Export-oriented industries and FDIs seen as answers to current economic crisis

By Hiran H.Senewiratne

The government is now in a deep financial crisis and the only hope for the country would be to promote export oriented industries and bring foreign direct investments into the country in the medium to short term perspectives. To salvage the country, resorting to commercial borrowings would drag the country into further difficulty, Colombo University economist Prof. Sirimal Abeyratne said.

“The government had made a US $ 1 billion loan repayment on sovereign bonds last month and the country is now left with little over US $ 3 billion in foreign reserves, which need to be increased gradually by attracting exports and foreign investments into the country, Abeyratne told The Island Financial Review.

Abeyratne said that commercial borrowings would be difficult and are not the solution, because interest is a bit high. “But cutting down on unnecessary expenditure and limiting importation of non- essential items would give some relief to the country. The Central Bank is now managing the economy fairly well in keeping with the dollar rate. It is also keeping inflation at a manageable level, he said.

Abeyratne added: “This year the government has settled major loans and now we have to plan for the next year. For the purpose of debt servicing of loans, the Central Bank is now building up foreign reserves in that direction.

“The current foreign exchange reserve issue could be tackled for the time being by going for low cost borrowings, replaced by investments to run the country. But the essential task is to use this period to lay the foundation to promote local exports and encourage foreign direct investments.

“The first thing we need to understand is that we should divert our focus from foreign borrowings to foreign investment, whether it is from China or elsewhere. In the past, we borrowed short-term and invested in long-term infrastructure projects against a weakening economic status.

“Sri Lanka also needs to make a balance between tradable and non-tradable growth. Infrastructure development, which is basically a non-tradable activity, is necessary to support tradable growth with private investment.

“The latter requires a significant reform agenda in order to establish business confidence and to promote an investment-friendly policy environment along with export growth.”