ADB hails relaxed monetary policy:

Eight percent growth spurt

Poverty declines, unemployment down:

Sanjeevi JAYASURIYA

Sri Lanka will be able to sustain an eight percent economic growth for the next two years.

The ADB is optimistic that Sri Lanka’s economy will record a rapid growth. The relaxed monetary policy will spur the growth further. But inflation may be higher than what it was. However, overall there is optimism inline with what Asia is experiencing, ADB Lead Economist Narhari Rao said.

The Sri Lankan economy bounced back strongly in 2010 reflecting post conflict optimism and global recovery. The economy is expected to show continued high growth of 8 percent in 2011, with services and industry leading growth, the Asian Development Bank said.

Sri Lanka’s foremost development challenges are to sustain macroeconomic stability, create an environment for greater private sector participation and urgently undertake financial sector reforms. Investor sentiment was strengthened by the approval of the tranches of the International Monetary Fund (IMF) standby arrangement. FDI strengthened sharply to an estimated $ 500 million, but at 1 percent of GDP, it needs to increase, the ADB says.

The 2010 budget deficit improved significantly from 9.9 percent in 2009 to 8 percent in 2010 supported by a lower expenditure ratio. The steps taken to expand the revenue base, simplify tax system, remove import duty, revise import taxes on motor vehicles and cess rates are noteworthy. The budget deficit is expected to come down further.

“The country needs to have price flexibility and exchange rate flexibility. Fiscal consolidation and macro economic stability with strong measures to reduce current expenditure is necessary. Sri Lanka has achieved good progress in the equity market and the bond market should be developed,” Rao said.

“The Government has embarked on major development plan and the single digit inflation stable prices, good macro economic and monetary management will support its efforts. However, in the long run implementation of the food subsidy is not wise and the Government needs to relook at the subsidy schemes,” he said.

Poverty has declined to 7.6 percent in 2010 while rural poverty too has declined. The access to electricity in rural areas has increased from 75.5 percent in 2006 to 83.2 percent in 2009. Access to safe drinking water has increased from 84 percent to 87 percent countrywide.

Almost 100 percent children attend school. The unemployment rate had dropped from 7.2 percent in 2005 to 5.4 percent in 2009.

“Rising inflation is a concern. The expanding of South to South regional link present a supplementary growth source, but structural weakness needs to be addressed to maximize potential,” Asian Development Bank Country Director Dr Richard Vokes said.

Tightening of monetary policy and interest rates with proper macro economic management will be needed to re-balance growth. Asia needs to be less resilient on industrialized economies, he said at the launch of Asian Development Outlook 2011 held in Colombo yesterday.

Developing Asia’s recovery is firming due to robust demand.

The region recorded 9 percent growth in 2010 and expects 7.8 percent in 2011 and 7.7 percent in 2012.