Growth challenge for 2013

Sri Lanka’s economy in the third quarter has suffered its lowest growth since the end of the war, putting forward fresh challenges for the coming year.

The Census and Statistics Department on Wednesday revealed that the economy in the third quarter period of July to September 2012 grew by 4.8% in comparison to 8.5% and 8% growth achieved in 3Q of 2011 and 2010 respectively. It was the lowest since the 4.2% growth rate achieved in the third quarter of 2009.

Earlier in the week, Fitch Ratings also sounded alarm bells by giving a mixed view on Sri Lanka’s sovereign in its latest overview, pointing out that public finance remains weak. The rating agency noted that whilst Sri Lanka’s external pressures are easing, the currency exposure was stalling fiscal improvements. However, acknowledging fiscal consolidation, strong growth, and lower inflation, Fitch has affirmed Sri Lanka’s Foreign Currency and Local Currency ratings at BB- with a stable outlook.

Among key rating drivers listed by Fitch were political stability, policy consistency to deliver sustainable Balance of Payments (BOP), sustained strong growth, and improvements to the investment climate, as well as credible fiscal consolidation to put public debt on a more sustainable path.

However, Fitch said Sri Lanka’s public finances remain weak, with currency causing sharp General Government Debt rising in 2012. Even though policy tightening has eased Balance of Payment pressures the agency warns that strong monitoring is needed. Transparency in debt accruement and management was thrown into further controversy when the government decided to present loan and investment agreements to parliament only after they have been signed, severely limiting checks and balances.

However, concern on borrowings is counterbalanced by the fact that Sri Lanka’s capacity has increased since the end of the war. There is also greater reliance on private sector borrowings that are steadily growing under Central Bank encouragement.

The International Monetary Fund (IMF) has also repeatedly acknowledged that Sri Lanka’s economy is on a more sound footing but has pointed out that the areas of Foreign Direct Investment (FDI), improvement in business climate, quality of labour, trade liberalisation, private sector involvement in infrastructure and trade liberalisation all need to be focused on.

Exports in particular have been hard hit, recording a 6.6 per cent drop in 2012, with apparel facing the biggest slide. Sri Lanka’s banking sector still needs to grow, show larger balance sheets, and address the relative lack of long-term finance. This sector is crucial to economic growth and the relative difference between low savings rates against high borrowing rates is having a deep effect in discouraging entrepreneurship. Despite strong economic growth in 2010 and 2011, inflation still needs to reduce further and the country remains a fiscal outlier, which means that fiscal deficit compared with public debt as the percentage of GDP still puts Sri Lanka at a vulnerable point when compared with similar nations.  

People hit by drought and floods will now be depending on the Government for assistance, increasing the challenge to balance public expenditure. In this backdrop, all stakeholders will have to work harder to achieve seven per cent growth as estimated. This process cannot also be divorced from larger issues of transparency and good governance.