Business Times

8% GDP p.a. next two years highest in region after India

ADB concerned about SL’s fiscal performance
By Sunimalee Dias

The Asian Development Bank (ADB) on Wednesday while being optimistic of Sri Lanka’s growth expressed concerns over its fiscal performance. With the budget deficit at 8% in 2010, down 1.9% from 9.9% in 2009, the current uphill task would be in bringing it down further, ADB Lead Economist (Colombo) Narhari Rao told the media on Wednesday. This was stated when the ADB released its flagship annual economic publication, the Asian Development Outlook 2011 in Colombo.
Government’s target is to bring down the deficit to 5% in 2012 while increasing revenue is at 16% and containing expenditure is at 21%.

Salaries and wages, interest payments, and transfers and subsidies were included in the current expenditure cuts as a share of GDP. As such as a share of GDP public investment was lower than in 2009 at 6.5%. Total expenditure topped at 23% of GDP in 2010 Further, this year the government expenditure is forecast to rise “moderately” in nominal terms as the government is looking to cap public investments at around the 2010 level of 6-7% of GDP. A sharp one-third increase in private investment is seen driving growth higher.

It was pointed out that fiscal consolidation is very important if not the debt levels would keep rising and investors would lose confidence, he said. The budgeted fiscal consolidation while being “prudent”, meeting its target will require further measures as the costs of the humanitarian reconstruction expenses related to the flooding in 2011 and reduction in customs duty on gasoline were not provided for in the budget adopted in 2010.

While the debt ratio has fallen in recent years, the structure of debt has adversely changed, as the mix has shifted from concessional external borrowing to higher cost domestic and non-concessional external borrowing as an issue of sovereign bonds. Mr. Rao noted that focusing on tax will not help the fiscal programme and in this respect, strong measures need to be used to rein in expenditure.
The easier option identified was to cut capital expenditure but the government has to look at the wages and debt issues seriously, he said.

“Unlike tax measures, expenditure measures cannot be dealt with as they have to be phased out over time,” he said. ADB projected GDP to be at 8% per annum for the next two years which is considered to be one of the highest after India in the South Asian region. India’s GDP is forecast at 8.2% and 8.8% in 2011 and 2012 respectively.

It, was pointed out that Sri Lanka was “able to raise resources” and that it has “achieved a lot much more than South Asian economies.” The ADB remained “hopeful” and “optimistic” and believed the country could “continue to grow rapidly with no major hindrances to growth.”

Inspite of achievements in bringing down inflation in Sri Lanka to single digit levels, the bank noted that in the face of possible future food and fuel price hikes most countries will have to live with it. However, Mr. Rao pointed out that as a remedy the government “shouldn’t try and subsidise it because in the short run it can deal with it but it could be adverse on fiscal management.”

Moreover, Sri Lanka is not capable of switching to any other alternative sources of energy in place of high fuel and electricity costs. The government also needs to exercise flexibility in ensuring sustainable management of inflation. In this respect, the government needs to allow price rate flexibility and exchange rate flexibility.

ADB Sri Lanka strategy 2012-2016

The ADB will be financing Sri Lanka’s development work through an injection of US$314.6 million for this year. This will be used for the national development projects in the construction of highways, energy sector, North East coastal development, water for rural areas, transport services, and assisting in the lagging regions.

In 2009, the ADB made a grant of US$330 million while in 2010 US$457.2 million was provided to the country’s development work. ADB is currently in discussion with the government in view of its five-year plan that works in tandem with the government’s Mahinda Chinthana.

Previously the ADB made a three-year plan due to the conflict in the country at the time that created uncertainty to initiate any long-term plans. Meanwhile, work on the A9 highway is currently underway and the project is being funded by China while ADB on the other hand, will be engaged in construction of rural roads.

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