Financial Times

Private sector lukewarm over govt. economic policy
Business leaders and market analysts last week cast doubts on the government's ability to realise an annual economic growth of 6-8 percent under its new economic policy

They also expressed misgivings about the state's commitment to free market policies. The UPFA's economic policy announced last week gives special attention to small and medium entrepreneurs and reviving agriculture.

Analysts they expect the government to announce unpopular economic measures after this month's Provincial Council polls. Unveiling the United People's Freedom Alliance's economic policy framework, Amunugama said the government would focus on agriculture, fisheries, livestock, small and medium enterprises and tourism.

"That does not mean we will forget the thrust in the export sector," he told a news conference. One of the government's main economic challenges was to correct regional economic imbalances with the Gross Domestic Products now skewed in favour of the Western Province which contributes about 50 percent of GDP.

The government would take measures to reduce this "gross disparity", Amunugama said. Malnutrition is on the rise, rural people are dissatisfied and many had a "sense of two countries" given the differences between the Western Province and the rest of the island, he said.

Government will pay special attention to small and medium entrepreneurs who make a major contribution to the economy such as in the tea and rubber sectors.

Declaring that "there'll be no privatisation" of state enterprises, Amunugama said that that does not mean the present level of Treasury assistance or public funding to organisations that bleed the government of funds can be sustained.

State enterprises would have to "radically reformed" and made profitable. "There'll be no privatisation but there'll be competition," Amunugama declared.

The government also intends to fast-track infrastructure development, especially power projects. Amunugama rejected suggestions that increased government spending on welfare and subsidies would lead to a huge gap between government income and expenditure. The government was "trying its best to increase revenue" as it was committed to spend on its "pro-poor" policies, but Amunugama added: "We're not printing money." The government would pay special attention to SMEs, which he called "the bedrock" of the country's economy and which contribute half of the island's GDP.

However, the business community has expressed doubts about the government achieving its ambitious growth targets and said there was still come confusion about its commitment to free market policies.

Reacting to the economic policy announcements, Joint Business Forum (J-Biz) chairman Mahendra Amarasuriya said the government had not made clear what strategies it would use to achieve such high growth rates.

The government faced a "tricky situation" with six months more to go in the fiscal year and having to cope with high international commodity prices, a depreciating rupee and lower revenue.

"The government has no strategy for making up the extra spending on the fertiliser subsidy and employing more people," Amarasuriya said. "The only strategy seems to be to increase revenue collection."

But he said the exchange rate is going up, inflation is also likely go up, as are interest rates, and the government will not have funding through privatisation, while funds pledged by donors are unlikely to be disbursed until peace talks resume.

Amarasuriya said he supported the focus on increasing value addition in local agriculture, and taking sugar cultivation as an example said production could be increased to supply more of the island's requirements if the 15 percent VAT was removed.

"We'll have to wait for the Provincial Council elections to see what the fiscal polices will be," Amarasuriya said. "Unpopular measures are not likely to be taken until till after elections. We expect increases in oil prices, electricity charges and government taxes which will impact on inflation."

Danushka Samarasinghe, research analysrt at SC Securities (Pvt) Ltd., said the government appeared to be sending out mixed signals on its economic policies. "The government apparently wants to continue free market economic policies but certain parts of the government seem to want a price controlled economy."

He expects inflation to go up and said the budget deficit is also increasing, forex reserves are continuing to drop and the rupee is depreciating. Tourists arrivals, which brought in a lot of revenue last year, are expected to be below target this year.

"Investors would be discouraged by the price control mechanisms," Samarasinghe said, mentioning the example of Prima which was prevented from raising flour prices by the government. "This sends out wrong signals to investors."

The 6.2 percent GDP growth in the first quarter of 2004 was the result of the policies of the previous UNF government. "After that we expect growth rates to be reduced drastically. Business activity levels have gone down."

Samarasinghe expects petroleum prices to rise after the PC polls and said: "There would come a time when the government can't subsidise any more." Naren Godamunne, vice president of DFCC Stockbrokers said the impressive first quarter growth figures were "historical figures."

"We will have to see how the economy gets going in the second and third quarters and what the affect of rising oil prices and a depreciating rupee will be." He said the general impression was that the government was holding off unpopular price hikes until after the PC polls.

Investors have welcomed the appointment of former Hayleys chairman Sunil Mendis as the new Central Bank governor, Godamunne said. "It is a very welcome move. He would bring in a balanced view on what the economy needs, especially the private sector point of view." Mendis' concern for the rural economy and his hands on experience would also be helpful.

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