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Sri Lankan economy powers on

Whatever doubts Sri Lanka's local and overseas investors had about constitutional amendments reinforcing President Mahinda Rajapaksa's already appreciable powers, they did not show up in the stock market in the week since parliament approved the changes.

Sri Lanka Stock Market Colombo All-Share Index has risen more than 4.5%, reaching 6,234 at the Wednesday close this week. It has doubled in the past nine months, after breaking its previous all-time record high just under 3,000 in early September last year, then retesting it from the upside to confirm it as a support.

Among the most important changes to the constitution is the abolition of term limits on the presidency, allowing the incumbent to stand for office indefinitely into the future. He also acquires the power to appoint all senior judges, police, the election commission, and the central bank.

In a public statement, he justified these new powers in the name of promoting economic development and ethnic reconciliation. The main opposition United National Party (UNP) boycotted the vote, leaving only 17 of the 225-member parliament to cast votes against, while 161 votes were in favor.

At the end of last month, the head of the International Monetary Fund mission to Colombo, Brian Aitken, foresaw the country's economy growing 7% this year, double the rate in 2009, according to the Pakistani newspaper Daily Times,/em>. Consequently, he said, the IMF would release another US$200 million of a $2.6 billion stand-by arrangement approved in mid-2009. That fourth tranche would bring the total amount lent so far up to $1.2 billion.

The IMF report released last month added, however, that concern remains over difficulties in reducing the budget deficit, which reached 9.9% in 2009. The hope is to reduce this to 8% in the current year and then continue decreasing it until it reaches a "sustainable" level of 5%.

The IMF loan eased concerns over current-account balances and the financing of external debt and so signaled to foreign investors the international community's belief that economic reforms and liberalization would continue.

The Standard & Poor's rating company raised the long-term foreign-currency rating to B+ from B ahead of a $1 billion bond sale, and also its local-currency rating from B+ to BB-. Both upgrades were given "stable-outlook" prognoses but are still several levels below investment grade.

Sri Lanka has hired Bank of America, HSBC and Royal Bank of Scotland Group to arrange meetings with credit investors starting this week and lasting about 10 days, Bloomberg News reported.

The bond issue will increase the island nation's foreign reserves to $6.8 billion, as international investor confidence has increased following the IMF's package approved last year, itself following by two months the end of the long conflict with the Tamil Tiger rebels.

The already impressive rate of economic growth may be expected to increase further in 2011 and 2012 if reconstruction efforts get seriously underway and foreign direct investment continues to show confidence. Faster growth will be necessary to increase revenue to met budget deficit targets. The regime will have to balance lower taxes for investment promotion against that goal. Tourism has also increased significantly since the end of the civil war.

Yet the president's increase and consolidation of his the powers of his office, along with moves to establish what looks like a dynasty, have foreign investors already nervous. The president is himself minister of finance and minister of defense and holds two other portfolios besides.

His brother Gotabaya is in charge of all military and intelligence services, and his brother Basil heads the Economic Development Ministry and is in charge of investment promotion. The British newspaper The Guardian estimated that "[w]ith dozens more relatives in prominent positions, the net result is that the Rajapaksas control an estimated 70 percent of the national budget". In addition, earlier this year the president's son Namal made his political debut by winning a seat in parliament.

All this is why Forbes magazine is cautioning that "sentiment on the Sri Lankan economy may be beginning to turn", although there are increasing economic relations with such countries as Iran and China, which are not known for concerns over authoritarianism.

The stock market indeed looks due for a rest sometime soon. It is up phenomenally by over one-third in just the past two months, and by one-quarter since the cabinet approved the amendments at the end of the last month before they were submitted to parliament.

This cannot go on forever. Volatility is also to be expected in both directions. In three trading days near the beginning of August, the index plunged nearly 7%, ironically in response to the exchange's imposition of a 10% limit on daily stock moves.

First published in Asia Times Online, 23 September 2010.

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