Wall Street Journal skeptical about Sri Lanka promises

[TamilNet, Monday, 22 November 2010, 19:58 GMT]
Commenting on Sri Lanka’s new budget unveiled Monday, the Wall Street Journal echoed international investors’ skepticism, saying “implementing reforms is more important than announcing them.” Warning that “given its recent track record Colombo should expect investors to sit on the sidelines until the government shows it's serious about reform,” the paper singled out for criticism President Mahinda Rajapakse’s approach to business, noting his bragging about the state’s renationalisation successes. The paper also expressed other concerns: “Local businesses report an increasing trend toward crony capitalism. Corruption is endemic, and hostility to the private sector rife in the bureaucracy and among elected politicians.” The concern of WSJ was rather ‘investment reforms’ and not the fuming situation arising out of an unresolved national question.

The full text of the Wall Street Journal’s op-ed follows:

A year and a half after Colombo finally won its battle against Tamil insurgents, Sri Lankans are starting to ask when the promised "peace dividend" will materialize. Yesterday's budget offers hope—modest hope—that President Mahinda Rajapaksa and his administration are headed in the right direction.

The government announced a rationalization of the country's tax code, which currently features 62 different taxes and can leave businesses paying an effective rate as high as 60%. Reforms include cuts in personal income-tax rates to between 4% and 24%, from the current range of 5% to 35%, as well as cuts in taxes on banking services and the banks themselves.

Colombo also bucked the Asian trend by tearing down capital controls instead of putting them up. The central bank promises to allow foreign individuals and businesses to open bank accounts in Sri Lanka, and also will allow Sri Lankans to invest more of their money abroad. Tax reform and capital opening, not to mention various other business-friendly red-tape cutting, is all to the good.

Yet the real test will be in the implementation, and given its recent track record Colombo should expect investors to sit on the sidelines until the government shows it's serious about reform. While the budget is evidence that some members of the cabinet do understand the importance of the private sector for Sri Lanka's economic future, it's not so clear that President Rajapaksa is one of them.

In a speech last week to mark the opening of the Hambantota port in the south—a marquee project intended to attract foreign investment—Mr. Rajapaksa bragged about his government's renationalization earlier this year of the country's main airline. He also boasted that Colombo had outbid other private investors to buy back a 100% stake in a Shell liquefied petroleum gas subsidiary when Shell opted to pull out of the country. Those examples will make foreign and domestic investors wonder how welcome their ventures will be, notwithstanding Mr. Rajapaksa's rhetoric about supporting businesses.

That might be one reason why an uptick in portfolio investment from abroad has not been matched by a surge in direct investment in factories, stores and the like. A $500 million sovereign bond issue last year was 13-times oversubscribed, and the all-share index of the stock market has doubled in the past year. Yet longer-term direct investment was lower in the first six months of this year than in the same period last year, when the war was still going on.

Attracting that capital will be key to meeting Mr. Rajapaksa's promise to double per-capita income to $4,000 during the new six-year term he started Friday. So will creating a more hospitable climate for homegrown entrepreneurs. Local businesses report an increasing trend toward crony capitalism. Corruption is endemic, and hostility to the private sector rife in the bureaucracy and among elected politicians. In this context, it's notable that the new budget makes no move to cut a civil service (including military personnel) that ballooned dramatically at the end of the war. Instead, Mr. Rajapaksa is giving government employees a 5% raise.

Yesterday's budget announcement showed that the government can talk the talk of attracting foreign investment and getting the economy back on track. Investors will be watching carefully to see how quickly Mr. Rajapaksa moves to turn talk into reality.