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| Sunday, 4 May 2003 |
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Noteworthy improvement on fiscal front in 2002 Sri Lanka's economy is expected to grow by 5.5 per cent this year while inflation is likely to stand at 7.5 per cent, Central Bank (CB) Governor, A.S. Jayawardena said last week. Addressing a media conference held to release the Central Bank Annual Report 2002, he said that the economy recorded a four per cent growth in 2002, recovering from the 1.5 per cent negative growth in 2001. If the peace process continues and envisaged economic reforms are implemented, the economy could grow by six, seven or eight per cent, CB's Director Economic Research Department, Dr A.G. Karunasena said. With the growth in economy, per capita income rose by three per cent in real terms, improving the living conditions of the people. Prices continued to be high because after a slump in the economy, it takes time for prices to stabilise, Jayawardena said. The rate of unemployment remained high at nine per cent. The Government's introduction of the Fiscal Deficit Act was prudent, as the nation cannot live beyond its means, he said. On the production side, growth was largely reflected in the services and agricultural sectors. The industrial sector made only a marginal recovery, due to weak export demand. The services sector accounted for about 80 per cent of the overall growth in 2002, benefiting mainly from the recovery in trade, transport, port services and tourism and the continuation of the growth momentum in the telecommunications and financial sectors. Agriculture and allied activities accounted for about 13 per cent of overall growth, reflecting recovery in paddy, tea, rubber, other agricultural crops and fishing, the CB Governor added. Growth in demand was mainly driven by improved domestic consumer demand, stimulated by improved security conditions and distribution facilities. Overall, macroeconomic stability improved as a result of a reduction of the fiscal deficit as well as the external current account deficit. Despite the increased consumer demand and increases in prices, inflation, as measured by the Colombo Consumers' Price Index, declined through the year to 9.6 per cent in 2002 from 14.2 per cent in 2001. This was the combined effect of a tight monetary policy stance pursued by the CB since mid-2000 on the demand side, and improved domestic supply conditions, the relative stability of the rupee and easing of import prices. Maintaining this declining trend is critical for continuing the still high inflationary expectations in the economy, Jayawardena said. A salient feature of 2002 was the noteworthy improvement on the fiscal front. Despite a large shortfall in revenue, the current account deficit, primary deficit and the overall deficit declined, benefiting from strong expenditure rationalisation and improvements in Treasury cash management and public debt management. Improved fiscal conditions contained expansion in public debt, released more resources to the private sector, reduced pressure on domestic interest rates and facilitated monetary management. The Government's commitment to maintain fiscal discipline was demonstrated by the enactment of the Fiscal Management (Responsibility) Act, he said. The external sector benefited from the recovery in the services account and improvements in inward private transfers and capital flows, though the recovery in export demand was slow. Consequently, the overall balance of payments recorded a surplus of US$ 338 million, the second consecutive year of surplus, raising the country's external reserves to an equivalent of 4.9 months of imports and reducing pressure on the exchange rate. The independently floating exchange rate regime continued to serve well, further strengthening stability in the foreign exchange market and improving the external competitiveness of the country, the Governor said. Monetary expansion remained within target, compatible with the nominal increase in GDP. Reduced demand for credit by the Government facilitated the accommodation of the expanding private sector credit demand without resulting in additional inflationary pressure. The Central Bank reduced its policy rates cautiously, supporting economic recovery, following the declining trend in inflation and increasing public sector domestic borrowing requirements. Markets responded positively, shifting the entire interest rate structure downward, benefiting from improved domestic rupee liquidity, which resulted from purchases of foreign currency by the CB and a reduction in the public sector overdraft facility. A renewed commitment to structural reforms necessary for creating an environment conducive to long-term high growth was evident in the reforms in the labour market, public enterprises, the financial sector, the civil service, the tax system, the regulatory system, trade policy and the legal framework. Benefiting from improved macroeconomic management and structural reforms, the International Monetary Fund (IMF) Stand-By Arrangement was put back on track in early 2002 and concluded successfully in September, strengthening the policy creditability of the country and facilitating finalisation of long-term concessionary financial assistance programmes with the IMF and World Bank. The major factors that contributed to these economic achievements are the progress in the peace process, improvements in macroeconomic management, renewed efforts for structural reforms, removal of the war risk insurance premium, favourable weather conditions, the end to power cuts and the recovery in the global economy. The most important factor was the restoration of a peaceful environment under the ceasefire agreement, which improved the smooth functioning of economic activity and business confidence. It also helped in reducing internal and external macroeconomic imbalances by containing security-related expenditure and imports. At the same time, reduced government domestic borrowings made more financial resources available to the private sector and facilitated interest rate reductions, supporting private sector-led economic recovery. However, the performance of the economy in 2002 was below the level required to reduce poverty and raise per capita income levels on a more sustainable basis. Savings and investment as a ratio of GDP have been well below the required levels for achieving high growth rates and creating adequate employment opportunities to satisfy the increasing demand for jobs, the CB Governor noted. Meanwhile, poverty, unemployment, inflation, the fiscal deficit and the public debt burden remained high. Similarly, the level of external reserves is still below the desired level, given the adverse external risks. Steps have also been taken to improve the functions of the CB to meet the requirements of a modern economy. Action has been initiated to reform the payment and settlement system to provide necessary infrastructure to support the development of Sri Lanka's financial markets and banking system. A Real Time Gross Settlement system and a Scripless Securities Settlement system are to become operative by the fourth quarter of 2003. The automated cheque clearing system, owned and operated by the CB, was divested and is now jointly owned by the CB and commercial banks. The objective of the divestiture was to improve the efficiency and technology used in cheque clearing and positive results have already been seen. Public debt management, which the CB performs as an agency function for the government, has been improved. Long-term government securities are now being issued. This improves the flexibility available to the government in managing public debt and provides a longer-term yield curve for government securities, which is of great benefit to the private sector, the Governor said. (EL) |
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