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Balance of Payments

image from JDS Lanka

image from JDS Lanka

The Pax Rajapakse is almost four years old. In that time I’ve gone from being a relative tortoise in my own country to having a degree of freedom that I never imagined possible. I’ve traveled now to virtually every place formerly torn up by the war. And can travel anywhere else I please should I wish to do so.

But the Pax Rajapakse is just that, peace. It has no moral identity. It has no moral pretensions even though it likes to pretend otherwise. Dreadful things are done to preserve the peace. But in all objectivity some might say that the end justifies the means. Peace is its own reason.

But a once universal peace is now fragmenting into varying degrees of peace; different categories of peace now exist. There is a lesser peace and a greater peace. The greater peace is being able to move around your country with freedom, the lesser peace is demarcated by invisible lines drawn through society with labels saying things like ‘Do Not Cross’, ‘Trespassers Will Be Shot’ and  ‘Sycophants Only’.

The country, as it strains under the forces of development, churns society like the roiling Indian Ocean and casts up new oppressed classes and facilitates the surge of new elite. Apparently there is ‘good’ corruption and ‘bad’ corruption. So say some, justifying the regime’s steamroller approach to progress with a substantial personal cut. But where is the line, I say?

While people leave on boats, and put up with heavy abuse for want of jobs and are kicked out of their homes to make way for high rises in the midst of Colombo; a whole new class of wealthy and powerful Sri Lankan is emerging. Closely connected to the country’s powerbrokers, they wield high influence that cuts through social and legal infrastructure like butter. Any justice is we have here is highly skewed in the favor of these elites.

All this has not gone unnoticed. The people are restless and feeling the brunt of ever increasing cost of livingn. Straight talking journalists are still in danger. And the briefly stable peace is now crumbling at the edges with this latest drive of racism. The people are hungry for something to blame. A few decades ago it was the Tamils, and now it is the Muslims. 

But peace is profitable, war is not. And the last thing the government needs is another conflict. And therein lies the problem. Sri Lanka is a corrupt animal. This corruption is like a cancer, but it can still grow within it. Most forecasts still place our economy with prospects of around 6-7% of GDP growth per annum. On a global scale this is huge. This means we double every ten years or so. And if we’re patient enough and do not over reach, we can still become a rich country in our own time.

There are however, serious glitches that can ruin everything. Since Sri Lanka stopped being a low income country, it has stopped receiving aid which basically allowed us to spend more than we earned without worry. And over the years a strong parasitic class developed that benefited and prospered from this surplus, the result; a bloated state sector, crazy inefficiency and high levels of corruption. And now it is this transition from being aid dependent that is really killing us.

Finding itself forced to cover up its various deficits (budget and current account) by taking loans, Sri Lanka is realizing (I hope) that it is mixing a recipe for disaster. We need solid foreign investments to replace these loans and they will not come in until the political, and by extension business, environment is made investor friendly; until budget gaps are sorted out sustainably;  until capital expenditure is focused on projects with long term benefits like education, infrastructure and health.

Currently the government is trying to cover its behind by putting the burden on the public. It should be cutting dead weight and increasing its efficiency by turning state corporations (like the cash bleeding CPC and CEB) profitable, instead it is reducing much needed public expenditure and increasing prices of essential goods and utilities. This burden on the public, ever increasing with the latest round of fuel price hikes, is what is contributing to unrest. There is a continuing laxity in addressing post war issues, and fiascos like the Expropriation Bill and the impeachment of the Chief Justice are poorly handled and reflect very badly internationally.

The Rajapakse regime still has my support. Most East Asian giants grew up under pseudo democracies; Indonesia, Malaysia and Singapore. And the fact that we lack a better alternative has never been more obvious in the light of the UNP’s recent feeble opportunism in attempting to capitalize on racist propaganda. The Rajapakse’s have huge potential to bring something the country has not had for a long time; political stability and long term growth. But they cannot do this by cultivating a parasitic social sub-strata of sycophants and dependents.

Hidden agenda lurks behind this fresh wave of racism, trying to distract from pressing issues at hand. What we should be doing is figuring out the real problems and then campaign for reform, especially with the limitations of our reality in mind. This is undoubtedly hard to do in the current context; the corruption is the cancer and it is within all of us, if you will permit me a bit of drama. If the Rajapakse regime had a big role to play in creating the pax, average Sri Lankans have an even bigger role to play in keeping it.

The Krrish project has been making waves, if only for its absurd proportions. The complex’s tallest tower is going to be the third tallest residential tower, are you ready for this? In_the_world. I hear three quick bangs on a bell; the crowd goes wild as the fighter in the right corner shrugs off his glittering robe. All hail the Krrish project, destroyer of third world woes.

But seriously. I snooped around a bit (and by now this is relatively common knowledge) and found that Krrish doesn’t really have any completed real estate projects anywhere in the world. Closest thing they have is a few projects underway in Guragon, India. As a company laying claim to such a massive venture, Krrish has virtually no media mentions in India, and its only ties to solid listed corporate are a claim to own a stake in Cobra Beer. And in fact Krrish is better known for its brewery business than anything else.

It’s projected to bring about $560mn into the country. But that number exists only on paper. In reality these projects bring a fraction of that amount, usually 10%, and try to source the rest locally. Krrish, which hasn’t started building yet, is rumored to only have brought in $5mn, as a 10% down payment for the value of the land. The completed project will have some 750 apartments plus equal amount of office spaces, each of the apartments are priced at roughly a million dollars.

The plan is to pre-sell them to raise money to build.  But as you can see from the chart below, demand for apartments hasn’t exactly been booming. If demand does not meet supply, the project will have to be abandoned. Far worse though, is the prospect of the project being bankrolled by a country eager for any kind of investment (especially something with a result so grandiose) ending up with the local banking system owning roughly $500mn of bad loans. And this will probably at the very least result in a major banking/debt crisis for the country. Just putting some thoughts out there. What does everyone else think?

krrishh

The Central Bank just released the first six months of trade data for Sri Lanka. Trade is an important component of the Balance of Payments  (BOP). Which computes the sum of a countries transactions with the rest of the world.

Sri Lanka’s BOP is perpetually in the red. In 2011, massive imports in consumer durables and investment goods made the negative balance worse.  High imports last year were facilitated by low interest rates and a propped up exchange rate. But this year the government has tried to discourage imports by floating the rupee, increasing interest rates and actively discouraging banks from lending with a lending cap. There’s also the new taxes on vehicle imports that, together with other restrictions have just begun to impact durable imports in a big way.

The revenue the government gets from vehicle imports is important for its budget deficit (which is total government revenue less its spending). An increase in taxes like we’ve just seen is likely to actually reduce government revenue even further because potential vehicle owners will be completely discouraged to buy.

But so far this year, imports have failed to ease up as much as they were hoped to. And floundering global economies have reduced the demand for our exports. Globally, fuel prices are looking to rise but this will impact fuel imports less than local demand which is likely to increase the more we use thermal power in response to our ongoing electricity problem.

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