The peace dividend
Far Eastern Economic Review; Hong Kong; Jul 4, 2002; Manik de Silva;

Abstract:
If the stockmarket is the barometer of investor confidence, as Sri Lanka's Finance Minister K.N. Choksy had it when presenting the 2002 budget last March, the national economy is heading for a desperately needed take-off. Since October 8 last year, when defections began threatening the People's Alliance government of President Chandrika Kumaratunga - which was defeated at the December elections - the All Share Index of the Colombo Stock Exchange has gained 78.3%, hitting a four-year high on June 6 but losing some gains since then on profit taking. Foreign investors, too, have returned to the bourse with a 1.1 billion-rupee inflow from January to May, against a 242 million-rupee outflow during the same period a year earlier. The prospect of peace, of course, is the main driver of economic revival.

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VOTE OF CONFIDENCE Foreign investors have returned to the Colombo stockmarket

Economic Monitor

SRI LANKA

If the stockmarket is the barometer of investor confidence, as Sri Lanka's Finance Minister K.N. Choksy had it when presenting the 2002 budget last March, the national economy is heading for a desperately needed take-off.

Since October 8 last year, when defections began threatening the People's Alliance government of President Chandrika Kumaratunga-- which was defeated at the December elections-- the All Share Index of the Colombo Stock Exchange has gained 78.3%, hitting a four-year high on Tune 6 but losing some gains since then on profit taking. Foreign investors, too, have returned to the bourse with a 1.1 billion-rupee ($11.4 million) inflow from January to May, against a 242 million-rupee outflow during the same period a year earlier.

The prospect of peace, of course, is the main driver of economic revival. Rajeeva Bandaranaike, the marketing manager at the Colombo Stock Exchange, admits that strategic buying in some counters largely fuelled recent market gains. "But what sparked the strategic buying was the positive sentiments on peace prospects with investors seeing value for the future." Chinthaka Ranasinghe of John Keells Stockbrokers, a leading Colombo brokerage, agrees, saying, "There is expectation of improving fundamentals with peace in the air and what the government is doing to revive the economy."

The December 24 ceasefire between the government and the separatist Liberation Tigers of Tamil Eelam has held, though direct peace negotiations originally targeted for May are not expected until the end of July at the earliest. "What's important is the stability of the peace process, not the speed," says Senior Minister Lakshman Peiris, who will lead the government team for the talks. "Were not unduly concerned about the slight delay."

But the situation is less comforting on the ground. Central Bank Deputy Governor W.A. Wijewardene admits that first-quarter GDP growth has fallen short of 1%-an improvement no doubt from the previous year's negative growth of 1.3%, the first time the country had suffered such a shock in its economic history, but still falling short of the government's target of 3.5%-4% growth this year. But the monsoon has not disappointed, and first-quarter crop losses in tea (down 4.2%) and coconuts (minus 6.5%) may still be made good before the year is out if the weather gods remain kind.

The rains have also helped the country to be free of the power cuts it suffered for more than six months, though the tariffs have been sharply raised in the face of massive losses by the state-owned monopoly Ceylon Electricity Board. Hydroelectricity accounts for 65% of Sri Lanka's power generation but thermal capacity, once only a back-- up, has been substantially boosted in recent years when repeated droughts forced the country to resort to expensive fuel-burning alternatives.

Choksy made no bones about what he called the country's "current state of economic paralysis" in his budget speech. Last year, the national debt, both foreign and domestic, was 103.4% of GDP. Government expenditure at 27.33% of GDP was running higher than revenue at 16.5% of GDP, while the budget deficit was 10.8% of GDP. Debt service in turn swallowed 12.8% of GDP. Fiscal profligacy in the run-up to the December election did not help. "We have inherited from the previous government an empty treasury coffer," the minister said. "While revenues have withered away, expenses have soared."