Investor Confidence in Doldrums

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Yesterday’s ‘Finance Today’ lead story ran the heading “Sri Lanka Eyeing Divestiture of Key State Assets.” It said the initial focus is Grand Hyatt Hotel, Colombo, Colombo Hilton and Grand Oriental Hotel.

Apart from hotels, there should also be a focus on divesting assets covering the financial, utilities, transportation, lands, mining and quarrying, pharmaceuticals, education, fishery, plantations, real estate, food and beverages, manufacturing, other wholesale and retail sectors and other State institutions/enterprises as well, which, ipso facto, too may take place .

The objective of divesting SOEs is three fold. They are to raise revenue, lessen the burden on the budget and to increase efficiency.  Some examples of successes of privatised enterprises are NDB Bank, DFCC Bank and Sri Lanka Telecom (SLT), despite the fact that in the case of the latter, the Government still has majority control over SLT. There are no examples however of failed privatised enterprises in Sri Lanka

But there are several examples of once divested, but subsequently re-vested SOEs, which, since, at least have become a burden once more to the taxpayer. An example is the national carrier SriLankan, divested by the Chandrika Bandaranaike Kumaratunga Government, but subsequently re-vested in the State after Mahinda Rajapaksa became President. In recent times, all takeovers, of once diversified SOEs, took place during the Rajapaksa era.

With the change of Government in 2015, the new Government passed a new Act, ‘Revival of Underperforming Enterprises or Underutilised  Assets (Repeal) Act No.12 of 2019’, which threw into the dustbin  the pernicious Act brought by Rajapaksa in 2011 to take over once diversified State assets.

However, as much of the SOEs that should and needs to be diversified would be costly to the buyer, a number of investors who will have that large amount of cash to make such buys will be foreign investors. When Kumaratunga divested SriLankan, the successful investor was Emirates Airlines, which had the cash, to buy, even a partial stake, of an expensive asset like SriLankan.

But the country’s US dollar shortage; made obvious by import restrictions and the mandatory requirement to convert foreign exchange proceeds, received in the form of exports or otherwise, may not be conducive to attract foreign investments.

There is also a need to first rekindle domestic private sector interest in the economy, to obtain the desired results of stirring foreign investor interest as well. In this context it’s imperative to once more create the right climate to boost private sector credit growth.

But private sector credit growth will achieve a thrust only if domestic investors have confidence in the economy. However, if domestic investors have no confidence in the economy, one may not expect foreign investors to have such confidence, either.

 Central Bank of Sri Lanka’s latest data showed that domestic credit extended by the country’s banking and monetary sectors to the private sector was overshadowed by such credit extended to the State and its agents such as Government corporations for 10 continuous months to June, last seen 39 years ago, when during the period January 1981 to July 1983, spanning a total of 31 consecutive months, domestic credit extended by the local banking sector together with the monetary authorities, cumulatively, to the Government and to its allied agencies such as State corporations was greater than such domestic credit, cumulatively extended towards the private sector.

This has to be looked at in the context that the private sector is considered as being the engine of growth.

Previously, as above, the reason behind domestic credit extended to the private sector being overshadowed by such credit extended to the State and to its agents was due to the multibillion rupee, largely foreign funded, multipurpose, Accelerated Mahaweli Development Project, due to the requirement at times from the Government of counterpart funds in rupee terms.

Currently, there is no such sustainable development project like the Mahaweli to give as an explanation for the reemergence of this phenomenon 39 years later to the present, other than stultifying the economy by import controls among  others. Sooner steps are taken to rekindle private sector confidence on the economy, only then will the divestment of SOEs be successful, not otherwise.