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by Gamini Warushamana

The Asian Development Bank (ADB) shattered the dreams of 8% economic growth in the coming years and forecasts 5.3% and 5.2% economic growth for year 2006 and 2007 in its Asian Development Outlook released last week.

To achieve a 8% growth there should be an increase in investment and improvement in productivity of the economy. Not only that, it depends on other factors such as integration to the global trade, ADB country director Alessandro Pio told a press conference on Thursday.

The report highlighted the real challenges faced by the Sri Lankan economy and reiterated the need for rapid implementation of unpopular but essential reforms which were difficult to many successive governments to push through.

The election manifesto of the current government included some departures from the past, but the extent and manner in which they will be implemented remains to be seen, the report said.

The report expressed doubt on the implementation of these reforms considering the different political agendas of the groups in the governing alliance, despite the strong executive presidency.

The report was released a week after the Central Bank announced that the country's economy grew at 5.9%, at a higher rate than predicted 5.3% and with 6.3% percent growth in the final quarter of 2005. The ADB forecast is based on assuming no outbreak of open hostilities in the North East and the continuation of "no war no peace" situation in the country.

The report recognised this growth forecasts as respectable performance and in line with Sri Lanka's long-term trend. The private sector will continue to drive economic growth, specially in textile and clothing manufacturing and in service.

Highly diversified private sector companies can survive in a difficult environment. Although the current business climate might not be very conducive for foreign or for other new investors, established companies and conglomerates have easy access to financial markets and they are able to operate and invest in an uncertain political environment. This resilience is evidenced in the buoyant performance of the Colombo Stock Exchange, the report said.

Inflation is projected to remain high at 9% in 2006 and 8% in 2007 considering external and internal factors. The current account deficit is projected to remain high peaking in 2006 at 3.7% of GDP and moderating in 2007 to 2.7% as most large scale post tsunami reconstruction work continues.

Oil prices will remain high but stable. Exports will grow at 8% annually, at a lower rate compared to the recent past due to challenges faced by the apparel industry. Achieving the overall 9.1% GDP budget deficit target 2006 will be difficult for the government as it has to resume external debt-serving payments that were suspended for one year as Paris Club tsunami assistance.

In the medium-term outlook, the report pointed out the need for investment to foster economic growth. It said that no large infrastructure improvements have been made for the last 20 years resulting in bottlenecks that are a heavy drag on the economy. Poor roads in Sri Lanka have been associated with 44% lower total factor productivity and lack of access to the power grid with a 35% reduction.

ADB has highlighted sectors with higher potential in growth. Non plantation agriculture, which is highly subsidised today needs more investment in research and infrastructure.

The sector which frequently has the largest impact on productivity and poverty reduction has been neglected. Over the last five years labour productivity in the agricultural sector has fallen by 10%.

The report pointed out that a decisive policy shift is needed in the agricultural sector to address the issues recognised by earlier studies such as research, extension services, tariff policy, land use restrictions, infrastructure and fragmentation of land holdings.

Serious shortage of skilled computer staff affected the growth of the software industry which is still in its infancy and the country's development in general.

The Government is slowly embarking on education reforms. The University admission ratio of the country is 2%, very low compared to 8% in South Asia and 30-40% in developed countries. Only 14,000 get opportunities to attend universities of the 113,000 students who pass the A/L examination each year.

This will make it increasingly difficult for Sri Lanka to improve productivity and move away from being a low-skilled, low-wage economy, the report said.

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