Beautifying the capital: is it for the benefit of our lenders as well?

The streets, pavements and parks of the capital are being repaired and refurbished. Colourful stones line the pavements, walls around old buildings have been broken down and the roads have been resurfaced.

It must be said that much of the work is good. Some trees were felled unnecessarily and the size of some of the new pavements is a problem-roads that are already narrow, Jawatte Road or Darley Road for example, have lost almost a whole lane to the expanded pavement. Some of the islands and roundabouts such as the one at the end of Jawatte Road (where it meets Thimbirigasyaya Road) are far too large.

The bigger quibble is what this is costing the taxpayer and the question as to whether the money could have been better spent elsewhere. As we have absolutely no idea of this it is impossible to comment. Let us just hope that we are not walking on streets paved with gold, as in the folk tale of Dick Whittington.

There is however another crucial benefit that this exercise brings to the rulers - it helps sustain a favourable impression of the country to foreign bankers and portfolio investors. The country may curse Western Governments but they adore Western Bankers.

This particular truth dawned on me when chatting to one such an eminent individual, a charming aristocratic old Englishman with many years of experience in India. He was a director of a fund that held several investments in the country, made over a quarter of a century. While he did express deep concern at the political developments, which he said they were watching closely (this was before the recent outburst of Islamophobia), he also said that in twenty odd years of visiting the country he had never seen the airport looking better, the city looking better or heard of so many tourists visiting the country.

Presumably he attributed this to good economic management. That the Government is a master in the art of propaganda is well known locally. Rosy statistics are published periodically that seem to show the country to be in rude economic health although this is not reflected in the living standards of most people. Many analysts have pointed out the flaws in the statistics but this has been largely an academic debate that has not been carried to the wider public. In the absence of other statistics, everybody relies on what the Government produces. Although a footnote or a qualifier may be attached at the end this is either ignored or missed out.

When the unsuspecting visitor arrives in the country and witnesses the changing landscape they are suitably impressed and the Government statistics become more tangible, more believable.

To the portfolio investor or banker who spends a few days  in the city and travels around to a few luxury hotels it appears that development is happening apace.. What they do not realise is that this is facade, almost a Potemkin village that belies a grimmer reality.

A real investor, who tries to set up factory or a business is brought to earth with a bump; confusion sets in with the first outstretched greasy palm that greets any request for an official document or form. The confusion quickly turns to dismay and horror as he is sent from pillar to post, wading through a thicket of contradictory, ever changing and confusing mass of regulations. Eventually he despairs and gives up.

This is why foreign direct investment (FDI) inflows are so low. Direct investment in businesses is what creates the jobs that are necessary to lift people out of poverty. The FDI figures published by the Government are inflated by the telecom sector which is littering the countryside with unnecessary towers (due to lack of a transparent sharing regime) and by the Chinese projects, neither of which does much in the way of job creation.Strip these out and there is not a lot left. 

The banker buying Governments bonds or shares on the exchange sees none of this; the path of the portfolio investors is smooth (especially so when compared to some other emerging markets), with sensible electronic systems in place. The returns are good, especially compared to the abysmal rates in Europe and the US, the system is smooth and the facade impressive.

The cycle of borrowing for consumption cannot last forever and sooner or later the bubble will burst and many will eventually discover, as Dick Whittington did, that the streets of Colombo are not paved with gold.

Addendum  

Fitch has highlighted some of the risks to the economy in its latest rating report on the country.

"Sri Lanka’s external debt refinancing schedule, however, remains quite heavy as an average of USD1.9bn per annum in sovereign debt is projected to mature from 2013 to 2015 (versus USD1.3bn in 2012). This may not only limit Sri Lanka’s ability to rebuild foreign exchange reserves to a much higher level, but it also means that the country’s external finances will remain vulnerable to any spike in global risk aversion,"

It also warns that "the authorities remain vigilant and maintain appropriate policy settings to ensure overheating risks and renewed strains on the balance of payments do not re-emerge. Sri Lanka has continued to make limited progress on fiscal consolidation as the budget deficit fell to 6.4% of GDP in 2012 (versus 6.9% in 2011). This was, however, partially achieved through an accumulation of arrears. Sri Lanka’s general government debt-to-GDP ratio remained elevated at 79.1% in 2012, which was significantly higher than the ‘BB’ peer rating group median of 32.6%. Low fiscal revenues weigh on the credit profile. The revenue take of 13.9% of GDP in 2012 was well below the ‘BB’ range median of 26.6% and was down from 16.7% in 2008."

The Central bank is trying to force down interest rates in a bid to stimulate the economy. This may lead to the overheating that the ratings agency warns against.