMF Loan and its goals The current loan is approximately $2.6b which exceeds the total of $1.5b that Sri Lanka raised from the IMF in a thirty year period between 1977 and 2008. In first IMF agreed to grant $1.9b but finally they granted $2.6b. It is a 20 month loan that will be released in quarterly tranches with the final due in March of 2011. The loan is repayable in four years starting in April 2012. There is a service charge of 0.3%. The loan is four times the size of Sri Lankas IMF quota. This loan is far cheaper than the commercial loans we raised in 2007 and 2008 at about 7.5% interest. The loan is not for development projects. It is only to augment the countrys foreign exchange reserves. To avoid the adverse political fallout from the loan request President Mahinda Rajapakse publicly claimed that Sri Lanka wouldn't agree to any conditions when borrowing money from the IMF. The Central Bank governor boasted that Sri Lanka could do without the IMF loan. In July the Acting Finance Minister and the Governor of the Central Bank signed a letter of intent agreeing to several conditions that we must adhere to receive the loan. In late July the IMF approved the loan and sent the first installment of $322m. Now some government ministers are hailing the loan as a stamp of approval of government economic policy. In reality it is not so much a stamp of approval as much as a stamp of redirection of economic policy that tells the government what it has got wrong in its recent policies and how to put them right. The main reason for taking the loan is the balance of payments crisis that the country faced in 2008. The current account balance ballooned from $1,401m (4.3% of GDP) in 2007 to $3,719m (9.4% of GDP) in 2008. Hit by the world recession the growth in the value of exports declined from 11.0% in 2007 to 6.5% in 2008.</p> <p>According the criteria of IMF, they are concerning on the financial discipline of the government. The IMF has explicitly stated that the government must protect its social spending, especially on education and health and transfers to protect the poor who are about 15% of the population. The point is that the much needed economic adjustment must not be at the expense of the most vulnerable in the population. This condition makes it hard for the government to blame the IMF for welfare cuts. In 2008 prices the government must reduce the budget deficit by about Rs 120b to meet the IMF target of a 5% budget deficit in 2011. In 2008 total tax revenue was Rs 586b. If tax revenue is to be raised to eliminate the budget deficit taxes have to go up by 20%. If the VAT alone is to be increased to raise the additional revenue it will have to go up by as much as 59%, not a practical proposition. The government has appointed a tax commission to make recommendations for tax reform. It is likely to recommend some tax increases, abolition of tax holidays and a greater effort to collect taxes from readily identifiable tax evaders such as businesses and professionals such as doctors, tuition masters and lawyers. Additional tax revenues alone wont help to reduce the budget deficit. The government will also have to cut spending. The government announced a few weeks ago that it has cancelled an import order worth Rs 23b for military equipment. The governments intention to recruit an additional 100,000 soldiers will add around Rs 40.0b to Rs 50.0b in wages and related personnel expenses to the military budget. Thus, we may not see a substantial financial saving from the military budget on account of the end of the war. The government and the IMF hope that the IMF loan and the connected reforms, if made, would provide a framework for other donors to step in help Sri Lanka reconstruct its economy following the end of the war. In theory this could happen. The government swallowed its pride and signed the Letter of Intent with the IMF agreeing to the IMF conditions. The governments strategy is to make an economic trade off. It is willing to undertake economic reforms in exchange for financial assistance, It remains to be seen whether the government will have the political will to effect the requisite economic reforms. Even if that happens, as the negotiations for the IMF loan amply demonstrated, donor assistance is not devoid of politics. Sweden, a long standing donor of Sri Lanka, terminated its assistance recently. It gave the unconvincing excuse that Sri Lanka has fully graduated from being a country that needs its assistance. The real reason appears to be Swedens dissatisfaction with governance in Sri Lanka. The continuation of GSP+ tariff concession from EU also depends on governance issues.</p> <p>6. CSE Growing In 1896, the Colombo Stock Brokers Association started the share trading with companies which had restricted accountability and entailed in aperture of plantation in Sri Lanka. In 1985, an official stock exchange was established with integration of the Colombo Share Brokers Association. At present 15 institutions are members of it and all of them are licensed to operate as share brokers. After the war in Sri Lanka, the stock market increased rapidly throughout the days. There were many reasons which pulled out by the specialists are that the loan given by IMF helped this growth &amp; the ending of war caused to the investments rapidity of other foreign countries like that. The significant event is the world record market price owned by the Sri Lanka recently. The Colombo stock exchange created history on 05/10/09 by recording the highest ever market capitalization 943 billion rupees. The previous one was 939 billion rupees recorded on the 13th of February 2007. A media release issued by the Colombo stock exchange says parallel to this the All Share Price Index has shown a significant upward movement by recording a growth of 2.05%. The turnover for the day was 1.5 billion rupees. The Colombo bourse has seen an exceptional growth during this year. After this fabulous record hit now the market begins to flow down rapidly. The most significant reason the people point out is the capturing of the largest share holder in Sri Lankan market. Mr Raj Rajarathnam was arrested for being guilty &amp; after that he decided to take over his shares in Sri Lanka. Some of the companies in which Mr Rajaratnam has stakes were among the worst performers. John Keells Holdings, the biggest listed company, in which Mr Rajaratnam has a 9% stake, fell 5.51%. Fallout from the arrest of the hedge fund billionaire Raj Rajaratnam in New York last week has reached the Sri Lankan stock exchange, which suffered its biggest intra-day drop in five years when trading.</p> <p>7. IT and Crisis</p> <p>IT industry is also one of the industries which is affected by the financial crisis very badly. But IT fights against the financial crisis and people use IT as a tool for survive in crisis. IT companies should come up with different solutions during a period of a crisis. IT industry depends on the demand of the IT services from other industries. At a time of a crisis most organizations operate with minimum resources and in most instances cut investment on IT. Therefore, demand for IT services could come</p> <p>down. However, at the same time organizations look for cost reductions, alternatives to maintain profits, process re-engineering, outsourcing options and retain their existing customers. Therefore, IT solutions can assist organizations and help organizations to survive at a crisis situation. If the clients have no money to buy the IT product, the IT companies face a serious trouble during the crisis period. Most of the local IT companies have more clients in Europe, USA, Australia etc, they couldn't sell their IT products to them. In many countries, job loosing becomes a great issue, but in Sri Lanka such a situation is not occurred. Because of the IT industry in Sri Lanka has many projects to do for the development of the own country like Nanasala, e-Sri Lanka, information system for police, hospital and factories etc. So through the IT products, the government can save more money and invest them. As well as the local IT companies can also earn some profit and survive in the market.</p> <p>8. Conclusion After the war, Sri Lanka gains many investments from local and foreign communities. So the Sri Lanka is passing a golden era of her in financial investment side. But there are many instances that affect to the Sri Lankan economy directly. The incidence of arresting Mr. Raj Rathnam in New York is one of the best instances of this. So the Sri Lankan government should launch some projects to increase the investments and use for services which can earn money or save money. If the government and local communities cannot gain 100% success during this era, it will become a bad affect to the future trends in finance.</p>