7% growth forecasts for 2007

The growth forecast for 2007 is 7%. The contributors are 5% from the existing open economy, 1% from new investments, 0.2% from policy reform and 0.8% from the Asian buoyancy.

Sri Lanka's economy expanded by 7.4% in 2006 but given the recent escalation of ethnic conflict and violence the country's growth is expected to slow down slightly in 2007, said Institute of Policy Studies Director Dr. Saman Kelegama at the launch of the ESCAP report.

He said that by reforming loss making State owned enterprises such as Ceylon Petroleum Corporation and the Ceylon Electricity Board the government can save and redirect 3-4% of GDP to be invested on productive investments such as infrastructure.

Dr. Kelegama said that reforms have taken place in certain areas such as the automatic pricing system in petroleum and the electricity tariff increases, but these measures have been inadequate to reduce the burden of these enterprises on the government budget.

SEMA models on State owned enterprises reforms should immediately be put in place while public private partnerships should come into effect with the public utility commission setting the tariff structure. For example, the new Electricity Act should come into effect soon while reforms in education, agriculture and other areas should move ahead in parallel.

The government can reduce expenditure and bring down the budget deficit and inflation thereby reducing pressure on interest rates, said Dr. Kelegama.

He said that with the APC report in the table by mid 2007 there is hope that the security situation will improve or stabilise at current levels. This will assist the government to have control over defence expenditure and improve or stabilise the investment climate.

Though there are worries there is a positive outlook too due to the country having a BOP surplus of US$ 204mn, reserves being adequate to fulfil three months of imports, government revenue on the increase since 2003, further measures being taken to increase worker remittances, further measures being taken to increase FDI by attracting mega projects into the country and political stability of the government consolidated and economic middle ground strengthened with recent crossovers from the opposition.

The government formed National Economic Councils in late 2006 to accelerate reforms. In addition the CEPA to be signed with a fast growing economy such as India will have spillover growth on Sri Lanka while the general buoyancy of Asia although it will be slightly less than 2006 will have a positive effect on the country's economy, said Dr Kelegama.

Economic Affairs Officer Poverty and Development Division UNESCAP, Bangkok Dr. Muhammad Hussain Malik said that the Asia Pacific region grew at 7.9% last year while the region is expected to slow down slightly in 2007.

It is forecast that inflation will be 13.7% while the GDP growth rate will be 7%. India, China and Japan will contribute to the region's growth.

He said that most of the poor in South Asian countries still live in the rural areas; therefore improving rural infrastructure is the key to reducing poverty.

SG