Sri Lanka’s Economic Outlook Encouraging despite Recent Challenges

ESCAP’s annual survey analyses region’s challenges, proposes solutions

Bangkok (UN/ESCAP Information Services) – Sri Lanka’s economic growth in 2008 – estimated at six per cent – is providing encouragement that it may be able to weather the worst of the global slowdown that has come in the aftermath of the financial crisis, unlike some other, more open, economies in the Asia-Pacific region.

This estimated growth in last year’s gross domestic product (GDP) is all the more encouraging given that Sri Lanka had to deal with the global recession, high and volatile oil prices, sharp increases in food prices and a tight anti-inflationary monetary policy throughout last year and this year, according to the Economic and Social Survey of Asia and the Pacific 2008.

The flagship publication of the United Nations’ regional arm – the Economic and Social Commission for Asia and the Pacific (ESCAP) – this year’s issue is titled "Addressing Triple Threats to Development.” It analyzes the three global crises which have converged to threaten development in the Asia-Pacific region: the financial crisis, fuel and food prices, and climate change. The Survey provides a regional perspective as well as country-specific analyses, outlining ways in which economies in the region can move forward in unison towards a more inclusive and sustainable development path.

The Survey notes how the Sri Lankan Government has taken measures to improve the liquidity of its financial sector, and also introduced a fiscal stimulus package which should soften the economic downturn and further strengthen domestic demand. Supported by these measures, the economy is expected to grow around 5.5 per cent in 2009.

Inflation has been driven up in all the countries of South Asia, partly by unrelenting pressures from higher international commodity prices, particularly the prices of oil, basic metals and selected food items. Inflation in Sri Lanka continued to rise – it rose 15.8 per cent in 2007, and is estimated at 22.6 per cent for 2008. Inflation began to subside in the middle of 2008 with improvements in domestic supply factors, the moderation of international commodity prices and reduced demand due to tight monetary policy.

The Sri Lankan Government took measures to enhance its revenues, mainly by broadening its tax base, changing the tax rates to provide some exemptions to encourage development in specific sectors, and improving tax administration. On the expenditure side, the retail prices of petroleum products continued to adjust to reflect their cost, while administered electricity tariffs were revised upwards in line with increased input costs. The budget deficit was estimated at seven per cent of GDP in 2008, down from 7.7 per cent of GDP in 2007.

The surge in prices of fuel oil, food and other commodities created severe problems for the external balances of most countries in South Asia. In 2007, Sri Lanka registered a growth of 12.2 per cent in exports and 10.2 per cent in imports. However, growth in exports decelerated to 6.5 per cent in 2008.

While growth in the export of agricultural commodities, particularly tea and rubber, remained strong, growth in the export of industrial products, particularly textiles and garments, was slow. At the same time, imports – largely of petroleum products and consumer goods – grew at the high rate of 24 per cent. In 2008, the deficit in the trade balance amounted to $5.9 billion, compared to $3.7 billion a year earlier. But private remittances, which amounted to $2.9 billion, helped to narrow the current account deficit.

Sri Lanka’s gross official reserves were $2.6 billion by the end of December 2008, down from $3.1 billion in December 2007, and were sufficient to finance more than two months of imports.

Among long-term challenges, poverty remains a major problem for most countries in South Asia. Also, economic and social inequalities remain widespread. The main challenge for countries in the subregion, the Survey notes, is not only to improve growth rates on a sustained basis but also to make them more inclusive for a rapid reduction in poverty and inequality.

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The Economic and Social Survey of Asia and the Pacific 2009 is available online from 0500 GMT/1200 Bangkok on 26 March at: http://www.unescap.org/survey2009/index.asp

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