Achieving National Economic Goals in the midst of Global Challenges : An Overview

Background

The focus on accelerated growth and development had arisen from the imperative to sustain  growth rates of 8 %-10% per annum and move Sri Lanka from its  lower middle income level to an upper middle income level and halve poverty  and reduce unemployment  to a tolerable level, by 2016, even overshooting the targets of  MDGs.

In this task, the Government, in addition to domestic constraints, faces a series of external or global  challenges. And this is what SLEA is going to discuss today and tomorrow, at its 2011 Annual Sessions, under the theme of Achieving National Economic Goals amidst Global Challenge .I shall in my address give an overview of this theme.

What is Sri Lanka’s national economic goal or goals?  The Mahinda Chintana- Idiri Dekma or Vision for the Future, indicates that the Government’s aim is to  make Sri Lanka  the “Wonder of Asia” by developing it as a Naval, Aviation, Commercial, Energy and Knowledge Hub. To fulfill this vision or  attain this goal is,  by no means, an easy task, particularly when it has to be realized within the next 5-6  years.

Wonder of Asia

To be Wonder of Asia, Sri Lanka, to my mind, must do better than the rest of Asia.  She must not only perform better than the so called economic miracle of East Asia but overshoot the growth rates of the present economic power houses of India and China. To this end, several objectives or targets,

we  may opine, have to be achieved by the end of the next five-six years, such as the following:

• sustained double digit economic growth of around 10%  doubling  the per capita real income in a matter of 7  years, achieving the per capita income at market prices in much shorter time.
• Inclusive development alongside,  with a reduction of the 40 % of the population now receiving less than US$ 2.00 ppp per day to about 20 % and  the 6 % of the population receiving less than US$ 1.00  to around 3%  and with inflation brought down to 3 % per annum,  halve the level of poverty and unemployment, by  the end of  the period.
• Budget deficit of 3 % of GDP;
• Positive Current Account deficit with official reserves sufficient for more than six months of imports;
• Realistic exchange rate   without  much volatility;
• National debt of less than 50 % GDP, with its foreign debt component constituting less than half of it.

These numbers are not coming out of a hat.  These are the economic fundamentals,  which we  consider,   Sri Lanka should  have attained  by 2016  if she  wishes to be looked up to as Wonder of Asia, and a role economic  model, by other Asian countries.

As  mentioned before, Sri Lanka met the challenges of a terrorist war and a global recession, in 2008-2009, and was able to sustain an average quarterly growth rate of 8% in the last six quarters ended in June this year. Given the existing level of productivity or efficiency of investment, it was difficult  to reach a higher level than this,  with the very low level of domestic savings of around 18% , and FDI of less than 2% of GDP, having to meet  the huge resource gap (difference between gross investment and savings)  by domestic and foreign borrowing.

Such level of performance, however,  is not  adequate to make Sri Lanka “Wonder of Asia” Worse is that Sri Lanka will not be able to sustain  for long even that level of performance  with borrowing,  without a bigger flow of FDI on the one hand and enhancing productivity of  investment and  improving competitiveness of  her exports  and her trade balance on the other.

The level of efficiency or productivity of investment has been very low in Sri Lanka in comparison with that of not only developed countries but also that of developing countries of Asia. This is particularly marked in her agriculture. In the last five completed years, the average capital-output ratio, which is a measure of  the level of productivity has been in the order of 4.2 ( that is 4.2 units of capital or investment have been utilized to produce I unit of output). With the new infrastructure investment that is being  undertaken in  Sri Lanka  since the cessation of terrorist hostilities, productivity  is likely to increase somewhat, thereby reducing the level of investment necessary to produce a given level of output.

How about the FDI? Since 2008, despite the end of the 30 year terrorist war and the return of peace to our country and political stability with a strong government, FDI has been decreasing, instead of increasing. It has been more than US $ 800 million in 2008, but US $ 690 million in 2009 and US $ 516 million in  2010.  Although this has increased to US $ 413 million in the first half of 2011 alone, and may exceed  the 2008 level  by the end of the year, the increase would be marginal

To add to this woe, our trade deficit has been on the rise. Due to the  increase in the value of imports  relative to the value of exports, the trade deficit of US$ 3122 million in 2009 rose to US $ 5205 million in 2010 and with US $ 5,077 million already in the first seven months of this year , it is expected to be more than US $ 8000 million for the whole  of  2011. Although worker remittances and tourist earnings have been on the rise, they have not been increasing as much as to significantly reduce the current account deficit. This has more than doubled to US$ 1,940 in January – July this year from US$ 785 million in the corresponding seven months of 2010.”