Successful tourism season needed to boost confidence

By Devan Daniel

A Chartered Wealth Manager says Sri Lankas economic growth could almost double in 2010 as peace takes hold of the country, and a successful tourism season this year-end would help bring much needed confidence to the countrys economic actors, but warns against complacency.

Michael Preiss, who is Economic Advisor and member of the Director Board of Ceylon Asset Managementfund managers of the Ceylon Index Fund that invests in the TOP 10 index companies on the CSE, Director and Research Fellow of the Hong Kong based Asian Bond Market Forum, firmly believes the end of the decades-long war would in its self bring economic dividends but needed hard work to make it sustainable.

\"Now that there is peace and virtually two new provinces contributing to the economy (the North and East caught in the deadlock of the thirty year war) Sri Lankas economy can grow by 6 to 8 percent in 2010,\" Preiss told the Island Financial Review in a recent interview.

The Central Banks revised GDP growth rate for this year is in the range of 3.5 and 4.5 percent and Preiss believes growth could double next year.

\"Now that there is peace, the economy can only grow. Sri Lanka has experienced a vicious spiral for so long because of terrorism, high interest rates and high inflation. But things have changed now, and the country is in a virtuous spiral,\" he said.

\"People need to believe in themselves. It is human nature, after a bad experience, to keep looking over their shoulders. It is like driving a car with your eyes constantly looking at the rear-view mirror. Sri Lanka needs to look forward.

\"I believe a strong tourism season at the end of this year will help restore confidence in the economic actors of the country and make them believe in themselves,\" Preiss said.

The onset of peace after the war ended last April has also lifted Sri Lankas profile as a destination for foreign investors and Preiss said this would only continue and believes peace it self would bring economic growth.

\"But, Sri Lanka needs to guard against complacency. The risk now is that the opportunities that have been opened up would not be taken. The government needs to start with a new slate and restore investor confidence,\" Preiss said.Fiscal imbalances...work like mad...

Sri Lanka has suffered from fiscal imbalances for decades, and the government is committed to bringing down the fiscal deficit (to about 5 percent of GDP by 2013 as per commitments with the IMF) according to the Fiscal Management Responsibility Act.

\"It is okay to run a fiscal deficit. The government would have to borrow more in order to kick-start development activities. Fiscal prudence is not the wisest thing right now; it is not the right time for that. In fact, it could be a mistake to try to cut down spending,\" Preiss said.

\"What is needed now, however, is for the government to spend right and spend wisely. Now that the war is over, the government can virtually start with a clean slate to rebuild the economy,\" he said.

\"Now is the time to work like mad and earn the trust of all the stakeholders to the countrys economy. There must not be half hearted ministry-level goals. Everybody would have to pull together. The biggest risk facing Sri Lanka now is complacency,\" Preiss said.

A government think-tank in a recent report said Sri Lanka needs to maintain fiscal flexibility in order to respond effectively to the needs of the once war-torn regions of the North and East.

\"Fiscal developments so far in 2009 have been unfavourable. Revenue growth has contracted sharply by 9.6 percent during January-April 2009 compared to a growth of 24 percent in the corresponding period in 2008. Expenditure has grown at 28 percentslightly above the 24 percent growth recorded in the corresponding period in 2008,\" the Institute of Policy Studies said in its flagship publication Sri Lanka: State of the Economy 2009.

\"As a result, the overall budget deficit estimate for the period has doubled to 4 percent of GDP relative to the 2.1 percent recorded in the same period of 2008.

\"These developments suggest that Sri Lankas fiscal situation is set to weaken considerably, contrary to the optimistic fiscal deficit target of 6.5 percent of GDP announced in November 2008 in the governments budgetary estimates for 2009,\" the IPS said.

\"Indeed, the revised fiscal target of 7 percent of GDP announced following the Letter of Intent with the IMF also looks to be similarly optimistic,\" it said.

\"The immediate response calls for rationalisation of expenditurescutting back on profligate expenditureso that priority areas are not duly affected,\" the IPS report said.