Economy on the right track

Despite the Domesday scenarios painted by many a pundit, the Sri Lankan economy is progressing to achieve over 5 per cent growth in the second quarter of 2005.

Many of these dire predictions were based on the inclusion of Left-leaning parties in the ruling UPFA. However, there was no fundamental shift from the Open Economic system which has been practised from 1977.

The latest alliances in the political arena seemed to have ruffled a few feathers in the business community. But one does not need a doctorate in economics to realise that the open economy is irreversible in the present context of globalisation.

That said, attempts are being made, and rightly so, to direct the open economy on a path that is more people-friendly. One cannot fault this approach, since unbridled capitalism may not be suitable for a developing country such as Sri Lanka.

The present economic performance is creditable given the extremely difficult circumstances precipitated by the steep oil price rise (more than US$ 70 a barrel) and the tsunami catastrophe. These twin factors have adversely affected the economies of many Asian nations.

Their woes have been compounded by the fact that many Asian Governments, Sri Lanka's included, have traditionally granted oil subsidies especially for the goods and passenger transport sector.

The oil subsidy is a huge burden on the economy, as are a number of other subsidies which we have taken for granted. In Sri Lanka, the recent removal of VAT from a number of consumer items, while contributing to reduce the high cost of living, will nevertheless have a significant effect on Government revenue and hence, on the economy itself.

The Government has raised taxes on a number of other non-essential items, but it remains to be seen whether that alone is enough to bridge the shortfall.

A growth of around six per cent has been forecast for 2006, which will begin with a new President in office. The country will eagerly look forward to his economic policies and all candidates must present their economic programmes and aims in a clear and concise manner without delay.

He will have to build on the economic gains already made and face the challenges on the economic front. Economic conditions have continued to improve since the IMF staff visits to Sri Lanka in April 2005.

International trade has improved, foreign inflows have increased, balance of payments has recorded a surplus, official reserves have risen to over three months of imports, fiscal consolidation has continued and monetary policy has been tightened to contain monetary expansion and adverse developments in inflation. These trends must be continued.

Increasing Government revenue should be a priority. Streamlining revenue collection at Customs, Inland Revenue and other Government bodies is essential while reforming some of the loss making State-owned ventures. Export earnings are also growing, which is a good sign for the country's economic health.

Sri Lanka faces many economic challenges in the coming years, as it grapples with an economy emerging from the scars of war. A permanent solution to the ethnic conflict is thus imperative for accelerated economic growth.