Financial Times

Towards 8% economic growth in 2006
By Sunil Karunanayake
Government economists are projecting high growth of 8 % this year based on various factors. An ambitious target? Our columnist today examines why and how this is possible.

The government has correctly set their target of eight per cent growth for 2006. After the tsunami devastation Sri Lanka recovered adequately to post a 4.5% growth for the first quarter 2005 and thereafter maintained an average of 6% + growth for the secnd and third quarters.

The Treasury Secretary has been optimistic that we may well reach a 6% growth for the year. Despite a presidential election, political squabbles and threat to the existing fragile ceasefire agreement, the economy has stood calm though stock market capitalization was somewhat effected. This is a tribute to the politicians and policy makers who had the courage to push through reforms in some of the key sectors such as plantations, telecommunications, port services etc to minimize state involvement in these areas resulting in considerable growth and creation of employment. Given the current political system it is difficult to expect good governance in state enterprises.

In December 2005 export earnings grew by 21.8 % reaching the highest ever-monthly value of $625 million. Despite the initial reservations and fears garments and textiles showed remarkable growth to enable cumulative exports to reach $6345 million ahead of $5757 earned in 2005. With increasing oil prices cumulative imports grew by 10.8%. However it was pleasing to note that the trade deficit for the month of December recorded the lowest for the year though the trade deficit for the year increased as expected. Despite the increasing trade deficit the overall Balance of Payment position was strengthened and the surplus increased to $502 million by the year-end with the contributory factors being the increase in private remittances (26%), effects of the debt moratorium and the flow of relief funds.

These developments have enabled the gross official reserves to increase to $2735 by year-end thus providing the necessary stability to the rupee.
Domestically with an abundance of rainfall and high water levels in the reservoirs providing an impetus to hydro power generation, record tea and paddy crops and significantly improved rubber prices should see a satisfactory improvement in the overall growth rate and achievement of 6% (in 2005) may not be an impossibility. The high performing services sector too is expected to do well in trade; transportation, Telecommunication, tourism and financial sub sectors too are poised for increased activity.

The Central Bank is optimistic that the economic expansion of 2005 will continue in 2006 with improved performance in all key sectors.
Given that the weather and global trading conditions are outside our reach the government must move on with the internal mechanisms to provide an encouraging investment climate.

While the southern expressway is progressing, other projects such as the Colombo –Katunayake, Colombo-Kandy expressways and the Colombo outer circular projects are yet on the drawing boards. The much talked Upper Kotmale hydro power project and the Norochcholai Coal power plant has now commenced work and one hopes these would not be subject to political interruptions.

Thermal power and weather dependent hydro power is not going to lower the exorbitant cost of electricity which is affecting every activity. The ADB and the World Bank has come up with a programme to improve the much neglected road network.

It is rather disheartening to note the ever-increasing losses to the public sector by way of strikes in essential economic activities. At this moment of writing we hear that that the CEB trade unions are flexing their muscles and the GMOA too has resorted to strike action.

We do not suggest that trade unions should be suppressed; they are an important stakeholder but why use the strike option as a threat when other avenues are available to resolve conflicts? Employer-employee conflicts are unavoidable; thus cannot the differences be discussed and resolved with the public interests being given priority?

We have repeatedly stressed through these columns that conflict resolution and negotiation are specialized functions and should not be left in the hands of Cabinet ministers (who may be forced into impulsive decisions due political affiliations) but in the hands of competent and trained public officials.
In the established private sector company CEO’s or Directors rarely get involved in these conflict issues but entrust it to the Employers Federation which comprises of trained and experienced resource persons who will tackle the issues with trade union leaders with whom they’ve developed a good understanding.

In keeping with the Mahinda Chintana, the budget proposals for 2006 took a ambitious step in granting tax exemption to international sports events such as the recently concluded under 19 World Cup. Those who watched the recent VB series may have witnessed the invincibility of the Aussies and the tremendous economic and social impact it makes to a nation. In 2006 Sri Lanka will also be hosting the Rugby Asiad and the 10th SAF Games (Athletics).

Sports can definitely make a very positive contribution to our economy and one hopes more international events would be hosted in Sri Lanka. Here too we would expect least interference from politics as the administrations and controlling bodies should be permitted to function in the best interests of the sports in keeping with the public policies with adequate regulatory checks to meet the Mahinda Chinthana targets.

(The writer could be reached at suvink@eureka.lk)

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