Sri Lanka to achive healthy growth rates in 2010 - ADB says

By Mario Andree

* Private sector development vital in post-war era
*2010 exports ‘will be below potential’

Sri Lankan economy, which grew at 3.5 percent last year, is expected to recover to healthy growth rates, buoyed by renewed confidence following the end of the three-decade long civil war, says the ADB.

With the global economy in recovery mode and with higher domestic and foreign investment, growth momentum is likely to strengthen and reach around 6 percent this year and 7 percent in 2011, the Asian Development Bank (ADB) said.

"The positive post-war economic prospects will mainly depend on private sector growth, improved investor confidence and performance of service industries," said ADB Country Director Richard Vokes.

The Asian development outlook (ADO) 2010 says Sri Lanka achieved its growth rate in 2009 amidst any challenges,

The country, which saw an average inflation rate of 3.5 percent last year would face an increase in its rates, the rise is expected to be manageable.

The ADO report says that the inflation rate of the country would be in the range of 6.5 percent this year and seven percent in 2011.

Large budget deficits and reliance on short term external borrowing in recent years was the main issues making the economy vulnerable to the global financial crisis and recession.

Heavy losses of foreign exchange reserves and domestic downturn in early 2009 threatened an economic crisis and required a recovery programme supported by the International Monetary Fund.

The end of the three-decade war in May last year marked a major turning point and it was followed by an immediate revival of confidence coinciding with global economic improvement generated an economic rebound, the report further noted.

Vokes also said that the Sri Lankan government is to project US$ 2.7 billion in reconstructing the Northern Province within the next three years.

The report also noted that the increased government expenditure accounted for a sharp increase in the fiscal deficit.

The total revenue was well below the target due to the slowdown in external trade and domestic economic activities tax base revenue to reach 15.3 percent this year, said Narhari Rao, lead economist of the Sri Lanka resident mission of the ADB.

He said the deficit would drop to eight percent this year and seven percent next year reducing gradually to meet the global demand of five percent in a short period, provided revenue enhancing measures are implemented and complemented by measures to rationalize expenditure.

Budget expenditure is expected to come down to 23.3 percent of GDP this year and reach 22.5 percent in 2011.

Capital inflows, which have improved since May Last year, are likely to strengthen during the forecast of this year.

"The government is expected to introduce reforms to broaden the tax base and reduce tax exemptions in this year’s budget in order to increase revenue," he said.

The ADO also says that the most difficult target of fiscal reforms for Sri Lanka is achieving a breakeven in two loss making state entities,

Vokes said the Ceylon Electricity Board and the Ceylon Petroleum Corporation "are the major loss-makers due to unpaid electricity bills by ministries and the mass use of petroleum by the government".

External trade is expected to gather momentum as the global economy recovers. It is expected to grow at five percent.

But Rao said the exports might be below potential in 2010 for Sri Lanka if the GSP plus is withdrawn.

Imports will advance from their current low base growing by 20 percent, reflecting a marked increase in domestic demand and higher oil prices, Rao said.

The trade deficit will widen significantly, but continued improvement in worker remittances should hold the current account deficit at about two percent of GDP this year.

It is further likely to rise to three percent in 2011, Rao said.

source - www.island.lk

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