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“Domestic conditions, with relatively low inflation, improving consumption demand and a falling fiscal deficit, all augur well for a higher growth trajectory,” said ADB Senior Country Economist for Sri Lanka Tadateru Hayashi at the launch event that was also addressed by ADB Officer in Charge of Sri Lanka resident Mission Ahsan Tayyab, and ADB Senior Economics Officer Hasitha Wickremasinghe.
The ADO also acknowledged Lanka’s GDP grew by 7.3% in 2013, reflecting recovery in domestic demand and a pick-up in exports and tourism.
Pointing out that the 7.3% growth rate achieved by Sri Lanka was “more than what was expected” by the ADB, officials noted that while the accomplishment was supported by strengthening domestic demand on an eased monetary policy and a pick-up in exports and tourism, faster growth in wholesale and retail trade, hotels and restaurants, transport, banking, insurance and real estate lifted performance in the large service sector, providing the impetus for the rebound.
Noting that growth rebounded last year from a slowdown in 2012, along with a substantial narrowing of the current account deficit, the easing of inflation and the relaxation of the monetary policy by the Central Bank of Sri Lanka, the report stated that the outlook is for sustained rapid growth leveraging easy private access to credit in the backdrop of the Government’s continued drive to expand infrastructure.
Although an improving external environment is expected to lift trade, the current account deficit will expand on higher imports and fiscal consolidation will focus on revenue enhancement, it stated.
For 2014 and 2015 inflation is expected to remain in mid-single digits, whereas for 2013 the rate tended downwards, standing at an average of 6.9%. The broadly-steady international fuel and stable food prices will help to keep inflation in check in the next two years, assuming normal weather patterns prevail.
Exports are expected to strengthen with better economic performance in the European Union and the United States, Sri Lanka’s main export destinations. The ADO also noted that imports will pick-up in 2014, after a decline in 2013 as domestic demands materialise. However, policy measures taken to limit food imports to support local production will affect imports in the medium term, the report stated.
On the current account deficit, continued strong performance in remittances will help contain that element at 2.6% and 3.5% in 2014 and 2015 respectively. In 2013 the worker’s remittances expanded as a result of an increased labour migration under the professional and skilled category.
With the fiscal deficit estimated at 5.8% of GDP in 2013, which is a drop from a peak in 2009, the report acknowledged the rate is in line with the sovereign target of 3.8% by 2016. “The target was hit, despite unexpectedly weak revenues, by compressing current expenditure,” the report stated.
Since revenue did not pick up as expected, better economic performance and more imports are expected to result in higher revenue collection in 2014 and 2015. Continued policy action together with improved revenue administration is also needed to achieve a higher revenue ratio.
The ADO highlighted and identified that the policy challenge is in boosting fiscal revenues.
Although Sri Lanka has been focusing on fiscal consolidation and taking many steps to improve revenue collection, it was highlighted that the revenue ratio has remained low. Despite it standing at 13.6% of GDP in 2013, revenue is noted to have fallen over the past few years, underperforming its target each year.
“As the Government continues its fiscal consolidation, reversing the revenue ratio’s declining trend is critical. The main cause for the erosion of the revenue ratio has been VAT, which accounts for 25% of tax revenue,” it stated.
VAT revenue has declined from 5.8% of GDP in 2004 to 2.7% of GDP in 2012. Many amendments to the VAT Act have taken place since 2002, mainly to improve collection. However, VAT collection has relentlessly declined, affected by exemptions.
“In the context of faster growth reached in the post-conflict years and increased income per capita, the low revenue ratio implies that revenue generation has not kept pace with the rising capacity of the population to pay. Average tax buoyancy (which is about how well revenue mobilisation tracks GDP growth) has hovered for the past five years at 0.78, which is significantly below unity. This indicates that tax collection has been unresponsive to the pace of economic expansion,” the ADO 2014 stated.
ADB approves $ 100 m to boost technical and vocational trainingThe Asian Development Bank (ADB) Board of Directors has approved a $ 100 million loan to help the Government of Sri Lanka revamp its Technical and Vocational Education and Training (TVET), which will equip youth with the required skills for the job market. The program will support the Government’s Skills Sector Development Program, which aims to improve the employability of youth. “This program will help reduce the significant mismatch that exists between the competencies of graduates and labour market demand, which has left youth unemployment very high at 17.3%,” said Sungsup Ra, Director for Human and Social Development, in ADB’s South Asia Department. The skills mismatch has become even more evident during the recent period of economic growth as both education and TVET systems have not been able to adapt to the rapid labour market shifts. Private sector employers often cite lack of skilled workers matching their needs. Under the new program, the Government will introduce a targeted stipend scheme for disadvantaged groups including the poor, women, school dropouts to increase their participation in skills training in skill shortage areas. Though a large number of women are enrolled for training in traditionally female occupations, women’s participation is low at around 26% in technology-related courses that would lead to higher-paying jobs. The program therefore aims to increase women’s participation in TVET and improve their rates of employment, especially in the four priority sectors of construction, tourism, information technology, and manufacturing. The loan marks the second Results-Based Lending (RBL) program approved by ADB, which links loan payments to the achievement of goals. As a prerequisite of RBL, the Government adopted a sector results framework and a medium term expenditure framework with which relevant development partner support can be aligned. RBL will help the government prioritise actions that are contributing most to the goal of youth employability. ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. |
