A “Peace Dividend" for Sri Lanka arising from a progressive reduction in defence spending and leading to more opportunities for private sector investment should be the "next important focus on the fiscal policy agenda;" according to World Bank Managing Director Dr. Ngozi Okonjo-Iweala, who was speaking last week on "Becoming the Wonder of Asia: Accelerating Inclusive Growth in Sri Lanka" at the Central Bank as a part of its year-long 60th anniversary celebrations.
Positively commenting on a revised tax policy outlined in the 2011 national budget, particularly that "income tax was broadened to include public sector workers and the removal of a number of nuisance taxes like the debit tax on bank withdrawals," she noted that, while local inflation had been maintained at between 6% and 7% this year, the challenge was to use monetary and fiscal policies to combat rising inflation, interest rates and international commodity prices while at the same time locking in the current inflation levels.
She also indicated that "[managing] the peace in a balanced, transparent and fair manner will be critical to accelerate economic growth and poverty reduction. The choices that policy makers make today and the collaborative partnerships they form to navigate this new environment is going to shape the economic fortunes of Sri Lankans tomorrow."
Also suggested was that the government should tackle "other well known constraints to doing business further – e.g. weak enforcement of contracts and difficulties registering property" to attract more foreign investment. A recent World Bank study which showed that business productivity could be boosted by as much as 10% by facilitating better management practices, including improving quality, managing inventory and speeding up production, was also cited. This led to Dr. Okonjo-Iweala, during an official visit to Colombo where she met President Mahinda Rajapaksa and other senior government leaders, urging the government to promote better management practices by "funding better business schools, developing the local consulting market, or making it easier for well-managed multinationals to enter the domestic market providing opportunities for local workers to gain experience."
Dr. Okonjo-Iweala was also of the opinion that "[re-energising] the export sector for accelerated growth is not going to be easy in a post-crisis world." However, she did suggest "it can be done if the multipolarity of growth is used by Sri Lanka to expad into new markets," indicating the country was "well positioned to compete for the rising imports of China, India, Brazil South Africa, Indonesia, Colombia, Mexico and in the world’s other emerging markets in Asia, Latin America and Africa." She further advised thinking "beyond the regional geography."
She also highlighted Sri Lanka's "worrying" debt levels, saying "[annual fiscal deficits of 7 percent of GDP and double digit inflation (12 percent) over the last three decades has given rise to questions of sustainability over the years, which has negatively impacted private investment. The fiscal deficit reached almost 10 percent of GDP in 2009. The public debt burden has at various times reached over 100 percent of GDP and the latest available data show it at 86 percent of GDP."
Also noted was "domestic interest costs of almost one-quarter of government expenditures and about 44 percent of the entire tax revenues of the country in 2009. The proceeds of the successful sovereign bond issue ($1 billion) in October will be used to pay down some of the more expensive short-tem domestic debt and represents a prudent debt management operation." Saying the debt management was not enough, she pushed for fiscal consolidation to "help end the need for building up domestic (and external) debt to worrying levels."
While the "[importance] of savings and investment, innovation and knowledge-led growth, re-doubling efforts to connect to global markets and macroeconomic stability" were indicated by Dr. Okonjo-Iweala as necessary conditions for accelerating growth; she also reminded the audience of the need for inclusion to make sure accelerated growth resulted in equality opportunities across all segments of society.
As such, Dr. Okonjo-Iweala noted the need for "providing well-targeted safety nets to the poor and vulnerable, and access to quality education and health services – especially when the demographic dividend is going to begin to decline within a decade. Another example might be putting in place incentives to agriculture and agro-based industry, especially in the North and the East of the country, to amplify market linkages to the rest of the country and internationally. Additionally, improved transparency and accountability of service delivery will help improve service provision."
Indicating local female labour participation to be at 35%, she also revealed that the "future declining demographic dividend can be offset partially though higher female labor force participation rates. The simple math of the matter states that the higher is the female labor force participation, the higher will be per capita incomes for all Sri Lankans." |
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