With an economic growth of 8 per cent last year, the Sri Lankan economy is believed to be in a strong position and set to take–off to a high trajectory of growth. Although this growth rate that is the highest in several decades is an achievement, the danger is that the euphoria it evokes could cloud the weaknesses of the economy and result in complacency.
Sustaining high growth is an uphill task as several challenges face the economy. It is difficult to sustain economic growth this year owing to external and domestic disadvantages. Economic reforms, a resolve to address weaknesses in fiscal conditions, the control of inflation and management of the public debt are among the important conditions for sustaining economic growth.
It was refreshing to have a balanced view of the state of the economy by the Chief Economist of the Central Bank K.D. Ranasinghe in his presentation on the “State of the Economy as Reflected in the Central Bank Annual Report 2010”. He underscored many of the challenges and conditions that must be met to sustain the country’s economic growth at a high level. He pointed out that Sri Lanka faces multiple challenges today in maintaining and further strengthening the significant macroeconomic achievements realized last year.
Among the key challenges he highlighted for maintaining and further strengthening the significant macroeconomic achievements realized in 2010 were: addressing possible labour market tightening; continuing the fiscal consolidation process and further diversification of export products and markets and effective use of existing bilateral trade agreements. He stressed the need for improving the business environment and attracting non-debt creating capital.
A significant challenge was reforms to the institutional framework of key public enterprises to operate them more efficiently and in a commercially sustainable way to reflect market conditions. He underlined the difficulties faced owing to rising international commodity prices including oil prices. These are issues that the government must address to sustain high economic growth.
Avoid complacency and distractions
The State of the Economy 2010 analysis of the Institute of Policy Studies (IPS) cautions the country of complacency. “What Sri Lanka should avoid is to be lulled into a sense of complacency. A post-conflict economic recovery phase driven by accelerated infrastructure spending can see the country achieving an annual average growth rate in excess of 7 per cent in the next few years. …..Such promising news on the growth front can also drown out calls for reforms. But, if the country is to truly lay the most viable platform on which to base long term growth, complementing an infrastructure development thrust with a broad reform effort will provide the most sustainable outcome.”
The Institute of Policy Studies report raises several pertinent issues that should be mulled over. These include the question as to why the post conflict period did not produce as much of the expected economic growth. It adduces the distraction of the government and country from economic issues to political ones, the downturn in the global economy and the uncertainties in economic policies are among the reasons adduced. It asserts that “Sri Lanka made significant progress towards long term peace and stability in 2009 with the successful end to a 30 year armed separatist conflict in the country. The economic dividends, however, were slow to materialize, held down not only by a severe global economic downturn but also by the distractions of Presidential and Parliamentary elections.”
The need to not distract ourselves from the foremost objective of economic development rather than be constantly distracted by other issues is especially relevant at the moment when a report submitted to the UN Secretary General has drawn far too much poitical attention. The tendency to be distracted from economic concerns has been observed by several economists who have characterized the country’s economic history as one of missed opportunities. Ethnic and political distractions have been a root cause of this. The end of the war provided a fresh opportunity to resolve these issues and focus on economic development.
National integration
The inability to bring about ethnic reconciliation and a durable solution to minority issues that would result in national integration continues to be a serious constraint to achieving the country’s economic potential. It is clear that the end of the conflict alone would not be adequate for the economy to achieve high rates of growth. The IPS stresses the need for a post conflict resolution of the conflict with an indigenous solution and economic policies fashioned to meet the peculiar conditions of the war affected areas. “In so far as post-conflict development relates to the economic sphere, the primary objective is to reduce the major risk factors of conflict recurrence by formulating economic policies that are sensitive to issues of inequities among groups.”
IPS considers the government’s development policies as a move in the right direction. The various economic policies to reconstruct and reawaken the North and East that is integrated in the national economic policies is seen as a means of national reconciliation as much as of economic development. “The intention is clearly to deliver rapid economic development to the war ravaged North and East (N&E), while focusing on bridging the rural-urban divide in the rest of the country. ….. Its economic message - rapid infrastructure improvements to rural Sri Lanka - has also become a decisive factor to an important constituency of voters.”
While economic policies could help, if they are themselves a distraction from meaningful steps towards national reconciliation, their benefits would be limited. The focus on infrastructure development, rapid economic growth and regime consolidation are a distraction from tangible measures towards ethnic reconciliation. The lack of national integration could continue to be a serious setback to more rapid economic development.
Economic reforms
The need for appropriate economic policies and reforms are stressed by the Central Bank and IPS. These include a credible macroeconomic policy framework and the reduction of the fiscal deficit. “The need for a credible macroeconomic policy framework is very real as Sri Lanka grappled with an expansion of its projected budget deficit of 7 per cent of GDP for 2009 to a realized figure of 9.8 per cent of GDP by year end. While it can be explained in part by falling tax revenues in the midst of an economic downturn, expenditure needs - partly related to rehabilitation and resettlement of internally displaced persons (IDPs), etc. - were on the rise. Nonetheless, such fiscal constraints are a reminder that the challenges for macroeconomic management over the next few years will be highly complex. Macroeconomic policy will be called on to support high growth - as almost a precondition to minimizing conflict risk - while ensuring that stability is not compromised in the process.”
“The priority for fiscal policy” in the IPS’` view “is to release financing for infrastructure investment and reconstruction spending. This entails that a mix of far reaching economic, institutional and policy reforms accompany a re-orientation of public finances.” It warns that “In the absence of such reforms, Sri Lanka will falter in putting its public finances in order - that is, cutting back on recurrent spending to support capital investment. Without such flexibility, a heavy infrastructure-led development drive will inevitably rely on borrowed funds. This will not only lead to an accumulation of the country's stock of public debt, and associated risks for macroeconomic stability, but will also mean that Sri Lanka's development priorities do not have the financing that is needed on a predictable basis.”
Sri Lankan economic policies have lacked adequate focus on economic reforms that have been repeatedly emphasized by international agencies for quite some time. The Central Bank has also stressed this. The issues that have been highlighted by both the Central Bank and the Institute of Policy Studies should be addressed if the economy is to be on a sustained high trajectory of economic growth. Fiscal consolidation, public enterprise efficiency and economic reforms are vital for long term economic growth and development.
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