Growth targets

Thursday, 18 March 2021 00:29 - - {{hitsCtrl.values.hits}}

Sri Lanka grew 1.3% in 4Q of 2020, fighting back from a second wave to end a challenging year with a 3.6% contraction, which is slightly lower than the 3.9% negative growth projected. The Central Bank expects 1Q growth to be about 3% or slightly higher, setting the stage for the 5.5%-6% growth target set by the Government.

For the first time in the history, in 2020 all three major economic activities of Agriculture, Industry and Services reported negative growth rates of 2.4%, 6.9% and 1.5% respectively, when compared to the previous year. The reported three negative growth rates of major economic activities mirrored the severity of the adverse impact of the COVID-19 pandemic on Sri Lanka’s economy.

It is clear that Sri Lanka will have to redouble its efforts to grow in 2021, not just in annual terms but sustainably. For this, the Government will have to take a reforms-based approach. Along with the establishment of a powerful Government, the COVID-19 outbreak has created an opportunity to review macroeconomic policies and set appropriate policy priorities and long-term development goals for the country, but whether this Government has the political will needed to push through uncomfortable reforms is a different matter entirely.

The Government’s drive to support and encourage domestic production to reach self-sufficiency in identified goods is likely to play a crucial role in Sri Lanka’s economic transformation, according to the Central Bank. However, the maintenance of quality standards of domestically produced goods and ensuring availability at a reasonable price are vital to derive intended benefits in the medium to long-term. This is imperative to boosting Sri Lanka’s competitiveness, because import substitution will not be successful unless products move up the value chain and can also expand the country’s limited basket of exports.

Adequate investment in innovation and research and development (R&D), and the promotion of export-oriented Foreign Direct Investment (FDI) are needed to improve efficiency and enhance productivity, particularly in the SME sector. If Sri Lanka is to achieve the high growth predicted in 2021, it must have improved access to international markets, so trade negotiations with existing and new partner economies must continue.

Public revenue needs to grow to about 15% of GDP for Sri Lanka to sustainably fund education, healthcare, housing and other welfare support needed for as much as 40% of the population. Without taxes, there is simply no other revenue source to achieve this.

Another tough but crucial step will be reforming State-Owned Enterprises (SOEs). The Government cannot keep funding its losses, but trimming the public sector will be deeply unpopular. Slashing defence allocations, which have remained the highest component of the budget despite the war ending over a decade ago, and rationalising other expenditure, is also important.

Strongly connected to this is effectively fighting corruption and proactively promoting transparency, which has received scant attention so far.

Persistent issues such as relatively low ranking in the Doing Business Index, high utility costs compared to regional peers, high costs of land acquisition, and rigidity in labour laws and Government procedures remain the main impediments in terms of attracting FDIs to the country.