Will Free Trade (FTAs) Lead to a ‘Powerful’ Sri Lanka?

THE IMF IN SRI LANKA – Part V



by C. R. de Silva, C.C.S. (Retd).


Small & Medium Enterprises (SMEs)


– Low Export Viability under FTAs.


Continued from Monday


Conclusions


The above IPS study of one year ago, includes Policy Recommendations to overcome the numerous constraints at both country ends which have been encountered in the operation of the existing FTA, but if after seven years, the experience of Sri Lankan businesses is not good, the bottom line is: Why are political leaders in Sri Lanka rushing into an expanded, new Economic and Technical Cooperation Agreement (ETCA), extending to wider economic cooperation, including labour and services, without resolving important existing trade issues with India?


Sri Lanka’s political and business community’s and professional bodies’ opposition to the proposed ETCA, which is a disguised, now abandoned Comprehensive Economic Cooperation Agreement (CEPA), has extended to the issue of allowing migrant labour and India’s unemployed millions to enter and saturate the Sri Lankan job market, to replace the large numbers of skilled and unskilled workers who have migrated to the Middle and Far East in search of more lucrative employment, thereby increasing labour costs here. Will these moves further discourage FDI in Sri Lanka, at its lowest historical ebb in 2016, due to increasing costs of imported Indian labour?


A Point of View


Meanwhile, a new but very perceptive national policy think tank ‘National Council for Sri Lanka’ has urged the Government to abandon the proposed ETCA, and stated that "it is the responsibility of the Government to conduct a comprehensive investigation of the ‘non-tax obstacles’ of both countries…Sri Lanka’s National Economic Planning Council needs to focus on the country’s total manufacturing and services’ key areas…including stabilizing the country’s manufacturing and service delivery processes…the present Government considers bilateral trade agreements as the foundation of foreign trade. Therefore, the Government continues to establish such bilateral agreements with a number of countries, including China, Singapore and India. In fact, these are outmoded instruments based on traditional development models. Therefore, instead of such bilateral agreements, the Government should focus on new mechanisms for establishing trade relations with many countries. Just as the previous regime proposed the CEPA with India, the present Government has proposed ETCA, and both of these are inequitable for Sri Lanka, and should therefore be abandoned…" (Ceylon FT, 3 March 2017).


Automation in India


Finally, India, which is globally the fastest growing economy, is also fast automating its industry, the momentum being driven by foreign robotics companies, which are cultivating the market and tapping into opportunities. Accordingly, India will have an installed base of 24,000 industrial robots by end-2017, while warehouse automation is expected to become a $ 32 Billion market by 2020 (from $ 1 Billion in 2013). ‘Robotic butlers’ are helping to pick, sort and package items in warehouses across India, while car manufacturing plants are relying on robots for speed, scale and accuracy – welding and painting cars – and buying 60% of all industrial robots made in India. Locally made robots are also cleaning radio-active components at India’s Atomic Research Centre; while an autonomous underwater vehicle is inspecting and repairing bridges, pipelines and hulls of ships.


So, robotics use and development in India is not waiting for the Government to formulate policy, but the private sector is quickly diversifying the market for automation (India’s Asian Dilemma : How Best to Grow Robotics Industry? - From Robotics Business Review). Finally, the six million dollar question arises: Can Sri Lanka compete in fair trade as an equal partner under a proposed ETCA with such an advanced, fast-automating industrialized country?


Sri Lanka : Economic Crisis – Update (as of 10 March)


Due to the convergence of many factors, including the worrisome 100 Billion Rupee level of recent exits from fixed securities; the well-known emerging markets specialist investor Templeton Funds, pulling out almost $ 1.5 Billion of its funds from the local stock market; as well as very low institutional investor (EPF, ETF, Unit Trusts and Insurance Companies) participation in equities – amounting to only 6.5% of the market’s Rs 3.1 Trillion capitalization) – mostly due to allegations of corruption and a low level of confidence in the market due partly to prolonged, unresolved, convoluted ‘bond scam’ news headlines; and absence of an enabling environment of macro-economic and political stability; also, a record high level of new money printing by CBSL – surpassing Rs 100 Billion at this time - to raise funds to pay locally raised debt, which itself has now exceeded Rs 9 Billion, contributing to attendant rising inflation, now over 5%; a low, net international foreign reserve falling to about $ 5.4 Billion, below IMF-agreed levels; continuing, loss-making Sri Lankan airline’s foreign exchange outflows; and rising cost of living due to two staples, rice and coconuts, running into supply shortages, combined with and partly due to, a prolonged and widespread drought affecting fourteen administrative districts; and with the Governor, CBSL announcing publicly late-February that "our export performance has deteriorated dramatically", to one-half the export level reached in 2000 - high level IMF staff and management concern has been activated with reported visits by the latter to Colombo, in due course.


Do all these most unwelcome economic developments signify serious problems with unrealistic assumptions made in early-2016, when the amount of IMF assistance was evaluated, or wrong assumptions on which the IMF’s economic stabilization program itself was based, supported by a totally inadequate $ 1.5 Billion EFF commitment in mid-2016, which promised ‘take off’ of the economy of Sri Lanka in the foreseeable future? The IMF commitment of funds, was to be disbursed in small, six-monthly instalments, amounting to insignificant resource inflows, providing no foreign exchange buffer at all to the Government, which was instead saddled with numerous people-impoverishing, unpopular conditionality. These significant issues arising from the IMF’s recent role in Sri Lanka, were fully analyzed earlier by the writer’s series of articles, "Sri Lanka - Case for a $3-4.5 Billion in IMF Funding" in ‘The Island’ of 13 May 2016, followed by "Sri Lanka – Avoiding the ‘Road’ to Greece" in The Island of 13 June 2016. See also The IMF in Sri Lanka: ’Bull in a China Shop Syndrome’, 7 October 2016 and "Reliability of IMF Judgements and Program Efficacy", The Island, 3-4 August 2016, none of which have evoked any comments from the IMF!


The developments enumerated above, and the prolonged drought referred to which has caused a serious shortage of rice, and the need to import rice once again, expending scarce foreign exchange, and also financial outlays so far amounting to Rs 82 million for drought relief and a (very difficult to administer) government pledge to provide Rs 10,000 per acre for unusable, dried-out rice fields – together contributing to greater challenges in reaching an already ambitious, IMF-agreed ‘austerity’-based, 4.6% fiscal target in 2017 (now looking more like well over 5%) - have caused Moody’s (the rating agency) to assign Sri Lanka a B1 rating with a negative outlook, prompting its analysts to comment :


"Majority of Sri Lanka’s macroeconomic indicators from inflation to interest rates and foreign exchange values to external economic outlook have worsened in recent times, mostly due to self-inflicted economic ills and partly due to legacy issues…the IMF will press the Government on certain delayed fiscal and structural reforms…the pressure would mount not just from the expenditure side but also from the revenue side…drought-caused lower agricultural output will lower economic growth…reduce exports, household consumption and incomes in affected areas, posing downside risks to GDP growth…now projected at 5% in 2017, materially lower than government’s 6% forecast…higher imports to substitute for the loss of domestic production will weigh on Sri Lanka’s current account deficit and foreign exchange reserve buffers, a key constraint to credit quality. Agricultural sector difficulties could also spill over into a multitude of socio-economic issues as the sector employs 28% of the labour force but accounts for just 10% of GDP". (Moody’s analysis cited in Mirror Business, 3 March 2017).


Sri Lanka’s economic and net foreign reserve problems may become more aggravated with the next expected dollar rate increase by the Fed very soon, given the improving U.S. economy and no rate change in February, which will further contribute to depreciate the rupee, (given free Rupee exchange movements agreed with the IMF), and due to potential, accelerated outflows of foreigners’ fixed income investments. The Rupee will also come under more pressure from dollar demand by importers ahead of Sinhala-Tamil new year celebrations mid-April.


The western powers and their proxies (ably supported by our great neighbor, now feigning historic national intimacy), are also doing a ‘very good’ job through the usual neo-colonial agencies, of keeping our government authorities’ and public attention diverted away from the coming economic storm, and concentrated on issues relating to alleged war crimes, transitional justice, reconciliation, human rights, including allegations of torture, and therefore, need for new Constitution-making; and an ever-ready international financing agency is waiting in the wings, ready to bail-out one of (the very few remaining) client countries, periodically in BOP difficulties, with another paltry dose of just enough rescue funds to tide over another crisis, gaining an even better foot-hold here, and generating more business for itself, but with bigger and more people-impoverishing, onerous conditionality. So, the same sad saga keeps playing out time after time, until Sri Lanka adopts a very different development strategy, like the East Asian ‘miracles’, which will set our people finally free, like they did to their now liberated populations, enjoying much higher standards of living in inclusive prosperity.


Concluded


(The writer who was a member of the former C.C.S., was later a senior professional at World Bank Headquarters for over 30 years)..


 
 
 
 
 
 
 
 
 
 
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