/ 22 May 2005

Sri Lanka rides tsunami to stay afloat

International lenders have downgraded Sri Lanka’s economic growth forecasts for this year after tsunamis devastated its coastline, but the island is banking on a flood of foreign aid to keep its head above the water.

The balance of payments, which were in deficit to the tune of $205-million last year, is expected to swing to surplus thanks to foreign cash inflows after the December 26 tsunami, the Central Bank of Sri Lanka says.

The rupee, which fell more than 10% against the dollar last year, saw a big turnaround, gaining 5,2% in the first quarter of 2005 to become one of the world’s best-performing currencies.

Foreign reserves also improved to $3,54-billion in March, from $3,12-billion in November, official figures show.

”The tsunami has certainly given the country a new lease of life,” said Alastair Corera, country head of Fitch Ratings. ”The question now is how the restructuring of sectors that need attention will be carried out.”

International lenders have been pressing for reforms in the country’s energy sector and privatisation of state enterprises, two areas where the Marxist-backed government has been slow to respond due to internal rifts.

”The debt deferment is not forever … the payments will kick in in about a year or two,” Corera said. ”If we don’t have the reforms in place by then, the country is going to be in bigger trouble.”

Tsunami aid inflows could keep the exchange rate steady possibly for the rest of the year, but economic growth may not see an acceleration despite reconstruction efforts, Corera said.

The tsunami has also reinforced expectations that neither the Colombo government nor Tamil Tiger rebels will resume their decades-old war because both sides suffered when giant waves swept much of the island’s coastlines.

Hasitha Premaratne, of HNB Stockbrokers, said although a permanent solution remains a distant prospect, it is believed both sides will maintain a ceasefire in place since February 2002.

Economic growth forecasts have been cut by 1% to 5% for 2005. The Central Bank says the country needs 6% to 8% growth to tackle poverty and unemployment. Last year, growth was at 5,4%.

The tsunamis that killed 31 000 people and left a million people initially displaced in Sri Lanka has now also put a smile on the face of the country’s top economic managers.

”The aid figure is not important, what is important is that we have got enough [foreign aid] commitments to undertake our entire reconstruction programme,” Finance Secretary PB Jayasundera said. ”What this means is the confidence our development partners have in us.”

The so-called ”tsunami dividend”, however, may be fleeting, according to a study backed by the United Nations Development Programme.

”Rising poverty and unemployment, worsened by the tsunami and slow development in conflict-affected areas, threaten Sri Lanka’s social sector gains,” said the report, released at last week’s review of aid to the island.

The report notes the tsunami-magnified development challenges — persistent slow growth, rising unemployment and malnutrition in rural areas and the conflict districts in the north and east.

”The tsunami disaster has increased the vulnerability of a large proportion of the very people whose income was to be uplifted under the government’s poverty-reduction programme,” the report said.

The government’s poverty-reduction strategy includes major infrastructure projects in depressed areas in a bid to generate employment with the help of foreign aid, but the country’s ability to absorb overseas help has been dismal.

Official figures show that the island was able to use only about 18% of its foreign aid last year due to bureaucratic delays and red tape.

About five million people, or more than a quarter of the 19,5-million population, still live below the poverty line, although the country for the first time crossed the $1 000-per-capita income mark last year to hit $1 030. — Sapa-AFP