Macro economic trends of sri lanka

7/29/2019 Macro economic trends of sri lanka

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Analyze macro economic trends of the Sri Lankan economy for the last four

years?

Here it is going to be analyzed macro economic trends of Sri Lanka from year 2005 to

year 2009. When our economic trends are examined during past four years one crucial

factor that dominated entire economic landscape of the island was bloodshed war

conducted against terrorists who had been grouped up in north and east provinces of

Sri Lanka. The period where our attention is going to be focused was the period in

which government started fighting back terrorism when its back is against the wall.

While this situation is kept in mind, it is better to examine macro economic

performance of our island during last four years.

Table-1, Growth in GDP

Index 2005 2006 2007 2008

GDP % 6.2 7.7 6.8 6.0

Agriculture % 1.8 6.3 3.4 7.5

Manufacturing 8.0 8.1 7.6 5.9

Services 6.4 7.7 7.1 5.6

Figure-1, Annual growth in GDP

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0

1

2

3

4

5

6

7

8

9

2005 2006 2007 2008

GDP

Agri culture

Manufacturing

Services

Year

Growth%


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Refer to the report published by Central bank of Sri Lanka in 2008; during last four

years Sri Lanka has been able to record around 6% growth in GDP. When Figure-1 is

closely examined it can be observed that even though around 6% growth is achieved

during last four years, after year 2006, growth rate of sectors like manufacturing and

services that contributing vastly for the growth of GDP has been declined from

respective figures of year 2006. At the same time it can be further observed that

growth in agricultural sector during last four years is lower compared to growth in

manufacturing and service sectors (except 2008). One of notable feature that can be

observed in growth rate of agricultural sector of Sri Lanka is uneven during last four

years. Once the growth rate of agricultural sector is as low as 1.8% and once it goes

well over 7%. In 2008 while service and manufacturing sectors of the economy is

shrinking, agricultural sector along achieved a growth of 7.5%.

Basically it should be noted that from year 2007 there global economy was

started to face an economic down turn. This global economic crisis can be considered

as the major factor affected to slowdown growth rates of services and manufacturing

sectors of Sri Lankan economy. This global economic slowdown equally affected to

export agricultural sectors like tea and rubbers as well. But thanks to good climate

conditions and governments massive Api Wawamu Rata Nagamu campaign,

agricultural sector of the Sri Lankan economy was able to achieve a remarkable

growth of 7.5% during 2008.

It can be observed that inflation figures recorded during last four years of Sri

Lankan economy are also relatively high. As expansionary monetary policy was

followed by the government as well as due to increase of government expenditures

inflation recorded was increased during last four years.

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Table-2, Inflation


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Fig-2, Inflation rate of Sri Lanka (Consumer price)

During resent years government had to increase its war effort against terrorism was

there in north and east provinces. So there was a sharp increase in defense

expenditures. In year 2008 crude oil prices were risen up to highest level recorded in

the history and as a country totally depend on crude oil imports, Sri Lanka had to

spend heavily on oil imports. As a result price levels in the country were sharply

increased and result was inflation level risen up to two digit level. As a trend in Sri

Lanka although inflation rate was continuously increasing, in other countries in south

Asian region, inflation rate has shown a gradual decrease.

Table-3, Unemployment rate of Sri Lanka

Index 2005 2006 2007 2008Unemployment % 7.2 6.5 6.0 5.2

When above table-3, drawn to the data published by Central Bank of Sri Lanka, is

examined, it can be seen that there is a steady decline in unemployment rate among

Sri Lankan workforce during last four years. At the same time it should be noted that

unemployment rate is relatively high among youths who have GCE advance level

education or more. And also there is a gender basis inequality in unemployment rate

of educated youths. Even though there is that short of deviations of overall picture, Sri

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Lankan economy has been capable of effectively lowering unemployment rate of the

country. Expansions taken place in public service sector, recent successful recruitment

drive of armed forces as well as privet sector growth have been contributed to this

steady lowering of unemployment rate. Due to the global economic down turn in 2008

and first part of 2009, some Sri Lankan export industries were closed down. So in

2009 unemployment rate is supposed to be increased despite of its past trend of

decreasing. But economic growth has shown some acceleration in third and fourth

quarters of 2009 and this growth would result again to normalize the trend.

Table-4, Foreign reserve

Index 2005 2006 2007 2008

Foreign reserve

(months of imports)

5.7 4.7 5.3 3.3

Above table shows how foreign reserve of Sri Lanka changes during past four years.

From 2008, it can be seen that amount of foreign reserve has declined. Sudden

increase of crude oil prices in world market, appreciation seen in Sri Lankan rupee

and sharp increase in defense expenditure can be considerable factors for this declineof foreign reserve. This trend was continued till second quarter of 2009 and

government was facing a balance payment crisis. Therefore government applied for

IMF stand by loan facility in order to go through possible balance payment crisis.

But macro economic trends explained here now have undergone significant

changes and economic out look of Sri Lanka has improved positively after ending of

the conflict of North and East in May 2009. Inflation continued to decline rapidly and

recorded lowest during last 5 years in September 2009. Balance payment position

which showed significant deficit in 2008 was improved significantly in third quarter

of 2009 with IMF stand by loan facility and recorded a surplus in balance payment

position in September. Investor confidence towards Sri Lankan economy was boosted

by ending terrorism in May 2009 and was again renewed by IMF loan facility. This

trend can be observed by rapid increase in foreign investment especially in

government securities and remarkable growth in Sri Lankan stock market. In this

context, as Sri Lanka has been capable of ending 30 year old conflict and reunion

North and east provinces with rest of the country, it can be expected a positive upward

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trend despite of global economic slow down and uneven growth pattern of past four

years.

In the article given, (Dont miss the `luxury` bus this time! by Dr.Sirimal Abeyratne,

Monday 19th October, 2009, The Island) the writer has suggested certain steps to be

taken to achieve 8-10% growth rate. Elaborate on these and broadly explain the ways

and means of achieving a higher economic growth rate.

Dr. Sirimal Abeyratne on his article of dont miss the luxury bus this time written to

The Island has summarized reasons contributed for slow economic growth of Sri

Lanka into two categories. One is policies while other one is politics.

In order to achieve higher economic growth rate of 8-10% one thing writer

suggests is that Sri Lanka should be able to provide competitive investment friendly

policy environment. This mean there should be strong incentives for individuals to

engage in identifying market opportunities and create wealth, jobs and economic

growth. This policy environment should make it easy for investors to start up

business, run them, sell them and fold them if they are not going to be successful.

When it was observed charts quoted from World banks doing business report 2008

and other rating agencies reports it is clear that Sri Lanka should immediately take

corrective action in order to lift up our position in those ratings to make investment

friendly atmosphere in the country. As it is clear that Sri Lanka needs to improve its

business environment, question arises here for policy makers is that where to start this

challenging agenda.

In Sri Lankan context, it can be clearly identified three major problematic

areas when it comes to do business in Sri Lanka. Those can be named as policy

instability, access to finance and importantly inadequate supply of infrastructure.

Furthermore Doing Business report of world bank, indicates that Sri Lanka needs to

initiate reforms in areas such as starting business, dealing with licenses, hiring and

firing workers, registering property, getting credit, protecting investors, paying taxes,

trading across boarders and closing businesses.

Our rank in the area of starting a business is 29 th in the world. Starting a business is

required to undergo through five separate procedures costing around 100$. When in

Sri Lanka, it takes 39 days for starting a business while average time taken to start a

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business in South Asia has shown consistent lowering and now that time has reached

to 30 days.

Fig -3, starting a business in Sri Lanka (Time in days and cost in rupees)

When it comes to identify what to reform in the area of starting a business in Sri

Lanka, eventually one more to do thing mentioned in Dr. Abeyratnes article should

be recalled. That is public sector should be made more efficient and bureaucratic and

regulatory hassles should be removed.

Sri Lankan over weighted public service is well known for its inefficient

operations. Further Sri Lanka is maintaining one of the largest public service in the

world compared to the population. Yet it takes more than 30 days to register a new

business with the department of labor. This indicates that the country should

immediately initiate a restructuring program in public service. Operating methods of

colonial times should be brought to an end. How much simplification and time saving

would be achieved if the office of company register, tax department and department

of labor computerized and connected to each other? It is funny to think that in a time

even schools without electricity in remote areas receiving modern high speed

computers, important government departments are left to still operate with tons of

paper works.

In terms of dealing with permits and licenses, Sri Lanka was ranked as 161 in

the world among worst countries of the world. Furthermore getting a building permit

would along demand 75days of time.

In terms of hiring and firing workers Sri Lanka was ranked as 110 in the

world. In Sri Lanka hiring a worker is straight forward whereas firing a worker is

extremely difficult as regulation of firing a worker is coming from labor laws of

colonial period and 1970 where the economy of the island was stubbornly closed and

stagnating. Rank of the island in this category also among worse performers of the

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world. Especially firing a worker in the country is extremely difficult and therefore

companies tend to recruit more and more contract labor for their operations in order to

gain more flexibility of facing various economic conditions. So training given to

employees and productivity level of employee becomes low. Furthermore in case of

economic down turn, investors tend to show bankruptcy and close down entire

operation due to this inflexibility of reducing workforce. On the other hand this

situation discourages formal sector job creation in the country.

Therefore in order to improve Sri Lankas position in terms of employing

workers, country should reform aged old Workers act and mandated severance

payments should be made in line with East Asian levels. Labor commissioners

approval required for every separation should be changed. Dr.Aberatne in his The

Island article has pointed out two reasons that are policies and politics, for economic

slow down. If there is a vision and a political will changing above hassles related to

employing workers is a matter of single stroke of pen.

Developing nations like Sri Lanka normally tend to give priorities to attract

more foreign direct investments. But access of medium and small business to credit is

also to be improved as their contribution to the GDB also relatively high. Bringing

inflation under control and making interest rates more comfortable for investments are

vital in this aspect.

In term of protecting investors, the island was ranked as 70 even towards end

of South Asian countries and behind Indonesia and Thailand. As improvements in this

sector, operations of companies should be made to be done with greater level of

transparency. This may encourage investors to take equity stakes in more companies

and would lower the premium of holding controlling shares. Large and suspicious

transactions of companies can be made subject to an external audit and this would

limit improper activities within companies.

In ease of doing business index Sri Lanka has been categorized in 164th place

in term of paying taxes. Furthermore our ranking is well below South Asian average

and we are again among worse countries for paying taxes. Present tax structure is

complicated and burdensome. On the other hand cumulative tax percentage is also

high.

Several middle east and east Asian countries have shown the policy of lower

corporate taxes in countries attract more potential investors. Number of payments to

be made can be reduced by consolidating taxes and eliminating minor taxes. Large

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companies in the island have found easy way of escaping from tax net through

obtaining BOI facilities and establishing themselves in export processing zones or

free trade zones. Only small and medium scale companies really experience burdens

of today taxation system.

So above mentioned improvement should be implemented. In context where

terrorism in two provinces has been brought to an end, it would be better to consider

lowering expenses of government to make tax system of the island more simple and

flexible.

Sri Lankas rank of trading across borders remains high (66th) compared to

other south Asian countries. But in order to have a clear picture we should compare

our ranking with Singapore. In Sri Lanka for exporting of goods it takes 21 days and

for importing of goods also takes 21 days. But in Singapore it takes 6 days to import

and 3 days to export. Average cost of exporting also in Singapore remains half of Sri

Lankan level. In case of improving efficiency of port operations Sri Lanka should not

necessary to look at Singapore port.

But it is even enough to look at South Asia Gate Way Terminal of Colombo

port. That terminal operates under private sector management and has shown itself

much more efficient than publicly operated Jaya Container Terminal. Increasing

efficiency of port operations would definitely help in lowering port tariffs. Further

more custom administration traditions comes from time of independence, should be

change and more and more paperwork involved should be eliminated in order to make

imports and exports more flexible. Corruption in the custom is also another area to be

eliminated.

But in the view of expanding port operations Sri Lanka has initiated two

remarkable port projects. One is Colombo South Harbor and other one is Hambantota

Harbor. Under Colombo South Harbor expansion project three new terminals are

going to be constructed and first terminal is expected put into operation by 2012. In

Hambantota port construction project, first ship is expected to receive by 2011. This

capacity increase would definitely help Sri Lanka to remain as regional hub of port

activities provided those new terminals are going to be managed efficiently.

Sri Lankan rank in enforcing a contract in Ease of Doing Business ranking is 135. In

Sri Lanka it would take more than 1300 days and 40 procedures for enforcing a

contract. Even in south Asian terms Sri Lanka among middle of others and

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international level of best countries this time is less than a year. This situation would

result companies turning away from the court knowing that it would takes long time

for a resolving a problem. And also there is a possibility of using lengthy court

procedures by companies, for tying up competitors to minimize competition.

Furthermore this situation would cut paths for increased corruption in the judiciary.

Capacity of judiciary on commercial laws should be expanded and at the same time

lengthy legal procedures should be shortened and appeal procedure should be

modified in order to facilitate the process of shortening time consumption.

In terms of closing a business Sri Lanka remain ahead of other south Asian

countries. In Sri Lanka for closing down a business it would take about 1.7 years and

would be able to recover more than 40 cents on dollar. When it comes to consider

how this position in ranking can be improved, adjustment would have to be made in

Termination of Employment Act is vital.

Apart from those indicators shown in Doing Business report, Dr.Abeyratne

directs his emphasis on other two important aspects for not missing the luxury bus at

this time. One is country should have to have a sound financial management system

and a strong balance payment position. Controlling inflation and interest rates

lowering and making it stable are also important. Infrastructures in the country are not

in good position to facilitate rapid economic growth in the country. Even around

export processing zones conditions of roads are not up to proper standards. But

engineering projects launched recently such as Norochchole, Kerawalapitiya and

Upper Kothmale power plants and construction of flyovers around Colombo can be

mentioned as positive developments in this area. But inefficiency in fat public service

and political interference in every matter in the country are two areas to be addressed

soon. Establishing rule of law and discipline in the country are also a must for

development.

Finally it is important to note that Sri Lankas standing on Ease of Doing

Business ranking has shown a slipping down every year since the rating was set up.

So the government should implement suitable policy changes for the rapid

development of the country.

Consider an economy that has achieved a higher growth rate in the past. (Ex.

Singapore, Malaysia etc) Highlight and explain the lessons we can learn from these

economies to achieve the said target.

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Here said target mean achieving economic growth of 8-10% like East Asian countries,

in order to ensure not missing the luxury buss waiting for Sri Lankan people to get in

at this time as Dr.Aberatne says in his The Island article. What East Asian country

does illustrate much more lesions for us to learn? Here Singapore gives us a good

example. Unlike Malaysia at the time of independent Singapore being a small island

nation, did not have sizable domestic market or rich natural resources like metal,

forestry most importantly oil and gases. So it is fair to believe that Singapore is

providing better example for Sri Lanka to learn and rethink about how to shape and

focus countrys growth strategy in the future.

At the time of independence, Sri Lanka was regarded as a model British

colony and unlike India there was no bloodshed struggle for independence; Sri Lanka

was at peace, had a stable parliamentary democracy and was Asia's second-wealthiest

nation. Per-capita income was one much higher than the South-Asian average. Sri

Lanka had a prospering plantation economy and, by developing-country standards, a

well-developed infrastructure, an efficient public administration and judiciary, and

significant achievements in health and education. Its prospects were golden. When

young Lee Kwan Yew visited Sri Lanka he was fascinated by Sri Lankan living

standards and watching Flats in Bambalapitiya and expressed his need of rising living

standards of his country to Sri Lankan level.

Unlike Singaporean leaders, Sri Lankan elite came from small number of

landowning families, had mostly British education and was mostly full of socialistic

ideas and importantly had no touch with ordinary life of the country. So popular

politics in post independent Sri Lanka was mainly biased on Marxist ideas and tried to

distribute share of economic pie among all equally or else drive was to achieve that

ultimate objective. Colonial Sri Lanka basically had civil service, trading and

professional categories dominated by dominated by ethnic minorities in the country.

Share of ethnic majority of the country in the economy was relatively little and mostly

they were engaged in rural farming. So newly adopted policies of export substitutions,

trade protectionism and shifting English from working language status was not

beneficial for elite of ethnic minorities of the country. Meanwhile economic policies

were also disastrous lot of subsidies were given for unproductive areas just sake of

securing vote banks of ruling parties. Plantation based wealth slowly began to

disappear and from 1970, trade protectionism was increased and self sufficiency was

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a major slogan. So economic growth of the country became almost minimal and

unemployment rose dramatically cutting paths insurgencies among youth in south as

well as in north. Again in early 1980s economy of the country was reopened and

economic growth was 7-8%. But soon country was covered by terrorism and thus

closing possibilities of rapid growth till crushing terrorism in mid 2009.

For the purpose of understanding what we can learn from Singapore, at this

point it is suitable to turn back and look at the time of independence of Singapore.

In the early 1960s Singapore was struggling with internal social and political

problems. The newly established state was confronted with communist insurgencies.

Singapores main way of addressing the underlying grievances was to put into effect

growth oriented economic policies with the view to create opportunities for all.

Instead of using all their political energy to quarrel on how to share the existing pie,

Singapore launched a set of policies to make the economic pie bigger so that

everybody could have a bigger share. So since independence, Singapore focused on

economic growth maximization and their politics made policies to support that

objective of the country.

In order to reduce poverty and create more jobs, Singapore relied on foreign

direct investments.1967, the economic development board of Singapore was

established to attract foreign investments which was offered attractive tax incentives

and access to a skilled industrious disciplined importantly English speaking labor

force that was to be paid relatively low at that time. English was never removed from

the status of working language of Singapore. So both Chinese and Malay ethnic

groups had comon medium of communication. Furthermore this policy was not only

to cause bridging the gap between major ethnic groups, but also that strengthened

countrys position as regional economic centre. Broad collaboration among

government, trade unions and company managements was set up in the event of

maintaining industrial peace in the Singapore. Although this policy was subjected to

some strikes at the beginning later it brought it plus points to the country. From mid

1960s country managed to grow around 8% annually and they managed to reduce the

unemployment rate from 14 percent in 1965 to 4.5 percent by 1973. It should be

highlighted that towards mid 1970s Sri Lankan economic growth come to an almost

halt and resulting rise in unemployment rate up to 25%. At the same time it should be

noted that Sri Lanka was second wealthiest nation in Asia at the time of

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independence. This gives clear indication to understand direction and role of politics

and policies of two countries.

On the other hand Singapore government engaged in eradicating corruption in

the country and modern day Singapore remains as a one of cleaner country in the

world while Sri Lanka at the other end of the queue. Furthermore government of

Singapore actively involved in constructing Air ports, harbor and other

infrastructures. While whole labor force works dedicatedly, government of Singapore

aligned its macro economic policies to create more jobs and make the country one of

busiest business centre of the world. In modern day, 2.2 million Singapores

population has GDP of over 220 billions USD while 20 million population of our

country has GDP of 40 billions USD. Singapore while remaining as regional hub of

services and industries, is now actively working towards creating knowledge

economy with increase emphasis and investments in education and R&D activities

thus proving awareness of Singapores planers about direction of wind. Although Sri

Lanka started labor intensive textile industries in early 1980s, still couldnt get

transferred into the phase of electronic and electrical industries. Despite of proving

success stories of rapid industrialization, Sri Lankas love of agricultural self-

sufficiency has not diminished yet.

In a moment 30 years long war has come to a halt, Sri Lanka again has come

to a cross road, in other words there is a luxury bus waiting for Sri Lankan to get in

but here Sri Lanka should not forget that world does not owe her economic

development. The only way is making Sri Lanka more attractive place for doing

business. At this point we can learn a lot from Singapore.

All countries wish to achieve high economic and social development over

time. Only the private sector in a market economy combined with good governance

can make this happen. The formula is simple, but it is often complicated to implement

it in practice. Relying on the private sector as the main engine of growth does not

make the public sector less important. But the public sector must move out of sectors

and areas which are better handled by the private sector. At the same time the public

sector needs to be stronger in the essential areas where they can play a role. Like that

of developing infrastructure, introducing policies and develop a climate necessary for

growth, investing in education and other essential services.

Macro economic policies of the country should be made stable and heavily

should be focused on lowering cost of doing business in country as well as increasing

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ease of doing business in the country. Here Singapore illustrates us a living example

by remaining on top of World Banks ease of doing business index. Sri Lanka already

may be latte in making country ready for a rapid growth. But we should act before it

is too late.

Reference:

1. Annual report of central bank of Sri Lanka 2008

2. www.doingbusiness .org/

3. http://en.wikipedia.org/wiki/Economy_of_Singapore

4. www.economywatch.com

5. www.cbsl.gov.lk

6. www.adb.org/Documents/Fact_Sheets/SRI.pdf

7. www.statistics.gov.lk

8. www.lankabusinessonline.com

9. www.who2.com/leekuanyew.html

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