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| Sunday, 5 May 2002 |
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Economic reforms, peace essential to ensure faster recovery - CB by SUREKHA GALAGODA The economic prospects of Sri Lanka will depend on changes in the external environment, weather conditions, domestic macro-economic policies, implementation of economic reforms, the political situation and developments in the ongoing peace process. All other factors except the external environment and weather conditions are under the direct control of Sri Lankan policy makers and the public, states the Central Bank in its Annual Report for 2001. Thus, a strong improvement in macro-economic management, implementation of bold structural reforms, development of a national consensus on major economic and political issues, the assurance of support from the international community and advances in the peace process are essential to ensure a faster economic recovery in 2002 and to lay the necessary basis for a medium term high sustainable economic growth by strengthening investor confidence and improving the resilience and efficiency of the economy. It states that finding a lasting solution to the ethnic conflict through a negotiated settlement will improve economic prospects as it will reduce the destructive expenditure. Building up a national consensus and improving transparency and accountability are critical in implementing macro-economic adjustments and bold economic reforms which could be painful in the short run are essential, it notes. The achievement of the fiscal targets specified in the budget, implementation of policy adjustments and economic reforms would be critical to ensure the realisation of the expected economic recovery and projected improvements in macro-economic stability. The report forecasts that the real output will grow by 3.7 per cent in 2002 with a strong improvement in the second half of 2002 due to the global economic recovery gathering momentum, increased business confidence and improved weather conditions. Recovery will be widespread recording positive growth rates in all major sectors. The drought-affected agriculture sector is expected to grow by 2.2 per cent while the paddy output is expected to grow by seven per cent, recording a partial recovery of the drop experienced last year. The industrial sector is expected to revive, recording a growth rate of 4.5 per cent due to the expected recovery in industrial countries coupled with a high domestic demand owing to the expected improvement in business confidence. Recognising the serious deterioration of fiscal performance in the recent past, the budget has been formulated to consolidate fiscal operations, reducing the overall deficit and domestic financing requirements. The report states that the tax system has become increasingly complex and less transparent due to the existence of widespread exemptions and waivers granted on an ad hoc basis. Consequently, the revenue mobility of the tax system has weakened while tax evasion has increased, reducing the tax revenue to GDP ratio in the recent years. Budget 2002 has taken a bold step in addressing these structural weaknesses in the government revenue mobilisation efforts by introducing a series of major tax reforms. The report states that the medium-term macro-economic prospects for Sri Lanka will depend mainly on the magnitude and speed of policy adjustments and implementation of economic reforms in addition to finding a lasting solution to the ethnic issue. A medium-term economic scenario based on strong policy adjustments and faster economic reforms is considered. The adjustments and reforms are not only necessary to improve the medium-term growth prospects of the country, but also to strengthen the resilience of the economy. However, despite positive economic achievements on many fronts, Sri Lanka's economic development has lagged behind East Asian countries. Developments in 2001 have clearly demonstrated the economy's vulnerability to external shocks, reflecting the necessity for strong policy adjustments and faster economic reforms. The report cautions that available room for accommodating any further policy slippage is very limited. The postponement of necessary policy adjustments and structural reforms is economically very costly and it could lead the country towards an economic crisis. The economic outlook for 2002 and the medium-term economic prospects of Sri Lanka emphasise the need for strong policy adjustments as soon as possible to ensure faster economic recovery with macro-economic stability in 2002 and high quality sustainable growth in the medium term. |
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