The Asian Development Bank (ADB), a major source of development funds for Sri Lanka, has expressed faith in the Mahinda Rajapaksa government saying that the latter has the wherewithal to take the island country economically and politically forward.
"Despite resurgence of the civil conflict, impact of the Asian tsunami, and doubling of oil prices since 2004, the economy grew at its fastest rate since 1978 last year (2006). This strength was fueled by buoyant private activity and expansionary macroeconomic polices though (they had) accelerated inflation," the ADB said in its report entitled "Outlook 2007", which was a review the performance of the economy in 2006 and a peek into the future.
About the future, the report said that among the factors that could potentially lay the foundation for strong economic growth was the existence of a "powerful" President who had succeeded in forging a parliamentary majority with crossovers of MPs from the typically more private sector oriented opposition United National Party (UNP).
"This could make implementing legislative changes easier than before, and could also be the beginning of a southern consensus, the lack of which has been partially blamed for the slow resolution of the ethnic conflict in the country," the report said.
The ADB admitted that the government's policies were fueling inflation, which is currently 17.5%. Military expenditure had gone up by 27%, the budget deficit was 8.9% of the GDP; and the tourism sector was still to recover from the tsunami and the war psychosis.
But it was hopeful of a good future, given the fact that public investment was going up (it had gone up by 26% in 2006); efforts were being to restrict money supply; and tax gathering was getting better.
In 2006, the Sri Lankan economy grew by 7.2% due to the strong performance of the services sector, especially telecom; a 6% increase in agricultural production; a 55% increase in fish production; a $ 400 million increase in workers' remittances from abroad; and a boom in private construction. Easy credit had resulted in a hike in demand for goods and services. Consumer credit went up by 43%, overall private sector credit by 24% and credit to the government expanded by 20%.
HIGH INFLATION, DEFICIT AND DEBT
But easy credit fueled inflation. There was also the rapid build up of domestic dollar-denominated, short term commercial debt, which in 2006 amounted to 6% of the GDP.
The government was constrained to take some corrective steps, which the ADB hopes will show results soon.
"If the fiscal consolidation and increased investment envisaged in the new 10-year development framework are achieved, growth is expected to pick up substantially," the report said. It noted that the government had stopped printing billions of rupees and pumping them into the economy. There were also moves to restrict credit.
Is the continuing war a retarding factor? The ADB says it is. Conflict shaves off 2% of GDP growth per annum. But it also notes that, despite the war, Sri Lanka has maintained an average growth of 4.6% since the armed conflict began in 1983.
While lauding the Rajapaksa administration for stressing on infrastructural development, the ADB has pointed out that the government will have to look into the woeful shortage of skills, and see that the underprivileged majority also get access to high quality education to enter the emerging, modern job market.