A report from credit ratings agency, Moody’s, has highlighted regulatory issues in the Securities and Exchange Commission (SEC) and growing tension between the judiciary and the government as posing downside risks to Sri Lanka’s institutional strength.
Citing Sri Lanka’s latest scores in the World Bank’s Governance Indicators, which saw the country drop from 40th percentile in 2008 to 28th percentile in 2011 in Control of Corruption and 44th percentile to 42nd percentile in Rule of Law, the report observed that institutional checks and balances have been coming under stress despite parallel improvements in Ease of Doing Business.
“While the World Bank’s assessment of Sri Lanka’s regulatory quality is somewhat more favorable than its B-rated peers, turnover at the Securities and Exchange Commission (SEC) raises concerns over the effectiveness and independence of regulation in Sri Lanka’s capital market.”
“In the past year, two SEC chairpersons have resigned over contentious market regulation issues. In addition, the parliament’s initiation of impeachment proceedings against the chief justice is a sign of growing tension between judiciary and the government. This comes on the heels of the court’s ruling which blocks the centralization of provincial development programs under a national department,” the report stated.
Despite such deterioration in the quality of governance, Moody’s ranked Sri Lanka’s institutional strength at ‘moderate’, which was also boosted by a strong payments record and the government’s commitment to data transparency.
“Sri Lanka is making strides in becoming more investor-friendly. The World Bank’s Doing Business report for 2013 notes that Sri Lanka is one of a handful of countries globally, and the only country in South Asia, that made improvements in ease of doing business.
Ranked 81 out of 185 countries surveyed (from 96th last year); its improved score gains in procedures to start a business, register property, and obtain credit,” the report stated.
Meanwhile, in the area of Government Financial Strength, Moody’s gave Sri Lanka a rank of ‘Low’ and leaning towards the ‘Very Low’ rank.
The country’s high debt burden and cost of debt servicing along with a notable budget deficit were the primary causes for its low ranking.
The report flagged the continuing issue of poor performances in Sri Lanka’s 74 stateowned enterprises, particularly in the transport and energy sectors, as loss-making and consequently posing a “significant fiscal drag”
“This is due to non-cost reflective pricing policies, weak governance, and a lack of internal controls. While the government is taking steps to improve performance, progress has been slow. Key to note are recent efforts to infuse private sector entrepreneurship and reduce tariff differential subsidies. Given the government’s policy of non-privatization, however, we could see the Public-Private Partnership model being viewed as a more attractive one,” the report pointed out.
Combined losses of the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB), increased to 1.5%of GDP in 2011 from less than 0.5% in 2010.
The losses are largely financed through bank credit and treasury funding, which have implications for inflation and private sector credit growth.
Losses would have risen by a further 1%, had the government not implemented fuel and electricity price hikes.
Going forward, Moody’s stated that macroeconomic stability, a continued commitment to and implementation of fiscal consolidation and a diversification of exports would be crucial to the country’s medium to long term economic prospects.