Tight monetary policies and credit control, a must

By Gamini WARUSHAMANA

The Central Bank of Sri Lanka revised economic growth forecast for 2012 to 7.2 percent from the eight percent anticipated at the beginning of the year. Governor Ajith Nivard Cabraal said that the growth forecast for the year is strong after two consecutive years with over eight percent growth.

At the launch of the Central Bank annual report 2011, Cabraal said that economic growth was downgraded to maintain economic stability. From August last year the external sector of the economy faced a slight vulnerability and as a result tight monetary policies and credit controls have to be introduced. Still the 7.2 percent growth is very reasonable and downgrade of the growth is the price we have to pay to balance the external sector, he said.

Central Bank Governor Ajith Nivard Cabraal presnts copies of the Annual report to President Mahinda Rajapakse. Economic Development Minister Basil Rajapaksa and senior Minister international monetary cooperation Sarath Amunugama look on.

He reiterated that policies adopted until February this year were correct and as a result, there was a space in the economy to adjust. There will not be another revision of the growth rate and strong government investment and government's less reliance on the banking sector which will enable to maintain expected growth, he said.

Director, Economic Research of the Central Bank Swarna Gunarathne presented the state of the Sri Lankan economy in the 2011 annual report.Here are excerpts.

Sri Lanka achieved success under the challenging global economic situation. Slow global recovery and the resulting slow growth in exports, high oil price, bad weather and high growth of credit were challenges. As a result the trade deficit widened and the country faced a BOP issue.

Real sector

However, the economy grew at 8.3 percent and with that over eight percent growth has been achieved two consecutive years, first time in the post independence history. Maintaining inflation at single digit level, export growth under adverse external conditions, low unemployment, low budget deficit and financial sector stability are great achievements. Growth is sustainable and over the last seven quarters the economy has maintained over seven percent growth rate. The GDP recorded $ 59 b and agriculture sector grew at 1.5 percent, industrial sector at 8.4 percent and the service sector by 8.0 percent.

The resumption of agriculture in the North and East provinces, the fertiliser subsidy and Government programs such as ‘Divineguma’ contributed 1.5 percent growth in the agriculture sector. Adverse weather in the early part of the year caused crop losses and setback in the agriculture sector but recovered in the second half of the year. The sector benefited from favourable price and policy measures introduced by the government.

The industrial sector remained resilient and achieved a 10.3 percent impressive growth during the year. Strong domestic demand conditions primarily emerging from low inflation and declining interest rates spurred the growth in demand for industrial products. Enhanced export competitiveness led to healthy growth in export-oriented industries despite the sluggish recovery in main markets. Improved productivity, enhanced quality, adoption of best practices in manufacturing and strengthen strategic partnerships with key customers helped export market oriented industries to maintain their growth momentum. Government support for SMEs, import substitution industries, fiscal incentives for R and D also contributed to strong growth in the industrial sector.

The construction sector grew at 14.2 percent in 2011 reflecting major infrastructure development activities undertaken by the government and increased construction activities undertaken by the private sector. The sector contributed 29.3 percent of the GDP.

The service sector maintained its growth momentum with a notable contribution from wholesale and retail trade, transport, communication, banking, insurance and real estate sub sectors. The service sector contributed 61.8 percent of the overall economic growth of the year and it is a 8.6 percent expansion compared to the previous year.

Total consumption expenditure increased significantly by 22.4 percent while domestic savings contracted widening the savings investment gap. Private consumption increased from 65.2 percent in 2010 percent to 69.8 percent percent while government consumption expenditure declined marginally from 15.6 percent to 14.8 percent. Both domestic and national savings declined from 19.3 percent to 15.4 percent and 25.4 percent to 22.1 percent. Private investment increased from 21.4 percent of GDP in 2010 to 23.7 percent while public investments increased marginally from 6.2 percent to 6.3 percent of GDP.

External sector

The sovereign debt crisis in the Euro zone, sluggish recovery in the world economy, geopolitical uncertainty in some oil producing Middle East countries and North African countries exerted pressure on oil prices and financial flows. Expansion in aggregate demand led to rapid growth in imports and as a result the trade deficit widened substantially despite significant growth in exports. Although inflows to the capital and financial accounts remained strong, they were insufficient to offset the high current account deficit.

Inflows of private long -term investments including FDIs and flows to the Government remained healthy. As a result BOP recored $1.1 b deficit by the end of 2011. Earnings from exports increased by 22.4 percent while import expenditure increased at a faster pace of 50.7 percent in 2011 compared to the previous year.

Challenges ahead

Exposure to global vulnerability including oil price increase and the high oil import bill will pose challenges to economic growth.