'Economic growth must be broadbased'

Since the end of terrorism in 2009, Sri Lanka has achieved economic growth above 7 percent on average and a relatively stable macro-economic position, a statement released to the media by the Ceylon Chamber of Commerce said.

Excerpts from the statement –

Inflation and interest rates have been low, fiscal deficits have been steadily reduced, balance of payments have been stable and investment in infrastructure has increased.

However, household incomes have not kept pace with GDP growth. As per the Household Income and Expenditure Survey of the Department of Census and Statistics, inflation adjusted per capita monthly income has increased from Rs. 6,411 in 2006-07 to just Rs. 6,953 in 2012-13.

Therefore, a key objective over the medium term must be to ensure more robust growth of income at household level along with broader economic development.

Unemployment

Economic growth must be broadbased, and not limited to a few narrow sectors that benefit only some segments of society. While overall unemployment is at a historical low of 4.4%, youth unemployment remains significantly higher at 19.1%.

As a small nation of 20 million people, achieving the country's full economic potential and sustaining growth over the long-term will depend on building a robust export-led economy.

To achieve these ends, the country needs reforms to enhance its competitiveness and productivity.

We make the following recommendations and remain committed and ready to contribute to the progress and prosperity of our Nation.

1. Focus on exports, FDI and competitiveness

While post-terrorism growth has largely been infrastructure led, it is necessary to focus on an export and FDI-led growth strategy. Diversifying Sri Lanka's basket of exports and export markets is essential. Export oriented investment - local and FDI - will be an important avenue to create productive and remunerative employment for Sri Lankans. A focus on FDI will reduce dependence on foreign borrowings, enhance access to foreign markets and facilitate transfer of technology and management skills.

Economic ties

In this connection we recommend -

* A predictable and competitive exchange rate to provide confidence to exporters in particular and the business community in general.

* Develop deeper economic ties with India beyond the present FTA and complete the proposed FTA with China. Similarly, Sri Lanka should seek greater market access to countries in the wider Asian region where dynamic supply chains are located and consumer markets are vibrant.

* Sri Lanka's thrust towards exportable services as articulated in its 5+1 hub strategy is encouraging and challenging. Sri Lanka would thus compete with world class hubs such as Singapore and Dubai.

These hubs are open to foreign factors of production and to compete effectively Sri Lanka too would have to gradually liberalise such markets to international competition and attract the best of global talent, including from among Sri Lankan professionals based overseas.

* Import substitution may have merits in the short term. However, in the longer term, insulating sectors from competition results in a lack of innovation and undermines productivity.

Sri Lanka should not allocate resources to sectors where it is not competitive. Import substitution sectors should be gradually opened to international competition, resulting in improved choice and prices for domestic consumers. A gradual reversal of para-tariffs will help this process.

* Link Sri Lanka's foreign policy to its economic objectives. Develop good relations with all countries, particularly its major trading and investment partners.

Engage professionals and career diplomats in Foreign Service positions.

Enhance the resources of commercial offices attached to Sri Lankan Missions abroad to effectively support overseas business development of Sri Lankan firms.

Staff overseas commercial offices with qualified local staff to help break linguistic and cultural barriers and create robust business networks for Sri Lankan exporters.

2. An attractive investment climate

Sri Lanka's limited internal market offers less potential for profitable returns when compared to countries such as Vietnam, Myanmar, Thailand, Bangladesh and Indonesia.

Exploitable resources are also limited. Thus, the investment climate is one of the few assets the country could leverage to attract FDI.

Therefore, Sri Lanka's business environment must be perceived as more efficient, attractive and predictable than its competitor countries. Such an investment climate will also encourage local investors including SMEs.

In this context we recommend -

* Consistent, transparent and predictable policies, which limit room for subjective discretion, are crucial to build confidence and draw investors to Sri Lanka.

A fully empowered, professionalised, Board of Investment – which must also perform the role of a true one-stop-shop - will play a crucial role in attracting investment.

* A vibrant, structured and robust process to consult key stakeholders in policy formulation. An inclusive process will lead to a shared vision and drive stakeholders towards shared national goals.

A regular, formal dialogue between relevant public sector institutions - especially the Ministry of Finance and the Business Chambers will form a vital component of such a consultative process as will be the publication of ‘White Papers’ on important policy initiatives.

* Ease of doing business is an essential pre-requisite. This needs effective coordination between the public and private sectors with the public sector playing the role of facilitator.

The public sector needs to be appropriately empowered to play this role. Sri Lanka must reach ‘top tier’ status in global rankings such as the Doing Business Index, Global Competitiveness Index and Economic Freedom Index.

A suitable mechanism with public and private sector participation should be created for this purpose. A smaller number of ministries will help improve the business climate since it will lead to efficient service delivery, lower transaction costs and clarity among investors.

* Ensuring property rights and sanctity of contracts are secure, as it's a non-negotiable need for investors, be they local or foreign.

* Base energy prices on a transparent formula linked to global market prices with adjustments at pre-determined intervals.

3. Factor market reforms

As Sri Lanka moves from labour intensive activities to greater capital-intensive investments, reforms are needed to align factor markets with the country's development needs.

* Land:

§ Create an inventory of land available for development and investment and link it to the one-stop shop. This will help investors and improve ease of doing business in Sri Lanka.

§ Permit Sri Lankan incorporated, foreign controlled, businesses to acquire land subject to a minimum investment threshold and BOI approval with a specific exclusion of residential units (other than apartments).

* Education and skills:

§ It will be impossible for Sri Lanka's households to benefit from improved investment opportunities if skill levels in the economy are not sufficiently developed. Furthermore, it will be difficult to attract investment without the availability of skills. In this context, education is the most important of all investment and public service priorities.

* Link skills development, especially tertiary and vocational education and training to an export-led growth strategy.

* Sri Lanka's education system at all levels continues to be examination based and focused on the transfer and retention of knowledge.

The labour market in a knowledge economy, that Sri Lanka aspires to become, is one where emphasis is on the ability to think in an independent, critical manner while challenging norms.

An education system that fosters creativity is a prerequisite for developing an innovation oriented work force. The Science and Technology policy must be strengthened to encourage innovation and research.

* Labour:

* The present labour laws are a disincentive for the expansion of local business and for foreign investment.

Present laws incentivise unprotected part-time and casual employment and growth of the informal sector while dis-incentivising the creation of sustainable, productive permanent employment.

With unemployment low at present, reforms to improve flexibility in the labour market should be initiated. This will stimulate productivity and encourage development of formal employment and the formal sector.

This in turn will be more supportive of an aging population which needs more formal income streams and safety nets.

* Capital -

* The measures taken in recent years to deepen capital markets - the Corporate bond and equity market - are positive. A gradual liberalisation of capital markets could be considered.

4. SMEs

Small and Medium Enterprises (SMEs) are the backbone of a developing economy and is thus an important sector. We recommend the following to develop this sector -

* Promote alternative sources for SME capital including venture funds,

Private equity and other forms of capital market development that is supportive of SMEs.

* Link SMEs to larger enterprises to enable greater access to markets and other spill-overs such as knowledge and technology transfer and financial stability.