Briefing Notes for the Launch in Colombo, April 2007
Sustained strong economic growth but inflation a genuine concern
- Despite internal difficulties, the economy of Sri Lanka expanded by 7.4% in 2006, up from 6% in 2005. Agriculture performed better with higher output of major crops and fisheries, confirming its recovery from the devastating Tsunami in December 2004. Export-oriented industries and domestic market-oriented industries, along with the continued expansion in construction, bolstered industry. Trade, telecommunication, transportation and financial services supported the expansion in services.
- Given the recent escalation of ethnic conflict and violence, Sri Lanka's growth is expected to slightly slowdown to 7% in 2007.
- Most countries in South Asia felt inflationary pressures in 2006 on the back of high oil prices. Food prices also rose significantly in several countries, hurting the poor particularly. Inflation in Sri Lanka increased from 11.6% in 2005 to 13.7% in 2006, with upward adjustments in retail oil prices, rapid credit expansion and higher civil service wages contributing to inflationary pressures.
- To contain inflation, most countries in the subregion pursued tighter monetary policies. In Sri Lanka, the Government's anti-inflationary policies included effective managing supply and demand for essential consumer goods and raw materials by means of a liberal imports policy.
- In Sri Lanka, the budget deficit remained high at 8.4% of GDP in 2006, partly as a result of higher military spending.
- In Sri Lanka, export earnings grew by 8.4% in 2006, led by tea, rubber, textiles and garments. Imports grew much faster at 15.7%, reflecting strong domestic demand for intermediate and investment goods in the manufacturing and construction industries. Spending on oil imports increased by roughly 25% in 2006 and represented about 20% of total imports, compared with 13% in 2002.
- The current account widened to 4.9% of GDP in 2006, while the capital account recorded a surplus with higher foreign direct investment and project-related flows to the Government. The overall balance of payments registered a surplus and gross official reserves stood at US$2.5 billion (3 months of imports) by end December 2006.
- Reform needs to be maintained to sustain high growth and rapid poverty reduction. With fiscal adjustment still a challenge, more progress is needed in tax collection and resource mobilization to reduce large budget deficits. This will allow redirecting resources from servicing public debt to economic development and social programmes, while at the same time creating an enabling environment for private investment.
- Increase in consumer prices is a genuine concern in most countries in South Asia. Striking an appropriate balance between promoting economic growth and price stability remains a challenge because inflationary pressures accompany rapid economic expansions. As the current account deficit is becoming serious in some countries, this will have implications for the balance of payments. If oil prices remain high, they will have to devise ways to contain their deficits.
Rural physical infrastructure for rapid poverty reduction in South Asia
- Physical infrastructure reduces poverty in two ways. It promotes growth, which generally benefits the poor. And it directly benefits the poor by improving their incomes and the quality of their lives. Since most of the poor in countries of South Asia still live in the rural areas, rural infrastructure is key to reducing poverty rapidly.
- Rural physical infrastructure covers roads, electricity, irrigation, telecommunications and much more. The impact of various types of infrastructure on rural economies and poverty reduction is maximized when provided in unison. The research feature in the Survey is focused on rural roads and electricity.
- In South Asia, only 65% of the rural population lives within two kilometers of an all-weather road, far less than the 95% in East Asia. Only 43% of the population has access to electricity, far less than the 88% in Eat Asia. The situation in rural areas is much worse.
- Numerous empirical studies concluded that rural roads and electricity improvements had a significant impact on poverty reduction. In India, a million rupees spent on roads led to seven times the poverty reduction as a million rupees spent on specific anti-poverty programmes. In China, the situation repeated itself, though the gain was of a smaller magnitude. The logic is simple: roads are the arteries that go where poor people live, improving their lives in concrete, immediate ways.
- To distribute electricity to smaller populations scattered over vast rural areas through conventional means, such as extending the electricity grid, can be complex and expensive. More preferred is distributing energy by using locally available resources, mainly renewable resources such as small hydropower, solar power, wind power and biomass power.
- Countries in South Asia are aware of deficits in infrastructure and making efforts to close those. It is important to remember that mega projects may be essential to accelerate growth, but projects that directly benefit the rural poor should be given equal importance, if not more. In the absence of interest from the private sector, more public investment should go to rural infrastructure.
- Pricing of electricity is complex because of efficiency and equity considerations. Tariff rates should be competitive and reflect market conditions, with some provisions for poor households. All the countries have been raising tariff rates over the years, which are increasingly becoming unaffordable for the poor.
- Tariff rates should be kept low, affordable for small consumers. To cover the losses of public utilities on this account, the Government can allocate a certain amount of subsidy in its general budget and pass it on to public utilities distributing electricity. A more targeted approach of giving vouchers to the poor so that they can pay electricity bills at market rates is worth considering. Poor households can be asked to pay a fixed percentage of the electricity bill, with the remainder covered through the voucher.
- Transmission and distribution losses of electricity are enormous in most countries, mainly due to theft. By improving accountability and governance, losses if not eliminated can certainly be reduced substantially, which will reduce constant pressure of raising electricity tariffs.
Gender inequality continues – at great cost
- Gender discrimination has widespread ramifications and clear economic and social costs. The Asia-Pacific region has made good progress in reducing gender discrimination in recent years, but appalling disparities remain. The region is losing US$42-US$47 billion per year because of lower labour force participation rates of women – and another US$16-US$30 billion per year because of gender gaps in education resulting in lower productivity of women. Those are just the economic costs – added to them are social and personal costs.
- Gender discrimination in the region is most visible in the low access of women and girls to education and health services, to economic opportunities and to political participation. In South Asia, female school enrolment ratios in most countries except Sri Lanka tend to be lower than in other subregions of Asia. Gender disparities are much less in Sri Lanka as compared to other countries in South Asia. In fact, Sri Lanka is ranked among top 25 countries in the world based on a global index of gender equality.
- One of the fundamental reasons women are subject to discrimination is that they do not have a voice in decision-making at home or in society, even when the matters are directly related to themselves. Meanwhile, violence against women continues, unabated, indicating how voiceless women are in households and in countries.
- The report proposes several specific recommendations in four critical dimensions: economic participation, education, health and empowerment. It recommends provision of free primary education, addressing safety and privacy concerns and provision of scholarships for girls. Governments should improve health services for women and involve NGOs and civil society organizations to improve health outcomes. They should ensure that women are not discriminated against in recruitment, wages, or promotions. The public sector should be a model for the private sector.
- Best practices highlighted from across the region and elsewhere show that gender balance can be achieved with limited resources, but this requires changes at the household, societal and national levels. In particular, political leadership and commitment will go a long way towards correcting abject discrimination against women.