The present state of the economy is a confusing picture. Confusing to a layman that is, and not for an economist. A detailed economic analysis shows that there are more positives than negatives, an economist said.
Dr. Saman Kelegama told the Island Financial Review that the challenge is to strengthen the positive side and rectify the negative side of the economy and move ahead.
"There are more positive things in our economy than people really think there is," he said.
An Executive Director at the Institute of Policy Studies, Dr. Kelegama highlighted several positive signs and negative signs of the economy.
He began a presentation on Macroeconomic Performance and Public Debt Issues of Sri Lanka, when the UN Economic and Social Commission for Asia and the Pacific launched its Economic and Social Survey of the region for 2008, a few days before speaking to the Island Financial Review, by saying that the economy had a confusing outlook.
"Those who want to criticise the economy can do so and those who want to praise the economy can do so too," he said to highlight the confusion that can result in people looking at different aspects of the economy.
Being Positive
Dr. Kelegama pointed that economic growth for the past three years was over 6 percent (2005-6 percent, 2006-7.4 percent and 2007-6.8 percent), was a positive aspect of the economy.
The Balance of Payments is a surplus of US$ 531 million and gross official reserves amount to US $ 3,063 million with foreign reserves adequate to fund imports for four months, together with unemployment declining (at 5.5 percent) and many infrastructure projects moving forward, Dr. Kelegama said that these gave the economy a positive outlook.
Sri Lanka’s economy continues to grow because the global economy is growing and trickles down to Sri Lanka a 70 percent trade dependent economy. Exports grew by 12 percent.
Foreign aid was satisfactory, Dr. Kelegama pointed out, with China, Iran and India offering up to US$ 800 million. Remittances amounted to US$ 2.7 billion, FDIs US$ 734 million and commercial borrowings amounted to around US$ 500 million.
The services sector and industry sector have kept their growth momentum above 7 percent in 2007, making a major contribution to the 6.8 percent growth in GDP, Dr. Kelegama pointed out. Credit to the private sector grew by 20 percent.
Negative signs
On the negative side Dr. Kelegama pointed out the following:
Domestic demand was created partly by government borrowing which resulted in more money supply than the supply of goods, leading to a high rate of inflation above 20 percent. International oil and food prices had contributed to the rise in inflation as well.
Dr. Kelegama said that the large public borrowing is reflected in the budget deficit of 7.5 to 8.5 percent of GDP. The imbalance is a major contributor to disturbing the stability of prices, interest rates (over 18 percent) and exchange rates.
However this does not reflect in the external balance sheet because of the overall Balance of Payments is in surplus.
While domestic borrowing can further escalate inflation the government had resorted to international commercial borrowing (US$ 500 million last year and US $ 300 million soon to follow) with rates in excess of 8 percent. These have reduced the pressure on the rupee from further depreciation to a certain extent.
"Public debt per GDP has been brought down to 88 percent (from about 90 percent in 2006) and still remains high. If we generate high growth in the next five years and bring down the budget deficit it will not be a problem to manage our debt with increasing commercial borrowings as long term debt is at a manageable level," he said.
Public debt is on a declining path. Public debt to GDP was almost 105 percent in 2002 to 2004, about 95 percent in 2005, 93 percent in 2006 and 88 percent in 2008. About 90 percent of total external debts mature after 10 years.
Challenges for government
Dr. Kelegama said that the government should bring down the budget deficit by reducing government subsidies and wastage. The following institutions recorded these losses for 2007; Ceylon Petroleum Corporation—Rs. 3 billion, Ceylon Electricity Board—Rs. 15 billion, Ceylon Transport Board—Rs. 4 billion, Ceylon Railways Department—Rs. 4.3 billion, Postal Department—Rs. 4.5 billion, National Water Supply and Drainage Board—Rs. 1.2 billion.
Kelegama said that the government can reform these institutions through public-private sector partnerships and by activating the Public Utilities Commission.
He said that reducing government expenditure on subsidies will induce more fiscal discipline and make monetary policy more effective in bringing down inflation which in turn will give the government space to reduce interest rates and give more stability to exchange rates.
"Retaining export momentum is important and GSP-Plus will be a crucial factor if the apparel sector, accounting for 40 percent of total export earnings, is to face the post safeguard challenge from China after 2008.
"We need to put energy conservation programmes into effect and provide incentives for export diversification while maintaining competitiveness by raising productivity," Dr. Kelegama said.
While laymen continue to argue amongst themselves as to whether economy is heading for disaster or prosperity, are the policy makers doing the same?
"The people who really matter are aware of the state of our economy, the positives and the negatives," Kelegama said.
Who are the people who really matter? Kelegama said it was the policy makers.
So depending on which side they sit at parliament, policy makers and their appointees will continue to want the people to see the side they want them to see.
While the positives must be appreciated by the people, the ones who really matter, the negatives must and should be continued to be given more coverage, not to topple governments, but to force the necessary changes for the country’s sake.
