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Sri Lanka’s Potentials for a Dynamic Economy

21 November 2012 06:30 pm - 0     - {{hitsCtrl.values.hits}}

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Excerpts of a presentation delivered at the Workshop “Post-War Reconciliation Dialogue for a Sustainable Peace”, which took place in Paris.
In January 2010, Sri Lanka was upgraded, from the IMF’s list of Poverty Reduction and Growth Trust, to that of Middle Income Emerging Markets. This represents a major recognition of Sri Lanka’s economic development. In order to be upgraded this way, you need to meet few requirements that evidently Sri Lanka has successfully fulfilled. Here are some examples of the criteria that Sri Lanka met: Sri Lanka’s GDP never stopped increasing, going well above the prevailing International Development Association threshold, projection of optimistic outlooks on the country’s external debt, allowing resilience to shocks (despite of global financial crisis, GDP remained around 8% in 2010 and 2011), presence of fiscal consolidation and the ability to access international capital markets, were among other criteria.
According to the Global Economic Prospects of the World Bank, published in January 2012, when it comes to real GDP growth outlook for 2013, 7.1% is expected for South Asia, and 7,8% for South East Asia, whereas 1,1% is expected for the Euro Zone. This clearly demonstrates that Sri Lanka is in the heart of a very dynamic economic area of the world. With such an opportune framework, it really has to play a key role.

One other factor that supports Sri Lanka’s economic expansion, among many other elements, is the end of its bloody civil war that started in the 1980s, and eventually ended in 2009. This war context did not reassure investors, and it certainly did not help the government to focus on the economic development of the country.
At the end of the war in 2009, President Mahinda Rajapaksa promised to have a strong leadership for the country’s economic expansion and so he did. One main sector in which the government decided to invest was the infrastructures, its development being of paramount importance in the country’s reconstruction-phase. Resurfacing roads, improving their conditions and reducing average vehicle operating costs have much more value than simply making every-day life easier: it is also vital for economic growth, and also ultimately reducing poverty. Investments in that area means the spread of economic growth outside the Colombo Metropolitan Area; new conditions and standards of roads more adequate to meet the growing freight and passenger traffic. New highways connected major growth centres. One simple example of how lowering transportation costs and travel times can play a major role in the economy, especially when it comes to exports: the improvements would help farmers to transport their products to markets on time, increase export competitiveness, accelerate export-led growth, and also contribute to sustained economic development.

The benefits of exports for the economy are now well considered by most countries, but they also must remember that in order to maintain their added value, their competitiveness, they always need new incentives and innovative products and ways of doing. This means that Sri Lanka must also invest in the field of Research and Development. Sri Lanka should assist Small and Medium Enterprises to develop, by supporting domestic competition in order to help its businesses. It will help their expansion in the domestic market and also to defend themselves on an international scale.

An example of that would be the presence of a few Sri Lanka businesses at the latest SIAL fair, the biggest fair of innovative global food that took place in Paris a few days ago. This is very positive for Sri Lanka’s businesses, to be present at such events in the Western part of the world: it means they have a certain weight, and are recognized.

Speaking of which, the added value of agriculture in percentage of GDP is up to 14%, whereas it is about 28% for the industry, and 58% for services. The service sector plays a major role in the economic development scheme of Sri Lanka. The strengths of the country are quite diverse; the service sector has the greatest keys to economic development, notably with tourism, but also financial and insurance services. As we noted, the industry, with its investments in infrastructures, is also a leading sector. When it comes to agriculture, it supports with no doubt Sri Lanka’s economic expansion, especially abroad with raw materials. Since the end of the war, the country attracted a lot of Foreign Direct Investments, especially from China and India that supports the tourism industry, education, energy, and information and communications technologies.

However, the government suffers from a trade deficit, fiscal deficit and even corruption. There is an evident lack of support from the State to support private incentives and SMEs, that represent about 90% of the 18 000 companies operating in Sri Lanka. Impacts of the global financial crisis remain as Sri Lanka’s main ‘customers’,  USA, are lowering their import.

However, Sri Lanka must not forget the opportunities it has: its strategic position in the most dynamic economic region of the world and its strong support of its financial partners - the World Bank, the IMF, but also the Asian Development Bank, the Japan Bank for International Cooperation. Moreover, we must also consider sustainable growth in order to have responsible approaches that can have long-term benefits for Sri Lanka.

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