DFCC Chairman J. M. S. Brito urged authorities to be more pragmatic than reactionary and not burn bridges in dealing with recent geopolitical issues, while commending the government for taking crucial steps to address longstanding structural problems in the economy.
Recent geopolitical developments have made things more complicated for the Sri Lanka economy already struggling to come out of a balance of payments crisis and while the domestic economy is undergoing some readjustment pains, the banking sector continues to generate healthy profits.
"Geopolitics has a significant bearing on Sri Lanka. From Sri Lanka’s perspective, the external macro situation has been made more complicated by the geopolitical developments in the West as well as in the Middle East. The former is still our largest trading bloc and source of tourism while the latter is a key market for our tea exports and principal source of oil. Therefore, the fallout from the recent imposition of sanctions and other politically driven actions would be better dealt with in a pragmatic rather than a reactive fashion," Brito told shareholders in the bank’s latest annual report.
As has been repeatedly highlighted in The Island and other media, Sri Lanka’s diplomatic corps has been found wanting on many occasions, while politicians back home are often irrational in their actions and pronouncements when it comes to geopolitical issues.
"Given the new geopolitical realities, this will require a fine balancing act if Sri Lanka is to assert itself without burning any of the bridges that have long stood the test of time," the DFCC Chairman said.
He also commended the government for biting the bullet, adopting measures to contain a balance of payments crisis.
"In 2011, the Sri Lankan economy recorded a growth of 8.3%, the highest in its post-independence history. It was achieved whilst maintaining inflation in single digits and unemployment below 5%. This performance, which was driven by the consumption and investment boom following the end of the conflict in 2009, merited the upgrade of the sovereign credit rating in June 2011. However, in the second half of 2011, some overheating was evident and developments in the external sector were not positive."
"A widening trade deficit raised concerns about Sri Lanka’s external finances and led to corrective measures in the form of the depreciation of the rupee, the hike in policy rates and a ceiling on credit growth. It delivered the message that the authorities were willing to bite the bullet and accept a lower growth in the context of giving priority to the external sector. This is crucial given that Sri Lanka’s external financing hinges on retaining investor confidence in a consistent and rational policy framework."
Economists have for long argued that artificial exchange rates, unrealistic pricing of fuels and lax fiscal discipline would bring short term fixes but would sooner or later catch up with the economy. The policy reversal announced this year as a late response to the balance of the payments crisis has resulted in positive reviews from sovereign ratings agencies, the IMF and our own economists, including UNP economic spokesman Dr. Harsha De Silva, who was quoted in these pages as saying the policy measures should work as there was no other option.
"Despite some systemic pressures in the latter part of the year, the industry reported a healthy performance with strong balance sheet growth, higher asset quality and increased profitability despite the narrowing of margins as the year progressed," Brito noted.