The end of the 30-year internal conflict in May marked a major turning point, and an immediate revival of confidence coinciding with global economic improvement sparked an economic rebound, the annual Asian Development Outlook 2010 issued by the Asian Development Bank (ADB) stated, with reference to Sri Lanka's overall economic performance.
The outlook is positive, despite large budget deficits weighed down by reconstruction costs, it further said.
"Tourist arrivals, which fell heavily during the first five months, recovered strongly over the rest of the year. Although they grew by only 2.1% for the whole year, it was the largest gain since 2004. The outlook for the industry is for marked upturn in the coming years."
Investor confidence
"With the global economy in recovery mode and with higher domestic and foreign investment, growth momentum is likely to strengthen and reach 6.0% in 2010 and 7.0% in 2011. These projections assume that the tax reforms and fiscal consolidation will achieve fiscal deficit targets, sustaining investor confidence."
Investor confidence in Sri Lanka's markets has already shown signs of improvement, as evidenced by a sharp run up in the stock market and the country's standing in global capital markets, the report added. "External capital inflows have improved since May and are likely to strengthen further in the forecast period."
The report also said Sri Lanka floated the increased international confidence in the economy. Moreover, during the second half of 2009, rating agencies raised Sri Lanka's outlook to "stable" from "'negative."
During the second half of 2009, services and manufacturing picked up sharply, driven by an upturn in domestic demand, it continued adding, "tourism saw a rebound after May".
Budget expenditure is projected to come down to 23.3% of GDP in 2010 and reach 22.5% in 2011.
With a revival of agriculture in the Eastern Province (which came under Government control in 2008), the sector performed well in the first half before shrinking marginally due to drought in the third quarter.
Inflation
Inflation had peaked at 28.2% in June 2008, driven by high global prices for food and fuel, but declines in these prices saw inflation subside to about 1% by mid-2009. Prices picked up in the final quarter of the year on short supply of certain agricultural products including rice, vegetables, and coconuts, which have significant weights in the Colombo consumer price index.
The annual average rate was 3.5%, down from 22.6% in 2008.
As inflation fell, the Central Bank eased monetary policy and cut the policy interest rates five times during the year, the ADB report continued.
"The authorities aim to control inflation through monetary targets, while ensuring adequate credit to the private sector. The Central Bank plans the growth of both reserve money and broad money supply to accelerate by 14.5% in 2010. Given international price pressures, inflation is expected to remain at around 6.5% in 2010."
Economic growth
Economic growth declined to 1.5% in the first quarter of 2009, but picked up rapidly after the second quarter supported by optimism over the end of three decades of war, the report stated.
It also said growth in broad money supply was subdued during the first half as the economy faltered, but accelerated in the second half, supported by a significant buildup of net foreign assets at both the central bank and commercial banks, and by an expansion of credit to the public sector. Broad money supply grew by about 19% in 2009 and was within the central bank's target.
ADB further stated that although credit to the private sector remained in the doldrums throughout 2009, due to weak demand and banks' cautious approach to lending and that nonperforming loans increased, the banking system as a whole remained well capitalised.
Economic stimulus package
The ADB noted that an economic stimulus package was introduced in December 2008. "It reduced prices of gasoline (petrol), diesel, kerosene, and liquefied petroleum gas; and brought in a subsidy for fertiliser for tea smallholders, and a subsidy for rubber manufacturers."
It also noted that in May 2009, Parliament passed a reward scheme to grant a 5% incentive for exporters that maintained export earnings at levels similar to the year before, kept their current employment levels, and met specific domestic value-added criteria for various sectors.
One of the most difficult targets of the fiscal reform effort under the standby arrangement is hitting breakeven in operations at the two loss-making state utilities, the Ceylon Electricity Board and the Ceylon Petroleum Corporation.
As an initial step, the Government established an independent regulator for the power sector in March 2009. It is also moving toward lower-cost electricity generation and has appointed a Joint Review Mechanism committee to monitor the operations of the two enterprises and to recommend improvements.
In July 2009, the Government raised retail prices of gasoline and diesel by 5%-10%, moving toward full pass-through of increases in international oil prices. However, it cut gasoline prices by 11% in December 2009, prior to the presidential election in late January, ADB notes.
"Remittances held up well, growing by about 14%. The shrinking trade deficit and growth in remittances took the current account into surplus at about 0.3% of GDP in 2009."
Investment
Substantial Government investment in social and economic infrastructure will still be needed, though, ADB stated. "With growth picking up in the second half of 2009, the economy is poised to recover in 2010."
Imports will advance from their current low base, growing by about 20.0%, reflecting a marked increase in domestic demand and higher oil price, ADB added.
As the economy picks up, revenue collection should improve. However, revenue enhancement measures that were expected to be implemented in 2010 under the IMF program have been delayed due to the scheduling of the parliamentary election in April and the consequent postponement of the 2010 budget.
The latest Government estimates envisage revenue to be 15% of GDP this year. The Government aims to bring down the fiscal deficit to 8.0% this year, ADB further noted.
source - www.dailymirror.lk
