According to Sri Lanka’s central bank governor, Ajith Nivard Cabraal, the country’s soaring inflation rate is a short-term price to pay for long-term stability. Although he acknowledges Sri Lanka’s inflation rate is high in global terms, he likes to call it a “clean” inflation rate. “That is, we have responded to the increase in world prices and revised our own prices without taking the path of subsidies,” he says. “Obviously that puts the economy under pressure in the short term but it will definitely strengthen us for the future.”
And the price revisions he talks of have been mainly in the energy sector. In the past four months, the government has adjusted electricity, petrol, diesel and kerosene prices to more accurately reflect market prices. “We make revisions as and when they occur so we do not have any hidden space within pricing levels,” he says.
While fuel inflation is unavoidable as Sri Lanka is dependant on imports, the government’s policy of supporting rural and suburban small and medium-sized enterprises in food production has been effective in parts, in that it has protected the domestic economy against the global economic slowdown. A policy of food security during the past two years means Sri Lanka has been better able to respond to rising food prices as the country is almost fully self-sufficient in rice and most other foodstuffs.
Whatever safety measures the government takes, runaway inflation can still present a serious threat to a country’s attractiveness as an investment destination; but Mr Caabral is not worried. He believes serious foreign investors who have been following Sri Lanka’s economic development for some time will understand the current price movement and the central bank’s economic decisions. “In the past two years, notwithstanding the global downturn and our own security situation in the east of the country, we have seen a huge increase in our foreign direct investment which can only be explained by a deep understanding of those people who are investing,” he says.
The opportunities for foreign investors continue, especially in infrastructure development as Sri Lanka moves into a middle-level income country with an increasingly strong private sector. The country’s per capita income stands at $1617, which is the highest in south Asia except for the Maldives. Telecommunications is another sector strongly supported by FDI, especially mobile technology, says Mr Caabral. It is being expanded into the areas of banking and business, so access to finance has a deeper penetration and has become increasingly rural based.
But it is the apparel industry that has become the biggest foreign exchange earner in Sri Lanka, attracting big names including Marks & Spencer, Victoria’s Secret, Next and Gap. “Many of the biggest distributors are manufacturing in Sri Lanka and many have dedicated plants that support their own retail outlets,” says Mr Caabral.
The manufacturing base of many foreign firms has been a factor in Sri Lanka’s poverty reduction – in 2002, some 28.2% of Sri Lankans lived below the poverty line but by the end of 2007 that figure had dropped to 15.2%. The reduction in poverty was a countrywide victory despite much of Sri Lanka’s economic activity taking place solely in the western provinces of Colombo, Gamba and Caluthara.
Mr Cabraal was a member of the government team that participated in the Geneva talks with the Liberation Tigers of Tamil Eelam in February 2006. While FDI has been a factor in the reduction of poverty, the end of a long and destructive 25-year period of unrest in the eastern province hailed new opportunities for foreign investors. “The eastern province has been liberated from terrorism, creating foreign investment opportunities in agriculture on the flat, fertile land; tourism because of the beautiful beaches; and great opportunities for fisheries,” he says.
AJITH NIVARD CABRAAL
2006Central Bank of Sri Lanka
Governor/chairman of the Monetary Board
2005Government of Sri Lanka
President’s adviser on economic affairs/secretary to the Ministry of Plan Implementation
Management consultancy practice founder/chairman of several public companies