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| Sunday, 14 April 2002 |
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ADB forecasts economic turnaround by 2nd half of 2002 by SUREKHA GALAGODA Sri Lanka's economy is forecast to grow by 3.5 per cent in 2002 and 5.5 per cent in 2003 due to improvements in the global economy, states the Asian Development Outlook (ADO) 2002, released by the Asian Development Bank. The ADO reports that last year's economic decline was the worst since the compilation of national accounts and was largely due to external factors. The airport attack by the LTTE led to plummeting tourist arrivals and a hefty war risk insurance surcharge damaged the shipping industry. It is forecast that the economy will turn around in the second half of 2002, but the key for the first half of the year is to stop the decline in macro-economic performance and to focus on stability. The ADO reports that unemployment increased in 2001 particularly in the manufacturing and tourist related activities. Savings and investments fell. The suspension of Parliament in July and its dissolution in October affected the public investment programme, as insufficient funds were available to support ongoing projects. Political instability was detrimental to private investment. It says the export performance will continue to drop during the first half of 2002 as the country's main foreign markets emerge from the current economic downturn. The expected break in the drought should lead to improved performance in the sectors of agriculture and hydro power. For the year the recovery should be modest with gross domestic product (GDP) expanding by 3.5 per cent and with potential for higher growth in 2003 if a stable macro-economic environment is in place. The ADO states that increases in administered prices such as power will raise inflationary pressure but stable food and oil prices will mitigate the effect bringing down inflation to about 8.5 per cent. The recent adoption of an automatic pricing formula for petroleum products means that price changes for such goods will evolve more smoothly over time. Slower money supply growth is needed to contain inflation, a key factor in which to control fiscal deficit to eliminate pressure for monetary expansion to fill the financing gap. Lower interest rates and the current ceasefire will help keep recurrent expenditure in check, but for the sake of medium-term growth, public investment in basic infrastructure needs to be accelerated. Revenues are likely to grow more slowly and the government's commitment to privatisation of State Owned Enterprises (SOE) will help bring the overall deficit down to 8.5 per cent of GDP in 2002 which should fall further in 2003. ADO notes that a stable macro-economic environment should attract higher rates of investment, leading to a widening of the current account deficit as capital import growth accelerates. Sri Lanka needs to achieve high and sustainable rates of growth in per capita income to make substantial inroads in reducing poverty and to provide new jobs for entrants to the labour force. The private sector will need to take the lead in realising more rapid economic expansion with the government providing an appropriate legal and regulatory environment. Therefore, reforms in land and labour markets are needed to free the flow of these critical factors of production and to increase economic efficiency. Eliminating market distortions will also entail a reduction in the government's direct involvement in commercial activities, notes ADO. ADO also notes that in the medium term the government needs to strive for a more commercial orientation in the remaining SOEs, reversing the losses in some cases and preparing the way for their eventual transition to private sector operations. The government faces many challenges ahead. Therefore, it will need to prioritise its reform agenda to optimise the use of its scarce planning and management resources. ADO also says that after the turbulent 1997-2001 period, developing Asia is returning to a more sustainable pace of economic growth in 2002-2003. The region's average GDP growth is projected to rise to 4.8 per cent in 2002 and 5.8 per cent in 2003 from 3.7 per cent posted in 2001. The report is the 14th in an annual series. ADO also contains a theme chapter every year. This year's theme chapter is 'preferential trade agreements in Asia and the Pacific'. |
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