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PESTEL research of the macro-environments

There are numerous factors in the macro-environment that will effect the decisions of the professionals of any company. Taxes changes, new laws and regulations, trade barriers, demographic change and federal government policy changes are all examples of macro change. To greatly help analyse these factors professionals can categorise them using the PESTEL model. This classification distinguishes between:

Political factors. These refer to government policy such as the degree of involvement in the economy. What goods and services will a administration want to provide? From what extent should it believe in subsidising firms? What exactly are its priorities in terms of business support? Political decisions can impact on many essential areas for business like the education of the workforce, the fitness of the country and the grade of the infrastructure of the market including the highway and rail system.

Economic factors. These include interest levels, taxation changes, financial development, inflation and exchange rates. As you will see throughout the "Foundations of Economics" book monetary change can have a significant impact on a firm's behavior. For instance:

  • higher interest rates may deter investment because it costs more to borrow
  • a strong currency could make exporting more challenging since it may improve the price in conditions of foreign currency
  • inflation may provoke higher income needs from employees and increase costs
  • higher countrywide income progress may raise demand for a firm's products

Social factors. Changes in interpersonal trends can impact on the demand for a firm's products and the availableness and willingness of people to work. In the UK, for example, the population has been ageing. This has increased the costs for firms who are focused on pension payments because of their employees because their staff are living longer. It also means some companies such as Asda have started to recruit more aged employees to utilize this growing labour pool. The ageing human population also has impact on demand: for example, demand for sheltered accommodation and drugs has increased whereas demand for toys is dropping.

Technological factors: new technologies create services and new procedures. MP3 players, video games, online gaming and hi-def TVs are all new marketplaces created by technological advancements. Online shopping, bar coding and computer aided design are all improvements to just how we conduct business because of this of better technology. Technology can keep your charges down, improve quality and lead to innovation. These developments will benefit consumers as well as the organisations providing the merchandise.

Environmental factors: environmental factors are the weather and local climate change. Changes in temperature can effect on many industries including farming, tourism and insurance. With major environment changes occurring due to global warming and with increased environmental consciousness this exterior factor is now a significant concern for firms to consider. The growing desire to protect the environment is having a direct effect on many market sectors including the travel and travelling market sectors (for example, more fees being placed on flights and the success of hybrid autos) and the overall move towards more green products and operations is affecting demand habits and creating business opportunities.

Legal factors: these are related to the legal environment in which firms operate. In recent years in the united kingdom there were many significant legal changes which may have affected firms' behaviour. The introduction old discrimination and disability discrimination legislation, a rise in the least wage and better requirements for organizations to recycle are examples of relatively recent laws that affect an organisation's actions. Legal changes make a difference a firm's costs (e. g. if new systems and types of procedures need to be developed) and demand (e. g. if the law affects the probability of customers buying the good or using the service).

Different categories of law include:

consumer laws; they are designed to protect customers against unfair procedures such as deceptive information of the product

competition laws; they are aimed at guarding small organizations against bullying by larger firms and ensuring customers aren't exploited by firms with monopoly power

employment regulations; these cover areas such as redundancy, dismissal, working time and minimum wages. They try to protect employees resistant to the abuse of power by managers

health and safe practices legislation; these laws and regulations are aimed at ensuring the office is really as safe as is fairly functional. They cover issues such as training, confirming accidents and the appropriate provision of safe practices equipment

Typical PESTEL things to consider include:


Could include:


e. g. European union enlargement, the euro, international trade, taxation policy


e. g. interest levels, exchange rates, nationwide income, inflation, unemployment, Stock Market


e. g. ageing populace, attitudes to work, income distribution


e. g. innovation, new product development, rate of technological obsolescence


e. g. global warming, environmental issues


e. g. competition legislations, health and security, employment law

By using the PESTEL construction we can analyse the many different facets in a firm's macro environment. In some instances particular issues may easily fit into several categories. For instance, the creation of the Monetary Insurance policy Committee by the Labour federal in 1997 as a body that was unbiased of government but had the ability to set interest rates was a politics decision but has economic consequences; meanwhile administration economic coverage can influence investment in technology via fees and taxes credits. If a factor can appear in several categories managers simply decide of where they think it best belongs.

However, it's important never to just list PESTEL factors because this does not in itself notify managers quite definitely. What managers should do is to take into account which factors are most likely to change and which ones will have the best effect on them i. e. each firm must identify the key factors in their own environment. For some such as pharmaceutical companies federal government legislation may be critical; for others, perhaps firms which may have borrowed heavily, interest rate changes may be considered a huge issue. Managers must choose the relative need for various factors and one of the ways to do this is to list or score the probability of a big change occurring and also rate the impact if it do. The higher the likelihood of a big change occurring and the higher the impact of any change the more significant this factor is to the firm's planning.

It is also important when using PESTEL research to consider the level at which it is applied. When analysing companies such as Sony, Chrysler, Coca Cola, BP and Disney it's important to remember they have a number of parts with their overall business - they include a number of divisions and sometimes various brands. Whilst it might be useful to consider the whole business when using PESTEL in that it may emphasize some important factors, managers may choose to narrow it right down to a particular part of the business (e. g. a particular division of Sony); this may be more useful since it will give attention to the factors relevant to that area of the business. They could also want to differentiate between factors which are extremely local, other that happen to be national and the ones which are global.

For example, a merchant undertaking PESTEL research may consider:

Local factors such as planning permission and local economical growth rates

National factors such as UK laws on retailer starting hours and trade descriptions legislation and UK interest rates

Global factors like the opening up of new market segments making trade easier. The access of Bulgaria and Rumania in to the European Union might make it better to get into that market in conditions of meeting the various regulations and provide new growth opportunities. It could also change the labour push within the united kingdom and recruitment opportunities.

This version of PESTEL research is called LoNGPESTEL. That is illustrated below:





Provision of services by local council

UK government insurance plan on subsidies

World trade agreements e. g. further development of the EU


Local income

UK interest rates

Overseas economic growth


Local society growth

Demographic change (e. g. ageing population)

Migration flows


Improvements in local systems e. g. option of Digital TV

UK vast technology e. g. UK online services

International scientific breakthroughs e. g. internet


Local misuse issues

UK weather

Global weather change


Local licences/planning permission

UK law

International contracts on human privileges or environmental policy

In "Foundations of Economics" we focus on the financial environment. We study issues such as the effect of interest rate changes, changes in trade rates, changes in trade insurance policy, government intervention in an overall economy via spending and taxation and monetary growth rates. These can be extremely important factors in a firm's macro-environment. The development of China and India, for example, experienced massive effects on many organisations. Businesses can relocate development there to benefit from lower costs; these growing market segments are also providing extensive markets for organizations to target their products at. With a populace of over 1 billion, for example, the Chinese language market is not one you would want to ignore; at the same time Chinese producers should not be ignored either. However, the comparative importance of economic factors in comparison to other factors will be based upon this position of a business. Exchange rate fluctuations may be critically important to a multinational but less significant to a local window cleaner. Quick economic growth or economic decrease is quite significant to a building business that is dependent heavily on the amount of income throughout the market but may be slightly less significant to a dairy developer whose product is less very sensitive to income. So whilst the overall economy is important to all firms on both the supply part (e. g. unemployment levels have an effect on the simple recruitment) and demand aspect (e. g. tax affects spending vitality) the comparative need for specific monetary factors and the comparative importance of the economy compared to, say, regulation or social developments will change. Whilst we hope this book offers a good insight into the current economic climate and the possible ramifications of economic change over a business these must be considered in the light of other macro and micro factors that impact a firms' decisions and success.

macro environment


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Definitions (2)

1. Major exterior and uncontrollable factors that influencean organization's decision making, and impact itsperformance and strategies. These factors include theeconomic, demographics, legal, politics, and socialconditions, technical changes, and natural causes.

2. Factors that affect a company's or product'sHYPERLINK "http://www. businessdictionary. com/definition/development. html"development but that are outside of the company's control. For instance, the macro environment could includecompetitors, changes in interest rates, changes in ethnic tastes, or administration legislation.

How Macro Environment impacts Financial Management Decision?

Macro environment is a vibrant factor and has evolved drastically in last few years, resulting in increase in strategies, competition and complexity. Efficient financial management demands better financial decisions. This is only possible when every factor is researched which can affect the decision at all and macro environment is one of the most important factors. It has made financial management more critical and very sensitive for any business.

Effective evaluation of alternatives is very critical in financial decisions. The evaluation calls for examination of varied factors belonging to both macro as well as micro environment. Financial management; a particular field of standard management is affected to a huge scope by macro situations. We have to make various decisions related to fund; broadly such decisions include capital budgeting, capital composition & working capital decisions. Capital budgeting helps investment decisions, capital structure takes care of decisions associated with mix of resources of cash and, working capital assesses your day to day needs of business.


While taking these decisions, one needs to understand the criticality of environmental pushes. Since, there is no single factor which makes our macro environment but group of various forces like politics, legal, economical, social, technological etc, along build it. A highly effective financial decision needs diagnosis of the factors.


To assess various macro makes, it is necessary to understand the machine and procedures of the united states constituting the economy. For e. g. economic climate of your country which plays a significant role while making financial decision. Consciousness about financial environment helps us know how it constraints or facilitate execution of decisions. Financial environment comprises of various intermediaries as well as regulatory bodies.


A simple example can help us understand the criticality of macro factors carefully. A big change in credit policy like tightening up of prudential norms for banking companies (for e. g. Increase in Cash Reserve Proportion and Statutory Liquidity Percentage by central bank of the country) will certainly reduce the money supply in the economy. Decreased money resource will press up the rates of interest and make credit costlier for people who wish to acquire. Costly credit will immediately affect the capital structure decision. It will also have an effect on capital budgeting decision while examining the feasibility of the investment alternative. Since, a higher cost of capital will raise the ratio of discounting factor (opportunity cost) with which the future cash flows are discounted. This might cause deferring or canceling the administrative centre expenditure (CAPEX) programs.


Also, one should be kept up to date with various changes occurring across the world. We are living in a time of globalization where, there is nothing stable and it has made the usage of news and information of the world only a click away. World is becoming a level playing field where, not only nationwide but international factor can also cause a hazard. Like, "Sub-prime Crisis" helped bring a challenging time for nearly entire world.


To summarize, financial management and its own decisions are greatly based on some major assumptions. These assumptions are greatly based on the macro factors such as country or worldwide interest levels, gross home product (GDP) of an country, progress rate of overall economy, development and sales characters, inhabitants census etc. It clarifies to a great amount that financial decisions may go wrong if proper study of macro factors is not done. If the foundation go wrong, thinking about a strong building would be equivalent to day thinking.


The new Thinking

The role of the Ministry should be facilitating industrialists to achieve their eyesight and being a catalyst in that process

I was inquisitive when invited to provide the keynote address at a workshop which is on Investment Opportunities in the brand new Current economic climate because the last person you'll want to speak on investment opportunities is a bureaucrat.

I think investment opportunities result from the market. Of course, if by the New Overall economy you are discussing the post-peace era, what we'd want to see is not bureaucrats choosing new investment opportunities, but making the private sector decide what new opportunities are for sale to investment.

I have been around in the Ministry going back three months. And during the three months I have motivated a soul-searching exercise within the Ministry as to what the role of the Ministry should be. We have asked ourselves the questions: What's the eyesight of the Ministry? Alongside the Minister and with the senior staff of the Ministry, we've been trying to define the vision we maintain for industry in Sri Lanka. And to be able to achieve that vision, what is the mission of the Market sectors Ministry? I'd like to share some of our conclusions.

We believe that the eyesight of the professional sector, as well as that of the Ministry should be to create an internationally competitive, solid, modern commercial sector in Sri Lanka. If we are looking at five years or a decade from now, we wish to see our industrial sector being internationally competitive, self reliant, sturdy and modern. This when federal subsidized industry, when industry existed with handouts from federal has ended.

If this is the vision that people hold out for industry, what is the objective of the Ministry? We intend posting with the chambers our views upon this matter because we want the chambers to either endorse or suggest what the Ministry must do. And for the reason that context we are unfolding before them the work program of the Ministry. We will be accountable to industry and the chambers. Every half a year we will tell them what we've achieved.

If making the professional sector modern and internationally competitive is our eye-sight, what's the role or the mission of the Ministry? We believe that the role of the Ministry should be facilitating industrialists to accomplish their perspective and being the catalyst in that process. And we've tried out to ask ourselves the question, if we are a facilitator, if we want to be considered a catalyst in assisting industry to accomplish their eye-sight, what should we be doing. The brand new organizational framework of the Ministry will indicate that mission.

Let me discuss some thoughts with you on what we should feel will be the areas that we should be involved in and we intend to get involved in. Firstly, all of you as business men and industrialists would concur that more than all the bonuses and the taxes breaks that you'll desire, the fundamental question for industrialists is the macro environment. If you do not have a conducive macro environment in which to operate, I do not think we can speak of business or industry.

What do we suggest by the macro environment? Macro environment comprises several factors like interest rates, labour coverage, tariff plan, the regulatory framework, investment policy, admittance policy and leave policy. There is a whole heap of factors like the legislative platform that creates the macro environment. If that macro environment is not right, I really do not think any industry can flourish in a country. So we would have a Director in the Ministry in charge of these macro environmental issues.

The previous budget included a proposal to create a everlasting Tariff Commission to decide on tariff issues. The marketplace is energetic and tariff issues keep changing. The government will soon appoint a Tariff Commission payment.

Similarly we intend to be displayed on physiques that choose other areas regarding industry, in creating that macro environment for industry, labour insurance plan and interest rates.

The second area is professional policy itself. I am sure a lot of you have either paid attention to or participated in debates which reviewed what industries ought to be covered in Sri Lanka, if any. We find criticism at many fora where people say we opened up our economy too soon and too immediate. We didn't give a chance to local industry to face competition from imported products. Even today there are people who assume that we ought to not allow some overseas products which have captured the market segments to enter into this country.

What is Federal policy on this issue? We wish to build up that coverage in the Ministry after discussions with industry and the chambers.

If you have a simple example, today the footwear industry is facing competition from imports from China. Large sums of shoes are on the pavements and in shops which have been brought in at suprisingly low prices. The footwear industry in Sri Lanka utilizes more than 5, 000 personnel. That is certainly in the organised sector. I am overlooking the informal sector. That industry is crying for safeguard. Should we protect the boot industry? There are some who dispute that if our industry is to endure, they must be able to compete with any imported product.

In all the areas of industry that we have handled, there are major issues of the kind. So, I think it's important for the federal government to announce, after a dialogue with the industry and chambers, the plan of the government on protection. I am certain as consumers we'd all like to pay a cheap price. We'd nothing like to pay even more, even for the reason for protecting industry. I don't think our national consciousness goes to such an extent that we would agree to the government levying a work of say, Rs. 900 in order to protect an area industry which manufactures the same products at a price of Rs. 1, 000 as the imported price is merely Rs. 100.

If on the other hands, the imported product is Rs. 100 and the cost of the local product is Rs. 110, and gleam likelihood that given the requisite support, given the assistance needed to upgrade technology and be more productive, the neighborhood product can be sold at Rs 100 within an acceptable time frame, then you and I may not mind a obligation of Rs. 10 being levied on the brought in product in order to provide that local industry an opportunity to improve and become competitive. In fact, if you look at examples far away, if you go through the Indian example, there was a time when milk stated in India was far more costly than brought in milk. In those days, they imposed a obligation on imported dairy and used the amount of money that was retrieved to help the neighborhood milk industry. Today India is able to export milk.

We should think carefully what our plan should be on tariff issues. So the Ministry need to get into that exercise and help federal make a declaration of its plan on tariffs.

Similarly, there are other issues of commercial coverage - like the BOI and the non BOI program. I am certain the majority of you are aware that the same industry within the BOI relishes certain privileges that are not available to an identical non BOI industry functioning in Sri Lanka. The budget has attempted to take those variations away and unify the machine. Similar issues is there on industrial coverage in regards to to environment, location of companies and the zones. All those areas are things on which the Ministry would like to target its attention.

A third area is entrepreneurship development. Sri Lanka has a brief history of being a protected economy. We've few enterprisers in the country. Much less than the required number we'd need in market economy. We have over the years acquired our people used to a static, comfortable state of affairs where risk taking is no more inside our genes. We have to take some steps in the colleges and in the colleges to inculcate the nature of entrepreneurship inside our future years.

There is an excellent programme in institutions, carried out with the collaboration associated with an American organisation for creating entrepreneurship in the universities. You will find 300 schools which have shaped companies with the students. They produce and market products. We need similar exercises like the incubation programs, the Vasanthaya Programme, and so forth to create enterpreneurs in the country. Thus, the third area that we would like to get into is to purchase business owner development.

A fourth area that the Ministry need to get into is small and medium industry.

With the assistance of the Asian Development Standard bank, we are now engaged in the process of finishing a white newspaper which will format the technique for development of SME industry in the state for another five years. There is a short term plan and a medium and long term plan. That paper will be out for general population scrutiny. You will see public hearings placed about the white paper throughout the united states. And we want publishing and utilizing the proposals embodied in that white newspaper.

These four areas aren't sector specific. They trim across all areas. In fact, without having a conducive macro environment, a logical industrial coverage and entrepreneurs, I do not think we can develop industry. As well as the Ministry would devote much attention to those areas in the forthcoming years.

But, that alone won't do. You can find sector specific problems and we have to get involved with such issues. For this purpose, we've selected 15 areas predicated on two tests done for Sri Lanka. One, the JICA sponsored, Japanese aided analysis, and the other, the USAID Competitiveness study. Based on those two studies we've selected 15 industries and formed process forces in each of these sectors. 14 have been formed. These process pushes are led by the private sector and the Ministry only has a director who serves as the secretary to each task drive.

The task drive in each group will make a five year plan for the sector. The five season plan will have four elements. One, the status of the sector today in the united states - how many units is there, how many are employed, how much exports, what is the amount of technology, competitiveness for the reason that particular sector. In other words, they will make a account of the sector as it is today.

Secondly, they'll do a SWOT analysis for this industry. They might look at the talents and weaknesses of that industry in Sri Lanka and analyse the opportunities and hazards encountered by that industry.

Thirdly, they might determine what would be fair targets for this sector to achieve in five years. They will create a perspective for the sector in terms of increased amount of models, increased exports and increased employment.

And lastly, they'll specify what they need the government to do in order to help them realize their perspective. A straightforward five calendar year plan is usually to be prepared by all 15 sectors.

Two sectors have already completed their project and handed over the documents to the Ministry. The Ministry will screen them and help them reach those targets. There could be policy changes that are essential. Areas in which the industry needs the support of the federal government as determined in these sector studies will have the attention of the Ministry.

In reinventing the Ministry to participating in that role of facilitator and catalyst, there is a tremendous contribution that the Ministry could make for industry. It is a challenge which i and my colleagues in the Ministry are wanting to undertake.

PEST analysis

From Wikipedia, the free encyclopedia

(Redirected from PESTLE)

PEST analysis means "Political, Economic, Public, and Technological research" and describes a construction of macro-environmental factors used in the environmental scanning component of proper management. Some analysts added Legal and rearranged the mnemonic to SLEPT;1 placing Environmental factors extended it to PESTEL or PESTLE, which is popular in the UK. 2 The model has been further prolonged to STEEPLE and STEEPLED, adding education and demographicfactors. It is an integral part of the external research when executing a strategic examination or doing general market trends, and gives a synopsis of the various macroenvironmental factors that the company has to consider. It is a good tactical tool for understanding market progress or decline, business position, potential and path for functions.

The growing need for environmental or ecological factors in the first 10 years of the 21st century have given surge to green business and prompted widespread use of any modified version of the PEST framework. STEER analysis systematically considers Socio-cultural, Technological, Economic, Ecological, and Regulatory factors.



1HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#The_Model. 27s_Factors" HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#The_Model. 27s_Factors"The Model's Factors

2HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#Applicability_of_the_Factors" HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#Applicability_of_the_Factors"Applicability of the Factors

3HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#Use_of_PEST_analysis_with_other_models" HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#Use_of_PEST_analysis_with_other_models"Usage of PEST examination with other models

4HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#See_also" HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#See_also"See also

5HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#References" HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#References"References

6HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#External_links" HYPERLINK "http://www. srilankadot. com/wiki-PESTLE#External_links"External links

The Model's Factors

Political factors, are how and to what degree a authorities intervenes throughout the market. Specifically, politics factors include areas such as duty policy, labour law, environmental law, trade restrictions, tariffs, and politics stability. Political factors could also include goods and services which the government wishes to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have great affect on the health, education, and infrastructure of the nation.

Economic factors include monetary growth, interest rates, exchange rates and the inflation rate. These factors have major influences on how businesses operate and make decisions. For instance, interest rates have an impact on a firm's cost of HYPERLINK "http://www. srilankadot. com/wiki-Cost_of_capital"capital and for that reason to what amount a business grows and expands. Exchange rates affect the expenses of exporting goods and the source and price of brought in goods within an economy

Social factors include the cultural aspects and include health consciousness, society growth rate, age group distribution, career behaviour and emphasis on safety. Styles in interpersonal factors have an impact on the demand for a company's products and how that company performs. For example, an aging populace may imply an inferior and less-willing labor force (thus increasing the expense of labor). Furthermore, companies may change various management strategies to adapt to these social movements (such as recruiting more aged employees).

Technological factors include ecological and environmental aspects, such as RHYPERLINK "http://www. srilankadot. com/wiki-R&D"&HYPERLINK "http://www. srilankadot. com/wiki-R&D"D activity, automation, technology bonuses and the rate of technical change. They can determine barriers to entry, least efficient production level and impact outsourcing decisions. Furthermore, scientific shifts make a difference costs, quality, and lead to invention.

Environmental factors include weather, local climate, and weather change, which might especially affect establishments such as tourism, farming, and insurance. Furthermore, growing recognition to climate change has effects on how companies operate and the merchandise they offer--it is both creating new market segments and diminishing or destroying existing ones.

Legal factors include discrimination law, consumer law, antitrust law, job law, and health insurance and safety legislation. These factors make a difference what sort of company functions, its costs, and the demand because of its products.

Applicability of the Factors

The model's factors will vary in importance to confirmed company predicated on its industry and the goods it produces. For instance, consumer and B2B companies tend to be afflicted by the interpersonal factors, while a global defense service provider would tend to be more affected by politics factors. 3 Additionally, factors that will change in the future or more highly relevant to confirmed company will bring greater importance. For instance, a company who has borrowed heavily will need to target more on the monetary factors (especially interest rates). 4

Furthermore, conglomerate companies who produce an array of products (such as Sony, Disney, or BP) may find it more beneficial to analyze one team of its company at a time with the PESTEL model, thus concentrating on the specific factors highly relevant to that one section. A company could also wish to split factors into geographical relevance, such as local, national, and global (also known as LoNGPESTEL).

Use of PEST examination with other models

Investment Deterrents

06 Dec, 2005 00:00:00

Sri Lanka must focus on a better macro-economic policy matrix to handle the difficulties ahead

Though Sri Lanka badly needs higher degrees of investment, to boost expansion and reduce poverty, economists are caution that long-term macro-economic instability is hindering improvement, with the deteriorating security situation also increasing the country's woes.

The effect of macro-economic instability is experienced by economical players and the ordinary public by means of high and volatile interest levels, a permanently weakening currency, high degrees of inflation and poverty.

Some economists also point to mounting facts that Sri Lanka's inflation and poverty is generally fiscally induced and usually compounded by fiscal dominance of economic policy.

Inflation leader

Sri Lanka's high level of inflation contrasts starkly with the rest of the world, while the gap between this country and the others of South Asia is also widening.

All over the world, inflation is trending down, because of labour versatility, outsourcing, the China impact and increasingly 3rd party central lenders that are aggressively focusing on decreasing inflation.

Even in Latin North american and African economies, that used to be mis-managed to a fantastic degree, inflation is decreasing.

"Increasing countries worldwide, you may be aware, were averaging 35% inflation in the 1980's, " Peter Harrold, Resident Representative of the earth Standard bank in Sri Lanka informed participants of the Chartered Institute of Management Accountants, throughout a presentation how macro-economic factors influence business.

Average Inflation is South Asia







7. 6

10. 1

8. 8

3. 3


7. 8

8. 9

9. 0

3. 8


12. 2

7. 0

9. 2

4. 1


19. 3

10. 4

5. 2

4. 6

Dev. Countries

23. 0

35. 6

25. 6

5. 9


13. 0

15. 9

18. 8

8. 0

Sri Lanka

8. 7

12. 2

9. 7

9. 7

Source : IMF, IFS Yearbooks 2000-2004 /World Bank

"That is especially inspired by Latin America that was well-known for extraordinarily high rates of inflation. It has come down slightly in the 1990's and then very, very, drastically down to about 6% in producing countries all together; again reflecting Latin America's much more robust monetary control lately. "

Closer to home, even Bangladesh now has better monetary policy with its Central Bank headed by an ex-World Bank or investment company staffer.

Bangladesh's average inflation has dropped from 10. 4 percent in 1980s to 5. 2 percent in the 1990s and only 4. 6 percent in 2000-04.

Sri Lanka on the other hand has not been able to make significant profits in attaining price balance.

Inflation which averaged 12. 2 percent in the 1980s in Sri Lanka has continued to be around 9. 7 percent in the 1990s and remained around 9. 7 percent between 2000-2004.

Indian Prudence

India (whose Primary Minister is himself an economist), noted an average inflation of 3. 8 percent in 2000-2004, down from 8. 9 percent in the 1980s and 9 percent in the 1990s.

"We see that in South Asia we've relocated down from around about 11% on average in the 1980's to, excluding Sri Lanka, to under 4% in South Asia now, " says Harrold

"The Indian minister of Finance expressed concern the other day, that inflation was trending towards 5% in India. And therefore this might require some measures to ensure that this stayed below 5%. Five percent, that's when India gets worried. "

After two years of exceptionally limited fiscal procedures in Sri Lanka under donor supported economical strategy, year-on-year consumer inflation nudged zero in the first one fourth of 2004.

But in January 2005 Sri Lanka's year on calendar year consumer inflation struck 18 percent, as the Central Loan company printed Rs. 65 billion to finance federal handouts and olive oil subsidies under a new Marxist driven "people friendly" coverage framework.

Later in 2005, monetary tightening and an improvement in the fiscal sector, helped bring by a tsunami credit card debt relief has helped lower inflation.

Negative Rates

The effects of weak financial and fiscal insurance policy come to the top not only through increasing prices but also through negative real rates.

Sri Lanka's real interest levels have a tendency to fluctuate broadly.

"Over the last ten years, the real interest levels being the nominal interest without the rates of inflation has transferred around significantly, " says Harrold.

"In lots of countries the real interest rates have become, very stable. Frequently around 3% historically. Nominal rates may move up and down with inflation, but not the true rate. But here, the real rate steps around a good deal from up to 12% right down to as it happens to be minus 3%. That means once you are depositing money you are subsidizing the individuals who are borrowing it in real terms. "

Exchange overhang

Though real interest levels are now beginning to change positive, other results are lingering.

Sri Lanka's exchange rate which began to depreciate under the vulnerable monetary insurance policy and massive amounts of subsidies payed for imported goods in 2004, appreciated sharply following the tsunami aid moves and debt relief came in early on 2005.

As an outcome, the inflation differential with this trading partners has not yet been functioned through the exchange rate.

But this may happen sometime in the future.

"Should your inflation is higher than everybody else's eventually your exchange rate will change. This is an inescapable, fundamental rules of economics. "- Peter Harrold, World Bank

"We noticed that Sri Lanka was the only country is the noteworthy exception to the international experience lately, where across South Asia, across the world and even in Africa we have seen sharp decrease in inflation, " says Harrold

"If the inflation is higher than everybody else's eventually your exchange rate will change. This is an inescapable, fundamental laws of economics. I have never seen in my 30 years of doing this a country that can run an increased inflation rate rather than have their exchange rate change eventually. Doesn't signify it will change tomorrow or even next 12 months, but eventually you will see a re-alignment of that exchange rate. "

Though Sri Lanka terribly needs higher degrees of investment, to boost growth and reduce poverty, economists are alert that persistent macro-economic instability is hindering progress, with the deteriorating security situation also adding to the country's woes.

An appreciation of the real effective exchange rates, induced by undesirable inflation differentials will eventually harmed domestic producers.

High inflation and macro-economic instability not only causes popular poverty but also discourages investment, because it makes in problematic for businesses to operate.

A World Standard bank study found that, urban firms shown macro-economic instability as the 3rd biggest constraint for conducting business, after high electricity tariffs and policy uncertainty.

The fourth reason was high interest levels, which is usually a result tight financial insurance plan compensating for fiscal profligacy.


But in 2004, Sri Lanka's rates of interest travelled sharply negative in real terms, as Central Bank or investment company eased monetary plan in the face of expansionary fiscal coverage, and an growing exchange rate problems, while financial market players observed in awed disbelief.

As a result, the bond marketplaces in particular, had to anticipate future rates of interest predicated on their assessment on how imprudent the rate setting Monetary Plank of the Central Bank would be, rather than monetary fundamentals, in order to make investment decisions.

"If you have a very unstable environment; if the exchange rate is moving in unstable ways, if inflation goes up and down in unpredictable ways, if these factors are impacting on the stock market and we have little confidence in direction of these signals then we are going to find it difficult to make, you will find it very difficult to make business options" says Harold.

"The evidence for this relevance is showed again and again over history in this country and every other country. These are fundamental economic laws that apply just about everywhere they do not discriminate; they are extremely very clear in their impact. "

Sri Lanka's high overall budget also deficit scares foreign traders, despite various duty incentives directed at draw in them.

Unsustainable mix

Foreign analysts know that duty breaks together with deficit spending is a vicious combo.

"When a country has a budget deficit of 8 percent, and promises to spend a lot of money for companies to come in, if you are smart you would know that it is not sustainable. " - Prof. Norbert Walter, Key Economist of Deutsche Bank Group

"If a country has a budget deficit of 8 percent, and assures to spend big money for companies to come in, if you are smart you'll know that it is not lasting, " says Prof. Norbert Walter, Key Economist of Deutsche Lender Group who stopped at Sri Lanka just lately.

"And you do not trust that this would help make your business design a victory. Therefore, if there is a tax edge, employ it, but do not make your economical decisions on it; that might be my very rigid advice for just about any company. "

Sri Lanka's budget deficits have range between 7. 5 percent and ten percent in the last five years, triggering the country to really have the highest credit debt to GDP ratio in your community.

Public Credit debt % /GDP





55. 5

47. 9

48. 5


71. 7

76. 7

86. 1


79. 2

88. 8

96. 8

Sri Lanka

95. 2

96. 9

105. 4

Source: World Bank

For years, current costs in the budget has been rising, due to an expanding public sector and vote catching side outs, at the trouble of general public investment.

Though Sri Lanka allures around US $ 200$ 200 mn in international direct investment per year, the natural risk capital have come to usually footloose, low capital incentive industries, that can come searching for cheap labour, which alone is an ailment brought about by persistent high inflation and exchange depreciation.

Sri Lanka has been able to get capital into infrastructure such as electricity generation and ports giving high dividends and the federal government taking on almost all of the commercial hazards.

With the security situation again needs to deteriorate, analysts say, Sri Lanka needs to focus on a better macro-economic policy matrix to face the challenges in advance.

-LBO Newsdesk:

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