Sri Lanka’s strategy of meeting domestic investment requirements through borrowing cannot be sustained for much longer, according to Sri Lanka Economic Association (SLEA) President Prof. A. D. V. De S. Indraratna.
“The gap between domestic savings and domestic investment was manifest in the corresponding trade deficit and was met largely through borrowings. This cannot go on much longer without either getting into a serious debt crisis or cutting down gross domestic investment.
The way out is to change the growth strategy to one of investing with savings rather than with borrowing or in other words,” he asserted.
Addressing SLEA Annual Sessions, Prof. De S. Indraratna went on to state that such a strategy would require reductions in the budget deficit and in aggregate demand, in addition to better strategized exports.
The resultant containment of inflation and positive real interest rates would give better public savings which would also allow government space to increase revenue and decrease expenditure.
“Decrease in current expenditure should result from the reduction in waste, corruption and ostentation in the public sector and improvement in the management and productive efficiency of the public-sector institutions.
These things do not happen automatically; positive action on the part of the relevant authorities is necessary,” Prof. De S. Indraratna said.
In that context, he went on to raise criticism over the National Savings Bank’s US$ 750 million debenture loan.
“External borrowing at high interest rates like the NSB’s US$ 750 million debenture loan at 8.875 per cent interest would certainly counter this strategy, specially with NSB being the premier state-owned institution for savings mobilization,” he noted.
Meanwhile, drawing attention to the role of Foreign Direct Investment (FDI) in Sri Lanka’s future growth story, Prof. De S. Indraratna highlighted that relatively low inflows were caused by a lack of confidence in the country’s institutional frameworks.
“Despite the cessation of terrorist hostilities in May 2009, FDIs have been flowing very slowly. Apparently foreign investors still do not find the necessary environment for their investment.”
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