Private sector could do more:
Sri Lanka's macroeconomy sound
By Gamini WARUSHAMANA
The Macroeconomic situation in Sri Lanka is basically sound said the
President of the Sri Lanka Economics Association (SLEA) Professor A D V
de S. Indraratna in an exclusive interview with the Sunday Observer.
However, he warned that it would be better if some key fundamentals,
particularly in the external sector function better. Excerpts of the
A D V de S. Indraratna
The Year 2009 was not a good year for Sri Lanka due to many reasons;
internally, in the first half of the year, the country was facing the
most intensified final stage of the terrorist war and externally, it was
the year that the second round of the global recession impacted heavily
on the real sector of the Sri Lankan economy.
Macro economic indicators were not sound with the country
experiencing a huge budget deficit of 9.9 percent of the GDP, high
inflation and high interest rates, an alarmingly low level of external
reserves and falling FDI and a large external debt with a heavy debt
Fortunately, the situation changed for the better in 2010 and
inflation started coming down until about the latter part of the year,
remaining at a single digit right throughout. However, until the end of
the year we have not seen a substantial increase in the credit to the
private sector and private investment has not increased as expected.
Even though in 2010 the average growth rate has risen to a
respectable level of 8 percent and is expected to grow even further to
8.5 percent in the current year (the IMF estimates are 1 percentage
point less than these respectively), the external sector has not fared
well. Our trade deficit have been widening as imports have been
increasing faster than our exports.
Even though the adverse impact on the current account deficit has
been cushioned somewhat by the increasing worker remittances, we cannot
reckon this as a fundamentally strong position. Our foreign reserves
have been rising (now adequate for nearly seven month's of imports at
current level) but they are relatively more of a short-term nature
rather than arising from FDI (Our FDI in 2010 was expected to be around
2009 level but it was below 2008 level).
The appreciation of the rupee due to this inflow of short-term
capital has been contained somewhat by the intervention of the Central
Bank. The trade weighted exchange rate should be lower helping our
Another unhealthy feature in the external sector is the rising
external debt burden even though not at an alarming rate. In order to
alleviate this situation several measures would be needed. Our exports
have to be increased by diversification as well as by increased value
addition in both agriculture and manufacturing.
Increased productivity is crucial in the context of an appreciating
rupee, both in export agriculture and manufacturing. The import bill in
food has to be curtailed by a vigorous drive in domestic agriculture
including fisheries, livestock, dairy and poultry farming and ensuring
food security. As I said before, both in export agriculture and
manufacturing, value addition, branding and seeking new and niche
markets should play a big role. A surplus in the current account of the
balance of payments would be vital to reduce the budget deficit as well.
An enabling environment has to be created to attract more and more FDI.
These measures also would help to reduce the debt burden. Our
external debt has been rising from around 85 percent of GDP to more than
86 percent. Our debt servicing expenditure is higher than the current
Even though the economy overall may not be worrying with single digit
inflation (around 6 percent), estimated unemployment slightly above 5
percent and market interest rates of 7 percent- 8percent and an
estimated poverty level of around 7 percent, there cannot be any
complacency as long as the external fundamentals are not sound.
In my view, by the end of the mid term (by 2016) or so, we would have
to have the budget deficit, unemployment and inflation, all brought down
to a tolerable level of 3 percent with poverty below 5 percent with a
sustained growth rate of more than 10 percent with inclusive development
(which I have explained elsewhere and I have no time to elaborate now).
These are not 'magic' numbers just quoted offhand but what would be
realistic with the achievement of targets of Mahinda Chintana Future
I generally agree with the economic policy framework of the
government Mahinda Chintana: Vision for the Future. One important
feature I particularly agree with the policy on agriculture, the pride
of place given to it in the Chintana. I am one who has been strongly
recommending such policy since the late sixties, because I strongly
believe in the critical need of food security as a weapon for a country
like ours in the sustainability of its development. It provides a
cushion against vulnerability in escalating food prices in the
It contains domestic inflation; it helps to have inclusive
development and reduce poverty and so on. I have already referred to
increase productivity and value addition in this sector. And there is
great potential for rapid development in this sector including
fisheries, livestock and dairy farming.
Infrastructure and FDI
Heavy investment in infrastructure is necessary for increasing the
rate of growth as envisaged by us. This is crucial for Sri Lanka to be
an upper middle income country, like some of her Asian neighbours,
Malaysia and Singapore. Initiatives already taken by the government in
this direction are welcome. For it is the government which should be the
provider of the basic infrastructure as one cannot expect the private
sector to provide public goods and heavy, lumpy investment whose private
costs are high relatively to private returns.. These are also essential
to improve the productivity of the economy. We see the government
investing, as it should be, in power, harbours, airports, roads and
The Government is also paying a great deal of attention to ICT. These
are necessary to make the knowledge economy grow and the economy
becoming competitive in the highly integrated world.
It may be because of the inadequacy still of the infrastructure and
the lack of an enabling environment that we are not fully realising the
dividend of peace.
I have already mentioned about the sluggish inflow of FDI which is
vital for achieving a sustained growth rate as high as 10 percent or
more. There is a big gap between our present rate of domestic investment
(of 24-28 percent of GDP) and the domestic savings of (15 percent-18
percent)-I am quoting these figures from memory.
This gap has been largely met by domestic and foreign borrowing and
we cannot go on doing this without falling into a debt trap. Already we
are near it, as I mentioned before. The only solution for this is to
increase the FDI inflow to the country. If a country like Vietnam can do
it why can't we?
The Government is fully aware of this problem and according to my
information, has been taking measures to create an enabling environment,
alongside building the infrastructure I have already mentioned about the
active role being played by the Government in regard to the former. As
regards the latter, the Government has still to do a lot. It is not a
difficult task to have good governance. After all, what is good
governance? It is simply the management of the limited resources without
waste and corruption, but with transparency and accountability. There
also should be 'flexible' labour laws which are not heavily weighted in
favour of one side, ensuring industrial peace and work ethics and norms,
the law and order in the country.
There should be simple rules, regulations and procedures for
investors to comply with, and efficient and honest government
institutions which the investors have to go through. These may be the
secrets of countries such as China and Vietnam and India in their
success in attracting FDI. The decision to re-structure BOI is a good
move by our Government in this direction. Similar moves in other areas,
which I have mentioned, are necessary.
The country has a vision for economic development as spelt out in
Mahinda Chintana Vision for the Future. It should be inclusive
development, the benefits of which shall be shared by all equitably. A
large segment of the people of our country has so far not got their due
share of the development that has taken place.
As far as I can gather from media reports, the trade chambers have
accepted the strategy spelt out in the Mahinda Chintana This augurs well
for the future. My question is: Is the private sector doing enough? To
attain the sustained high growth, the private sector must be the engine
of growth. It should come forward to make four to five times the
investment the Government is undertaking, as a provider of facilities.
If the Government is failing, it must tell the Government where and why
it is failing, and wherever possible and feasible, it must engage in
public private sector partnership.
To increase the economic growth rate to 10 percent or more, as
envisaged, our investment has to be increased to around 40 percent of
GDP unless we increase our productivity substantially by being able to
improve the capital- output ratio, say from around 4:1 today to 3:1.
Even if it were brought down to 3:1 we still need 30 percent GDP for
investment to achieve 10 percent growth.
The Government may not be able to invest more than 6 percent to 7
percent if it has to contain the budget deficit and the debt burden. The
difference has to come from the private sector. Here, the critical role
of the private sector and FDI must be highlighted in sustained growth
Sri Lanka also cannot overlook or disregard the prevailing global
economic situation. The world of nations is highly integrated and no one
country can stand in isolation in achieving its goal or vision. We have
experienced this as recently as 2009 and early 2010. We learnt some
bitter lessons during and after the global financial and economic
Since we had a sufficient domestic food supply we did not feel the
bitterness of the global food crisis as much as many others. But we were
seriously hit by the oil crisis. Of the total import bill during the oil
crisis, a staggering portion went into oil. Recession in USA and EU
affected our exports badly. Although there is recovery in these
economies now, it is slow and still not sufficient to give a significant
boost to countries like ours.
Moreover, we have been also affected by the denial of the
preferential access to their markets we had enjoyed until recently.
Therefore, we in Sri Lanka have to plan our development so as to cushion
the economy as much as possible from the impact of any adverse global
trends. That is why we have been advocating food security as a strategic
weapon in our development armour.
We also can look for alternative markets. In contrast to what has
been happening in the West, Asia has been growing fast, opening new
opportunities. China has become the world's second largest economy
growing faster than any other country except Singapore.
India too is growing very fast though not at double digit. East Asian
economies too are maintaining respectable growth rates. It is opportune
for us to shift our focus from the West to the East and look for new and
niche markets in Asia, without of course, turning away from USA and EU.
Today most of Sri Lanka's foreign investments come from Asia- China,
India and Japan. To remain competitive in these markets she has to
improve productivity all round, maintaining at the same time a realistic
exchange rate, and go in for more value added and branded products and
optimise the opportunities opened by bilateral trade agreements.