Christmas day is a day of glad tidings and of peace and joy. The good news this year is that the country averted a serious economic crisis and is moving towards macroeconomic stability and growth. May this Christmas usher in peace and social harmony that are vital for the country’s economic development. Economy in 2016 [...]


Modest economic growth in 2016 after avoiding serious economic crisis


Christmas day is a day of glad tidings and of peace and joy. The good news this year is that the country averted a serious economic crisis and is moving towards macroeconomic stability and growth. May this Christmas usher in peace and social harmony that are vital for the country’s economic development.

Economy in 2016

Being the last Sunday of the year, it is appropriate to sum up the year’s economic performance. Economic growth was modest. There wasn’t a robust economic growth or a spurt in economic activity. It was a year when an external financial crisis was averted and corrective measures taken to stabilise the economy.

Economic growth

The economy is estimated to have grown by about 4.5 percent in 2016. This is less than the expected GDP growth of more than 5 percent. Unfavourable global conditions were a constraint to higher growth. Policy uncertainty, unfavourable weather conditions and inefficient implementation also contributed to slow economic growth. In contrast, India that is admittedly much less dependent on global market conditions, is expected to grow at over 7 percent which is the highest growth in developing countries.

Growth sectors

Growth was mainly in construction, banking and finance, tourism and other services in the economy. Agriculture failed to grow owing to both bad weather conditions and low export prices for tea and rubber. The growth in tourism by over 16 percent contributed to growth directly and in activities that have backward linkages with tourism such as travel, food, arts and crafts and gems

Averting crisis

The averting of a serious balance of payments crisis was a substantial achievement during the year. The IMF’s Extended Fund Facility and policy changes resulted in an improvement in the external finances and the country will have a surplus in the current account of the balance of payments of around US$ 2 billion and a smaller overall balance of payments surplus.

Fiscal consolidation

The steps taken toward fiscal consolidation was an important step this year. If the fiscal deficit is brought down to the targeted 4.7 percent of GDP in 2017 and progressively reduced to 3.5 percent in 2020, it would stabilise the economy, give a boost to economic growth and provide the fiscal space for much needed social infrastructure development.

Budget 2017

Fiscal consolidation is vital for macroeconomic stability. The 2017 budget took some meaningful steps towards fiscal consolidation. The most noteworthy feature of the budget was its objective of containing the fiscal deficit to 4.7 percent of GDP in 2017 and bringing it down to 3.5 percent in 2020. This is imperative for macroeconomic stability, investment and sustained economic growth. It would reduce the country’s debt that is estimated at around 76 percent of GDP.

Income tax

The revision of the income tax system to pave the way for a simpler income tax regime with minimum tax exemptions  and  to increase the direct tax component towards 40 percent from around 20 per cent at present and to gradually decrease indirect taxes are steps in the right direction. However the implementation of these proposals could prove difficult.

External finances

At the beginning of the year external reserves were dangerously low and  inadequate to meet debt obligations and finance the country’s import needs. Corrective measures taken in April enabled a recovery in the external financial position. The country ends the year at a somewhat comfortable level of external reserves with both a current account and overall balance of payments surpluses likely at the end of the year.

The crisis in external finances brought about by heavy debt servicing obligations and a poor trade performance was averted by an IMF facility of about US$ 2.5 billion, the depreciation of the rupee and corrective fiscal and monetary measures.

Trade balance

The likely large trade deficit of about US$ 8.5 billion in 2016 is of serious concern. Export earnings are only about 55 percent of import expenditure. Expanding exports remain a serious challenge. Fortunately remittances from abroad and earnings from services, especially tourism, more than offset this deficit to generate a current account surplus in the balance of payments.

While global recessionary conditions that affected exports adversely were an important factor limiting export growth, the need for economic policies that are conducive for export growth are essential.

Foreign direct investment

The expectation of higher foreign direct investment (FDI) remains unrealised. FDI has been less than US$ 1 billion. Global recessionary conditions and unattractive local conditions account for it. International confidence to invest in the economy gets jolted from time to time. This year was no exception. For instance, the Prime Minister’s intervention to cancel a large transaction of shares in the Colombo Stock Market could have adverse repercussions on foreign investment, not only in the stock market, but on foreign direct investment as well.


The President and Prime Minister flew hither and thither and brought glad economic tidings of foreign assistance that appeared to be a panacea for the country’s economic difficulties. The extravagant promises of help however remain to be realised.

Socio-political constraints

The socio-political milieu is a severe setback to economic progress. One of the severe restraints on economic development that was evident during the year was the wide scale protests against nearly every step of the government. There were protests against taxation, traffic fines and other government decisions. These and strikes by university non-academic staff, bus operators, estate workers and even by doctors, crippled the normal functioning of the economy.

Sporadic outbursts of communal violence in several parts of the country were the severest potential threat to economic development. Fortunately discussions among religious leaders and civil rights workers have subdued this fear. May the spirit of Christmas usher in peace and harmony that is imperative for economic progress.

Summing up

The year that is ending is not one of robust growth. Nevertheless a serious economic and financial crisis was averted and a foundation laid for economic stability and growth. The policy measures taken this year, if effectively implemented, could provide the foundation for a better economic performance in 2017.

Global economic conditions, efficacy of implementing reforms, certainty in economic policies and ensuring social harmony would determine the pace of the country’s economic development. The economy is on a recovery path with a potential for higher growth.


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