Sri Lanka’s biggest policy overhaul since civil war risks inflation bump

By Anusha Ondaatjie | Bloomberg
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Sri Lanka’s biggest overhaul of economic policy since the end of its civil war risks a bump in inflation while auguring increased stability by aiming to curb the island’s trade deficit.

In less than two weeks last month, Sri Lanka let its currency weaken to a record low by shifting toward a more freely floating exchange rate, raised fuel prices and boosted interest rates for the first time since 2007 to damp credit growth. The moves aim to curb an excess of imports such as oil over exports, as Sri Lanka’s post-conflict resurgence buoys domestic demand.

“Although inflation could spike, the measures taken are good in order to ensure longer-term economic stability,” said Sanjeewa Fernando, an analyst at CT Smith Stockbrokers Pvt. in Colombo. “It’s the biggest monetary and fiscal policy overhaul since the end of the war” in 2009, he said.

Sri Lanka’s foreign reserves have fallen about 25 percent from almost $8.1 billion in July as the trade gap swelled, prompting Standard & Poor’s to lower the island’s sovereign rating outlook to stable from positive yesterday. Fitch Ratings said this week that the depleted reserves have increased balance-of-payments risks.

Consumer prices may rise 6.7 percent on average in 2012 as a result of last month’s policy steps, according to Standard Chartered Plc. They climbed 2.7 percent year-on-year in February, the slowest pace in 28 months. Price pressures are expected to build during 2012 because of “strong growth and imported inflation,” HSBC Holdings Plc said in a note yesterday.

Currency Decline

The policy steps began with the rate actions on Feb. 3, the scrapping of the rupee’s trading band on Feb. 9 and the increase in energy costs from Feb. 12.

The local currency has declined 6.5 percent against the dollar so far this year, the worst performance in the world after Iran’s rial. It slid to a record-low 122.35 per dollar yesterday. The Colombo All-Share index is down 10.2 percent in 2012, the most in Asia.

Governor Ajith Nivard Cabraal’s decision to raise the reverse repurchase rate to 9 percent from 8.5 percent and the repurchase rate to 7.5 percent from 7 percent contrasts with cuts in nations from Indonesia to Brazil, as Europe’s protracted debt crisis pressures officials to shield growth.

The increases in borrowing costs, a more than 20 percent rise in transport and electricity prices and a shift toward a “largely floating exchange rate” make up a “bold” package of measures, said Sajjid Chinoy, an economist at JPMorgan Chase & Co. in Mumbai.

‘Unambiguously Positive’

While they will probably crimp growth and spur inflation in the “near term,” the “reforms are unambiguously positive in the medium term, and will likely ensure that growth is rendered more sustainable going forward,” he said in a note.

Sri Lanka’s $50 billion economy may expand 7.1 percent in 2012, according to Standard Chartered, less than its earlier estimate of 7.5 percent. Gross domestic product rose an estimated 8.3 percent last year, Cabraal has said.

The central bank said last month it aims to keep inflation in the “mid-single digit levels” in the second half of 2012. Credit granted by commercial banks to private businesses jumped by 34.5 percent in December from a year earlier, “substantially” exceeding projections, it said.

February’s steps will help bring down the trade and current-account deficits, Cabraal said on Feb. 14. The International Monetary Fund welcomed the move toward greater exchange rate flexibility in a Feb. 9 e-mail. It has disbursed $1.75 billion from a $2.6 billion program to boost the Sri Lankan central bank’s reserves.

Sri Lanka’s trade deficit exceeded $1 billion in both November and December. Its reserves fell to three months coverage of current-account payments at the end of 2011, from roughly four months in the middle of last year, S&P said.

© Bloomberg

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"There is plenty of room for both India and China" - Presidential advisor assures

IANS | The Pioneer
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India should not feel uncomfortable with Chinese presence in Sri Lanka as there is "plenty of room for both", said a Sri Lankan MP and adviser to President Mahinda Rajapaksa. He said India should not try to seek "exclusive rights to Sri Lanka".

Rajiva Wijesinha, who was here Wednesday on his way to Nepal, said, "India should not feel uncomfortable" about China's growing presence in Sri Lanka.

"We are good friends with both India and China," Wijesinha told IANS in an interview.

"And there is plenty of room for both."

Wijesinha, who studied at Oxford University and has worked as a professor, said Sri Lanka's geographical position makes it attractive for both the countries, "but (seeking) exclusive rights to Sri Lanka is a waste of time".

"Not at all, not at all," said Wijesinha when asked whether India should begin to worry about the projects being undertaken by China in the island nation.

Citing the example of Hambantota port, he said: "We first offered its development to India. When it didn't go ahead, it was given to China."

The port is located in Hambantota, one of the lowest per capita income regions in Sri Lanka, and the port will be an important catalyst for major economic development. The total estimated construction cost of Phase 1 of the project is $361 million, out of which 85 percent has been funded by the Ex-Im Bank of China.

The professor said that now India is "moving quickly" and working at the Kankesanturai port in the north.

He gave the assurance that "India has nothing to worry about" regarding China and added: "China is not a Big Brother".

Wijesinha, who is advisor to the president for reconciliation, would like India to help out in providing micro-credit to the ex-combatants of the Liberation Tigers of Tamil Eelam (LTTE).

In May 2009, Colombo militarily crushed the LTTE, the last stages of the war leaving thousands of combatants and civilians dead.

India outlawed the LTTE in 1992, a year after a Tiger suicide bomber assassinated former prime minister Rajiv Gandhi.

The bloody war in Sri Lanka, Wijesinha said, left 300,000 internally displaced people. "About 10,000 combatants surrendered while another 1,000 were later caught."

"The idea is to provide micro-credit to the former combatants so that they can restart their lives through entrepreneurship," he said.

"We will soon approach India so that a sum of 1,000 lakh Sri Lankan rupees ($820,000) can be distributed to at least 1,000 ex-combatants."

Speaking animatedly on his favourite subject of education, he admitted that though his country has high literacy, "a lot still needs to be done".

"We have to fast forward education," said the professor who has published "Beyond the First Circle: Travels in the Second and Third Worlds".

He stressed that India has "done a lot" to help reconciliation in Sri Lanka.

"India has not done a song and dance about it," he said with a smile as he tried straightening his tousled hair.

© The Pioneer

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Sri Lanka's request is delaying tactic - HR Groups

BBC Sinhala
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Human rights groups have expressed their surprise at the Sri Lanka government's request for more time to investigate human rights abuses which it earlier rejected as anti government propaganda.

Addressing the United Nations High Commission for Human Rights in Geneva on Monday, Sri Lanka's special human rights envoy Minister Mahinda Samarasinghe said internal processes are already in place, and appealed for more time to deal with human rights issues in the country.

Amnesty International (AI) researcher on Sri Lanka, Yolanda Foster says that there is nothing new in the government's argument for more time and space.

"Successive governments in Sri Lanka had asked for time but only delivered broken promises," she told BBC Sandeshaya.

Ms Foster said that abductions, killings and torture continued across the island within a persistent climate of impunity.

She recalled that The Lessons Learnt and Reconciliation Commission (LLRC) a year before had requested in its interim report to release a list of detainees to the families searching for the missing.

"Government has simply failed to produce this list," she said.

Time 'not a barrier'

Executive Director of Human Rights Watch, Brad Adams says that time is not a barrier if there is a need for the Sri Lanka government to investigate human rights abuses.

He said that Sri Lanka government had given promises to inquire into alleged human rights abuses committed even before the war.

"Even a commission appointed by the president failed spectacularly, All international members of the commission resigned", he said.

It has been two and half years since the end of the war, and he said, it is unimaginable to think that the Sri Lanka government would now initiate a credible process to investigate human right abuses.

He said that Minister Samarasinghe had said that those who have eyes do not see, and those who have ears do not listen.

"This is exactly what I could say about Sri Lanka government which for many years refused to hear the evidence when people tell them, and refused to see when people show them evidence," Brad Adams said.

© BBC Sinhala

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