Economy grows at 6.9 per cent, drop in unemployment -IPS

The Sri Lankan economy has grown by 6.9 per cent a year on average over the past three years.

While GDP growth slowed in 2007, the higher growth momentum has also been accompanied by a sustained drop in the rate of unemployment to six percent by end 2007.

An extract from the just released Sri Lanka: State of the Economy 2008 report published annually by the Institute of Policy Studies of Sri Lanka (IPS) states that absolute poverty levels in the country are estimated to have declined sharply with the national poverty rate down to 15.6 per cent from of 22.7 per cent in 2002.

Despite these achievements and the apparent buoyancy in the economy, there are disquieting signs that the country’s ability to build on that performance over the coming years may prove to be by no means an easy task.

There are two major areas of concern: external sector developments, and the general state of macroeconomic stability in the country.

A key objective of economic management above all others is in delivering economic stability, the IPS said yesterday.

This means not just maintaining growth, but keeping inflation down as well. On the basis of the latter, Sri Lanka’s economic performance appears more fragile. With annual inflation hitting 15.8 per cent by end 2007 as per the newly compiled CCPI(N) - or 17.5 per cent according to the old CCPI - the details of Sri Lanka’s economic performance in 2007/08 underscore the complexities facing policymakers, most critically from a surge in the cost of fuels and, and more recently of foodstuffs.

While concerns about the rising cost of living are now being felt across Asia, it has been a primary source of concern in Sri Lanka since mid-2004, with a jump in inflation to a seventeen-year high by end 2007.

Monetary policy - normally best placed to help stabilise the economy - has been playing a much reduced secondary role to counter expansionary fiscal policy impacts.

In essence, it underlines the fiscal pressures faced by the government from heightened military efforts, escalating demands to improve infrastructure bottlenecks, including in particular, the restoration of economic activities in areas subject to decades of conflict.

External policy developments in the form of a sustained supply side shock of rising international oil prices have also added to the complexities of economic management.

Thus, in managing fiscal and monetary policy, the overwhelming challenge has been to ensure that the country’s growth momentum remains buoyant in the midst of an escalating and a fast deteriorating global economic environment, the IPS said.