Govt. debt should be controlled for economic growth

According to the Economic and Social Survey of Asia and the Pacific for 2008, public debt remains a serious problem for most countries in South Asia, including Sri Lanka.

While domestic public debt is becoming a larger component of total public debt, it has received relatively less attention despite its serious economic and social implications.

Excessive reliance on debt, whether domestic or external, carries macroeconomic risks that can hinder economic and social development. High domestic public debt also pushes up interest rates and crowds out private investment which is much needed to promote economic growth.

The survey conducted by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) was launched in Sri Lanka this past week, marking the 60th anniversary of the survey. Executive Director of the Institute of Policy Studies (IPS), Dr. Saman Kelegama said although Sri Lanka is growing, it is not living up to its potential. Highlighting some positive aspects of the local economy, Kelegama said foreign direct investments were increasing, improved infrastructure development, tourism was keeping its momentum, there is reasonable political stability and unemployment is decreasing. However, there is also increasing inflation and taxation as well as increased electricity costs coupled with high interest rates. He also said there have been signs of stagnation in some sectors of the economy such as real estate and automobiles. Despite the downsides, there has been an average growth rate of 6 percent over the past three years.

So why is the Sri Lankan economy growing? According to Kelegama, the global economy is growing and since Sri Lanka is a 70 percent trade dependent economy, global growth trickles down through the growth of imports and exports. In 2007, there was 12 percent growth in the export sector, largely due to the garment industry as well as the GSP + scheme. Last year, Kelegama also said that tea exports were over US$1 billion for the first time.

In addition to growth in exports, Kelegama said foreign aid inflows were continuing from countries and donor agencies such as the World Bank and the Asian Development Bank, totalling US$800 million. Foreign remittances also increased in 2007 to US$2.7 billion, foreign direct investments made up another US$734 million and commercial borrowing totaled US$500 million.

Kelegama explained that domestic demand generated growth for infrastructure projects but that this domestic demand was also driven by government borrowing which created excess money in the economic system leading to inflation. In fact, he said it was one of the main causes of the high inflation in the country, in addition to increases in oil and food prices. Kelegama said government borrowing is necessary for infrastructure projects because government revenue is used on wages, subsidies and interest payments, leaving nothing for infrastructure development. Government borrowing is reflected in the budget deficit, around 7.5 to 8.5 percent of GDP and a major contributor to price instability and high interest rates.

Kelegama said the government must sustain a high growth rate or reduce the budget deficit in order to effectively manage its debt. The 2007 public debt to GDP ratio stood at 88 percent. Furthermore, in order to bring down the budget deficit, the government must reduce subsidies and wastage. In 2007 alone, the loss to the government from public institutions such as the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) was Rs.3 billion and Rs.15 billion, respectively. The total debt of public institutions last year was Rs.35 billion or 1.4 percent of the GDP.

Kelegama urged the government to bring down inflation by reducing expenditure on subsidies which will induce greater fiscal discipline. Kelegama expects 2008 growth to be between 6 and 7 percent.

ESCAP's Economic Affairs Officer, Dr. Muhammad Hussain Malik expects the volatility in oil prices, the economic slowdown in the United States and financial sector problems to be the main challenges in 2008. However, he said growth in the South Asian economies were impressive despite these problems. Inflation which he described as high and a serious problem is becoming a global phenomenon. Food prices are rapidly increasing and will serious affect the poor. In this regard, Malik said there should be programmes for the poor such as social benefits and food stamps.

Eminent economist Dr. Nimal Sanderatne said the declining contribution of agriculture to GDP is a feature of the process of economic development. From 1990 to 2005, the agriculture sector grew by a mere 1.5 percent. Tea production has been slowing and the current rubber production is half of what it was in 1963. According to Sanderatne, the issue lies in productivity.

He cautioned that agricultural development alone cannot reduce rural poverty. Instead, poverty has to be attacked through a twin strategy. Currently, the agricultural sector is overpopulated and some of the people must be siphoned off to productive jobs in other sectors. The ESCAP survey said this would offer them a better chance of escaping poverty but requires better opportunities for skills development and strategies for raising overall economic growth. (NG)