Economic Policy Reviwe of Sri Lanka 2013

8/13/2019 Economic Policy Reviwe of Sri Lanka 2013

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Sri Lanka : The emergingWonder of Asia!!

- An Evaluation of GovernmentPolicy Framework for the LastThree Years -

Group Assignment

Managerial Economics

Group 3

Athula, Sujith, Lindsay, Dilruk, Peter andDamith


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Contents

Sri Lankan Economy at a Glance

Government Policy Changes in Recent Past

Economic Objectives of the Government

Business, Investment and Export SectorPerformance

Private Sector as the Engine of the Growth

How to Enable The Private Sector to Make aGreater Contribution to Enhance The GrowthPerformance


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Sri Lankan Economy at a Glance With renewed investorconfidence in the aftermath of

the end of the conflict In 2009,and progress recorded in theexternal environment due tothe gradual recovery ofeconomies from the global

downturn , Sri Lanka posted asharp improvement in GDPgrowth averaging 8% p.a.during 2010-2011.

However, 2012 once againmarked a slowdown in thecountrys growth momentum -

- as GDP growth declined to 6.4%, on the back of sluggishdomestic demand and weaker external environment.


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Sri Lankan Economy at a Glance (Contd..) Rising food prices due toinclement weather

conditions that contributedto inflationary pressure in2011 eased in 2012.

But again the inflationarypressure became intense,due to the lagged effect ofcredit growth, depreciationof currency, and sharpadjustment to fuel prices.

In early 2013, inflationarypressure in the economy hasbeen largely moderate andcontained around 7.6%.


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Sri Lankan Economy at a Glance (Contd..)

In 2012, unemploymentfell to its lowest yet at 4.0 %,down from 4.2% in 2011.

The decline is largelyexplained by the drop in thenumber of entrants into the

labor force, as a result ofboth migration and growingeconomically inactivepopulation.


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Sri Lankan Economy at a Glance (Contd..)

In line with lower GDP growth, consumption and investment growthdeclined quite sharply in 2012.

Sri Lankas economic growth is led by consumption, accounting on averagefor 80% - 85% of GDP. This is in contrast to many fast growing emergingmarket economies in Asia that raised their investment and boosted thesupply of goods to the rest of the world at the cost of consumption in theirown economies.

Consumption, Saving and Investment2010 2011 2012

Consumption (% change) 14.0 22.4 13.7

Gross Domestic Capital Formation (% change) 30.8 26.8 18.5

Domestic savings (% of GDP) 19.3 15.4 17.0 Investment (% of GDP) 27.6 30.0 30.6

Private 21.4 23.7 23.7

Government 6.2 6.3 6.9

FDI (% of GDP) 0.9 1.5 1.4


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Economic Objectives of the Government

There are four main economic objectives; Keep inflation under control Maintain a low level of unemployment Achieve a high level of growth rate Maintain a healthy balance of payment

Government influences the economy through its economicpolicies. Those are;

Fiscal Policy Monetary Policy Supply Side Policies


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Government Policy Changes in Recent Past

After posting impressive growth rates of over 8% in two yearsfollowing the end of conflict, growth in 2012 moderated to 6.4%.

Following economic overheating in the second half of 2011 evidenced mainly by a rapidly expanding trade deficit thegovernment undertook a series of adjustment measures in early

2012. Higher interest rates with a credit ceiling on bank lending Allowing flexibility on the exchange rate Tax hikes on major import items (cars) Higher energy prices (through allowing greater pass-through

and cut in subsidies)


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Business, Investment and Export Sector Performance Despite the reasonable performance of the agricultural sector, the

spur to Sri Lankas GDP growth has come from elsewhere.

At first glance, industrial sector growth appear to have done well,by growing at an average of 9.4 % and 10.3 % during 2010-11 and2011-12 respectively. However, much of this growth has come as aresult of rapid growth in the construction sector, as opposed tostronger growth in the key sector of manufacturing.

Even there is a growth in key manufacturing sectors including; Food, beverage and tobacco

Textile, wearing apparel and leather products Chemical, petroleum, coal, rubber and plastic products

It was not sufficient to increase the share of manufacturing in SriLankas GDP over time.


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Business, Investment and Export Sector Performance(Contd)..

Additionally, FDI inflows have also been disappointing. Whilst netFDI flow, as a share of GDP has risen to a 1.4 % in 2012, much of

this has been in infrastructure (44.6 %), which left smaller shares of31.9% and 23% for services and manufacturing sectors respectively.

Sri Lankas exports-to-GDP ratio down to a low of 16.4% evenhigher GDP growth witnessed in recent years driven by publicinvestment in infrastructure .

The shift of resources from tradable to non-tradable sectors, suchas construction and related activities has also been encouraged by

a distorted and uncompetitive real rate of exchange that hasprevailed in the economy. The real effective exchange rate saw asteady appreciation, weakening the competitiveness of Sri Lankas exports in international markets.


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Private Sector as the Engine of the Growth At this very moment, economic growth heavily depends on public

investments in infrastructure.

Manufacturing sector share of GDP which stood at 17.7% in 2006,had declined to 17.1% by 2012.

The Budget 2013 rely heavily on domestic borrowing to bridge thedeficit. Given the governments domestic borrowing spree, therewas a little room for a sharp decline in lending rates to spur privatesector investment in support of higher GDP growth.

Energy costs, electricity in particular, most often constitute a majorshare of direct non wage costs for firms. Rising electricity pricesand supply reliability pose serious challenges to enterprises.


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Private Sector as the Engine of the Growth (Contd..) Weak trade facilitation, such as lack of and / or poorly maintained

transport infrastructure, complex import and export procedures

etc., result in increased transaction cost which in turn adverselyimpacts competitiveness.

The incentive framework in place to promote export andinvestment growth is far from satisfactory.

The countrys limited involvement in regional and bilateral FTAs hasalso restricted export competitiveness and market penetration.

Moreover, the highly overvalued currency continues to adverselyimpact the competitiveness of Sri Lanka exports in the worldmarket .

H E bl Th P i S M k G


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How to Enable The Private Sector to Make a GreaterContribution to Enhance The Growth Performance

To encourage more private sector borrowings, CBSL must easeinterest rates sufficiently which will help to achieve thegovernments GDP growth target.

Sri Lanka needs to undertake more aggressive policy measures toreduce the energy tariff rates, ease the current labor regulations

and improve the quality level of trade facilitation.

Mitigating government failures is also vital if firms are to minimizeproduction related costs, and compete effectively in an

international environment .


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How to Enable The Private Sector to Make a GreaterContribution to Enhance The Growth Performance

(Contd..) The role of well-developed and targeted export

promotion strategy is vital to enhance the exportcompetitiveness of the country.

Government should be entered into regional andbilateral FTAs in order to create moreopportunities for local manufacturers .


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Th an k Yo u

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Economic Policy Reviwe of Sri Lanka 2013

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