Economic growth decelerating - Ex CB Deputy Governor

by Rohana Jayalal

Sri Lanka is heading towards a foreign debt crisis and economic growth is decelerating, former Central Bank Deputy Governor, W. A. Wijewardene told the economic forum in Colombo on Thursday.

Wijewardene said external payments for the next 12 months will be US dollars 4.5 billion and the import bill will also rise.

Economic growth will also slow down. Sri Lanka’s economic statistics are also disputed, Wijewardene said. He said analysts have warned the Central Bank that domestic credit and imports are being driven to unsustainable levels by printing money to maintain low interest rates amid a rising Budget deficit. Government revenue has been declining as a percentage of the GDP over the past decade while exports have been reducing as a percentage of the GDP.

These are not healthy economic indicators for a developing country such as Sri Lanka. Sri Lanka is also heading towards a Balance of Payment (BoP) crisis as a result of the drop in exports and the large cash outflows due to rapidly increasing foreign commercial borrowings.

On the other side of the equation, the country’s external sector has been in a very precarious situation from early 2012. Exports which fell significantly in that year have not yet recovered sufficiently and in 2015, it declined by about 2% compared to the previous year.

Christopher Woodruff, Professor of Economics at the University of Warwick, said the regulations shouldn’t baulk the growth of the economy, as the country is successful in tourism, while having large scale development projects. It also fosters the growth of small-scale business.

The government should not over-regulate the informal hospitality sector due to pressure from large hoteliers, he said.“Due to the internet, there are opportunities for small-scale businesses which should be encouraged,” he said.

Woodruff said the new-age tourist having no brand loyalty, or little desire to indulge in brands, prefers to engage in authentic experiences with the locals.

An ongoing debate is that smaller businesses are more innovative in providing services and management practices compared to larger companies that aren’t willing to take risks and only copy ideas. But Corporates argue that having a more qualified workforce fosters innovation.

Director, Graduate School for Development Policy and Practice, University of Cape Town, Alan Hirsch said Sri Lanka should focus on economic competitiveness to achieve sustainable and inclusive development.

The government has to find the ways to get employers to pay their workers more while encouraging business as a means to distribute wealth evenly across the population.

In a country such as Sri Lanka, however, which is very dependent on imports, where half the productive resources are devoted to export, and chronically short of capital equipment, such policies tend to raise domestic prices without producing an adequate return in domestic output. Instead, higher domestic income stimulates the consumption of imported goods and precipitates a serious balance of payments issue.

The government should look for new avenues to strengthen the external sector by increasing exports.

Economic competitiveness captures the extent to which economies possess the essential factors to enhance productivity and the well-being of the people.

It is defined as the set of institutions, policies, and factors that determine the level of productivity of the country. The level of productivity, in turn, sets the level of prosperity that can be reached by an economy.

The productivity level also determines the rates of return on investments in an economy, which in turn are the fundamental drivers of growth rates.

In other words, a more competitive economy is one that is likely to grow faster over time and produce a higher level of income in the medium to long term.

The agricultural sector is a promising area for Sri Lanka for specialization and competitiveness, if suitably developed.

However, agriculture in Sri Lanka is largely dominated by subsistence farming despite its huge youth population with low skills and limited mobility.

The efficiency and flexibility of the labour market is critical for an economy.

Workers should be allocated to jobs in a very effective manner and they should be provided with attractive incentives so that the labour force can contribute positively to the growth of the economy. Gender equity in the business environment and flexible regulations will attract skilled workers with talent.

According to available data, the Sri Lankan labour market is largely populated with unskilled labour with limited technical know-how to promote efficient production and competitiveness.

Production in Sri Lanka is factor-driven and depends mostly on natural endowments. The industries are mostly at the extractive stage and employ a high proportion of unskilled workers with low productivity and low wages.

Ensuring efficiency in the market through human capital development will unlock large untapped potential. This involves skill acquisition and training which governments must invest in to make the sector virile and competitive.