Friday, 18 January 2013

The so-called economic development in Sri-Lanka is just a mirage!

Sri-Lanka faces huge economic, political and social problems in the years ahead. Most of these problems stem from the Rajapakse regime’s incompetence and corrupt activities. The country can expect high inflation, high interest rate, high taxes, high unemployment, depreciation of the currency and political unrest.

Standard & Poor’s (S&P), has recently classified Sri Lanka as a “very high risk” (a risk score of 8) for economic resilience and credit risk, and a “high risk” (a score of 7) for economic imbalances. On a scale of 1 to 10 (lowest risk to highest risk), S&P placed Sri Lanka in group 8 of its Banking Industry Country Risk Assessment (BICRA).

The S&P report pointed to the country’s weak external liquidity “in the context of low income levels, relaxed lending practices and underwriting standards, as well as a weak payment culture and rule of law.”

S&P’s report drew attention to economic imbalances produced by the annual 28 per cent growth in credit during the past two years.

During the past 10 years, two state banks, Bank of Ceylon and Peoples Bank, wrote off 125 billion rupees, with the loan defaulters mostly backed by government politicians.

Fitch Ratings has stated that Sri Lanka, among Asian countries, was “most at risk” from any disruption to global funding markets.

Foreign Direct Investment (FDI) has largely been limited to hotels and other tourism related projects. Foreign investment is being deterred by perceptions of corruption and arbitrary governance, as well as continuous protests and violence and issues in media freedom.

The S&P report also voiced concerns about government manipulation of the stock market, through pension funds controlled by the Central Bank.

Market regulator Tilak Karunaratne quit in August 2012, saying he could no longer battle against a "mafia of crooks" preventing probes into insider trading and "pump-and-dump" scams in which investors drive up shares and then sell them.

Karunaratne's predecessor, Indrani Sugathadasa, also resigned in 2011, saying she was unwilling to compromise her "principles".

No one has been jailed in Sri Lanka for securities fraud and previous cases of insider trading have been settled by the parties agreeing to pay small fines without accepting guilt.

Rajapakse has in the past pointed to the rocketing share prices as proof of his government’s economic success. The financial press hailed “one of the best performing share markets in the world,” but the “success,” amid the global financial crisis, was built on rampant speculation. In 2011, the bubble burst and the index is currently hovering around 5,800 points compared to 7,800 points in February 2011.

Foreign investors have been withdrawing funds and Colombo is rated as one of the world’s worst performing markets.

Karunaratne admitted that speculation had been a major factor in the share price rises. “The major contribution came from people who used unfair means in pumping up the market, which made it reach extreme high levels,” he told the media.

The Central Bank encouraged this speculative frenzy by releasing money from the Employees Provident Fund (EPF), the country’s biggest pension fund, to purchase shares, including in ailing companies such as Galadari Hotels, Laugfs Gas, Piramal Glass Ceylon, Ceylon Grain Elevators and Browns. The release of EPF cash for private sector investment was a longstanding demand of the International Monetary Fund (IMF).

The results have been disastrous. For example, the EPF purchased 23.7 million shares in the loss-making Galadari Hotels at a price of 32.50 rupees a share in 2010. By July 2012, the share price had plummeted to 11 rupees, resulting in a loss of 500 million rupees for the EPF. Overall, the EPF had lost about 6 billion rupees by the middle of last year.

The newly-appointed SEC chairman, Nalaka Godahewa, is well connected to the government. He was given the job despite heading the Colombo Lands and Development (CLD), which is also under a cloud for share manipulation.

According to Transparency International, about $ 500 million of the tsunami aid for Sri Lanka is unaccounted for and more than $ 603 million has been spent on projects unrelated to the disaster. In a report examining the funding, the group concluded the discrepancy between relief money received and money spent ''does not have a credible explanation''.

The government has removed the Chief Justice, Shirani Bandaranayake and appointed a crony of the Rajapakse as her replacement.

The removal of the Chief Justice is a witch hunt to punish Bandaranayake for ruling against a key government bill which centralises development work under one of the president's brothers.

The impeachment has drawn international condemnation with the International Commission of Jurists (ICJ), saying Mohan Peiris' appointment raised serious concerns about the future of the rule of law and accountability in the country.

"ICJ condemns this appointment as a further assault on the independence of the judiciary and calls on the Sri Lankan government to reinstate Chief Justice Shirani Bandaranayake. If there are grounds for questioning the chief justice's actions, they should be pursued following due process and a proper impeachment process."

Faced by rising unrest over its austerity program demanded by the IMF and the high level of corruption and cronyism, the regime will increasingly depend on repressive methods in order to hold on to power.

“False words are not only evil in themselves, but they infect the soul with evil.” Socrates

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