Bangkok (UN Information Services) – Sri Lanka’s economy is expected to remain strong in 2008, despite high international oil prices and an unsettled security situation, according to the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
In its Economic and Social Survey of Asia and the Pacific, ESCAP said economic growth should reach seven per cent in 2008, up from 6.7 per cent last year with productivity improvements in all three sectors of the economy. “Several large planned infrastructure projects are expected to boost aggregate demand and output if speedily implemented,” it said.
But ESCAP cautioned that the outlook for growth remained vulnerable “to any further escalation in the country’s ethnic conflict.”
In 2007 growth in the industrial and services sectors slowed slightly, but these sectors still expanded by over seven per cent. Agricultural growth fell sharply due to adverse weather conditions.
Inflation on the rise leads to tighter monetary policy
ESCAP also warned of rising inflationary pressures which led to an annual average increase in prices of 15.8 per cent in 2007, “substantially up from 10.0 per cent in 2006.” The main price pressures came from state-mandated hikes in fuel prices, supply shortages in domestic food crops due to poor weather and “sharply rising” demand-induced inflationary pressures.
A tighter monetary policy by the government however raised concerns over the impact higher interest rates would have on the country’s public debt situation. “Sri Lanka needs to balance its concern with inflation against the rising cost of public debt servicing that has accompanied higher interest rates,” ESCAP said.
Public debt an issue for Sri Lanka and South Asia
ESCAP noted that across South Asia, public debt remained “a serious problem” that needed to be addressed by governments.
“Excessive reliance on debt, whether domestic or external, carries macroeconomic risks that can hinder economic and social development. High domestic public debt pushes up interest rates and crowds out private investment, which is much needed to promote economic growth,” ESCAP said.
ESCAP said that to avoid the threat of debt traps, Sri Lanka and other South Asian countries needed to pursue “vigorous macroeconomic policies to contain public debt, including domestic public debt before they become totally unmanageable.”
In 2006, public debt in Sri Lanka stood at 93 per cent of gross domestic product (GDP), as a result of the years of high fiscal deficits following the intensification of the civil conflict from the mid-1980s.
In 2007, while there was a slight easing in the budget deficit, to 7.2 per cent of GDP from 8.1 per cent a year earlier, the figure “remains large.” ESCAP said this was partly because of Sri Lanka’s large public debt.
“The total revenue-to-GDP ratio in 2007 rose for the third consecutive year, benefiting from measures to broaden the tax base, rationalize tax rates and strengthen tax administration,” it said. The government’s target is to bring the budget deficit down further in 2008 to seven per cent of GDP.
Trade outlook improves as current account buoyed by remittances
Sir Lanka’s trade outlook received a boost in 2007 as export earnings rose by 10 per cent and import earnings grew by 8.9 per cent resulting in a narrowing of the trade account.
ESCAP also reported workers remittances had “increased significantly” and helped to contain the current account deficit which was estimated to fall to 4.3 per cent of GDP in 2007 from 4.7 per cent in 2006.
Foreign direct investment and financial flows to the Government were also reported to have increased substantially allowing for a surplus in the overall balance of payments. This led to gross official reserves increasing to US$3.08 billion by the end of 2007, up from US$2.53 billion at the end of the previous year.
Agriculture’s revitalization key to reducing poverty
ESCAP, in a wider view of the Asia Pacific region, said efforts to reduce poverty especially in the rural areas required the promotion of productivity in the agriculture sector. The rural poor account for some 70 per cent of the poor in the Asia-Pacific region.
“Agriculture appears to be neglected, even though it still provides jobs for 60 per cent of the working population and generates about a quarter of the region’s gross domestic product,” ESCAP said in its Survey.
But growth and productivity in the sector have slowed and the green revolution appears to have by-passed million. “In South Asia, growth in agriculture dropped from 3.6 per cent in the 1980s to three per cent in 2002-2003,” ESCAP noted.
ESCAP said that by raising the average agricultural productivity across the region some 218 million, a third of the region’s poor, could be taken out of poverty. It also noted that “large gains in poverty are also possible through comprehensive liberalization of global agricultural trade, which could lift a further 48 million people out of poverty in the region.”
The policy focus needs to be on revitalizing agriculture. This, ESCAP said, requires connecting the poor to markets through improvements to rural infrastructure, the availability and management of water, agricultural technology, increasing the capacity to adapt technologies, and speeding up diversification and commercialization.
ESCAP says improving land distribution and access to credit and extension are also important, as well as making macroeconomic policy “friendlier to agriculture, all enabling the poor to make a dent on poverty by themselves.”
It also called for support for those looking to shift from agriculture to industry and services, whether it is still in rural areas or by way of migration to the cities.
Further information on the Survey can be found at:
For more information, please contact:
Hak-Fan Lau, UN Information Services, ESCAP
Tel.: +66-2-288-1866, Mob.: +66-84700-1147
Ari Gaitanis, UN Information Services, ESCAP
Tel.: +66-2-288-1862, Fax: +66-2-288-1052