Business Times

After 2 'strong' years, SL's economic growth falls

By Sunimalee Dias

Doomed with prospects of a challenging year ahead, the Central Bank on Monday released its 2011 Annual Report citing a slow down in Sri Lanka's rollercoaster ride for two consecutive years to projected GDP of 7.2%.

The first copy of the report was handed over to the President as is customary. The Central Bank notes that the country would experience a period of "moderation and consolidation" this year due to the raising of taxes and imposing credit ceilings among other key policy changes adopted in the early part of 2012. Harping on the impressive growth of last year at 8.3%, President Mahinda Rajapaksa, speaking on the occasion, said the country would continue to be sustainable and banked on prospects of gains made from the key infrastructure development projects initiated.

Presidential Secretary Lalith Weeratunga listens intently at the launch of the CB report.

He noted that in this regard, gains from this growth must reach the people and the government must adopt measures towards this end. Speaking on the issue of terrorism, the President observed those supporting it was still existent not only within the country but also internationally.

He pointed out that this economic growth has contributed to the establishment of both large and small and medium enterprises and highlighted some of the government-sponsored projects Maga Neguma, Divi Neguma that connected the village and urban areas. Commenting on the price escalation in fuel, he lamented that while certain leaders insist they can do nothing it is only they that would be able to help in lifting sanctions imposed on certain countries and thereby assist smaller nations affected by this.

Criticizing international calls for a 24-hour solution to the process of reconciliation the President observed that it would be impossible to end 30-years of hatred in such a short time frame Considering any foreign advice as short-lived, Mr. Rajapaksa said they remained committed towards achieving reconciliation in the country. Central Bank Governor Ajith Nivard Cabraal dismissed recent reports in the media of the country's economy falling into a "huge deep trouble."

He pointed out that the reduction in the growth for this year was mainly due to measures taken to rein in the trade deficit. Reserves were currently at US$6.1 billion that was expected to rise to US$7.2 billion in 2012 with a BOP surplus targeted for this year at US$1.2 billion following recent interventions in the external sector, Mr. Cabraal said. He pointed out that this would be a challenging year mainly due to the global issues of sanctions imposed on oil importing nations affecting smaller states like Sri Lanka.

However, he noted that they had built spaces in the economy and observed that the macro fundamentals of the present day would provide strength to deal with unforeseen external and or internal risks. The country's growth has been recorded as the highest for two consecutive years due to improved consumer and investor confidence and opening up of economic activity in the North and East.

The Central Bank notes the debt to GDP ratio declined to 78.5% in 2011 from 81.9% in 2010. With more vulnerability expected in the external sector this year, the Bank imposed new regulations and increased taxes to offset these. In 2011 the external sector was under pressure due to adverse global developments and fast pace of growth in imports, the report states. It notes that high import expenditure reflecting oil prices and a surge in investment and intermediate good imports led to a rise in the trade deficit to an "unprecedented" high level.

Agriculture that rebounded in 2011 was noted to have made a moderate growth of 1.5%; with the industry sector recording an impressive growth of 10.3%; and services sector expanding at 8.6%. Total consumption expenditure increased significantly by 22.4%, the Bank states noting that domestic savings contracted thereby widening the savings - investments gap.

FDI inflows were expected to be healthy although the bank notes that it was below its potential at US$1.1 billion last year and expecting to double this figure in 2012. Import expenditure resulted in the widening of the trade deficit to US$9.7 billion from US$4.8 billion in 2010. In the services account, worker remittances continue to top earnings that grew by 25% to US$1.5 billion.

In the fiscal sector the deficit was reduced to 6.9% from 8% financed through domestic sources with the banking sector contributing a major portion of the required funds. The monetary policy stance was eased in January 2011 but was tightened towards the latter part of the year.

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