Going against the advice of the International Monetary Fund (IMF) has not prevented Sri Lanka from growing consistently at a high speed and at the same time bringing down the country's debt-to-gross domestic product (GDP) ratio and fiscal deficit.
Investors put their seal of approval on the country’s progress in April when they bought $500m-worth of five-year sovereign debt with a coupon of 5.125%. The deal was eight times oversubscribed.
Since peace was achieved in 2009 after a bloody 25-year civil war Sri Lanka has undergone a massive programme of removing land mines, resettlement and renewal of infrastructure – at a cost over four years of $3.2bn, or roughly 6% of GDP. This has helped push GDP growth to an average 7.5% a year.
Ignoring is bliss
All of this has been achieved against the backdrop of the international financial crisis and subsequent bond redemptions, which led the IMF to recommend that Sri Lanka follow a conventional strategy of currency depreciation to balance the current account together with tax rises to boost government revenues.
But Sri Lanka resisted this advice and went for a more expansionist approach, keeping the currency high to pay for imports needed for reconstruction and lowering tax rates to boost economic activity.
The governor of the Central Bank of Sri Lanka, Ajith Nivard Cabraal, says: “We are looking at 7.8% growth this year and, going into the future, growth of about 8% a year. There is the possibility to make it higher but as a central banker I would prefer to keep it around the 7.5% to 8% mark on a sustainable basis. The investment levels we are presently seeing is giving us confidence that this will be achieved.”
On the approach of the IMF, Mr Cabraal says: “We have to appreciate that the IMF may not have been able to completely understand the way the Sri Lankan economy would move in the future. We have an in-depth knowledge of it so that’s where we had an advantage over the IMF. Nevertheless, [the IMF is] now seeing that the policy measures we put in place have been yielding results. I think that going forward we will have a better engagement with the IMF and it will see the wisdom of some of these moves.”
When asked about the concerns of analysts over Sri Lanka's high debt-to-GDP level and fiscal deficit, Mr Cabraal says: “Those are problems that we ourselves see as important to address. We had a debt-to-GDP level that was about 100% in 2004 and we have systematically brought it down to 78%. The projections of the next few years are that it will come down to about 65% so there is a very clear indication that we are addressing the problem. [This situation is the] same with the fiscal deficit – in 2009 it was as high as 9.9%. It has been coming down and now we have [reached] the 5.2% mark, and the government is aiming to get it down to 3.5% in the next two years.”
Happy customers
Portfolio investors seem to buy into the story. Apart from the sovereign bond, investors have been bullish on the Sri Lankan stock market and in the years following the peace agreement, making it one of the best performing in the world at one point. Naturally there have since been reversals leading on to a steadier growth pattern. In 2012, the S&P SL20 index was launched as way of fostering investment and on the debt side companies are now issuing and listing securities.
The chairman designate of the Colombo Stock Exchange, Vajira Kulatilaka, says: “Companies are starved of capital and there are attractive investors not only on the equity side, but also on the debt side. Corporates require capital and they are going out on to the market. Companies with acceptable ratings can issue debt; it started with banks as they require Tier 2 capital, and now corporates are coming to the market.”
Economic policy is not the only area in which Sir Lanka is resisting outside advice – human rights being the other. In March, the UN Human Rights Council adopted a resolution calling for a war crimes inquiry to be held in the country, but this has been rejected by the Sri Lankan government.
Mr Cabraal says: “Sri Lanka has a very good judicial system and we have every intention of having a reconciliation among the communities... [But] when an outside party comes in and appears to be involved in a process that should be entirely domestically driven, that gives a signal that there is something that is not really relevant or not really needed… Going forward, Sri Lanka has every intention of ensuring that we are able to put the conflict behind us, for after all we are the ones who suffered most.”
