Financial News | Sundayobserver.lk

A double digit economic growth rate will only be realistic if the Government implements essential policy reforms on time, economy analysts said.

Senior Lecturer, Department of Economics, University of Colombo Dr. Sirimal Aberathne said “The annual average economic growth rate is around 5 percent and this growth is led by the policy reforms introduced in 1977. A double digit growth rate means that we have to double economic growth and achieve an over 10 percent growth rate. Also the Government has targets to double the percapita GDP to $4,000. These targets are difficult to achieve, with only a few countries achieving them. Considering the situation in Sri Lanka, they can be achieved”.

To achieve high economic growth we have to invest more. If we want to double the growth by simple calculations we can say we have to double our investment. Today our investment is around 26 percent of the GDP and therefore at least we have to increase our investment to 40 percent of the GDP. This can be seen in the fast growing economies such as China where they maintain investment at 35-40 percent.

Who will invest?

If we break down our investment figures, private sector investments accounts for 20 percent of GDP while government investment is only 6 percent. Government cannot increase investment because it has already invested by borrowing money at high interest rates. Also there is a current account deficit at the moment.

Our private sector too is not big to pour the required investment into the economy. Then who will invest? Dr. Aberathne said that investments should come from foreign investors but attracting foreign investment is not easy as there are rivals in all parts of the world.

Therefore Sri Lanka has to go for its next policy reform to cater to the needs of the domestic private sector as well as foreign investors. In 1977, reforms were targeted to attract investors for labour intensive manufacturing industries because we had cheap labour. However, today the FDI does not flow to cheap labour destinations and it is only a minor factor. If you look at FDI flows, investments now flow to high labour cost destinations where the business environment is better. Therefore policy reforms and reforms in the regulatory framework are essential at this moment. Long term policies are needed to ensure policy stability and predictability, he said.

Dr. Aberathne said that under these circumstances, the forthcoming budget is crucial. Last year the budget was aggravated by internal and external factors.

The Government has declared its vision for economic development and therefore the budget should reflect it and cater to medium term growth.

Explaining the high economic growth rate achieved up to the second quarter of the year, he said that it is a combination of two factors, policy reforms after 1977 that did not reap full potential and peace.

This growth will not be sustainable unless we implement necessary structural reforms.

Peace contributed in many ways including utilisation of abandoned resources, reconstruction and other economic activities. In 2009 this capacity was under utilised.

Competition for FDI is so high and there are many choices such as China, Vietnam and India. We are not doing that good.

Some economists argue that a robust growth of the Sri Lankan economy will be realistic and is reflected in all indicators at the moment. According to the most recent report released by the research division of C.T.Smith Stockbrokers, growth forecasts for 2010 and 2011 in all three sectors are higher compared to last year.

According to the report, indicators such as private sector demand for credit, tourist arrivals, building material volume index, cement volume index, Colombo port TEUs handling volume index, Monthly rubber production, tea production and fish production are increasing with a significantly higher rate compared to 2009.

Analysts also said that the favourable weather condition that prevailed during the year will contribute to the growth this year mainly in the agricultural sector and in power generation.

Since many power plants have been commissioned and some are almost completed even under adverse weather conditions, growth will not be hampered in the coming years.

The lowest economic growth has been reported in the years that severe droughts were reported because it affected the agricultural sector as well as the industrial sector as a result of over dependency on hydro power and high cost thermal power.

Simultaneously with the ending of the conflict the country has addressed a crisis that prevailed in the power sector.

Some economists argue that Sri Lanka should study and follow lessons in post conflict development from countries like Ireland.

Ireland’s economy is fast growing and attracting investments for high tech industries, knowledge industries such as software development and nanao technology.

Chairman of the Sri Lanka Foundation Institute Dr. Ranjith Bandara said that a double digit growth rate is not a difficult task. Today the country has cleared all possible obstacles in economic and non economic fronts.

Now we have peace and political stability that is crucial to attracting investments. Government has a ten year development plan and all these sectors have been considered.

Service hub

Dr.Bandara said that the service sector of the economy will grow faster and education, health, ports and shipping and tourism sectors will contribute greatly to the GDP in the next 3-4 years.

The Government has already invited reputed foreign universities to set up their campuses here. Since there are a visa restrictions to students in UK and Canada we have opportunity to develop Sri Lanka as an alternative destination for higher education in the Asian region.

Sri Lanka’s friendly foreign relations with all Asian countries will have advantage to attract students from all Asian countries.

China and India do not have this advantage due to many political issues between the countries. Sri Lanka will be the education hub of the region in the future.

The Health sector is also a potential area to attract investment and businesses, he said.

The port sector was neglected in the past and already huge money has been invested into this sector.

After completion of the ongoing mega port development projects Sri Lanka will be the naval hub of the Asian region.

Already five leading shipping lines have agreed to venture into Hambantota harbour.

Arrival of ships, TEUs handling and many other related services will improve in the next 3-4 years, Dr. Bandara said.

He said that without much marketing effort tourist arrivals have increased 42 percent and therefore the 2.5 million tourist arrival target is achievable.

Government has a clear plan to develop the sector considering all aspects of the industry. Now investments are flowing into the industry and new hotels are being constructed.

The Kalpitiya area will be developed as a special tourist zone similar to what is in Malaysia.

Commenting on structural and policy reforms Dr. Bandara said that today Sri Lanka is more flexible and we are moving forward in line with what suits best for the country and not guided by the IMF or World Bank.

Reforms will take place according to the policy framework of the Mahinda Chintanaya which was approved by the majority of the people.

Agriculture and land consolidation Economist Loyd Yapa said that agriculture is a neglected sector in the economy and needs new direction in post war Sri Lanka.

All advancing economies such as Japan, South Korea and Taiwan started to march towards prosperity through manufacturing exports and agricultural sector development via land reforms (land consolidation).

He said that land consolidation is important because small land plots are too small to obtain economies of scale or improve productivity.

Subsistence agriculture has to be changed and issues such as lack of credit to the agricultural sector has to be solved, he said.

Yapa said that FDI inflow to the country is very low compared to other countries.

During the period Taiwan has attracted over US$ 40 billion and Thailand and Malaysia over US$ 60 billion, he said.

C T Smith Stockbrokers on the Sri Lankan economy

The government has taken a number of measures to increase domestic consumption and encourage private sector participation in the economy. Interest rates have declined sharply over the past year with the Government repeatedly reducing policy rates while also looking oversease to tap the Bond market.

Consumption initiatives include the reduction of import taxes on a number of consumer durables, reducing levies by more than half.

Further incentives are expected following the recommendations of the Presidential Tax Commission, which are expected to be incorporated into the Government Budget for 2011. We expected growth to continue to remain robust, though presently driven by Government investment in the economy.

Numerous opportunities have arisen in the fields of tourism, retail, food & beverages, agriculture, transportation, financial services, although sufficient investment is at present a limiting factor. To address this issue the Government is looking to rationalise the investment process and reduce the level of bureaucracy, which has been a stumbling point for investment. Given better than expected GDP growth in 2Q 2010, we have revised upward our forecasts for overall GDP growth to 7.2 per cent in 2010 from 6.6 per cent and 7.9 per cent in 2011 from 7.4 per cent. Key sectors of growth include agriculture, construction, wholesale and retail trade, banking and leisure segments with significant (public and private) investment expected in these sectors.

Subsequent to the amendment in our expectations, nominal GDP is forecast to rise to US$49.6 in 2010 and US$ 58.5 in 2011, resulting in per capita GDP of US$ 2,398 in 2010 and US$ 2,795 in 2011 bolstered by expectation of further appreciation of the Sri Lankan rupee Vs US dollar.

Double digit growth rate possible - Economy analysts

Who will invest?

Service hub