The International Monetary Fund (IMF) believes Sri Lanka has the potential to maintain sustainable growth and become an emerging market of tomorrow, but there is a lot that needs to be done.
Sri Lanka was averaging 6 percent GDP growth each year prior to the global economic crisis where growth contracted to 3.5 percent in 2009. But there was strong growth during the first and second quarters of this year, at 7.1 percent and 8 percent respectively. The Central Bank’s projection for economic growth was revised last month to near 8 percent. The IMF’s latest projection is 7 percent.
"Our latest projection (of 7 percent growth for 2010) came before the second quarter data and we would reevaluate our projections this November of December when the mission next visits Sri Lanka," Brian Aitken, IMF Mission Chief for Sri Lanka told The Island Financial Review.
"The second quarter growth was very positive and higher than what we expected," Aitken said.
However, maintaining this momentum in the medium term would be crucial and in order to sustain growth, fiscal policies would have to be aligned with growth expectations. While the government develops infrastructure, maintain welfare (which has to be better targeted) and revives the economies of the North and East, steps must be taken to contain high budget deficits, attract private sector investment.
Sri Lanka’s budget deficit ballooned to 9.9 percent of GDP last year from a target of 7 percent and is expected to bring it down to 8 percent this year. The government envisages to double per capita income by 2016, but this would require an increase in private sector investment, and as such, bank credit to the private sector must double from the existing Rs. 1.1 trillion levels. In the past, high government deficit financing and overreliance on the domestic sector has crowded out credit to the private sector. This was why Central Bank Governor Ajith Nivard Cabraal earlier this year warned that reckless spending on the government’s part could threaten private sector credit growth, the low interest rate regime and low inflation.
But the banking sector is holding excess liquidity positions for the past few months. They argue that there is no demand for credit, or that there are no viable project proposals being shown to them. But businesses argue that banks are being too tight fisted.
"Now is the time for the government to formulate its fiscal policy and give a signal of how it would approach the post war economy. This is why we would look closely at the next budget (which would be presented to parliament in November). If Sri Lanka is going to move up to the next level, it is going to need a lot more investment, mainly private sector investment," Aitken said.
"The private sector would be able to invest, and would be willing, if there was a sustainable fiscal policy which would facilitate a sound macroeconomic environment.
Tax reforms…
Aitken said Sri Lanka would have to reform its tax system in order to make it business friendly.
"Sri Lanka would have to make the tax system efficient, bring down rates and broaden the tax base so that it becomes business friendly. This must be done in such a way that tax revenues improved," he said.
Reforming the BOI…
Aitken also said the Board of Investment (BOI)no longer needed to grant tax exemptions to attract foreign investment.
"There was an overreliance on tax exemptions given by the BOI to attract investment and this is no longer needed. Investments do not require tax exemptions; they would flow in if there was macroeconomic stability and a business-friendly environment. So reforms to the BOI must happen," Aitken said.
source - www.island.lk
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