Reduction in levels of poverty, income inequality:

Well-planned strategies boost economic growth

By Shirajiv SIRIMANE

Sri Lanka is looking at the possibility of attracting a record two billion US dollars in foreign direct investments to the country. The island is also looking at tourist arrival figures of one million and one million US dollars in revenue. One of the main reasons to set up these high goals is the dawn of peace which was achieved through the world’s biggest humanitarian operation which has baffled many countries that have been fighting terrorism for over three decades.

In a bid to support the achieving of this target, the Government is providing infrastructure in the form of highways, international harbours, airports and many other facilities. One of the other key points that drove away investors from Sri Lanka was the power interruptions. Today a permanent solution has been found for this problem too with Sri Lanka being the only country in the region to provide an uninterrupted power supply.

The development of the North and the East would attract the Tamil Diaspora who remained out of the country for more than three decades. In the first quarter of 2012, the Board of Investment (BOI) received 72 new applications compared to the 28 in the corresponding period of the previous year. There were also five applications for the expansion of existing projects.

In the first quarter of 2012, the BOI granted approval for 54 projects against 27 in the first quarter of 2011.

This was a 100 percent increase over the previous year. The estimated investment of those approved projects was Rs. 96,317 million of which a total of Rs. 49,169 million is expected as foreign investment and the balance Rs. 47,148 million as domestic investments. These approved projects would create 9,500 new employment opportunities.

The BOI signed 40 project agreements in the first quarter of 2012 which includes 33 new enterprises and seven project expansions. This was a 25 percent increase from the 32 agreements signed in the corresponding period in 2011.

During the period under review, 23 projects started implementation, all of which were new projects. It’s a 64 percent increase compared with the new projects starting implementation in the first quarter of 2011. The estimated value of the investment from companies that commenced implementation is Rs. 75,273 million. They will create 2,946 employment opportunities.

Commercial operations

During the period under review, 18 enterprises commenced commercial operations against 20 in the corresponding period in 2011.The estimated investment value of these 18 enterprises is Rs. 7,198 million compared to 3,089 in the first quarter 2011. These enterprises are expected to create over 5,000 employment opportunities.

Total exports made by enterprises under the BOI during the first quarter of 2012 amounts to Rs. 193 billion, a seven percent increase over the corresponding period in 2011.

The total of BOI companies during the period under review amounts to Rs 131 billion of which Rs. 93 billion consists of capital goods and Rs. 37 billion consists of raw material.

The total imports by BOI companies show a 22 percent increase compared to the previous year (i.e. Rs. 107 billion). In terms of capital goods, a 2.5-fold increase is evident.

Secretary to the Treasury Dr. P.B. Jayasundera, presenting the Central Bank annual report,said that the planned strategies for the future have accelerated economic growth in GDP to eight percent, with a reduction in poverty and income inequality. Social indicators too have improved.

“The development strategies specifically targeted to integrate conflict-affected areas with the rest of the economy towards achieving a rapid economic progress and national reconciliation, have made significant progress.

The conflict affected areas have been made ‘mine free’. Displaced people have been fully resettled. The progress made island-wide in infrastructure development has created a new investment climate favourable for rapid private investment.

The Government has sustained an annual public investment of six percent of GDP,” he said.

Financial sector stability and efforts to contain the fiscal deficit below seven percent of GDP by 2011 are conducive to sustain a stable macroeconomic environment. The reduction in unemployment, rising wages and emerging new growth areas have shifted the economy towards skills-focused employment.

“A well-focused development strategy to raise exports and reduce imports needs to be put in place” he said and urged the private sector to manufacture more goods,in Sri Lanka as the last budget gave concessions in this regard.

The first Five-Year Development Framework 2006-2010

The five year period ending in 2010 achieved many development outcomes in the midst of the conflict in the North that prevailed till mid-2009, the global food crisis, volatile oil prices and financial uncertainties in advanced countries. The salient development outcomes are summarised below;

* Per capita income, measured in terms of national accounts as well as household income reflected in the periodic household surveys, indicates a steady increase in income between 2005 and 2011.

*Income inequality declined at national level as well as at provincial level in response to income growth, rural development initiatives and a decline in unemployment. Income distribution reported a reduction in the gap between various income groups.

* The trends in poverty indicators point to a marked improvement in poverty reduction in response to economic growth.

* Post-2005 development marked a massive improvement in access of the population to basic infrastructure.

* Economic growth has been associated with new employment opportunities, productivity growth and high wage income. Industrial disputes and the number of strikes declined to a record low level from 2005.

* Expanded facilities in education across the country continued to sustain a higher general literacy as well as school enrolment.

* Public expenditure on health expanded due to increased deployment of doctors, nurses and other support staff to maintain islandwide health services. Improvements were made to hospitals and the provision of equipment and other related facilities also widened. Preventive healthcare to address concerns relating to communicable diseases had been a priority. The progressive decline in maternal and infant mortality rates as well as the continued rise in life expectancy show that the country is on track in terms of the Millennium Development Goals.

* The fiscal policy strategy of the Government is designed to generate a revenue surplus by adopting expenditure management measures to economise operational expenditure and to improve government revenue through broadbasing the revenue collection. The Government follows a rolling three year medium-term plan to bring down the fiscal deficit to about five percent and the public debt level to below 70 percent in relation to GDP. The protection of public investment at six percent of GDP and sustaining social spending on education, health, rural development and welfare is the main thrust of this adjustment strategy as it supports growth and poverty reduction.

* The Government adopted measures to increase food production through its agriculture development initiatives and promoting household level activities in food production. Food inflation declined to a significantly low level in 2010/11. Import replacement initiatives through domestic food production programs have continued and the budget deficit has been contained. Combined effects of these supply and demand management measures have led to a decline in inflation to a single digit level during the last three years. The country attained self-sufficiency in rice production.

The Government has placed the country on a major food production drive to improve availability of food, vegetables, coconut, milk, and poultry to achieve food security and price stability.

* The expansion in export earnings suffered a major setback in 2009 with a loss of one billion US dollars, but bounced back thereafter with an annual growth of 22 percent per year. Maintaining such a high growth is expected with investment in further value addition to export products as well by entering new markets. Remittance income which was only 20 percent of exports in 2000 increased to US$ 5,145 million in 2011 which accounts for 50 percent of exports. The prospects of raising such income by at least a billion US dollars each year to make it a US$ 10 billion activity, have improved.

* The post-conflict development phase commencing from 2009 has improved prospects of exploiting the full potential of Sri Lanka’s tourism resources. The country is expected to earn over one billion US dollars in 2012 and double such earnings in five years. Tourism is expected to drive both foreign and domestic investments in the medium term.

* The port, aviation and other professional services is expected to be a major foreign earning source in the medium term with an expansion in port and aviation services on which the Government has promoted investment by both private and public sectors. The new port terminals in Colombo and Hambantota are expected to attract significant global trade-based activities in Sri Lanka.

* The debt market and equity market improved to new dimensions in 2010/11 following the previous low volume operations, with the equity market capitalisation reaching 40 percent of GDP, a sizable volume reflecting the depth of the economy.