Right policies - Lanka's economy in good shape -Dr Koshy Mathai

by Lalin FERNANDOPULLE

Sri Lanka should be happy as the economy is in good shape with the right policies, said International Monetary Fund (IMF) Resident Mission Chief Dr. Koshy Mathai. He was speaking at the 15th Annual General Meeting of the Exporters' Association of Sri Lanka (EASL) on Tuesday.

Janaka Ratnayake                          Dr. Koshy Mathai

Dr. Mathai said that it was a good time for the Sri Lankan economy as major economic policy changes had been made to tide over external shocks and boost economic growth. Unlike the unsustainable policies of the past year, the current flexible exchange rate and control on the Current Account deficit are good policy changes which augur well for the economy.

"The GDP grew by eight percent and the export sector recorded a 20 percent growth rate for two years but there was an issue with imports which were higher than exports. Imports rose US$ 13b in 2010 to US$ 20b this year. Yet we know that in the pipeline dollars were flowing into the country and we did not want the rupee to weaken as it is now," he said.

Central Bank Governor Ajith Nivard Cabraal had said that reserves are there to be used and not to be placed on a shelf to be admired.

Dr. Mathai said that if there is a shortage of dollars for six to eight months then we need to realise that it is wrong to have a Current Account deficit. Steps were taken by policy makers to address the Current Account deficit by reducing imports.

Sri Lanka's economy grew 7.9 percent during the first quarter this year compared to the corresponding period of last year, according to the Department of Census and Statistics data. The economy has been resilient to external pressures such as rising fuel prices earlier this year and a turbulent global economy. However, the export sector declined by seven percent during the first five months of this year, according to the Export Development Board.

The drop in export income is attributed to the slump in the boat-building sector (98 percent), natural rubber, leather products, spices and handloom industry exports.

Dr. Mathai said that the depreciation of the Sri Lankan rupee has greatly benefited the export sector and added that the sector should take advantage of the weak currency and boost revenue through enhanced value-added exports. Sri Lanka should focus on enhancing the brand value of Ceylon Tea and gain from the hub concept for tea-blending which is a good mechanism to increase the export volume.

"Sri Lanka should focus on regional integration which will help increase exports. Sri Lanka exports only around five percent of its goods to India. The Indian economy is growing fast and its Southern States are developing rapidly. Exports to China which is the economic power house in Asia account only for one percent of Sri Lanka's exports. Sri Lanka should take advantage of the major economies to boost exports," Dr. Mathai said.

He said that Sri Lanka should expand free-trade areas with regional countries and focus on comparative advantage. Exports have been hit by the uncertainties in the global economy. The increase in fuel prices and high interest rates are affecting export growth.

EDB Chairman Janaka Ratnayake said that exports will rebound in the second half of this year despite a dip in the early part of the year. Exports of apparel, tea, spices, handloom and boat-building sectors declined during the first five months of this year.

"The EU economic crisis is affecting trade in developing countries. Exports of India and China have declined due to the sluggish growth in Europe. Sri Lanka's exports increased from US$ 1.5b in 2001 to US$ 10b last year. Exports should contribute 30 percent to the GDP," Ratnayake said.

He said that the EDB is optimistic that export will grow by around 20 percent by the end of this year despite the global challenges.

The 5.8 percent growth in the services sector, which includes tourism, telecommunications, ports and transport, this year was lower than the 9.5 percent recorded in the first quarter of last year. The agriculture sector rebounded with an impressive 11.3 percent growth in the first quarter of 2012 compared to the reduction of 4.3 percent in growth in the corresponding period last year.

The International Monetary Fund (IMF) on Friday lowered the economic growth forecast for Sri Lanka to 6.75 percent this year, lower than the 7.2 percent projected by the country's Central Bank.