A leading economist said the growth rate of 4.5% to 5% forecasted for 2009 by the Central Bank (CB) is realistic given the global economic crisis. Economist Dr. Sirimal Abeyratne said the growth rate would have gone down substantially from the 6% GDP in 2008 but was prevented by the government extended assistance to the agriculture sector which also benefited from good weather conditions.
However, he added hat high growth in the agriculture sector cannot be sustained in the long run and that the major driving force for growth will be the industry and services sectors which are much more integrated in the world economy. Long term growth is sustained by the industry and service sector, he said. “When the world economy is doing bad, the demand for those sectors will come down.”
During a media briefing to launch the 2008 Annual Report this past week, CB Governor Ajith Nivard Cabraal said a pessimistic growth rate of 2.5% to 3% has also been estimated for the coming year. Mr. Cabraal said negotiations with the International Monetary Fund (IMF) for a stand by loan of US$1.9 billion are on-going. He added that the IMF facility is mainly for balance of payment support but expects that it will boost confidence and attract development partners.
Dr. Abeyratne said that according to the World Bank (WB) and the IMF, the world economy will face the most hardships this year and that the CB must have taken those figures into consideration when forecasting Sri Lanka’s growth. So far this year, Dr. Abeyratne said the export and tourism sectors as well as foreign remittances have not done well.
During the press briefing, Mr. Cabraal said that the end of hostilities should bring growth and economic stability. So far in the Eastern Province, there has been an investment of Rs.103 billion rupees over the last year and that there are numerous development projects in place.
In terms of the gross official reserves with and without ACU payments, which were US$2,561 million and US$1,753 million respectively at end 2008, Mr. Cabraal said the CB is shoring up reserves through Diaspora bonds which were initially slow but more recently have had tremendous inquiries. He said NRFC’s and RFC’s have performed better and there will be a two year period for people to bring earnings in tax free from abroad. He added that reserves are mean to be used in a time of crisis.
GDP growth
According to the Annual Report, Sri Lanka had 6% GDP for 2008 in the midst of unprecedented and unfavourable developments globally and domestically. Director of Economic Research Dr. P.N. Weerasinghe added that GDP for the first three quarters of 2008 was 6.5% and declined in the last quarter of the year to 4.3%. During the first part of the year, food and energy crises in the global economy was threatening the macroeconomic stability by way of sharply widening trade and current account deficits, raising inflation to the highest levels since the 1980’s. It also exerted pressures on fiscal balances due to tax exemptions arising from duty waivers granted in order to minimize the impact of high food and energy prices on domestic cost of living coupled with high defense expenditure and the cost of rehabilitation, resettlement and reconstruction of the Eastern Province.
Towards the latter part of the year, the second wave of the global financial crisis, originating from the sub-prime mortgage issue in the US, turned into unprecedented global turmoil. It triggered a reversal of capital flows from emerging market economies for safety, resulting in an outflow of approximately US$120 billion from the Asian region towards the end of 2008. Sri Lanka had sudden withdrawals of foreign capital by supplying almost 50% of its external official reserves which the CB said had been prudently accumulated to the highest ever level of US$3.56 billion by end July 2008. Consequently, the accumulated balance of payments surplus of US$515 million by end July 2008 turned into a deficit of US$1.2 billion by end 2008.
Inflation
The CB said it continued to focus on achieving its two key objectives which are economic and price stability and financial system stability. There was the sharpest ever deceleration of year on year inflation from 28.2% in June 2008 to 5.3% by end March 2009. The reasons for the decline in inflation is the CB’s monetary policy strategy of restricting monetary expansion through quantitative targeting as well as tumbling global food and energy prices.
Real Sector Developments
Growth in the industries and services sectors decelerated to 5.9% and 5.6% respectively in 2008 from 7% in 2007, mainly due to the slowing down of domestic economic activity amid lower external demand in the fourth quarter of the year. The agriculture sector grew at 7.5%, benefiting from higher commodity prices and the re-awakening of the Eastern Province.
The services sector continues to provide the highest contribution of 57% of overall growth while the industry and agriculture sectors contributed 28% and 15% respectively.The first nine month’s economic growth at 6.5% was instrumental in the decline of the unemployment rate to a record low of 5.2% in 2008 compared to 6.5% and 6% in 2006 and 2007 respectively.
External Sector Developments
The CB said most of the external sector indicators (exports, workers’ remittances, balance of payments, short-term investments and external reserves) performed well above the original projections before the intensification of the global financial crisis.
Exports grew by around 10% during the first nine months of the year but declined by 2.8% in the last quarter. The set back led exports to grow by 6.5% in 2008.
Import expenditure grew sharply by 33.7% on account of high petroleum and commodity prices in the international markets and widened the trade deficit by 88.1% by end September 2008. Imports grew by 24% in 2008 leading to the substantial expansion in the trade deficit in 2008. The overall trade deficit widened by 60.6% to US$5.9 billion in 2008 from US$3.7 billion in 2007.
The widened trade deficit was partly offset by the increased remittances which grew by well above 20% in the first nine months of the year. However, remittances fell to 17% by end of December 2008 to US$2.9 billion.
As a result of these developments, the CB said the balance of payments, which recorded a surplus of US$515 million by end July 2008, turned into a deficit of US$1,225 million by end 2008. Consequently, external official reserves, which were maintained at a comfortable level equivalent of well over 3 months of impost during the greater part of the first nine months, declined gradually thereafter as total outflows were higher than inflows with the intensification of the global financial crisis.
By end 2008, the gross official reserves, with and without ACU payments, declined to US$2,561 million and US$1,753 million respectively. The total external debt, consisting of medium and long term, and short term debt of the country declined to 37.1% as a percentage of GDP in 2008 from 43.2% in 2007.
Fiscal Sector Developments
During the first nine months of the year, total revenue continued to increase at 22% while total expenditure and net lending increased by 20%. According to the CB, the financing mix between domestic and foreign sources was fairly good and the government continued to repay the outstanding debt to the CB until September 2008.
These favourable developments changed rapidly during the latter part of 2008.
As a result, total annual revenue, in nominal terms, increased by only 16%. This was mainly attributed to a sharp drop in international trade related taxes, especially due to the lower quantity and value of vehicle imports and the slowdown in domestic economic activities which resulted in a drop in the revenue from both direct and indirect taxes.Recurrent expenditure, in nominal terms, exceeded the budgetary target but as a percent of the GDP, continued to decline. The overrun in the recurrent expenditure was mainly due to the higher than expected expenditure on salaries and wages, pension payments, fertilizer subsidy, counter terrorism activities and intensified humanitarian and development work in the newly liberated areas.
|
E-mail