The present economic condition in Sri lanka.

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.

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 don’t 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 country’s 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.

4. Role of IMF in Sri Lanka

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

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 wouldn’t 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 & 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 Lanka’s 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 country’s 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.

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 won’t 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 government’s 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 government’s 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 Sweden’s dissatisfaction with

governance in Sri Lanka. The continuation of GSP+ tariff concession from EU also depends on

governance issues.

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 & 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 & 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.

7. IT and Crisis

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

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.

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.