Cut-backs in government spending are essential to beat the negative macro economic conditions in the country, according to a foreign economist. Dr. Yeah Kim Leng, Group Chief Economist of Malaysian-based, ratings agency RAM Holdings Berhad, who was recently in Colombo, told The Sunday Times FT that this year the high fixed costs have constrained the cuts in government spending as witnessed in the past year. “The twin deficits of fiscal and the current account have to be sustained,” he said.

According to him, Sri Lanka’s economy is likely to be more resilient than expected under the current increasingly more adverse global economic conditions due to strong domestic demand. “But growth will moderate more than anticipated due to high global food and energy prices and increasingly security concerns faced by foreign investors and visitors because of armed conflict escalation,” he said.

He noted that the high double-digit inflation remains a major threat but the anticipated widening of the budget and current account deficits this year is viewed to be temporary and would likely normalise and return to a declining trend once the international food and oil price shocks subside. He added that the fiscal consolidation strategy has to remain on track.

Dr. Yeah said that of most South and Southeast Asian economies running fiscal deficits, Sri Lanka’s is the highest in the region. He noted that the painful adjustment to the fuel subsidy removal has already been done in 2006/07 while other Asian countries (India, China, Malaysia and Indonesia) are taking similar measures in 2008). “Further escalation in world oil prices, surpassing US$150 per barrel remains a threat,” he said.

He also said that South Asia led by India is poised for high sustained growth if economic integration via regional trade and investment can be expanded. “Sri Lanka, being more open and with a higher per capita income, can harness the forces of regional dynamism to accelerate its growth, as in the case of Malaysia.”

Dr. Yeah said that political stability is a ‘sine quo non’ in today’s highly competitive environment where nations compete for FDI, global markets and talents and whereby their macroeconomic policies and FDI promotion strategies have converged. “The peace dividend from conflict resolution will be sizeable.”