Structural reforms vital for economic growth

by Gamini WARUSHAMANA

Sri Lanka is in need of urgent structural reforms to avoid economic stagnation and to achieve high economic growth, said renowned economist Dr. Indrajith Kumaraswamy. He was addressing a Stakeholder forum organised by the Consortium of Humanitarian Agencies (CHA) in Colombo last week.

Dr. Kumarasawamy said that the Government has taken bold measures to address the external sector imbalance of the economy. These are brave decisions, but they are contractionary and inevitably against growth. Therefore economic growth will be slow. If the Government introduces the essential structural reforms urgently, these contractionary policies can be changed within another two or three quarters, he said.

During the last few years, economic performance was gathering momentum and there was a higher GDP growth. Inflation and unemployment were low. However, this growth was not sustainable and successes were short-term. The trade deficit doubled from $ 5b to $ 10b and foreign exchange earnings and capital inflows were insufficient to bridge the gap. A portion of $1.5b of the increased trade deficit was due to oil price increases, which was beyond the control of the Government. But $3.5b of the increase could be controlled, Dr. Kumaraswamy said.

Quoting former Central Bank Deputy Governor, W. Wijewardena, he said, “Prior to the three percent devaluation in November 2011, the Sri Lankan rupee was 25 percent over-valued. There was a 35 percent credit growth and there was pressure on the balance of payment. The CB had to spend $ 3.6b of its reserves to defend the rupee. These tight contractionary policies such as high interest rates, credit sealing, cutting subsidies have to be introduced to address the resulting issues. As a result prices have gone up and in my view these are brave measures.”

Dr. Kumaraswamy said, “The question is have we done enough? In the first five months the results were not encouraging. Imports as well as exports have come down and some of the causes are beyond our control. Our main export markets, the US and EU are in crisis and as a result exports too have suffered.