Policy and institutional reforms vital to boost economic growth

By Gamini Warushamana

The economy is not stable today as the internal and external financial situation is out of control, Prof. Sirimal Abeyratne of Department of Economics of the University of Colombo, told Sunday Observer Business last week.

Excerpts of the interview

If we take the internal financial situation, this year, the country has to pay Rs.3.5 billion as loan instalments which is much lower than the tax revenue. Since the total tax revenue is insufficient for debt servicing, to fulfill all the proposals in the 2015 Budget the government will have to go for further borrowings.

Where external finance is concerned, it is a well-known fact that our exchange rate is stable because it is kept stable by the Central Bank and it is not market-driven stability. As export growth is weakening it cannot be stable.

The huge trade deficit and balance of payments are bridged by the growing foreign remittances into the current account and government borrowings into the capital account.

This financial instability hinders economic growth. The development strategy of the country should be greater integration and competitive integration with the rest of the world. But this did not happen over the years.

Therefore, in every sphere of the economy we need bold institutional and policy reforms. This should be the priority of the government.

Our economic growth rate and many indicators are moving in different directions and there is no consistency. Today, Sri Lanka has the potential of achieving around 10 percent economic growth. Therefore, the next 10-20 years are crucial for the country because the Sri Lankan economy is at the doorstep of taking off, as internal and international conditions are very conducive for it. This is the Asia's century in global economic development.

This is the time to exploit this opportunity. Many countries in Asia are doing this and Sri Lanka has a greater potential of an unimaginable magnitude to exploit this situation but it needs clear policy direction and policy reform process.

Infrastructure

There was a misconception that the massive infrastructure development in the past few years alone would boost the economy. However, this did not happen. Infrastructure development is necessary but that alone is not sufficient for economic growth.

That's why the economy was stagnant over the past few years despite infrastructure development. Growth is driven by investments and to attract investments a country should create investor confidence.

Institutional and policy reforms are essential to create an investor-friendly business environment. Once these conditions are in place private investment will grow.

Long ago countries had to increase savings to finance investments and, therefore, investments mainly came from domestic savings. However, the situation has now changed and private investments flow to countries where conducive investment environments are in place.

There are huge accumulated investment funds in the world seeking better locations.

Twenty years ago total global FDI flow was at US $ 250 billion a year and today it has increased to US $ 2.5 trillion. We have failed to attract even a fraction of this huge FDI flow compared to our Asian competitors such as Vietnam and India.

The government should show its policy direction. Not in the macroeconomic front, in the political economy too there are challenges for the new government.

One positive thing in the manifesto of the new President is his pledge to end corruption and establish good governance and law and order.

This is one essential component in creating a business -friendly environment a fundamental need for in economic development. During the Rajapaksa era all these deteriorated. It is the main reason for low FDI inflow.

Political economy

However, in the new President's election manifesto we don't see anything about economic reform and therefore, it does not give the direction of our economic agenda. Instead we can see some out dated economic policies such as import substitution, greater emphasis on agriculture sector and protectionism in some sectors.

I think the government should give clear policy direction for the next 10 years. The Government should not consider this presidential election victory as similar to the 1956 Sri Lanka Freedom Party victory.

This is the opposite of that because all three ethnic groups, Sinhala, Tamil and Muslim have voted for the new President. The Mahinda Rajapaksa regime failed to deliver the dividends of peace to the people by creating a pluralistic society.

Today, it is the responsibility of the new government to deliver the peace dividend to the masses in terms of economic benefits, democracy and freedom irrespective of ethnic or religious differences.

A stable government is essential for this no matter that it is a coalition of many parties. However, it is a challenge considering the present composition of Parliament.