Global spillovers to weigh on Lankan economy in 2016: PM

3 December 2015 02:31 am Views - 1892

Expresses commitment for 6.5% GDP growth

By Chandeepa Wettasinghe
The Sri Lankan economy may face a downturn in 2016 due to the events unfolding in the global arena, but should nevertheless work towards a 6.5 percent growth, Prime Minister Ranil Wickremesinghe said at the 30th anniversary celebration of the Colombo Stock Exchange.

“There’s going to be an unpredictable world scenario both politically and economically, which will determine the fate of the global economy and ours also in the coming years. A lot of what happens next year is not in the government’s hands. It’s going to be in the hands of actors outside the country,” he said.

He said that Sri Lanka must brace for declining commodity prices, a further pressured rupee and financial market volatility stemming from the West’s decision to escalate retaliation against ISIS and the International Monetary Fund’s (IMF) decision to include the yuan in its reserve basket.

Exporters would welcome a further declining rupee while it would raise the cost of living in the import-dependent economy.

Declining commodity prices would also benefit value-added exports and companies engaged in global value chains—which have been victimized through taxes in Budget 2016. However, many Sri Lankan companies export commodities.

Wickremesinghe noted that Sri Lanka could also face foreign investment outflows with the US Federal Reserve rates set to increase next year. The rates were surprisingly kept low in September, with foreigners pulling funds out of Sri Lanka ahead of the expected hike.

“In 2016, the Federal interest rates have to increase. That is one sure sign that President Obama has to show his electorate—that under his administration, the economy has improved and the interest rates are gradually crawling back to normal. Don’t expect it to stay low. It won’t. It will be decided politically. Otherwise he will be open to attack,” he said.

However, he said that with the bursting of the Chinese credit and equity bubbles, which have adversely impacted the exchange rates in the region, China is in a rebalancing period, now looking for foreign investments.

“What we can expect is that there will be larger amounts of Chinese direct investments in our economies for China to expand, and for our own economy to expand,” Wickremesinghe said. However, China may opt to increase its share of debt in the US to hold as a bargaining chip, especially if the Federal rates hike, or invest in strengthening Western markets.

“What have we got to do? We have to maintain our momentum and ensure that whatever happens, there is a 6.5 percent growth rate for next year. There may be some unseen circumstances, not just in our economy, in which case most of the emerging market economies will take a downward plunge,”
Wickremesinghe said.

He said that due to this, the government will focus on factors within its control. Ironically, the Budget is very foreigner friendly.

Wickremesinghe said that there are a lot of untapped funds among local individuals and companies which should be directed towards investments through an investment and growth-friendly culture. He added that state-owned enterprises will also contribute to the growth, which must exceed 8 or 9 percent in coming years for Sri Lanka to reach a high-income country by 2030.

Sri Lanka’s growth was 7.5 percent in 2014, and the IMF said that the growth would be 6.5 percent for 2015 and 2016. The Central Bank earlier this year said the economy would record an 8 percent growth in 2015.


Budget 2016 is passing its inauspicious period
Wickremesinghe said that the current Budget cycle is the ‘nonagathaya’ or inauspicious time, prior to a Sinhala New Year, which will be experienced next year. “Ravi Karunanayake’s second Budget is very much like a Sinhala New Year. First we have the Old New Year, when people are given bonuses and start spending, which was the mini Budget. 

Then we have a nonagathaya, when we get everything ready, which is where we are now. 2016 is when we have the New Year,” he said.

According to astrology, ‘nonagathaya’ is a period prior to the dawn of the Sinhala and Tamil New Year, where you do not engage in any activity other than religious activities, as it is deemed inauspicious.          

Wickremesinghe admitted that there may be a higher budget deficit next year. International credit rating agency Moody’s recently warned that despite predicting a budget deficit of 5.9 percent of gross domestic product (GDP) for 2016, past experiences show that the budget deficit may be worse than estimated.

“I was reading Moody’s report. Yes, we will have a high deficit next year. But as investments come, as revenue grows, and we bring more people into the net and more incomes into the net, then we should be able to achieve our target of 3.5 percent deficit by 2020,” Wickremesinghe added.

However, Wickremesinghe said that the government will pursue a standby loan facility from the IMF for a possible balance of payment crisis and ask for its assistance in tax reforms.

During numerous post-Budget seminars, Karunanayake emphatically stated that Sri Lanka would not require the IMF assistance since Sri Lanka has local expertise to manage its economy and find greater tax revenue. He said that the budget deficit was 6 percent of GDP, compared to the IMF’s target of 6.9 percent, which he had also endorsed in October. However, Moody’s report indicated the 6.9 percent figure.