Economy on sound footing By Sanjeevi Jayasuriya Sri Lanka’s economy is on a positive growth path and all indicators point out that it will continue the growth at six to seven percent in the years to come. The development initiatives of the Government have driven economic growth further with expectations of it stabilising at the top bracket in the middle income country category. The country has ambitious targets of reaching a per capita income of US$ 4,000 by 2016 and an export value of US$ 20 billion by 2020; the economy will be doubled to reach 100 billion GDP by 2020. The economy is developing largely in the areas of agriculture, services and light industry. Agriculture accounts for 21 percent of the Gross Domestic Product (GDP) and employs 38 percent of the workforce. Agricultural output is divided into two categories, cash crops from plantation agriculture and food crops from subsistence agriculture. Cash crops such as tea, rubber and coconuts are largely grown in plantations. Rice is the principal food crop and the staple food for over 70 percent of Sri Lanka’s rural population. Manufacturing industries include textiles, ceramics, petroleum products, vegetable oils, fertilisers and cement. They account for 19 percent of the GDP and employ about 17 percent of the workforce. The service sector which consists of tourism, banking, finance and retail is the largest contributor to Sri Lanka’s economy, employing 45 percent of the workforce and contributing 60 percent of the GDP. Because Sri Lanka is a developing country, some citizens who are below the poverty level live with many financial difficulties. A large segment of the population depends on benefits under income supplement programs initiated by the Government such as Samurdhi. Global recession By the end of 2007, the world economy was heading towards a recession. The collapse of the US housing market, the financial system and international banks caused a financial storm all over the world. Financial experts said this crisis was created by the wrong decisions made by the American government. Declining economic growth and rising inflation in most countries resulted in a lower demand for certain commodities. With these developments and a stiff global competition, the local apparel industry, which is one of the country’s main foreign exchange earners, recorded a less than expected growth. Moreover, the industrial sector growth was also affected due to difficulties related to increased cost of production stemming from high oil prices and the consequent increases in electricity and transportation costs. After 1977, Sri Lanka embraced economic reforms and a free market ahead of India and the rest of South Asia. Current development initiatives will help maintain the growth momentum and keep the economic growth rate above eight percent and improve export competitiveness. The Government plans to reduce the budget deficit from eight percent of GDP to 6.4 percent and the estimated budget deficit is Rs. 468.9 billion. Inflation has dropped to five percent from eight percent last year. However, the global economic crisis and global commodity price increases as a result of the devaluation of the rupee might create inflationary pressures. However, the Government is confident of maintaining low and stable inflation levels as domestic food production has increased. Exports have grown by 20.8 percent in 2011 against 10 percent in 2010. With the devaluation of the rupee, public debt has increased by Rs.74 billion and the oil bill by Rs.11 billion. Trade deficit Steps have been taken to contain the widening trade deficit of the country by discouraging imports through the imposition of import tariffs on various commodities coupled with promoting import substitute businesses. The trade deficit of the first eight months of the year recorded at US$ 6 billion. The devaluation of the rupee too will support this as it will increase the prices of imported commodities. The Government has shown its commitment to investing in infrastructure development to improve the business environment in the country. The Government has supported key sectors in line with its medium-term policies by providing incentives. Leisure, healthcare, manufacturing and development banking sectors have gained accordingly. According to the Central Bank’s review on external sector performance, the trade deficit for the first nine months of 2012 declined by 0.3 percent, year-on-year. This was the first time since December 2009 that the cumulative trade deficit for the year declined. The multi-pronged policy strategy implemented during the first half of 2012 to curb the widening trade deficit has therefore helped reduce the deficit in the current account. It decelerated sharply in September 2012 as tea exports fared well after declining for three consecutive months. Expenditure on imports continued to respond to the tighter policy environment and recorded a sharp decline of 25.4 percent, year-on-year, in September 2012. The lower import expenditure during September 2012 reflected developments in respect of both external and domestic economic conditions. While expenditure on the import of most consumer goods declined import expenditure on non-food consumer items declined responding to the depreciation of the rupee since February this year as well as the tightening of credit conditions over the past several months. Motor vehicle imports being subject to higher taxes since March 2012 contributed the most to the decline in expenditure on consumer goods imports. Expenditure on intermediate goods imports declined in September 2012, driven by non-oil imports, industrial exports as well as lower prices. Expenditure on textile imports declined as both global cotton prices and import volumes were lower than in 2011. Lower global demand for jewellery meanwhile, resulted in lower import expenditure on diamonds and gold during September 2012. Expenditure on wheat imports however, increased as world wheat prices increased due to drought conditions impacting on major wheat producing countries. With respect to imports of petroleum products, despite expenditure on refined petroleum increasing in September, total expenditure on petroleum products declined during the month, on a year-on-year basis, as crude oil was not imported during the month. Import expenditure on investment goods meanwhile, declined in September 2012 with expenditure on machinery and equipment, building material as well as transport equipment declining. Despite earnings from agricultural and mineral exports increasing, total earnings from exports declined in September 2012 as earnings from industrial exports, which have the largest share in exports, declined. Export of tea, which accounts for about 14 percent of total earnings from merchandise exports, spices including cinnamon and pepper, and several minor agricultural products such as cereals, fetched higher export earnings in September 2012. More tourist arrivals With the number of tourists visiting Sri Lanka recording 71,111 in September 2012, thus raising tourist arrivals during the first nine months of 2012 by around 16 percent year-on-year, to 693,772, earnings from tourism continued to increase on a year-on-year basis. Inflows on account of workers’ remittances meanwhile, amounted to US$ 511 million in September, an increase of 27.3 percent, year-on-year, while during the first nine months of 2012, workers’ remittances recorded a growth of 16.8 percent and amounted to US$ 4,419 million. A higher growth is expected in both earnings from tourism and workers’ remittances during the last quarter of 2012, as higher inflows are usually recorded towards the end of the year due to seasonality related patterns. Foreign currency inflows to the financial market during the first nine months of 2012 continued to strengthen the capital and financial account of the BOP. At the Colombo Stock Exchange (CSE), net foreign investment inflows have been recorded for each month so far in 2012. There has also been a significant increase in foreign investments in government securities during the first nine months of 2012 and net investments in Treasury Bills and Treasury Bonds during the first nine months of 2012 amounted to US$ 820.7 million. Foreign Direct Investment (FDI), including foreign loans obtained by BOI companies, of which data become available only quarterly, amounted to US$ 452 million for the first half of 2012, and more inflows are expected to materialise during the remainder of the year. Gross official reserves amounted to US$ 7,053 million by end-September while total international reserves, which include gross official reserves and foreign assets of commercial banks amounted to US$ 8,610 million. The gross official reserves were equivalent to 4.3 months of imports by end-September while total reserves were equivalent to 5.2 months of imports. Overall, the economy is on a sound footing as confirmed by the indicators and as a result, the living standards of the people have improved significantly.