Peace dividends yield higher returns in all economic indicators

Higher economic targets from 2012:

Ravi Ladduwahetty

The improvement of the performance of the economy following the eradication of terrorism, will also enable the setting of higher targets from 2012, Central Bank Governor Ajit Nivard Cabraal told the Daily News in an interview.

“A stronger performance could be expected in the next few years. In order to reap the benefits of the peace dividends further, all sectors of the economy should grow at a rapid pace,” he said.

In 2010, the first full year of operation subsequent to the ending of the three-decade long conflict, the economy of Sri Lanka has displayed its true potential.

Sri Lankan economy has recorded an impressive growth of eight percent far exceeding the average annual growth of five percent recorded since 1977, which we believe is a sustainable growth level for the coming years.

With the revival of production in the former conflict areas, good weather and government initiatives, agriculture grew by seven percent. Increased domestic and external demand with enhanced investor and consumer confidence helped industry and services to grow by 8.4 percent and 8 percent, respectively.

Per capita GDP has improved to US$ 2,399 and is expected to exceed US $ 4,000 by 2016. The unemployment rate has been gradually declining and reached 4.9 percent in 2010 and the Poverty Headcount Index has halved from 15.2 percent (2006/07) to 7.6 percent (2010).

Confidence in the economy is evident from the performance of Sri Lanka’s stock exchange which was the second best performing market in the world with substantial rise in market capitalization and number of IPOs in 2010.

Exports have been buoyant with growth of 17.3 percent in 2010.

Despite the withdrawal of the Generalized System of Preferences Plus (GSP+), textiles and garments exports continues to grow.

Government’s efforts for reforms received world recognition: Sri Lanka’s World Bank’s Doing Business survey ranking improved from 105 to 102, WEF Global Competitiveness Index ranking improved from 79 to 62 and UNDP HDI ranking improved from 102 to 91.

Business confidence resulted in strong investment climate with Investment/GDP increasing from 24.4 percent (2009) to 27.8 percent (2010).

Inward workers’ remittances increased substantially and continued to be the foremost foreign exchange earner in 2010 showing a growth of 23.6 percent to US $ 4.1 billion, followed by a similar growth during first quarter of 2011.

Even though imports rebounded strongly, current account deficit in 2010 stood at 2.9 percent of GDP compared to the 10-year average of 3.5 percent.

Long-term net FDIs (Excluding loans) increased from US $ 384 million (2009) to US$435 million (2010), with a strong pipeline of future projects. The FDIs for 1Q 2011 is provisionally estimated to be US $ 226 million.

Long term external inflows helped to attain overall positive BOP situation with total external assets reaching an all time high of US $ 8.6 billion by end 2010 worth worth 6.8 months of import of goods and services.

Total Committed undisbursed Balance of foreign financing available for the Government development programmes accounted to US $ 7.1 billion at end 2010.

Budget for 2011 benefited from the recommendations of the Presidential Commission on Taxation and several measures were implemented to incentivize value added activities, remove unnecessary and multiplicity of taxes, simplify the tax structure and streamline the tax concessions granted under the BOI Act.

Reflecting Government commitment for fiscal consolidation, the budget deficit and GDP ratio reduced from 9.9 percent (2009) to 7.9 percent (2010) while the Govt. debt/GDP ratio reduced from 86.2 percent (2009) to 81.9 percent (2010). Under the medium term framework the deficit/GDP ratio is targeted to reduce to 4.8 percent and Govt. debt/GDP to 71 percent by end 2013.

Tax Revenue/GDP ratio has reversed the downward trend of last several years and rose from 12.8 percent (2009) to 13.0 percent (2010). This is expected to improve to 13.6 percent in 2011.

Current Expenditure/GDP ratio reduced from 18.2 percent(2009) to 16.7 percent (2010) while public investment in infrastructure projects was maintained at 6.4 percent.

The low interest rate environment helped government to bring down its average cost of domestic debt from 12.9 percent in 2009 to 8.7 percent in 2010.

CBSL maintained benign monetary policy during 2010 to enhance credit delivery to private sector while being cautious on any demand driven inflation pressure.

Credit to private sector grew by 25 percent (2010) which improved Private sector credit/GDP to 26.7 percent (2010) from 24.7 percent (2009).

Average inflation was broadly stable in 2010 at 5.9 percent which slightly increased to 6.6 percent in April 2011. Some moderation is expected during the 2nd half of the year.

In April 2011, credit cycle being well entrenched and outlook for higher international commodity prices, Monetary Board increased the Statutory Reserve Ratio (SRR) by 1 percent to 8 percent as a precautionary step.

CBSL will continue to keep a close watch on the monetary developments, price and wage trends and supply side dynamics to take suitable actions promptly.

CBSL further strengthened its supervisory and regulatory framework to improve the soundness and risk management systems of banks.

Overall banking sector’s performance improved in 2010, with all the key benchmarks like ROA, ROE, Gross NPLs and Net NPLs showing favourable trends.

Sri Lanka was graduated to the middle-income status by the IMF considering rising per capita income and ability to raise funds in the capital market.

The Sri Lanka Deposit Insurance Scheme was introduced in October 2010 where all licence banks and RFCs should be participated on mandatory basis.

A series of exchange control regulations was relaxed in 2010. IMF-SBA programme continued successfully and the seventh tranche was released in April 2011.

Normalcy prevailed in North and East and development activities in those provinces are continuing.