IPS says economic slowdown seen this year

The most promising feature of Sri Lanka's economic performance in 2005/06 was a steady acceleration in GDP growth to a rate of 7.4% in 2006, according to the "Sri Lanka : State of the Economy 2007" report released this week by the Institute of Policy Studies (IPS).

Nonetheless, it said, there are increasing signs of a gradual slowdown in economic growth with the growth rate slowing in the first quarter of 2007 to 6.1% and to 6.4% in the second quarter of 2007. The report said the economy displayed a number of signs that demand is rapidly outpacing supply and that consumer price inflation has seen a sharp increase while the external current account deficit has widened significantly.

“In part, the problems stem from the fact that Sri Lanka's recent economic expansion has been driven partly by relatively relaxed fiscal and monetary policies. The predominant policy concern remains the risk that inflation may fail to moderate sufficiently. The risks in the interim is that the macroeconomic environment is likely to be tightly constrained and volatile, leaving limited policy options in the face of any domestic or external shock with very little tolerance margin for any policy errors,” it said.

The report said there is a need to reorient government expenditures to priority and growth enhancing areas and to implement necessary reforms to boost the economy's supply capacity. The financing constraints on the government are stringent. Accelerated investment in infrastructure is a necessity if the economy is not to run up against supply side constraints. Encouraging private investment, particularly in infrastructure, will also depend on the approach to implementing broader reforms in the economy. Public-private partnerships require regulatory reforms to protect the interests of both investors and consumers.

Better infrastructure and improved public services are needed to increase economic growth and to ensure that the benefits of growth are widespread. The supply-side constraints in infrastructure, skilled labour and public services in Sri Lanka can seem formidable. However, improving the capacity of the public sector to deliver basic services is the core issue and requires a commitment to major policy reforms, it said. (NG)