Lankan economy stagnant due to structural reforms delay: CB
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For Sri Lanka to succeed as a higher income economy and improve the wellbeing of its people, it is essential that the root causes for the continued low economic growth are addressed by expediting the required structural reforms with a focus on improving productivity and efficiency of the economy, the Central Bank (CB) said in its annual 2018 report.
It said the postponement of much needed structural reforms has moved the Sri Lankan economy to a modest growth path. Sri Lanka’s graduation to the middle income status almost a decade ago required far reaching policy reforms to move towards higher income status by avoiding the so-called middle income trap. “However, delays in addressing barriers to growth and introducing growth enhancing reforms in the areas of export promotion, attracting FDI, reducing budget deficits and debt levels, reforming factor markets, strengthening public administration, and ensuring the rule of law have largely contributed to Sri Lanka’s economic stagnation, while peer economies have progressed rapidly as a result of growth supporting reforms,” it said.
Natural resources
While Sri Lanka is endowed with plenty of natural resources with potential to support a high economic growth path, if utilised efficiently and numerous ocean resources, local consumers still consume imported canned fish and this reflects the strong need for supporting the fisheries sector.
Common salt extracted from sea water is used to produce a number of industrial raw materials, including Caustic Soda, Chlorine, Hydrochloric acid, Sodium Carbonate, Sodium Bicarbonate, Bleaching Powder, Poly Vinyl Chloride (PVC), etc. Sri Lanka, however, spends a substantial amount of foreign exchange in importing these raw materials at present, the CB said.
Vietnam example
The report said Sri Lanka still lags behind its regional counterparts in attracting FDI, particularly to sectors that enable manufacturers to integrate into high value added global production networks, which could also bring along technological know-how related to the high tech manufacturing industry.
In contrast, other emerging market economies in the Asian region, such as Vietnam, have been extremely successful in attracting impressive levels of FDI over the years. Vietnam’s FDI strategy focuses on increased foreign investment in high-tech industries, rather than labour-intensive sectors. Vietnam’s success can be mainly attributed to the country’s sociopolitical stability, the government’s commitment to create a fair and attractive business environment for foreign investors while constantly improving its legal framework and institutions related to business and investment, the CB said.
“Sri Lanka needs to develop a well-articulated and coherent investment policy clarifying how the country can use FDI to achieve the development goals of the country …,” it said.
Ageing
Rapidly changing lifestyles, urbanisation and demographic transition have put pressure on the traditional social protection system. More specifically, the decreasing family size, the diminishing role of the extended family due to internal migration from rural to urban areas or outward migration in search of better economic prospects, as well as the changing perceptions regarding supporting and caring for the elderly have largely contributed to this phenomenon. The elderly population continues to rely on family members, who are also ageing. This social challenge is likely to become aggravated further with rising dependency ratios highlighting the need for an elderly care system that would support and supplement the traditional family based care system, the report said.
The CB said there is a need to expand public and private healthcare services to suit the requirements of the ageing population and also highlights the increasing fiscal burden associated with the provision of public healthcare services.
“As the labour force is growing older while shrinking in size, it may have an impact on the overall efficiency of the economy,” it said.
Education
Although numerous policy measures implemented in the education sector have enabled Sri Lanka to attain commendable achievements in primary and secondary education in terms of student enrolment and gender equality, the education system has failed to replicate the achievements of its regional peers, particularly in terms of learning outcomes. The lack of student engagement in STEM (Science, Technology, Engineering and Mathematics) and vocational subject streams has resulted in the labour demand for entrants with technical skills not being met.
Public service
Despite excessive growth in public sector employment over time, public sector service delivery has stagnated due to inefficiencies and non-optimal allocation of resources, thus highlighting the urgent need for policy reforms in the public sector, including the increased use of modern technology. The number of people served by a public official has decreased significantly over the years demonstrating the high growth of public sector employment compared to population growth. “However, the public sector output is far below expectations, thus impacting negatively on the economic and social wellbeing of the general public,” the CB said.
CPC
As per the unaudited provisional financial statements, the Ceylon Petroleum Corporation (CPC) reported an operational loss of Rs. 104 billion in 2018, compared to a profit of Rs. 3.4 billion in 2017. The CPC’s outstanding trade receivables from government entities decreased by Rs. 10.4 billion to Rs. 81.7 billion in 2018, compared to 2017. As at end 2018, the CEB and SriLankan Airlines (SLA) accounted for 58.3 per cent and 31.3 per cent, respectively, of total trade receivables of the CPC.
SLCTB
Despite the reduction in operations, the financial performance of the SLTB (Transport Board) improved during 2018. As per provisional unaudited financial statements, total revenue of the SLTB increased by 4.6 per cent to Rs. 44.1 billion in 2018 with the increase in revenue from passenger fares by 7.6 per cent in 2018 in comparison to the previous year .
Railways
SLR (Railways) continued to record a weak financial performance in 2018 as well. Total revenue of the SLR increased by 14.4 per cent to Rs. 7.4 billion mainly due to the upward revision of passenger fares in October 2018. However, total expenditure increased by 9.9 per cent to Rs. 29.6 billion in 2018, owing to the increase in capital expenditure with respect to payments made for the purchase of rolling stock, which is to be delivered in 2019.
SriLankan Airlines(SLA)
The financial performance of SLA remained weak in 2018 as well. As per the provisional financial statements, SLA recorded an operating loss of Rs. 18.6 billion in 2018, in comparison to a loss of Rs. 11.9 billion recorded in 2017. This was the outcome of an increase in total revenue by 16.7 per cent to Rs. 172.7 billion in 2018, compared to a 19.6 per cent increase in operating expenditure to Rs. 191.2 billion.
Money in circulation
Currency notes in circulation at the end of last year was worth Rs. 641 billion against Rs. 598 billion in 2017 while coins in circulation rose to Rs.13.8 billion last year from Rs. 12.7 billion in 2017 .
EPF returns
The total member contribution increased by 8.8 per cent to Rs. 145 billion from Rs. 133.3 billion recorded in the previous year while the net contribution for 2018 increased to Rs. 37 billion compared to Rs. 15.8 billion recorded in 2017, the report said. Total investment income of the Fund amounted to Rs. 222.4 billion, down by 0.1 per cent over the previous year.