Heading towards new economic horizons

Sri Lanka’s steady progress in all spheres, achieved after the eradication of terrorism, has been commended by many world organisations. The landmark achievements of Sri Lanka since the dawn of peace have opened new economic horizons, not only to the people in the North and the East, but to the entire nation as the country is heading in the right direction under the Government’s far-sighted economic policies.

Sri Lanka is rising in the middle-income country ranks. Even during the three decades of conflict, the country maintained at least five percent of growth throughout. The unemployment rate (seven percent in 2005 to four percent in 2011, excluding the Northern and Eastern Provinces) and poverty rate (15 percent in 2006/07 to nine percent in 2009/10) have dropped dramatically, according to the World Bank.

The World Bank will support the Government’s efforts in addressing the challenges and constraints for achieving its vision, specifically by facilitating sustained private and public investment through improving the investment climate and increasing fiscal space and public spending efficiency; supporting structural shifts in the economy through assistance for a knowledge-based economy, and increased internal and international integration and competitiveness; and promoting improved living standards and social inclusion through support for increasing quality of services, reducing the prevalence of malnutrition and promoting social inclusion and equitable access, the Bank said.

Improved road network

The quality of the national road network has improved with a reduction in the International Roughness Index (from 9.5 in 2005 to 6.2 in 2012) and a decline in the network vehicle operating costs (from 24 Rs/km in 2005 to 14 Rs/km in 2012).

World Bank support through the Road Sector Assistance Project upgraded 618 km of national roads and the Roughness Index is far below the national average. Support to rural roads has contributed 154 km of repaired roads, with a 60 percent reduction in travel time in 2012 when compared to 2005.

The Sri Lanka portfolio is healthy with no problem projects or projects at risk, and 100 percent pro-activity. Following the recent approval of the Second Health Sector Development Project, the portfolio comprises 16 projects with a total net commitment of $1.49 billion.

The foreign aid profile in Sri Lanka has changed considerably in recent years. With Sri Lanka graduating to the middle income level, the Government has broadened its options for foreign financing for public investment, in a mix of less to non-concessional financing together with the available concessional financing, the World Bank has said.

Meanwhile, the Asian Development Bank (ADB) has indicated optimism over Sri Lanka's growth prospects, it said in a latest report.

“The Sri Lankan economy is forecast to grow by 6.8 percent in 2013 on the back of strong performance in the remaining quarter of the year. Healthy growth in 2013 and acceleration to 7.2 percent in 2014 will be supported by further monetary easing and improved electricity generation that will power growth in the domestic industry,” the ADB said in a supplement released to its Asian Development Outlook (ADO) 2013.

The forecast on Sri Lanka is the same as those made in ADO, which was originally released in April this year, while it is also higher than South Asia's average of 5.6 percent for 2013 and 5.7 percent for 2014.

The ADB's latest supplement said by contrast (to Sri Lanka), Afghanistan, Bangladesh, Nepal and Pakistan are expected to report slower growth in 2013 than in 2012, as some of these countries face political transitions that could hamper economic policy-making.

It said the South Asia sub-region is expected to expand by 5.6 percent in 2013 and pick up momentum to post 6.2 percent growth in 2014. South Asia's largest economy, India, is expected to see growth moderate to 5.8 percent in 2013 against the earlier projection of six percent, according to a Xinhua report.

Sri Lanka’s tourism sector has reached new heights during the past couple of years. The number of tourist arrivals to Sri Lanka

went up 12.8 percent to 73,628 in June 2013, compared to June 2012 which was only 65,245, according to the latest figures released by the Sri Lanka Tourism Development Authority (SLTDA). Tourists numbering 512,281 have arrived up to June in 2013.

More arrivals

Figures showed an increase in the number of arrivals from Western Europe, East Asia, Australasia, South Asia and North America. The number of visitors from Western Europe rose by 14 percent (19,731) with tourists from France up by 12.3 percent (2,545), Belgium up by 46.8 percent (555), the number of visitors from the UK at 6,400 and Germany up by 6.4 percent (3,248), according to the SLTDA. Arrivals from East Asia increased by 33.1 percent (11,679), with Malaysian arrivals reaching 1,600, and those from South Korea up to 491. Arrivals from Australasia went up by 2.9 percent to 4,176 within June 2013. The number of visitors from South Africa went up by 28.8 percent to 206.

Sri Lanka was able to attract 438,653 tourists during the year as of end-May 2013, recording a growth of 13.2 percent in total tourist arrivals. Earnings from tourism expanded at a commendable rate of 34.5 percent in May 2013 to US$ 77 million, from the US$ 57 million recorded in May 2012, the Central Bank said in its External Sector Performance Report for May 2013.

This increase was the result of a significant increase in the number of tourist arrivals in May 2013. Tourist arrivals increased by 21.8 percent to 70,026 in May 2013. On a cumulative basis, earnings from tourism during the first five months of 2013 recorded a growth of 21.9 percent, to US$ 484.3 million, compared to the cumulative earnings of US$ 397.1 million received from tourism during the first five months of 2012, the Bank further said.

President Mahinda Rajapaksa has stressed the importance of gaining World Bank funding for mega development projects from which a greater number of people would benefit.

Large core projects

At a meeting with the World Bank’s Executive Director for Sri Lanka, India, Bangladesh and Bhutan, Mukesh Prasad last week, President Rajapaksa urged the Bank to focus more on large core projects rather than smaller projects that have a lesser impact.

Prasad, while agreeing to the President’s proposal, said that the World Bank too has begun to focus more on larger “transformational projects that have a direct bearing on the goals of the country.”

An example of a successful World Bank-funded project is the work done with regard to urban development in Colombo, which has helped lessen the flooding that the city used to experience, President Rajapaksa said.

He also requested Prasad’s assistance in accelerating the project approval process, noting that it currently takes a very long time for the project documentation to be processed, which causes further delays to the project’s implementation.

The Central Bank expects to further reduce short-term interest rates in a couple of months if inflation continues to fall as expected. Central Bank Governor Ajith Nivard Cabraal has said that the decision to cut interest rates will be taken around September or October, but for the time being, the monetary policy will remain unchanged.

“If we feel very confident with the events of the next few months, then we would feel a little more inclined to relax restrictions further,” Cabraal was quoted as saying. The Central Bank, in May, eased policy interest rates by 50 basis points to seven percent Repurchase rate and nine percent Reverse Repurchase rate.

Sri Lanka's inflation decreased in June to 6.8 percent and the Central Bank expects inflation to fall further to around five or 5.5 percent by the end of the year and the economy to grow by 7.5 percent. The policy rate cuts will depend on how inflation will be, Cabraal, who was in the US to brief investors on Sri Lanka's finances has told the Wall Street Journal.

Monetary stimulus

Speaking of the United States Central Bank's plans for withdrawing the monetary stimulus, Cabraal said Sri Lanka is largely prepared for the Fed's exit because it has tried to limit its exposure to swift changes in capital flows.According to the Central Bank Governor, Sri Lankan authorities, focusing on international investors looking for long-term exposure, have been careful not to open their debt markets too wide, too fast and US investors have tended to buy long-term Sri Lankan debt.

Cabraal has noted that the Central Bank has doubled its cash reserves in the last few years and plans to continue stock filing foreign-exchange reserves over the next several years to give it an even bigger buffer against market volatility.The Government is also continuing to cut the budget deficit since the end of LTTE terrorism in 2009. Investor demand, strong growth, a declining deficit and the end of the conflict have pushed borrowing costs down several percentage points.However, the Euro-zone crisis which threatens the global economy may have some impact on countries such as Sri Lanka. Europe is one of Sri Lanka's largest export markets, but Sri Lankan firms are now looking for alternative export markets as the authorities are negotiating a free trade agreement with China.

Considering all these factors, Sri Lanka should have a bright future with the added contribution to the national economy from the Northern and the Eastern Provinces. These two provinces, which had been devastated for over two decades until 2009, are now showing an economic growth of over 22 percent. Such added contributions to the national economy should get Sri Lanka closer to its cherished dream of becoming the Wonder of Asia.