Treasury Secretary Dr. P.B. Jayasundara, speaking at the Sri Lanka Economic Summit 2008 on “Managing Public Finance to Enhance Efficiency”, said public investment which dropped during 2002-2003 has now been raised to six percent with plans to stabilize it at seven percent, adding that public spending shouldn’t be sacrificed because of inflation.

Expenditure compression is not the solution because private investment cannot take place without the public spending in place, the Secretary said. The downward trend in government spending seen in the last 10 years has been reversed and unemployment is on the decline and is at an all time low of six percent.

Speaking of managing public expenditure efficiently, he said that it is done in clusters to see where wastage occurs. He said scrapping a few ministries is not the answer. Spending on national security, which is at three and a half percent of the GDP is a critical component of public expenditure, he said, adding “The government considers it an investment”.

Speaking of the infrastructure developments that are taking around the country, the Secretary noted that during the last 30 years development has been concentrated in certain areas, leaving some others lagging behind. Among these are the Eastern Province and the Mannar – Puttalam areas. In the East, several projects are underway, including the Arugam Bay Bridge, and the move to create an Export Processing Zone. Large irrigation systems, highways and other developments are taking place all over the country, Dr Jayasundara said.

Speaking of the funding for the projects, he said that this is the largest mobilization of foreign funds with work being carried out on three ports, two international airports, roads and irrigation schemes. He also added that implementation periods have been shortened and consultation curtailed, with donor assistance targeted towards country specific needs and not donor specific needs.

The Secretary noted the rising cost of fuel and food prices in the international market as new challenges but stated that adjustments in Sri Lanka are much stronger that in the rest of South Asia. Speaking at the same session providing the private sector perspective was Dr Anura Ekanayake, Deputy Vice Chairman of the Ceylon Chamber of Commerce who stated that it is the private sector who contributes 80 percent of the GDP of the country but said that in Sri Lanka it is performing below the regional par. He also noted that while public investment has increased private investment has slowed down and added that given the size of the private sector economy, the government will not be able to fill the gap.

Inflation, high interest rates and high energy costs were seen as some of the factors adversely affecting the private sector. Dr Ekanayake pointed out that the country’s inflation during 2007 and 2008 is way above those of the competitors, while the prime lending rate in Sri Lanka as of May was at 18.7 percent. In the commercial and household categories Sri Lanka has the highest price for a unit of electricity while in the industrial category, the local unit price is second only to that in Singapore. He also noted that low confidence in the stock market as another reason for the decline in private investment.

He pointed out a few immediate issues that need to be addressed such as conflict, rising inflation, high cost of capital and energy and relatively poor infrastructure. As solutions to these problems, he suggested that in the short term, public expenditure should be reduced, revenue collection should be increased keeping rates steady and reforms in the public sector. In the medium to long run he stated that exports need to be focused on and commercial agriculture needs to be established in the country noting that agriculture productivity levels have been stagnating for the last decade. The government should also combine with the private sector to improve infrastructure, he said.