Business Times

Macroeconomic stability becomes challenging in 2011 : chief economist

By Sunimalee Dias

With the macroeconomic environment expanding post war, Sri Lanka today faces multiple challenges going forward, the Central Bank (CB)’s Chief Economist said on Wednesday. Having faced the first full year after the ending of the conflict in the country, the market now faces the challenge of maintaining and further strengthening the significant macroeconomic achievements realized last year. The Bank’s Economic Research Department Chief Economist K.D. Ranasinghe made these observations delivering the presentation on the “State of the Economy as Reflected in the Central Bank Annual Report 2010” held at the Centre for Banking Studies, Rajagiriya.

In this respect, he pointed out that carefully drawn policies needed to be adopted as compared to previous years 2010 came out as “successful for macroeconomic stability.” A tightening of the labour market is essential even though last year had indicated a drop in unemployment in the country, Ranasinghe said.

“If we are to grow over 8% there could be labour market issues and in this respect there is a need to take necessary measures by the government in a bid to increase labour mobility,” he said. Further, with an excess capacity gained last year with the opening of previously lost regions to the economy and the liberation of the North and East, industries and services sectors, and high level of growth in next few years is expected in this context

Implementation of infrastructure development projects is set to enhance capacity further and the government needs to face upto the challenge of closing output gap.

Mr. Ranasinghe observed that a continent fiscal consolidation process was required in a bid to provide space to contain inflation and work on the target of achieving a 6.8% reduction in budget deficit this year.
Moreover with rising international commodity prices including oil it may not be prudent to absorb the cost incurred by institutions such as the Ceylon Petroleum Corporation or provides subsidies. On the other hand, at least partly increasing cost to consumers is required to avoid adverse macroeconomic conditions arising in the economy, he explained.

Another key requisite that requires government attention was the further diversification of products and market and the effective use of existing bilateral trade agreements, he said.

The chief economist pointed out the need to also improve doing business environment in the country and assist in attracting non-debt creating capital for future investments. Some measures in this regard diversifying defunct or bankrupt organization is necessary with some efforts observed on the CPC and Ceylon Electricity Board establishments. In transforming Sri Lanka into a strategically important economic centre it is necessary to engage in central and co-ordinated actions, he pointed out.

Necessary reforms to the institutional framework of key public enterprises to operate them more efficiently and in a commercially sustainable way to reflect market conditions is another challenge the government currently faces this year.

Mr Ranasinghe observed that in the first full year after the end of the conflict a favourable environment set in with peace, an improved investor confidence, favourable macroeconomic conditionsl and gradual recovery of the global economy.

Appropriate policies were in place in relation to accommodative monetary policy, fiscal consolidation and strengthened financial sector stability. While the outcome indicated a high economic growth, an improved resilience, increased stability and an increased social welfare.

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