Per capita income of US $ 3,719 in 2014 :

Economic growth to remain stable - Dy. Treasury Secretary

By Sanjeevi Jayasuriya

The Budget 2015 could be described as inclusive and investment-oriented and many sectors including health, nutrition, agriculture, plantation, gem and jewellery, export businesses, export of knowledge industry and land development have received far reaching benefits.

With additional EPF and pension stimulants, the Budget has covered many areas of national interest, Deputy Secretary to Treasury S.R. Attygalle said.

The Budget has emphasized the key development goals while reiterating the country's commitment to achieve the knowledge hub status.

The country is expected to reach an economic growth rate of 8.2 percent whereas measures have been taken to maintain a tax rate of 10.5 percent, Deputy Secretary said at the budget proposal discussion organised by Ernst & Young held in Colombo recently.

This year's Budget is a continuous process and not a single initiative or a stand-alone budget. It could be viewed in the backdrop of concessions given.

From a grim outlook in 2005 where infrastructure, education, health and agriculture not geared to meet the demands and with an ineffective public sector delivery side, the country was at the low ebb of development, he said.

The budget policies of 2005-2010 were articulated to achieve development of key sectors. With peace in 2009, long term investment strategies have been achieved. For the 2010-2015 period transformation was done through inclusive development including the transportation system, of the entire population enjoying telecommunication facilities and availability of pipe-borne water.

The government policies were directed to empower the rural community. The budget is a policy document to alleviate the country to improve macro-economic fundamentals.

The effective management of macro-economic fundamentals in the background of the exchange rate, inflation, interest rate and unemployment has been possible. The policy direction was there to sustain and achieve the next level of growth.

While special emphasis on enhancing the skill level of people and human resource management is in focus, the key objective is to become a knowledge economy where knowledge, skills and technology are key in this regard, Attygalle said.

The economy is on an upward trend since the dip in the year 2012 though not as bullish as the first two years immediately after the conclusion of the conflict. The country is expected to have a GDP growth of 7.8 percent for 2014 following a 7.3 percent GDP growth in 2013 supported by favourable performance in sectors of exports, tourism, construction and IT services.

Keeping up with the target of transitioning to a middle income country, Sri Lanka achieved per capita income of US $ 3,719 for 2014.

However, the World Bank's Global Economic Prospects report issued in June 2014 forecast Sri Lanka's economic growth to remain broadly stable at 7.2 percent in 2014 and forecasts the GDP growth rate to moderate about 6.9 percent in 2015 and 6.7 percent in 2016.

These projections position Sri Lanka as the fastest growing South Asian nation, ahead of the regional average of 5.3 percent, 5.9 percent and 6.7 percent for 2014, 2015 and 2016 respectively.

The economy is dominated by the services sector, with key drivers in this sector wholesale and retail trade, transport and communication and banking, insurance and real estate contributing significantly during the last five years to the economic growth in the country.

Manufacturing and construction segments within the industry sector have also contributed significantly to the recent economic growth.

Collectively the wholesale and retail, transport, communication, manufacturing and construction sub segments account for over 60 percent of the growth.

It is important to note that net exports and investments were drivers of GDP growth in 2013 and these are continuing to drive the economic growth in 2014 as well. In 2013 net exports and investments increased by 20 percent and 10 percent respectively over 2012.

The Incremental Capital - Output Ratio (ICOR) which is the ratio of investment to growth reflecting the capital productivity in the economy on average has improved since 2009.

If the accelerated public investments made in the recent past start yielding in the future, ICOR will continue to improve providing good prospects for the country.

The Central Bank of Sri Lanka is confident of maintaining inflation at mid-single digit levels with single digit interest rates in to the foreseeable future.

Inflation remained at single digit levels for the fifth consecutive year despite supply disruption due to adverse weather conditions and fuel price increases.

Considering the lower demand for credit and excess liquidity in the market the low interest rates are expected to continue in the short run until the private sector investments and demand for credit increases.

Foreign direct investment inflows increased to US $ 1.4 billion in 2013, of which infrastructure and manufacturing sectors attracted the highest FDI inflows in 2013.

The share of FDIs inflows in to infrastructure amounted to 56.5 percent of total FDIs with major investments in telephone and telecommunication networks, housing and property development and ports and container terminals. Increasing FDI inflows is critical to boost the confidence in the Sri Lankan economy and to fuel economic growth.

Foreign remittances rose over 50 percent from 2010 levels to US $ 6.4 billion in 2013. This is attributed to an increase in more skilled and semi-skilled Sri Lankans being employed abroad.

The CBSL projects foreign remittances increasing to US $ 7 billion by 2014 and US $ 8.3 billion by 2016.

These increased foreign inflows supported by foreign borrowings have resulted in gross official reserves of the country reaching above US $ 8 billion. Though this is a healthy reserves scenario as compared with the past, in comparison to emerging economies still lies in the lower end.

Given these reserves consist of debt inflows it carries the risk of flowing out as a result of change in external conditions which can contribute to Sri Lanka rupee exchange rate depreciation.

The positive reserve scenario is supported by the growth in the revenue from the export of goods estimated at US $ 12 billion for 2014 as opposed to US $ 10.4 billion in 2013. The increased contribution primarily coming from the export of high-value apparel products and a shift in tea exports to value-added branded products.

Revenue from the export of services also increased in 2014, with significant contributions from port and airport related services, tourism services, export of IT/BPO services and knowledge economy services. Such changes in the structure of the economy have helped to reduce the reliance on traditional exports.