‘Sri Lanka Economy Beyond 2014’ “SRI LANKA NEEDS A RADICAL DEPARTURE FROM PRESENT ECONOMIC PATH”

23 August 2013 06:56 pm - 0     - {{hitsCtrl.values.hits}}

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In the aftermath of the military conflict of May 2009, the country was expecting an economic take off sustainable over a decade.  That was possible only by building on the reforms of the liberalization of the late 1970’s

A small island, with a limited market, limited capital and resources could only progress by embracing globalization and building competitiveness of its agriculture, industries and services.

The country benefited from the cessation of hostilities and the 3 -5% GDP growth increased to 8% in 2010 and 2011.  With the global financial crisis the GDP growth rate has dipped to around 6% in 2012 and will remain in that orbit over the next few years.  In short, the economy has not transformed into a competitive economy securing new global markets.

The twin deficit of budget and current account persists. Government revenue is stuck at about 11% of GDP while expenditure, wastage and corruption go unchecked.   The trade deficit was Rs.9.7 billion and 9.4 billion in 2011 and 2012 respectively. The trade deficit will only marginally reduce in 2013.  Imports are twice as much as exports.  Import substitution is limited as oil, fertilizer and textiles are only a substantial proportion of imports.  40% of food imports are wheat.  Altering the dietary habits in urban areas and the hill country will take time if wheat is to be substituted and imports are to be reduced.  The recent scare created by the import of milk powder has raised the necessity to increase domestic production of milk from the present 30% of our requirements to a possible 50% over time.  Meanwhile the government goes ahead with its ambitious roads, ports, airports and infrastructure projects which increase  the imports of capital goods and have hardly an impact on increasing exports.
The real issue is that exports are continually declining as a percentage of our GDP from 32% in the past to 16% in 2012, and Sri Lanka’s share of global trade is also declining.  The present economic strategy fails to arrest the declining export base.  We have been unable to attract high technology, ICT related and other high value adding industries or services over the past decade.

The present economic growth has been propelled by a public investment programme of 6% of GDP.  The country has not been able to attract any substantial investment and has relied on foreign commercial debt.  The present strategy while not delivering sustainable growth has also increased the vulnerability to a financial crisis.  There are early warnings signs that our financial institutions are weakening.  He cautioned that the Central Bank should take measures proactively to strengthen the finance companies which are vulnerable, not limiting itself to warning the public through media advertisements.  On being questioned further, Wickramaratne refused to elaborate on the impending finance company crisis, only saying that the government had a responsibility to protect depositors who are the major Stakeholders in financial institutions.

The debt profile has changed drastically over the past 5 years.  The foreign debt has become nearly 50% of the total debt.  The commercial debt and non-concessional debt is as much as the concessional debt which is 1.3 trillion rupees.


"The present economic growth has been propelled by a public investment programme of 6% of GDP.  The country has not been able to attract any substantial investment and has relied on foreign commercial debt"



The Government’s economic goals are to create economic hubs around aviation, commerce, knowledge, energy and the maritime industry to achieve a per-capita income of US $ 4000 by 2016, to reduce poverty and unemployment and attract 2.5 million tourists.  While conceding that there has been a reduction in unemployment he points out that it is mostly due to the increased migration of labour to the Middle East and unproductive employment in the state sector.
The Government is in a continual attempt to paint a rosy picture of economic performance based on statistics which are not grounded in reality.
There is a phobia to project the per-capita income as the trophy of economic advancement.  Prof. Athukorala of the Australian National University (ANU) recently pointed out that “the doubling of per-capita income in current US $ terms during this period partly reflects domestic inflation and artificial stability of the exchange rate of the Sri Lankan rupee against the dollar.  When the data we expressed in real (2000) prices in order to allow for these factors, the increase in per-capita income in 2010 (US$ 1240) was only 30% higher than in 2004 (US $ 959)”.


" It is natural that as neighbours, India and China will be confronted with situations that call for a larger political vision. On trans-border rivers, there are worries in India about the possible impact of Chinese development projects on downstream areas. Both common development and mutual respect warrant a more reassuring Chinese position"




 The public sector is poorly remunerated, under trained and demotivated. Extreme politicization has broken the backbone of one of post independent Asia’s most promising public services.

A radical overhaul is needed.  A motivated, remunerated, trained public service is a prerequisite even for the private sector to flourish.

The problem in the public sector and the public corporate cannot be addressed unless radical reform is embraced.  The Government does not have the vision or the political will to restructure the public service.  Those at the helm of public policy have been around for too many years.  They continue to advice on making a poor system better-unable to see the necessity to change direction radically.  The inability of the President to replace his ‘old’ team with people who will promote a new paradigm will adversely affect the development of the country.  A new team, if not a new administration is now required.

The ‘old’ policy makers and big business who plays to the tune of these bureaucrats have wrongly advised the Executive to abandon its application for GSP for the fear that Sri lanka will not be able to comply on its international treaties.  The country is estimated to lose US$ 350 Million per annum.  The loss over a decade could be US $ 5 billion.  But the more important point is that we will lose our markets where Bangladesh, Pakistan, Vietnam and a host of other countries will replace us.  A skillful negotiating team could have bifurcated the negotiations on GSP into the pre 2009 and the post 2009 Sri Lanka.  Our partners in Europe are looking for transparent Government and international trade.  The fear of the past will wreck our own economic prosperity while not achieving the objective of excusing us from our international commitments.  New thinking on foreign trade and foreign policy is now the need of the hour.

Sri Lanka’s economy will be affected particularly by the performance of China and India over the next decade.  The age of fast growth is over. China’s economic growth will be 4 – 5 %.  China will face a long workout from the credit and debt boom of the 2000s.  There is too much debt relative to GDP.  It has been taking more and more debt to generate less and less GDP.  China has over invested and under consumed over a considerable period.  The economic shadow of China will send a shock to the countries in the periphery, namely, Indonesia, Australia, Malaysia, Brazil and Africa.  The impact on Sri Lanka will be limited.  The Chinese will meet their obligation to us given the strategic nature of the commitments and the smallness of the investments and debt.  However, future credit beyond 2014 may become more restrictive.
India’s growth will also be 4 – 5%.  The twin deficit of fiscal and current account will persist.  The Congress party policy of trading off growth for distribution will compound economic difficulties.  Higher inflation than its key trading partners will necessitate an adjustment to the Indian rupee.  The real exchange rate may be overvalued by 25 – 30%.  A depreciation of the Indian rupee will be inevitable.  Then our exports will be under further threat, so the Sri Lankan rupee will have to depreciate.

2014 may be the most challenging year for Asia since the 1997/98 crisis.  However, Asia is better positioned than in the 1990s to face the crisis.  The adjustment will take longer than expected.

There will be no short cuts to sustainable economic growth.  The political economy will have to be extricated from its present dismal state.  The separation of power, the restoration of the independence of the judiciary, law and order, will be a prerequisite to improve the business climate and attract foreign investment. It is only in that background  economic and financial reforms and public sector reforms  will give the country the high and sustainable growth it deserves - Nothing short, nothing less.
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