Growth rate - highest since Independence:
Prudent decisions, timely state intervention boost economy
The apparel industry is one of Sri Lanka’s main export
The Colombo Stock Exchange
Containers at the port
Minister of Economic Development Basil Rajapaksa recently said that
Sri Lanka would be among the four best performing economies in the world
next year and the country seems to be heading towards this target.
Prudent economic management decisions and timely intervention by the
State helped the Sri Lankan economy to register the highest
post-Independence growth rate of 8.3 percent in 2011. This is a
substantial increase over the eight percent growth recorded in 2010.Per
Capita Income increased to US$ 2836 from US$ 2400 the previous year.
GDP per capita is often considered an indicator of a country's
standard of living although this can be problematic because GDP per
capita is not a measure of personal income.
One of the key drivers of this growth was the increased contribution
from the industry and services sectors. The growth in the Agriculture
sector was subdued, but was adequate to enforce a substantial downward
pressure on domestic commodity prices.
While year-on-year non-food inflation increased in March 2012 due to
the full impact of the adjustment of domestic energy prices and bus
fares, year-on-year food inflation remained negative for the third
consecutive month. Overall, the year-on-year change in the Colombo
Consumers' Price Index increased to 5.5 percent in March 2012 from 2.7
percent in February.
The domestic foreign exchange market has shown clear signs of
stabilisation following the expected volatility during the early stages
of allowing greater flexibility in the Rupee/US dollar exchange rate.
The Rupee, which depreciated against the US dollar to Rs. 130.41 in
March, appreciated by 3.94 percent during the period from March 21 to
April 4, 2012 to reach Rs. 125.47.
The increased foreign exchange inflows contributed to this
stabilisation, while prudential measures implemented by the Central Bank
supported this development.
Secretary to the Treasury Dr. P. B. Jayasundara said this is expected
to further appreciate after the Sinhala and Tamil New Year.
Significant foreign inflows in the first three months of the year
included the inflows to the Government securities market amounting to
US$ 400 million and inflows to the Colombo Stock Exchange of US$ 164
IMF facility received
The eighth tranche under the IMF-SBA facility, amounting to US$ 427
million, was also received. These and other foreign receipts to the
private sector and the Government have now raised the gross Economic
Research Department official reserves (without ACU balances) to US$ 6.1
billion, which is equivalent to 3.6 months of imports.
"The Sri Lankan Government has not agreed to any conditions put
forward by the International Monetary Fund (IMF). There are only
understandings. From the beginning, the Sri Lankan Government follows
the right track when it comes to economic development and only now some
officials point that out. There is nothing wrong pointing it out. The
Government did not privatise even a single bank or any other State
institution which shows whether it agreed to any conditions or not,"
Acting Minister of Information Lakshman Yapa Abeywardena said.
The past two years brought massive transformation to Sri Lanka,
including the construction of highways, harbours, airports, agricultural
development, total transformation of the North and the East by
developing infrastructure facilities and other giant development drives.
"Sri Lanka achieved all these goals while the Western world was facing a
huge financial crisis and other countries were going through severe
financial difficulties.", he said.
2012 seems brighter
A significant improvement in the external sector performance is
expected in 2012 mainly through strong foreign exchange inflows,
amounting to around US$ 25 billion via major foreign inflow sources.
Sri Lanka targets an export income of around US$ 12 billion and
foreign remittance, which is Sri Lanka's top forex earner, to reach US$
6.5 billion. Foreign direct investments are expected to reach a record
two billion US dollars while stock market inflows are expected to pass
the US$ 500 million mark.
TIER 2 capital inflows to some commercial banks would be around one
billion US dollars while net foreign investments to government
securities would be around US$ 500 million.
These strong foreign exchange flows to the Sri Lankan economy would
help improve the trade and services accounts, current accounts as well
as service accounts and generate a considerable surplus in the overall
balance of payment in 2012. These inflows would also support the
stability in the foreign exchange market and help continue the high
growth momentum in the economy.
Money supply grows
Tea, a major forex earner
Meanwhile, broad money supply grew by 21.9 percent, year-on-year, in
February 2012. Net Credit to the Government (NCG) increased
substantially by Rs. 136.3 billion during the first two months of the
year, while credit extended to the private sector also increased,
year-on-year, by 34.4 percent amounting to around Rs.100 billion in the
first two months of the year.
These developments resulted in the continued high growth of monetary
aggregates, although the recent policy measures introduced by the
Central Bank are expected to decelerate the expansion in broad money
supply in the near term. Towards such outcome, it is essential that the
current shortfall in Government revenue is effectively addressed and
public expenditure further rationalised, so as to significantly lower
the reliance on bank sources to finance the Government budget deficit.
Such a course of action would reverse the trend observed in the first
quarter of 2012, and in that context, the recent upward revision of
Customs and excise duties on selected items by the Government is a
display of its commitment to the fiscal consolidation process.
Meanwhile, notwithstanding the increase in the Central Bank policy
interest rates in February 2012 and the direction issued to restrain the
growth of credit extended by licensed banks, there are still some signs
that credit growth is continuing at an undesired pace.
Regional disparity has been one of the key factors that led to two
insurrections and steps are being taken today to breach this gap and to
break the popular saying 'Kolambata Kiri Apita Kekiri.'
The Gamata Karmantha initiative which was launched by the Government,
offering tax incentives is one of the key drivers to breach regional
disparity and the private sector has taken maximum advantage of this
move,opening several factories in the provinces. The expressway to the
Southern Province and plans to extend it further would also help breach
regional disparity. This is similar to what happened in Malaysia in the
1980s where highways were built to take development out of Kuala Lumpur
and helped the people in the provinces to increase their income levels
and living standards.
The share of the Western Province in the GDP has reduced from over 50
percent to 45 percent during the period of 2006 to 2010 because all
other provinces grew faster than the Western Province.
Sharp improvements of income have been recorded by the Eastern,
Northern, and North Central Provinces with the Northern Province growing
by 23 percent and the Eastern Province growing by 19 percent in 2010. As
a result national GDP increased from 7.7 percent to 9.3 percent during