ADB identifies two development challenges

Simplifying tax system, broadening manufacture base:

Ramani Kangaraarachchi

The Asian Development Outlook 2009 (ADO) has identified the broadening of its manufacture base and simplifying the tax system as development challenges for Sri Lanka. Economist, ADB Hasitha Wickramasinghe told a media briefing.

She was speaking at the launch of the Asian Development Outlook (ADO) 2009 at the Sri Lanka Resident Mission yesterday.

She said that the Government started rationalizing tax exemptions provided to foreign companies, which have been costly in revenue terms.

Lead Economist Sri Lanka Resident Mission, ADB, Narhari Rao and Country Director, Sri Lanka Resident Mission ADB Richard Vokes at the media briefing. Picture by Sumanachandra Ariyawansa

Export zones have been set up and wide ranging incentives have been offered to attract foreign direct investment for industrial development since the opening of the economy in the seventies.

In the 2009 Budget it raised the issue of broadening its manufacturing base. However, doing this and attracting investments may be difficult during the global recession, and the success of both will depend on improving the investment climate, she said. Wickramasinghe said that the economy has moved from agriculture to services, but the manufacturing base continued to concentrate on garments, processed food and chemical and plastic products.

The Government has proposed to set up a task force to simplify the tax system identifying its importance. However, such initiatives have fallen far short of expected outcomes in the past on numerous occasions.

The challenge is to ensure that the proposed task force will not be a similar one, she said. Referring to the development challenges identified in 2008 she said that the brain drain was still an issue. The reason for this situation was the slowdown of recruitment of the twenty biggest companies in the stock exchange.

However, it will reduce with some migrant workers returning as a result of job losses and stoppage of recruitment abroad. However, with the end of the military confrontation a positive reduction of the brain drain is anticipated, she said.

Meanwhile, the ADB Country Director Richard Vokes said that Sri Lanka’s economy has managed relatively well under difficult circumstances, and now it needs to meet the challenges of post-war development with the expected opening of the North of Sri Lanka.

Inflation is expected to decelerate in 2009 due to the global economic downturn and weak domestic demand is common to many developing countries across the region, he said.

Lead Economist Narhari Rao said that inflation which dropped to 7.6 percent to reach a single digit for the first time since July 2006. is expected to average 8 percent in 2009. There will be a large decrease in Sri Lanka’s growth but still would be somewhat better but much below its potential.

He said that the export demand will drop by 3 percent in volume terms but will pick up by 5 percent in 2010.

The drop in import prices will be a positive sign towards Sri Lanka and on the other hand remittances from migrant workers are also likely to drop in 2009.