Sustainable economic growth in 2007

By Susiri Gurusinghe

Sri Lanka has maintained a real economic growth rate of 5 percent per year from 2002-2005. Per capita income has risen from USD 500 in 1990 to USD 1,324 in 2006. The latest achievement in the economic activity is nearly 8 percent in GDP growth in 2006.

Sri Lanka achieved this growth rate despite the domestic setbacks, terrorist hostilities, uncontrollable oil prices and substantial economic difficulties.

Government's policies

The new government under the new President has given high priority to establishing peace and promoting economic development. The Government's most comprehensive policy package "Mahinda Chintana" (Mahinda's Thoughts), a development strategy of the country, now guides the government's economic policy. This package was well received by the public and duly approved by the community at the presidential election in 2005. Mahinda Chintana policies focus on poverty alleviation and steering investment to rural areas; developing the small and medium enterprise sector (SME); promotion of agriculture; and expanding the enormous civil service.

Within first year the government laid the foundation for sustainable and high economic growth. Government has launched large-scale development projects of second Airport, Highways, Road developments and important initiatives to over come power crises. The Government programmed and targeted an 8-10 percent economic growth rate in 2006 but achieved a medium growth of near 8 percent, keeping an enhanced macroeconomic stability in the future. This was enabling the economy to reduce the unemployment and poverty to some extent.

Growth in 2006

The economic growth in 2006 was broad-based, services being the main growth area in 2006 (64 percent of GDP represent service sector).

Service sector orientation in GDP is the world trend because weak international demand, relatively high prices can be seen regarding our agricultural products and that moves away the economy to service sector.

The beneficial effect of the ceasefire has ended and governments had to face almost a war situation in the North and East in the country.

Thus tourism sector was the mostly affected service sector from the war. Within the service sector improvements trade, port services, telecommunications and banking grew strongly.

Inflation, which has been a matter of concern to the authorities for many years, never declined to a single digit in 2006, remained at 13.2 percent average in 2006, while marking its highest in December 2006 that is 19.3 percent. The oil price hike during the year was the main underlying reason to this high inflation.

Any prudent monetary policy found it difficult to control this type of external influences. The high inflation during the year badly affected the exchange rate and it adversely affected the economic growth in the country. The high inflationary expectations are increasing day by day. The goal of the government is therefore to bring down inflation to one digit .

The important aspect of the growth was achieved despite the violence of the LTTE. Despite all these drawbacks Sri Lanka achieved nearly 8 per cent GDP growth. It was remarkable because even with the ceasefire in place during 2002-2005, the average rate of growth was 5.4 percent.

One can argue that this growth has been surged by post-tsunami reconstruction and large remittances from citizens working in the overseas. But interestingly the economy continued its 8 percent growth even during the second half of 2006.