Briefing Notes for the Launch in Colombo, 6 May 2010
Economic growth expected to improve in 2010Global economic crisis affected countries of South Asia adversely but generally to a lesser extent as compared to countries in other subregions of Asia and the Pacific. The crisis penetrated domestic economies of the subregion through substantial decline in exports and slowdown in capital inflows. Generally domestic demand plays a bigger role than external demand in these economies. Therefore, the impact of the crisis has been less pronounced on these economies. Many of the countries of the subregion have been facing security problems ranging from internal conflicts to terrorist attacks linked to global geopolitical issues, thus adversely impacting on their macroeconomic performance.
In Sri Lanka, GDP growth slowed down from 6% in 2008 to 3.5% in 2009 on account of the worsening global economic environment and the fall in domestic demand. Investment in the export-oriented sector remained weak. The industrial and services sectors witnessed slower growth in 2009. However, with the end of the internal conflict in May 2009 and as a result of improving security situation should boost confidence among consumers and businesses. The improvement in security should also boost agricultural output in the north and east of the country, swelling rural incomes and lifting private consumption, although bad weather may negatively affect harvests. Improved security situation in Sri Lanka should benefit all major sectors of the economy particularly tourism and agriculture and growth in 2010 is projected to improve to 6.0%. Overall investment is likely to expand strongly in 2010 as companies prepare for a period of accelerated growth in domestic demand.
Inflation remains a key policy concernA sharp increase in food and fuel prices in 2008 created hardships for large populations in countries of South Asia. As inflation adversely affects the poor disproportionately, it is a serious problem for many countries in the subregion with high incidence of poverty. In Sri Lanka, inflation is expected to rise in 2010 following a sharp deceleration in it in 2009. Therefore, controlling inflation will remain a major challenge for the Government. The country witnessed a faster reduction in inflation in 2009. Inflation after reaching a high of 28% on a year-on-year basis in June 2008, decelerated sharply to less than one per cent in September 2009. On average inflation in 2009 was 3.4% as compared to 22.6% in 2008 as a result of restrictive monetary policy efforts, favourable domestic supply conditions and significantly lower global commodity prices.
Trade declines sharply but workers’ remittances stay strongThe global economic crisis impacted adversely on expansion of both exports and imports. At the same time, workers’ remittances held up strongly and provided support to the current account balance. In Sri Lanka, relatively lower oil prices, a sharp decline in imports, a steady flow of remittances, and continued flexibility in the exchange rate allowed the current account deficit to recover from 9.0% of GDP in 2008 to a virtual balance in 2009. Exports are estimated to have fallen by 12.2% and imports by 29.5%, while workers’ remittances increased by 14.1% in 2009.
Budget deficit remains highAs for all other subregions of Asia and the Pacific, Governments in South Asia used expansionary fiscal and monetary policies to counter the negative fallout of the global slowdown and moderate the decline in growth. Of some concern is the continuation of high budget deficit in some countries, while in others fiscal deficits improved somewhat in 2009 as compared to 2008. Moving forward, it is important that governments in the subregion prepare a clear roadmap of fiscal consolidation to be implemented at the earliest to contain growing public debt. Central banks also showed much more willingness to implement concurrently a range of monetary easing and liquidity enhancing measures including reduction in cash reserve ratio, statutory liquidity ratio and key policy rates in support of expansionary fiscal policies. Furthermore, inflationary pressures are growing. Consequently, some tightening of monetary policy is expected also.
In Sri Lanka, with the return of peace to the country, the budget deficit is estimated to come down. In 2009, it fell to 7% of GDP in 2009 from 7.8% of GDP in 2008. The Government signed a 20-month Stand-By Arrangement with IMF of about $2.6 billion to support the country's economic reform programme and rebuild international reserves. To contain its budget deficit, the Government introduced several measures to enhance revenues and rationalize current expenditures. As revenue measures usually take time to yield results, the Government’s adjustment programme in 2009 relied more on expenditure restraint, while ensuring protection of vulnerable groups. The highest priority is being given to the reconstruction and development of the previously war-torn areas and resettlement of internally displaced persons. It is important that a reconstruction related economic impetus is allowed to transform into a sustained long-term growth path through an appropriate economic reform process, including restructuring of public sector/public enterprises to allow fiscal consolidation.
Sustained high and inclusive economic growth needed for rapid poverty reductionWidespread poverty continues to be a serious problem for all countries in South Asia. Therefore, accelerating economic growth is crucial to bring down poverty levels. The challenge will be how to make growth more inclusive by spreading its benefits to larger segments of the population. More resources should be devoted to provision of basic services such as education, health, sanitation and housing particularly for those belonging to lower income groups. Targeted programmes for the benefit of the poor in the broader framework of social protection should also be a priority. The Indian National Rural Employment Guarantee Scheme being successfully implemented in India can be replicated in many developing countries. The scheme provides guaranteed employment at minimum wage for 100 days each year to every rural household whose adult members volunteer to do unskilled manual work.
The inadequacies of physical infrastructure remain a key constraint holding back the potential of economic growth. Of particular concern is electricity shortage, where disruptions in the supply of electricity are compromising growth as a result of closures of factories and economic activities. Quality of life and human capital are adversely affected in case of frequent electricity outages of long durations. Huge investments are needed to enhance capacity of electricity generation. At the same time, renovation of transmission and distribution lines is necessary to minimize electricity losses. Potentials of trade in electricity among countries of the subregion should be explored and subregional cooperation in electricity generation and distribution should be promoted to overcome electricity shortages.