The Economy According To CBSL

• Broad-Based Economic Growth Of 7.4%: Per Capita Income $ 1,355
• Services Has No ‘Natural Limitations’, Will Be Engine of Growth
• Need To Accelerate Infrastructure Development Programme

The Central Bank Annual Report is prepared primarily to fulfill a legal obligation of the Central Bank of Sri Lanka (CBSL). However, over the years, this report has gained in importance and now serves the needs of a broad spectrum of readers. Last week, the ‘State of the Economy’, as dealt with in Part 1 of the 2006 Report, was the subject of a public lecture by Dr P Nandalal Weerasinghe, Director of Economic Research at CBSL.

First, the statistics… During 2006, Sri Lanka’s economy grew by 7.4%, the highest since 1978. In the process, the country’s per capita income rose to US$ 1,355. Unemployment dropped to 6.5%, the lowest level ever. Dr Weerasinghe pointed out that what is commendable about all these accomplishments is that they were achieved amidst several challenges. Some such impediments were high oil prices, an escalation in terrorist activity and counter-terrorism measures, and natural disasters.

Growth was broad-based too - with the services sector growing by 8.3%, industry by 7.2% and agriculture by 4.7%. Dr Weerasinghe, describing the services sector as “the driving force in the economy”, said that the country is poised to become a service-oriented economy.

Explaining the higher growth of the services sector, H N Thenuwara, Assistant Governor, CBSL said,”There are natural limitations in agriculture and industry because they occupy physical space. Besides, our competitive advantage has always been in services.”

The industrial sector needed “to transform itself into a globally competitive, dynamic and technologically sophisticated sector”, said Dr Weerasinghe. He called for further diversification into value-added apparel, minerals, gems & jewellery and industrial goods.

To enhance productivity in the agricultural sector, Dr Weerasinghe suggested adopting consistent trade policies and making rural financing available.

“The external sector also continued to expand, supported by strong global growth and preferential access through bilateral and multilateral trade agreements,” said Dr Weerasinghe.

On the failures side, Dr Weerasinghe said that monetary policy during 2006 was aimed at reducing demand-driven inflationary pressures. The CBSL raised policy interest rates by 125 basis points during 2006 – and a further 50 basis points in 2007. The bank also absorbed excess liquidity through Open Market Operations. However, it was a situation of too little, too late.

Dr Weerasinghe listed four “fundamental forces of productivity improvement” - infrastructure development, technological improvement, human capital development and research & development.

Speaking to the Financial Times later, Thenuwara stressed the need to activate the infrastructure development programme. “The Government has committed financing for the implementation of planned major infrastructure projects“, he said. “Making this available within the stipulated period is a prerequisite to achieving higher growth. Besides, emerging infrastructure requirements need to be financed through public-private partnerships.”

Talking of the need to increase productivity, Thenuwara said that significant improvement in operations of state-owned enterprises is critical.