Economy’s outlook: Optimism and challenges

When the country’s private sector began the New Year, the Central Bank via its Road Map had an emphatic message. In 2012 and beyond the country will deliver high growth (over 8%) despite global downturn. This, as well as some of the other pronouncements and targets set by Governor Nivard Cabraal, was viewed as “highly ambitious and overly confident.”

However there was also a view that Cabraal is well aware of the risks hence such optimism from him must have come after careful assessment. The Central Bank is expected to properly crystallise the prospects and challenges or put those in proper perspectives via its 2011 Annual Report, which will be out in a few months.

The World Bank last week via its Global Economic Prospects publication, gave a gloomy outlook for the international economy. With regard to Sri Lanka’s prospects, the World Bank view was that economic growth in 2012 will reduce to 6.8%, much lower than Central Bank’s 8% forecast. Standard Chartered Bank recently said its forecast for Sri Lanka was a GDP growth was 7.5%.

A Reuters poll, made public last week, said the world economy will lose momentum in 2012 but it will keep moving in the right direction.

The 600 economists polled had said crisis-hit Europe would drag on global growth. Asian economies will again power the expansion of the world economy this year, but with relatively subdued performances. The US, meanwhile, should continue to contribute modest growth that will easily outpace its recession-hit European peers.

From all these it appears the reason for lower optimism is certainly the global downturn which has so far failed to reverse the course.

Despite this gloom and doom, and perhaps something the sceptics of ambitious and confident pronouncements of the Central Bank, may have under estimated is the Sri Lanka’s resilience and the end of war phenomena. Whilst it is true that the country has thus far grown considerably thanks to peaceful times and burst of activities that were previously suppressed by the war. Some believe the natural take off since the end of the conflict in May 2009 is waning and the country needs a fresh thrust. This is valid too especially for sectors other than tourism.

The Government needs to opt for a good mix of policy stimulus and reforms which will accelerate the growth engines, overall efficiency and confidence level thereby triggering a fresh wave of investments.

The faith in the country’s resilience had been underscored in the findings of CEOs survey done by MTI Market Research recently. As reported in front page of today’s Daily FT, despite concerns about the global economic outlook, Sri Lankan businesses seem confident that the local economy and their own businesses will perform even better in 2012.

However, as we have stressed greater investments, especially those from foreign firms, upward pressure on inflation, interest rates and balance of payments along with better governance have been listed as concerns of CEOs surveyed.

It needs to be stressed that greater Foreign Direct Investments are important, the Government needs to maximise the vast pool of local funds including black money by facilitating their productive deployment. This could only be done by greater liberalisation or reforms and improving the ease of doing business.  Getting existing Board of Investment approved ventures to expand or modernise is another option. This is easier than trying to hunt for new foreign investors since existing enterprises have a firm foothold and have demonstrated their commitment.

Either way for greater investments as well as growth across key economic sectors require continuous nurturing of business confidence and facilitation. Sound and consistent policy will be helpful as well. If these are in place, Sri Lanka economy growing at 8% or more is achievable.