Economy far from stagnating

Preethi JAYAWARDENA Managing Director and CEO, Chemanex PLC, Member of the Monetary Policy Consultative Committee of the Central Bank

Preethi Jayawardena

Recently, eminent public voices have resonated with opinions regarding the state of the Sri Lankan economy and related monetary and fiscal policies, often branding it as over-hyped and lacking clear focus.

While respecting diverse opinions and encouraging debate in a healthy democracy such as ours, it is fair to point out that amidst trying global economic conditions, the Sri Lankan economy is far from stagnating.

Credible market reports indicate that the global economy gained momentum post-2008/2009 and a substantial proportion of growth is expected to be derived from emerging market economies, driven by high domestic demand and rising growth rates.

In 2010, the Sri Lankan economy exhibited robust expansion with agricultural, industrial and service-oriented sectors performing above expectations. It also posted a record growth rate of 8% - the highest in thirty-two years.

The economic trends of the past year have continued in 2011, especially in relation to strong and improved GDP rates and a sustained rise in investment coupled with development activities in both the public and private sector that has boosted the local economy’s profile significantly.

Indeed, the United Nation’s Annual Economic Report, World Economic Situation and Prospects 2011(WESP), predicts Sri lanka’s rate of growth for real GDP for the years 2011 and 2012 to be 6.8%, second only to India’s 8.2% in the South Asian region.

Furthermore, the country has rebounded sharply since the culmination of the North-East war and the implementation of concrete peace initiatives and trade incentives.

The $2.6 billion loan by the IMF to help reform the economy upon the end of war was in support of the Government’s credible long-term economic programme aimed at restoring “fiscal and external viability,” along with undertaking large-scale reconstruction efforts - all of which have been successfully achieved.

In addition, the Government’s monetary and fiscal policies have been flexible and accommodating, with policy rates being cut several times.

As Leif Lybecker Eskesen, HSBC’s chief economist for India and ASEAN noted, the action of fiscal consolidation undertaken in Sri Lanka actually supports growth because it effectively boosts investor and consumer confidence by demonstrating the Government’s commitment to macroeconomic stability.

The 2011 budget, in effect, lays the groundwork for long-term economic plans and objectives such as increasing purchasing power and investment in capital, people and technology, while broadening the tax base and restraining spending as a means of slashing fiscal deficits.

The country has “reigned in deficit spending” and allowed “inflation and interest rates to ease,” thereby giving expression to the intentions expressed in the national budget.

This is evident as the fiscal consolidation process has steadily brought down fiscal deficits from 10% of GDP to below 7% of GDP in 2011. To add to the momentum, the Government’s measure to reduce lending rates by banks in 2010 has seen far-reaching benefits, with the Central Bank of Sri Lanka easing its monetary policy stance in order to facilitate the offering of credit at lower rates.

Market stability and widespread economic sustainability cannot be achieved overnight, and while we cautiously gauge ‘negatives’ - such as the country’s continuing weak export performance for the past 15 years and the gradually appreciating Rupee, which depletes internal reserves and stifles foreign investment and exports, primarily to crisis-ridden advanced global markets - one must not hesitate to applaud the Government on necessary initiatives taken to encourage private sector growth, infrastructural development and wide-spread modernization.

With the World Bank announcing that the global economy is teetering on a “new danger zone” and arguably the world’s most powerful leader, Barak Obama, emphasizing that the Euro-Zone sovereign debt crisis is “scaring the world,” the steps taken by the Government of Sri Lanka to ensure broad-based economic development and domestic and regional stability needs to be assessed with a positive frame of mind as opposed to a cynical one.

After all, Sri Lanka’s first half of 2011 also grew by 8%. The Government gained standing for restructured taxation laws that downsized corporate income tax from 35% to 28%, except for tobacco and alcohol, which was raised to 40%, while financial VAT was cut to 8% - reduced from a steep 20%.

The country’s sovereign rating outlook was raised to ‘positive’ (from ‘stable’) by Moody’s, while Standard and Poor’s upgraded the country’s credit rating by one notch to B+. Such steadily improving credit assessments enabled the Government to raise much-needed capital from international markets at low rates, with a single digit annual inflation rate of 7.4% also assisting in garnering investor confidence.

The country’s gross official reserves reaching $8 billion, with increased flows strengthening the local currency, while Government revenue rose and overall expenditure was contained with considerable success.

Furthermore, half the proceeds of the recently concluded $1 billion sovereign bond issue was used to retire domestic debt while the other half was deposited to meet future debt payments.

At a time when the Government is striving to bring down debt to GDP ratio below 60% by 2016, it is imperative that as conscientious and knowledgeable citizens of this country, we constructively support instead of randomly criticize, in order to realize the ideal of this Nation becoming the ‘Wonder of Asia’ in our lifetime.