Thursday, December 9, 2010

There is no FDI in the private sector, for that matter even Local Investment

It is almost unbelievable that over a year and half after the hostilities ended, there just is no increase in private sector investment, from Local or Foreign sources in Sri Lanka. The Central Bank statistics amply point out there is no net Private Sector Job growth either. All the domestic job growth in the past 5 years has been in the Public Sector and Security Forces. The budget was aimed at increasing Private Sector Employment by providing more incentives.

There is no time to waste, as the government seems intent on doing keeping busy with accusing the opposition of a host of ills, to shift focus away from the real problems at hand. The stock market has risen to great heights in anticipation of the future, but if there is no real activity, we could see a crash of confidence followed by a crash in the market with the inevitable consequences for the economy.

A liberal budget is not the only requirement for takeoff. It is the confidence of the investor that the conditions are ripe for new investment. That is not there. The banks are awash with money with no one borrowing. I can get Rs1B loan at .25% above the repo rate, namely at 7.5%, but I do not have credible investments to invest with confidence that will guarantee a return, worthy of me taking the risk.

The question as to why this is so is what the Government should be asking. Once they can understand this and act on changing the scenario, only then will the investors move in with Investments and Expansion of existing businesses. I am not saying there is no Investment, it is that the level has not changed from pre conflict days. The level needs to be much higher if we are to grow at a rate that is forecast.

There is a lot of hype in the press about new hotels being built, but until we actually see construction taking place these are all still on drawing boards. I agree the power projects are good investments, as well as the expansion of the Colombo Port, but other infrastructure projects will take a very long time to payback, and if we do not have a return to be able to debt service in the short term we will have severe problems to pay off our foreign debt. This will especially be so once the Eurozone and US economies pick up, and then we will find it more difficult to borrow to repay loans falling due, unless they are refinanced at higher rates.

The logic that is used now to keep the exchange rate strong, so that our imports and borrowings can be cheap will then immediately evaporate, resulting in a huge depreciation to protect capital flight, something that will then become hugely counterproductive. The answer lies in ensuring we start viable investments without delay, having regard to the investment climate, which MUST BE IMPROVED


Anonymous said...

Problem could not have been expressed more correctly. It's invest now or perish!

Anonymous said...

The Government is not doing the right things to inspire confidence.

The keys being: law and order, due process, proper functioning of the judiciary, elimination or corruption, and improving diplomatic relations with the west.

If these issues are not tackled there will be a financial crisis. We have borrowed too much and need to get a lot of things right in order to debt service.

Your analysis is good and no one is talking about this!