The International Monetary Fund (IMF) has urged the Sri Lankan government to maintain a predictable business environment which in return will assist the country to transform itself to become a more sustainable, FDI-driven (foreign direct investment) economy from a debt-driven model.
“Maintaining competitiveness and achieving a more sustainable external position will require a mix of continued innovation, sustained investment in infrastructure and human capital, a predictable business environment, and ideally a heavier emphasis on direct investment and equity portfolio flows than debt,” IMF said in its Article IV consultation report released last week.
Sri Lanka appears to be vulnerable in most debt dynamics. The recent and the projected declines in debt to GDP ratio is largely attributed to the GDP growth, but the slower than projected economic growth and high share of foreign currency-denominated debt creates vulnerability.
The debt to GDP ratio declined from over 100 percent to 75 percent in 2014 with external debt at 35 percent of GDP of which 66 percent is long term and institutional debt, and the government targets below 65 percent debt ratio by 2020.
“The steady decline in the fiscal deficit and public debt as a share of GDP is a linchpin of macroeconomic stability and a critical factor in maintaining credibility and investor confidence,” the IMF said.
Meanwhile the country’s FDI flows have been extremely low— less than 2 percent of GDP and foreign investors have been complaining about the uncertainty in the economic environment.
The recent policy recommendations suggest the Washington based multi-lateral lender is not fully content with the overall governance structure and the regulatory environment – particularly the tax environment in the country and mix signals that are given by the government which are potentially hindering FDIs in to the country.
“Tax and regulatory environment is the centerpieces for understanding quality of business environment,” the IMF Resident Representative for Sri Lanka and Maldives Dr. Eteri Kvintradze said recently.
Meanwhile, IMF renewed their calls to contain the fiscal deficit through revenue generation without resorting to expenditure cuts as the Sri Lanka’s tax revenues stands lowest in the region at 11.6 percent of GDP.
Sri Lanka ranks 171 out of 189 countries in the ease of paying taxes index, but the country’s Finance Ministry Secretary, Dr.P.B Jayasundera said the country is not
among the worst lot in terms of most of these regulatory and governance indicators but ranks among the promising lot in the emerging global economy.
Meanwhile, IMF urged authorities to maintain a balance in the monetary policy between growth and inflation and also to watch the lags in monetary transmission.
Despite the Central Bank’s 7.8 percent growth target for 2014, the IMF forecasts a more conservative 7 percent growth for 2014, extending to 6.5 percent in the medium term.
Increasing state control in banks
Corporate governance in the banking sector in the post-consolidation era must be improved, the IMF stressed. In recent times the government was seen tightening its grip in larger private sector banks through the appointment of directors, as state-managed private sector pension fund, Employees’ Provident Fund (EPF) ups its stakes in most of the private banks almost up to the regulatory caps allowed.
As of June 30, 2014 EPF had 9.75 percent stake in the country’s largest private commercial bank, Commercial Bank PLC and there were four directors representing government interest in the bank’s nine member board.
The EPF holding in the second largest private commercial bank, Hatton National Bank PLC was 9.95 percent as of June 30, 2014.
The top three state-owned banks; Bank of Ceylon, People’s Bank and National Savings Bank account for half of the total assets of the 33 commercial and specialized banks and thus the post-consolidation might see state control increasing further in banks.
Meanwhile, EPF holds another 10 percent stake in the newly formed Cargills Bank.
Despite academic excellence and wide exposure to ministries and d e p a r t m e n t s , t h e s e government appointed directors in most cases lack commercial sense to lead a commercial enterprise. The Central Bank plans to have 5 strategically important banks with assets in excess of Rs.1 trillion.