Making Sri Lanka an economic hub * Improved business and investor confidence * GDP 8.2 percent By Gamini WARUSHAMANA The Economic policy of the fifth Executive President of Sri Lanka, Mahinda Rajapaksa outlined in the Mahinda Chintana policies completes its sixth year of implementation. In his political manifesto Mahinda Chintana presented at the 2005 presidential election, President Mahinda Rajapaksa clearly outlined his vision for the future of the Sri Lankan economy and its development path. After a landslide victory at the presidential election, it became the policy framework of the government. Once again at the presidential election in 2010 his manifesto Mahinda Chintana Forward Vision , an extension of the previous policies was approved by the vast majority of the people. One important point here is that development partners of Sri Lanka and the business community of the country accepted these policies as the rationale and that it was capable of delivering expected results. They extended their support and became active partners of implementing the policies. They were neither branded as extreme neoliberal policies nor inward oriented and closed economic policies. The policies were designed to match with the realities faced by Sri Lankan economy at the time and there was a vision for the future. Political stability However, by the time the country was facing serious challenges. The economy was stagnant and loss of business and investor confidence, security fears due to LTTE terrorism and political uncertainty had created an anarchy situation. Political stability was achieved immediately after his victory in 2005 obtaining support of the opposition parliamentarians and consolidating a strong parliament. Confidence was also built on winning the war against terrorism strengthening military, political and international forces to fight the battle and achieving sustainable peace. As a result even under adverse conditions, the economy could maintain an average 6.2 percent growth rate during the last five years. The unemployment rate dropped from 7.2 percent in 2005 to 4.9 percent in 2010. The per-capita income of the country was almost doubled from $ 1,241 in 2005 to $ 2,399 in 2010. International trade (turnover) increased from $15.2 billion to $ 22.8 billion while exports alone increased from $ 6.3 billion to $ 8.3 billion. As economic activities resume inflation rose moderately but other socio economic indicators too shown positive development. For instance foreign remittances increased from $ 2 billion to $ 4.1 billion during the five years. Household access to electricity increased from 75 percent to 88% and access to telecommunication increased from 23.6 percent to 100 percent. In 2011 the number of telephones in the country surpassed the population. Another important achievement is progress in computer literacy which was at 9.7 percent in 2005 increased to 20.3 percent in 2010. President Rajapaksa also offered avenues for the business community to participate in decision making in the implementation of these policies. NCED and different clusters in the NCED are playing an important role in the decision making process at each year budget in relation to respective sectors. The Tax policy of the government is decided each year with the consultation of business chambers and tax cluster of the NCED. Obtaining views of the business chambers for the budget has become a tradition today. The first five years of the Rajapaksa regime was a challenging period as the country was fighting a fierce war against terrorism. As a result some sectors were facing challenges. The Tourism sector was not performing well and attraction of FDI and increase of private investments were challenging tasks. FDI inflow The FDI inflow declined from around $ 800 million in 2008 to $ 690 million in 2009 and US $ 516 million in 2010. With the business environment of the country improved now it is picking up again and around $ 413 million FDI inflow has been recorded in the first half of 2011 alone. The government also recognised the urgent need of improving the business environment and economic infrastructure. Infrastructure development has been considered as a responsibility of the government and the government launched massive infrastructure projects in the road, ports, electricity, water and sanitation and irrigation sectors. As a result public sector investment has increased by 50% from 4.2% of GDP in 2005-2006 to 6.4% in 2009-2010. According to estimates, government investments will surpass 7 percent of GDP in 2011. These mega infrastructure development projects have significantly improved the business environment in the country. The other important factor is that most of the infrastructure projects President Mahinda Rajapaksa’s government launched and completed as urgent economic needs were several decades long-awaited project proposals. All previous governments failed to implement them due to financial constraints or opposition from pressure groups or communities that had to be relocated. For instance the Upper Kotmale hydro power project and Norochcholai coal power projects had been abandoned due to socio environment issues. The government solved these socio-environment issues successfully negotiating with the communities and offering attractive alternative solutions and mitigating adverse environment impacts. Hambantota harbour, Colombo south port development project, Colombo- Katunayake express way were abandoned due to financial constraints. The Government was able to obtain funds from international donor agencies and friendly countries. The Government also obtained funds from the international capital market a novel approach and each time when government bonds were offered they were over subscribed. Apart from internal security issues, the global economic and financial crisis in 2008/2009 posed serious challenges on the Sri Lankan economy. However, Sri Lanka was able to successfully face the crisis reducing its negative impact on the domestic economy. A series of remedial measures were implemented and they could reverse the downward swing. As a result, the economy had fully recovered by the end of 2009 and recorded 8 percent GDP growth rate in 2010 and 7.9 percent and 8.2 percent growth rate in the first and second quarters of 2011 while inflation and unemployment decreased and the volume of gross official reserves increasing. Challenges faced by the economy due to drain out of external reserves as a result of the global economic crisis and other external factors were managed by successfully negotiating financial assistance from the IMF. We can divide President Mahinda Rajapaksa’s tenure into two parts. The first five years from 2005 as a challenging period due to internal and external issues explained above. After the winning of the war against terrorism in 2009, the second era dawned and it is full of opportunities and expectations. All indicators demonstrate improving business and investor confidence. Continuation of release of all tranches of IMF’s SBA facility up to the middle of this year indicates the macro economic management is sound. Budget deficit has maintained at agreed level. Issue on exchange rate policy has become a debatable issue and the government is considering a broad range of proposals that are tightening with the exchange rate rather than export competitiveness alone. The Colombo stock exchange was named as the best performing market in the Bloomberg news wires in 2010 March. In July 2011, international rating agencies Fitch Ratings and Moody’s Investors Service upgraded Sri Lanka’s ratings. Fitch upgraded Sri Lanka’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to ‘BB-‘ from ‘B+’ and also the Country Ceiling to ‘BB-‘ from ‘B+’ and affirmed the Short-Term Foreign-Currency IDR at ‘B’. Moody’s Investors Service upgraded the outlook of Sri Lanka’s B1 foreign currency sovereign rating from ‘Stable’ to ‘Positive’. The key factors stated by the rating agencies for this upgrade are; increasingly evident peace dividend reflected in greater macroeconomic and financial stability, policy orientation of fiscal reform and economic growth, supported by a successful IMF program, improving the external payments position, reduction in political event risk. The vision of the government is make Sri Lanka the Miracle of Asia and in that vision there are clear targets to achieve. It is expected to build $ 98 billion economy with $4,470 per capita income and $18 billion exports by 2016. Creating more conducive environment for investment is another target. To create such an environment the government took initiatives such as lowering interest rates, strengthening banking and non banking financial institutions, reforming tax system and provided other incentives for the investors. High priority has been given to remove barriers for investment. Government expects to attract private investments into tourism, IT/BPO, skills development, urban development, agriculture and manufacturing sectors. Integrating Sri Lanka into the global economy through five hubs is another target. Taking the advantage of the geographical position, natural resources and human resources of the country, the government has launched a series of programs to make Sri Lanka an economic hub in the region. Five areas, naval, aviation, commercial, energy and knowledge, have been selected to be developed according to this vision.