Sri Lanka’s economic growth this year is targeted at 6.2 % while the country last year demonstrated its resilience growing at 3.5 % amidst challenging domestic and external conditions.
President Mahinda Rajapaksa, CB Governor- Ajith Nivard Cabraal and Treasury Secretary Dr. P.B. Jayasundera enjoying a joke outside the CB office.
The country’s economy recovered from the effects of the global recession and the Northeast war, which had ravaged the country for almost three decades - reaching a critical juncture during the early part of the year. “This remarkable performance was largely due to the steady recovery in the economy since the second quarter of the year, resulting in a notable growth of 6.2 per cent in the final quarter, according to K.D. Ranasinghe, Director of the Central Bank's Economic Research Department ,when he highlighted significant factors of the the 60th annual report of the Central Bank (2009), at a ceremony organized to hand over the annual report to President Mahinda Rajapaksa in Colombo on Monday.
He said that a notable achievement in 2009 was the sharp decline in inflation, a result of the stringent monetary policy measures adopted by Central Bank over the last two years and the significant reduction in global commodity prices. Inflation, which reached 28.2 % in June 2008, dropped sharply to 4.8 % by end 2009, recording an average rate of 3.4 % in the year, the lowest since 1985. Mr Ranasinghe said inflation is expected to pick up but remain within single digit levels throughout this year. Interest rates had also come down during the year. Imports had fallen by 28 % while export earnings fell 12.7 % but are expected to improve by 10 % this year. The trade deficit for 2009 amounted to US$ 3.1 billion, a 48 % drop from US$ 5.9 billion in 2008, he said .
Enhanced investor confidence in the economy saw a sharp reversal in foreign financial flows helping the country to record an unprecedented surplus in the balance of payments of $2.7 billion by end 2009 and raising foreign exchange reserves from a low level of $1.1 billion in March 2009 to a historic high of $5.1 billion by end 2009 .
Treasury Secretary P B Jayasundera emphasized the need to strengthen the exchange rate and improving productivity to operate in the new environment created after the war. He noted that the country’s currency has depreciated but from this year, it will appreciate, from Rs.113 to Rs.100 with the improving productivity in both public and private sectors. Dr Jayasundera said Sri Lanka had a target of doubling per capita gross domestic product to $4,000 in the next five years. He stressed the need to increase $1 billion dollar export industries from two (tea and apparel) at present to at least 10."Then our trade deficit will be a trade surplus. This will also help strengthen our exchange rate," he said.
Making a suggestion to the President, Central Bank Governor Ajith Nivard Cabraal said macroeconomic stability in the country is essential and the future cabinet of ministers must be given targets to achive economic goals. He urged the president to appoint suitable ministers to the next Cabinet and also ensure that they are given targets to achieve. He had suggested that the next Parliament should have a set of capable Ministers heading Ministries in an effort to raise per capita income to the $4000 level by 2015.
He pointed out that in spite of the sluggish growth in the first quarter of the year; workers’ remittances grew by 14.1 % to $3,330 million in 2009. The current account, which recorded a surplus of $339 million for the first nine months of the year, turned around to record a deficit of $214 million due to the increase in the trade deficit during the last quarter of 2009.
Responding to the Governor’s suggession, President Mahinda Rajapaksa said that Sri Lanka’s voters are responsible for electing suitable persons to Parliament (at the April 8 election) who can take the country forward to achieve bigger growth.
“It is the responsibility of the voters to elect people or teams that are capable of achieving these goals,” the President said. The Bank also released a new 10 rupee coin at the same ceremony
During the past five years, the country gained a per capita income of $2,053, while becoming a middle-income country. The President said that it took Sri Lanka more than 50 years to achieve a per capita income of $1,020. Reaching a per capita income of $4,000 by 2016 will be a feasible target with the encouraging economic environment, he said.
According to the Central bank annual report, defence spending, high interest costs and revenue shortfalls caused by falling imports resulted in the government overshooting its 7 % of GDP budget deficit target for the year, reaching 9.7 %. Public debt which was on the decline since reaching 90.6 % of GDP in 2005, increased to 86.2 % in 2009 from 81.4 % the previous year. The IMF is withholding the third tranche under the US$ 2.6 billion standby facility until the next budget articulates the government’s commitment to rationalising expenditure and introducing tax reforms. The Central Bank Report said the major challenge the economy would have to face is to balance price stability with growth adding that structural and institutional reforms would have to be carried out to drive the economy on a sustainable growth trajectory.
GDP growth in single digits
The Central Bank (CB) is forecasting maximum GDP growth in 2010 to be between 6% to 7% with no expectations for double digit growth over the next two to three years. According to the CB’s Additional Director of Economic Research K.M.M. Siriwardena, the liberation of the North and East is providing new opportunities for accelerated economic growth although the government is facing significant challenges in 2010 in terms of raising revenue and continuing mega infrastructure development projects coupled with the sluggish recovery of the global economy.
Agriculture an important sector in Sri Lanka’s economy
Addressing a discussion organized by the Institute of Chartered Accountants of Sri Lanka (ICASL) on the Pre-Election Budgetary Position Report 2010, Mr. Siriwardena said there were significant deviations in 2009 from expectations on revenue growth and the budget deficit. Revenue growth which was expected to increase in 2009 came down while the budget deficit which was 9.8% of GDP was originally forecasted at 5.9%. He attributed the deviations to a decline in revenue, a slowdown in domestic activity, the impact of the global financial crisis and a rise in government expenditure. He added that during the second half of 2009, fiscal operations eased to some extent.
In the medium term, Mr. Siriwardena said there should be a strengthening of fiscal consolidation processes by introducing reforms to strengthen the tax system, address the root causes of high recurrent expenditure and continue development in the North and East.
Chairman of Hatton National Bank Rienzie Wijetilleke who was a panelist at the discussion said Parliament control of public finances is virtually non-existent today. He said uncontrolled increase in recurrent expenditure and the slowdown in the domesticeconomic should be addressed. He said the Pre-Election Budgetary Report will become irrelevant once a new government is in place but that there has to be a plan by the new government to bring reforms to the public sector and correct the inefficiencies.
Mr. Wijetilleke said the size of the Cabinet, waste, overlapping of functions, duplication of government institutions across the country and delays in implementing projects all lead to a slowdown in the domestic economy. He also said there is a need forthe rapid creation of new wealth in Sri Lanka coupled with the creation of new jobs and savings. He warned against short term solutions for long term growth.
Managing Director of the DSI Group Kulatunga Rajapakse attributed the decline in tax revenues to the reduction in motor vehicle imports. He said there is no capital generated within companies for investment. He also described the Free Trade Agreement (FTA) with India as a ‘non-starter’, explaining that the results have not met the expectations of the private sector.
Mr. Rajapakse said there is no money in the private sector to be taxed anymore and that the only relief so far has been bank interest rates coming down. Another problem facing companies is the severe shortage of workers in the industrial sector.