Growth rate - highest since Independence:

Prudent decisions, timely state intervention boost economy

By Shirajiv SIRIMANE

The apparel industry is one of Sri Lanka’s main export industries

The Colombo Stock Exchange

Containers at the port

Colombo Port

Southern Expressway

Minister of Economic Development Basil Rajapaksa recently said that Sri Lanka would be among the four best performing economies in the world next year and the country seems to be heading towards this target. Prudent economic management decisions and timely intervention by the State helped the Sri Lankan economy to register the highest post-Independence growth rate of 8.3 percent in 2011. This is a substantial increase over the eight percent growth recorded in 2010.Per Capita Income increased to US$ 2836 from US$ 2400 the previous year.

GDP per capita is often considered an indicator of a country's standard of living although this can be problematic because GDP per capita is not a measure of personal income.

One of the key drivers of this growth was the increased contribution from the industry and services sectors. The growth in the Agriculture sector was subdued, but was adequate to enforce a substantial downward pressure on domestic commodity prices.

While year-on-year non-food inflation increased in March 2012 due to the full impact of the adjustment of domestic energy prices and bus fares, year-on-year food inflation remained negative for the third consecutive month. Overall, the year-on-year change in the Colombo Consumers' Price Index increased to 5.5 percent in March 2012 from 2.7 percent in February.

The domestic foreign exchange market has shown clear signs of stabilisation following the expected volatility during the early stages of allowing greater flexibility in the Rupee/US dollar exchange rate.

The Rupee, which depreciated against the US dollar to Rs. 130.41 in March, appreciated by 3.94 percent during the period from March 21 to April 4, 2012 to reach Rs. 125.47.

The increased foreign exchange inflows contributed to this stabilisation, while prudential measures implemented by the Central Bank supported this development.

Secretary to the Treasury Dr. P. B. Jayasundara said this is expected to further appreciate after the Sinhala and Tamil New Year.

Significant foreign inflows in the first three months of the year included the inflows to the Government securities market amounting to US$ 400 million and inflows to the Colombo Stock Exchange of US$ 164 million.

IMF facility received

The eighth tranche under the IMF-SBA facility, amounting to US$ 427 million, was also received. These and other foreign receipts to the private sector and the Government have now raised the gross Economic Research Department official reserves (without ACU balances) to US$ 6.1 billion, which is equivalent to 3.6 months of imports.

"The Sri Lankan Government has not agreed to any conditions put forward by the International Monetary Fund (IMF). There are only understandings. From the beginning, the Sri Lankan Government follows the right track when it comes to economic development and only now some officials point that out. There is nothing wrong pointing it out. The Government did not privatise even a single bank or any other State institution which shows whether it agreed to any conditions or not," Acting Minister of Information Lakshman Yapa Abeywardena said.

The past two years brought massive transformation to Sri Lanka, including the construction of highways, harbours, airports, agricultural development, total transformation of the North and the East by developing infrastructure facilities and other giant development drives. "Sri Lanka achieved all these goals while the Western world was facing a huge financial crisis and other countries were going through severe financial difficulties.", he said.

2012 seems brighter

A significant improvement in the external sector performance is expected in 2012 mainly through strong foreign exchange inflows, amounting to around US$ 25 billion via major foreign inflow sources.

Sri Lanka targets an export income of around US$ 12 billion and foreign remittance, which is Sri Lanka's top forex earner, to reach US$ 6.5 billion. Foreign direct investments are expected to reach a record two billion US dollars while stock market inflows are expected to pass the US$ 500 million mark.

TIER 2 capital inflows to some commercial banks would be around one billion US dollars while net foreign investments to government securities would be around US$ 500 million.

These strong foreign exchange flows to the Sri Lankan economy would help improve the trade and services accounts, current accounts as well as service accounts and generate a considerable surplus in the overall balance of payment in 2012. These inflows would also support the stability in the foreign exchange market and help continue the high growth momentum in the economy.

Money supply grows

Tea, a major forex earner

Meanwhile, broad money supply grew by 21.9 percent, year-on-year, in February 2012. Net Credit to the Government (NCG) increased substantially by Rs. 136.3 billion during the first two months of the year, while credit extended to the private sector also increased, year-on-year, by 34.4 percent amounting to around Rs.100 billion in the first two months of the year.

These developments resulted in the continued high growth of monetary aggregates, although the recent policy measures introduced by the Central Bank are expected to decelerate the expansion in broad money supply in the near term. Towards such outcome, it is essential that the current shortfall in Government revenue is effectively addressed and public expenditure further rationalised, so as to significantly lower the reliance on bank sources to finance the Government budget deficit. Such a course of action would reverse the trend observed in the first quarter of 2012, and in that context, the recent upward revision of Customs and excise duties on selected items by the Government is a display of its commitment to the fiscal consolidation process.

Meanwhile, notwithstanding the increase in the Central Bank policy interest rates in February 2012 and the direction issued to restrain the growth of credit extended by licensed banks, there are still some signs that credit growth is continuing at an undesired pace.

Regional disparity has been one of the key factors that led to two insurrections and steps are being taken today to breach this gap and to break the popular saying 'Kolambata Kiri Apita Kekiri.'

The Gamata Karmantha initiative which was launched by the Government, offering tax incentives is one of the key drivers to breach regional disparity and the private sector has taken maximum advantage of this move,opening several factories in the provinces. The expressway to the Southern Province and plans to extend it further would also help breach regional disparity. This is similar to what happened in Malaysia in the 1980s where highways were built to take development out of Kuala Lumpur and helped the people in the provinces to increase their income levels and living standards.

The share of the Western Province in the GDP has reduced from over 50 percent to 45 percent during the period of 2006 to 2010 because all other provinces grew faster than the Western Province.

Sharp improvements of income have been recorded by the Eastern, Northern, and North Central Provinces with the Northern Province growing by 23 percent and the Eastern Province growing by 19 percent in 2010. As a result national GDP increased from 7.7 percent to 9.3 percent during this period.