Opinion: Northern Province had highest growth rate in 2015. Good news for North or not?

By Jekhan Aruliah

Don’t be misled by the 2014-2015 Provincial GDP Growth figures . The Northern Province had the joint highest GDP growth rate that year. Mathematically if the Northern, Southern, Eastern, Central and Western provinces’ GDP Per Person each continued with their same 2015 growth for the next 14 years then in terms of GDP Per Person the North starting from its current last place would catch up with the Central and Southern provinces in about 4 years, with the Eastern province in 10 years, and would even overtake the Western province in 14 years. Exhilarating stuff? Probably not.

 

 

The North won the 2015 Provincial Growth Race not because its growth had strongly boomed, but because all these other provinces’ growth had slumped in 2014 and 2015. Did the North beat the others with an economic ‘dead cat bounce’? The ‘dead cat bounce’ is a financial markets metaphor speculating whether a falling cat (representing a crashing financial market, e.g. shares or property prices) hitting the ground rebounds due to its spitting energy or its splatted elasticity. The graph showing Provincial GDP Growth between 2010 & 2015, using Central Bank of Sri Lanka (CBSL) data, is not encouraging with the North seemingly following the inevitable trajectory of Wile E Coyote in a Road Runner cartoon.

 

 

Despite this relatively high growth in 2015 the North firmly remained the poorest province in Sri Lanka.

 

 

I have frequently heard it said that these Northern GDP figures don’t reflect the alleged flood of remittances from the Tamil Diaspora to family and friends in the North. It is doubtless true the Diaspora is still sending money to the North. But how much and how widespread seems to be unknown. I have informally asked about this from people ranging from a senior Central Bank official in Colombo to retail bankers based in Jaffna. They have said the data must be there somewhere but they are not sure where. [I would be grateful to anyone who can provide reliable data to show how much money coming into Sri Lanka from the Diaspora is going to support the Northern economy not just to buy condominiums, cocktails and canapés in Colombo].

In the absence of direct evidence on abundant foreign remittances to the North, one can get an inkling of Northern household spending power from CEB (Ceylon Electricity Board) data on domestic electricity bills. Remittances sufficient to fund a more upscale lifestyle would lead to purchases of fridge-freezers; DVD players; curling tongs; air conditioners and other electrically powered essentials of an upscale lifestyle. If this was happening on a wide and statistically significant scale it would presumably become apparent in electricity bills. CEB figures in a CBSL report show this is not the case.

 

 

While I am confident the bouncing Northern economy isn’t dead, it certainly needs some warm milk and cuddles to get back in shape. It appears these comforts aren’t coming from the Government. In November 2017 Dr. Indrajith Coomaraswamy, Governor of the Central Bank of Sri Lanka, gave the annual Gamani Corea Memorial Lecture in Colombo. In his speech titled “Towards A Vibrant Economy And A Prosperous Country” he commented that “The Government is launching a number of major development programmes around the country”. Coomaraswamy went on to list them:

– “Japan is developing a Master Plan for the Kandy area”

– “industrial zones are planned in the Kurunegala/Kuliyapitiya areas of the North-Western Province”

– “The Western Region Megapolis Plan covers the three districts of the Western Province. It is a USD 40 bn. programme over 15 years.  It envisages elevated highways; a light railway; residential and commercial real estate, including affordable housing; a logistics hub, involving the Colombo Port and Bandaranaike International Airport, as well as a tech city”

– “An industrial zone is being established by a Thai company in Kalutara. Tourism developments and additional industrial zones are being planned along the Southern Coast. Further South, there is the major proposal to develop the Hambantota area”

– “The leasing of the Port to China Merchant will also catalyse a plan which envisages investment in a refinery, LNG Plant, Cement factory, steel billet plant and a ship repair company. Subsequent phases are expected to involve development of industrial zones by Chinese companies on up to 15,000 acres of land”

– “Surbana Jurong, the Singaporean Consultancy, which developed the Western Region Megapolis Plan, is also preparing a Master Plan for the Trincomalee area. Tourism, real estate and industrial zones will be major features of this development”

And for the North:

– “In the conflict-affected areas, Palaly airport and the Kankasanthurai port are being rehabilitated. There are also plans to improve road and rail connectivity.  In addition, there will be a 200% upfront investment allowance for businesses locating in these areas.”

The rehabilitation of Palaly Airport and KKS Harbour have been on the cards for years. The Indians started work on the KKS Harbour in 2010 and handed it to the Sri Lanka Ports Authority (SLPA) in 2012 together with the offer of a loan for the SLPA to complete the rehabilitation and then get the port fully operational. The Indian Consulate in Jaffna reported:

“Phase I was completed by an Indian Navy ship in June-July 2010 as part of the preparation for this project. The second phase involving geo-technical investigations and preparation of DPR [Detailed Project Report] by M/s RITES Ltd was completed in July 2011 and the DPR was accepted by SLPA [Sri Lanka Ports Authority] in July 2012. The cost involved was about INR 2.8 crores (USD 0.5 million approx.). Following the signing of a Memorandum of Understanding and an agreement between India and Sri Lanka on 21 July 2011, work on the third phase of the project involving wreck-removal and salvage was inaugurated by Hon’ble Minister of Economic Development Basil Rajapaksa and H.E. High Commissioner of India Ashok K. Kantha at a ceremony on 26 July 2011.  The wreck-removal work was completed on 6 January 2012 at a cost of about USD19.5 million, which was fully funded by a grant from the Government of India.  The wreck free Harbour was officially handed over by the then Minister of External Affairs of India Hon’ble S.M. Krishna to the Sri Lanka authorities on 18 January 2012.”

Nothing much happened on the KKS Harbour project until 2017 when the government at last decided to accept the loan. One hopes the money will be used for the intended purpose soon, with ships coming and going from KKS bringing visitors and exporting goods to boost the Northern economy. But one isn’t holding one’s breath.

The Palaly Airport saga is a classic example of Sri Lankan Tamil Push-Me-Pull-You politics. Like the two-headed comedy llama from the Dr Doolittle children’s stories, our venerable Tamil political leaders pull in opposite directions to themselves and childishly seem to do little.

The Northern Provincial Council first demanded direct flights from Palaly to India in 2014, and then two years later in 2016 the same council objected to the airport being extended. Which will mean only smaller planes, with smaller passenger and cargo capacity, would be able to use it. To date Palaly Airport remains an expensive gateway to Jaffna for passengers from Colombo and Trinco carrying not more than 15kg of luggage who are prepared to suffer the indignity of themselves being weighed in public before boarding. I suppose as the planes are quite small the chubbier travellers must be distributed evenly so they don’t wobble the aircraft.

The repeated announcements over the years of the refurbishments of KKS Harbour and Palaly Airport has been like giving your kid a Rs5,000/= cheque for Christmas, not letting him cash it, and then giving him the same cheque the next Christmas. And then again year after year presenting the kid with a used envelope containing the same uncashed cheque. After a few such cycles it is the frustration, not the anticipation, that becomes unbearable.

At least the “200% upfront investment allowance” for businesses locating in the North is new. I assume this refers to the item in the 2017 Inland Revenue Bill, announced in June 2017 and passed by Parliament in September the same year. This states:

“A depreciation allowance of 200% for expenses incurred by a person, that are used in the Northern Province up to USD 3 million on depreciable assets mentioned in subparagraph (3) during a year of assessment shall be granted to that person for that year where the depreciable assets are used in the Northern Province.”

The fact that this applies for projects less than US$ 3 million (usually the project has to be over US$ 3 million or even more to get tax incentives) is great because it will apply to the small and medium developments that are more suitable for the North. But even then, this is not as great as it seems. Having consulted a partner at a leading Colombo based accountancy firm, I understand this enhanced allowance has limitations:

– Is a temporary concession, available only for 3 years from 1st April 2018.

– Applies only for brand new projects that don’t start before 1st April 2018.

– Only available to brand new companies, that haven’t done anything material prior to this project.

Why only brand new and why not until April 2018? Why not activate this allowance immediately? Or at least activate it for investment spending done after 1st April 2018 even for projects that started before that date? And why “brand new companies”? New companies will find it harder to raise cost effective finance unless they are subsidiaries of established groups. Why are existing companies wanting to rebuild themselves from the effects of the war excluded from this benefit?

Those with a suspicious nature may think this concession is craftily crafted to impede projects rather than encourage them. I understand representations were being made to the authorities, so perhaps the implementation of the legislation will ultimately prove more seductive to investors.

Another time-limited piece of legislation was designed to help people who lost possession of immovable property including land because of the Civil War. The “PRESCRIPTION (SPECIAL PROVISIONS) ACT, No. 5 OF 2016” meant someone who lost possession in a war area some time between May 1st 1983 and May 18th 2009 can sue for recovery of the property regardless of the passage of time. However, this right expires two years after the act became law in April 2016. The act states:

“A disadvantaged person who was unable to pursue his rights for the recovery of any immovable property including land, shall be entitled to institute an action to avail himself of the benefits conferred by this Act within two years after the coming into operation of this Act.”

Therefore those who actually want to recover and invest in their land need to be quick. While those who have lost interest or are feeling generous should allow the current occupants to obtain good title and develop the property themselves. To generate some good Karma original owners could legally write the property over to current occupants for avoidance of all doubt. So the current occupants don’t get displaced by some other influential entity throwing its weight around as sometimes happens in our country.

Over the decades politicians have invoked the enormous gifts of our country including its natural and diverse beauty, its strategic location, and the potential of its people, to promise that Sri Lanka will become the Hub of South Asia. We are, according to various government promises, to become the following hubs:  Financial; Trade; Services; Goods; Naval & Maritime; Commercial; Aviation; Energy; Distribution; Oil; Knowledge Based; Traditional Knowledge; Cultural Expressions; Education; Startup; Design; Fashion; Innovation; and Shopping.

Inspite of this hubbub of hubs, the Sri Lankan economic cart has many more punctures leaking deficit dollars and corrupt cash than it has money spinning hubs. Successive governments have a poor economic record for all provinces outside the Western Province, as can be seen from the GDP Per Head graph near the top of this article. Even then it’s no consolation for the neglected North that other Southern provinces are also being woefully neglected.

The North can’t rely on the government alone to make it rebound economically. The North needs the private sector to become the prime actor. Given the right tools and training, provided with good management and good market access, and also with decent investment the North can dig itself back to prosperity.

The North in its current state is a quick place to lose money and a slow place to make money. The private investors who choose to come North need to be determined and need to be patient. A tiny handful have come, but many more need to come soon.

( — The writer Jekhan Aruliah was born in Sri Lanka and moved with his family to the UK when he was two years of age. Brought up in London, he graduated from Cambridge University in 1986 with a degree in Natural Sciences.

Jekhan then spent over two decades in the IT industry, for half of which he was managing offshore software development for British companies in Colombo and in Gurgaon (India). In 2015 Jekhan decided to move to Jaffna where he is now involved in social and economic projects. He can be contacted at jekhanaruliah@gmail.com — )