Analyze macro economic trends of the Sri Lankan economy for the last four years?

Here it is going to be analyzed macro economic trends of Sri Lanka from year 2005 to year 2009. When our economic trends are examined during past four years one crucial factor that dominated entire economic landscape of the island was bloodshed war conducted against terrorists who had been grouped up in north and east provinces of Sri Lanka. The period where our attention is going to be focused was the period in which government started fighting back terrorism when its back is against the wall. While this situation is kept in mind, it is better to examine macro economic performance of our island during last four years. Table-1, Growth in GDP Index GDP % Agriculture % Manufacturing Services 2005 6.2 1.8 8.0 6.4 2006 7.7 6.3 8.1 7.7 2007 6.8 3.4 7.6 7.1 2008 6.0 7.5 5.9 5.6

9 8 7
Growth %

6 5 4 3 2 1 0 2005 2006 2007 Year 2008

GDP Agri culture Manufacturing Services

Figure-1, Annual growth in GDP

Refer to the report published by Central bank of Sri Lanka in 2008; during last four years Sri Lanka has been able to record around 6% growth in GDP. When Figure-1 is closely examined it can be observed that even though around 6% growth is achieved during last four years, after year 2006, growth rate of sectors like manufacturing and services that contributing vastly for the growth of GDP has been declined from respective figures of year 2006. At the same time it can be further observed that growth in agricultural sector during last four years is lower compared to growth in manufacturing and service sectors (except 2008). One of notable feature that can be observed in growth rate of agricultural sector of Sri Lanka is uneven during last four years. Once the growth rate of agricultural sector is as low as 1.8% and once it goes well over 7%. In 2008 while service and manufacturing sectors of the economy is shrinking, agricultural sector along achieved a growth of 7.5%. Basically it should be noted that from year 2007 there global economy was started to face an economic down turn. This global economic crisis can be considered as the major factor affected to slowdown growth rates of services and manufacturing sectors of Sri Lankan economy. This global economic slowdown equally affected to export agricultural sectors like tea and rubbers as well. But thanks to good climate conditions and governments massive Api Wawamu Rata Nagamu campaign, agricultural sector of the Sri Lankan economy was able to achieve a remarkable growth of 7.5% during 2008. It can be observed that inflation figures recorded during last four years of Sri Lankan economy are also relatively high. As expansionary monetary policy was followed by the government as well as due to increase of government expenditures inflation recorded was increased during last four years. Table-2, Inflation

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Fig-2, Inflation rate of Sri Lanka (Consumer price) During resent years government had to increase its war effort against terrorism was there in north and east provinces. So there was a sharp increase in defense expenditures. In year 2008 crude oil prices were risen up to highest level recorded in the history and as a country totally depend on crude oil imports, Sri Lanka had to spend heavily on oil imports. As a result price levels in the country were sharply increased and result was inflation level risen up to two digit level. As a trend in Sri Lanka although inflation rate was continuously increasing, in other countries in south Asian region, inflation rate has shown a gradual decrease. Table-3, Unemployment rate of Sri Lanka Index Unemployment % 2005 7.2 2006 6.5 2007 6.0 2008 5.2

When above table-3, drawn to the data published by Central Bank of Sri Lanka, is examined, it can be seen that there is a steady decline in unemployment rate among Sri Lankan workforce during last four years. At the same time it should be noted that unemployment rate is relatively high among youths who have GCE advance level education or more. And also there is a gender basis inequality in unemployment rate of educated youths. Even though there is that short of deviations of overall picture, Sri

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Lankan economy has been capable of effectively lowering unemployment rate of the country. Expansions taken place in public service sector, recent successful recruitment drive of armed forces as well as privet sector growth have been contributed to this steady lowering of unemployment rate. Due to the global economic down turn in 2008 and first part of 2009, some Sri Lankan export industries were closed down. So in 2009 unemployment rate is supposed to be increased despite of its past trend of decreasing. But economic growth has shown some acceleration in third and fourth quarters of 2009 and this growth would result again to normalize the trend. Table-4, Foreign reserve Index Foreign reserve (months of imports) Above table shows how foreign reserve of Sri Lanka changes during past four years. From 2008, it can be seen that amount of foreign reserve has declined. Sudden increase of crude oil prices in world market, appreciation seen in Sri Lankan rupee and sharp increase in defense expenditure can be considerable factors for this decline of foreign reserve. This trend was continued till second quarter of 2009 and government was facing a balance payment crisis. Therefore government applied for IMF stand by loan facility in order to go through possible balance payment crisis. But macro economic trends explained here now have undergone significant changes and economic out look of Sri Lanka has improved positively after ending of the conflict of North and East in May 2009. Inflation continued to decline rapidly and recorded lowest during last 5 years in September 2009. Balance payment position which showed significant deficit in 2008 was improved significantly in third quarter of 2009 with IMF stand by loan facility and recorded a surplus in balance payment position in September. Investor confidence towards Sri Lankan economy was boosted by ending terrorism in May 2009 and was again renewed by IMF loan facility. This trend can be observed by rapid increase in foreign investment especially in government securities and remarkable growth in Sri Lankan stock market. In this context, as Sri Lanka has been capable of ending 30 year old conflict and reunion North and east provinces with rest of the country, it can be expected a positive upward 2005 5.7 2006 4.7 2007 5.3 2008 3.3

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trend despite of global economic slow down and uneven growth pattern of past four years.

In the article given, (Dont miss the `luxury` bus this time! by Dr.Sirimal Abeyratne, Monday 19th October, 2009, The Island) the writer has suggested certain steps to be taken to achieve 8-10% growth rate. Elaborate on these and broadly explain the ways and means of achieving a higher economic growth rate. Dr. Sirimal Abeyratne on his article of dont miss the luxury bus this time written to The Island has summarized reasons contributed for slow economic growth of Sri Lanka into two categories. One is policies while other one is politics. In order to achieve higher economic growth rate of 8-10% one thing writer suggests is that Sri Lanka should be able to provide competitive investment friendly policy environment. This mean there should be strong incentives for individuals to engage in identifying market opportunities and create wealth, jobs and economic growth. This policy environment should make it easy for investors to start up business, run them, sell them and fold them if they are not going to be successful. When it was observed charts quoted from World banks doing business report 2008 and other rating agencies reports it is clear that Sri Lanka should immediately take corrective action in order to lift up our position in those ratings to make investment friendly atmosphere in the country. As it is clear that Sri Lanka needs to improve its business environment, question arises here for policy makers is that where to start this challenging agenda. In Sri Lankan context, it can be clearly identified three major problematic areas when it comes to do business in Sri Lanka. Those can be named as policy instability, access to finance and importantly inadequate supply of infrastructure. Furthermore Doing Business report of world bank, indicates that Sri Lanka needs to initiate reforms in areas such as starting business, dealing with licenses, hiring and firing workers, registering property, getting credit, protecting investors, paying taxes, trading across boarders and closing businesses. Our rank in the area of starting a business is 29th in the world. Starting a business is required to undergo through five separate procedures costing around 100$. When in Sri Lanka, it takes 39 days for starting a business while average time taken to start a V

business in South Asia has shown consistent lowering and now that time has reached to 30 days.

Fig -3, starting a business in Sri Lanka (Time in days and cost in rupees) When it comes to identify what to reform in the area of starting a business in Sri Lanka, eventually one more to do thing mentioned in Dr. Abeyratnes article should be recalled. That is public sector should be made more efficient and bureaucratic and regulatory hassles should be removed. Sri Lankan over weighted public service is well known for its inefficient operations. Further Sri Lanka is maintaining one of the largest public service in the world compared to the population. Yet it takes more than 30 days to register a new business with the department of labor. This indicates that the country should immediately initiate a restructuring program in public service. Operating methods of colonial times should be brought to an end. How much simplification and time saving would be achieved if the office of company register, tax department and department of labor computerized and connected to each other? It is funny to think that in a time even schools without electricity in remote areas receiving modern high speed computers, important government departments are left to still operate with tons of paper works. In terms of dealing with permits and licenses, Sri Lanka was ranked as 161 in the world among worst countries of the world. Furthermore getting a building permit would along demand 75days of time. In terms of hiring and firing workers Sri Lanka was ranked as 110 in the world. In Sri Lanka hiring a worker is straight forward whereas firing a worker is extremely difficult as regulation of firing a worker is coming from labor laws of colonial period and 1970 where the economy of the island was stubbornly closed and stagnating. Rank of the island in this category also among worse performers of the VI

world. Especially firing a worker in the country is extremely difficult and therefore companies tend to recruit more and more contract labor for their operations in order to gain more flexibility of facing various economic conditions. So training given to employees and productivity level of employee becomes low. Furthermore in case of economic down turn, investors tend to show bankruptcy and close down entire operation due to this inflexibility of reducing workforce. On the other hand this situation discourages formal sector job creation in the country. Therefore in order to improve Sri Lankas position in terms of employing workers, country should reform aged old Workers act and mandated severance payments should be made in line with East Asian levels. Labor commissioners approval required for every separation should be changed. Dr.Aberatne in his The Island article has pointed out two reasons that are policies and politics, for economic slow down. If there is a vision and a political will changing above hassles related to employing workers is a matter of single stroke of pen. Developing nations like Sri Lanka normally tend to give priorities to attract more foreign direct investments. But access of medium and small business to credit is also to be improved as their contribution to the GDB also relatively high. Bringing inflation under control and making interest rates more comfortable for investments are vital in this aspect. In term of protecting investors, the island was ranked as 70 even towards end of South Asian countries and behind Indonesia and Thailand. As improvements in this sector, operations of companies should be made to be done with greater level of transparency. This may encourage investors to take equity stakes in more companies and would lower the premium of holding controlling shares. Large and suspicious transactions of companies can be made subject to an external audit and this would limit improper activities within companies. In ease of doing business index Sri Lanka has been categorized in 164th place in term of paying taxes. Furthermore our ranking is well below South Asian average and we are again among worse countries for paying taxes. Present tax structure is complicated and burdensome. On the other hand cumulative tax percentage is also high. Several middle east and east Asian countries have shown the policy of lower corporate taxes in countries attract more potential investors. Number of payments to be made can be reduced by consolidating taxes and eliminating minor taxes. Large VII

companies in the island have found easy way of escaping from tax net through obtaining BOI facilities and establishing themselves in export processing zones or free trade zones. Only small and medium scale companies really experience burdens of today taxation system. So above mentioned improvement should be implemented. In context where terrorism in two provinces has been brought to an end, it would be better to consider lowering expenses of government to make tax system of the island more simple and flexible. Sri Lankas rank of trading across borders remains high (66th) compared to other south Asian countries. But in order to have a clear picture we should compare our ranking with Singapore. In Sri Lanka for exporting of goods it takes 21 days and for importing of goods also takes 21 days. But in Singapore it takes 6 days to import and 3 days to export. Average cost of exporting also in Singapore remains half of Sri Lankan level. In case of improving efficiency of port operations Sri Lanka should not necessary to look at Singapore port. But it is even enough to look at South Asia Gate Way Terminal of Colombo port. That terminal operates under private sector management and has shown itself much more efficient than publicly operated Jaya Container Terminal. Increasing efficiency of port operations would definitely help in lowering port tariffs. Further more custom administration traditions comes from time of independence, should be change and more and more paperwork involved should be eliminated in order to make imports and exports more flexible. Corruption in the custom is also another area to be eliminated. But in the view of expanding port operations Sri Lanka has initiated two remarkable port projects. One is Colombo South Harbor and other one is Hambantota Harbor. Under Colombo South Harbor expansion project three new terminals are going to be constructed and first terminal is expected put into operation by 2012. In Hambantota port construction project, first ship is expected to receive by 2011. This capacity increase would definitely help Sri Lanka to remain as regional hub of port activities provided those new terminals are going to be managed efficiently. Sri Lankan rank in enforcing a contract in Ease of Doing Business ranking is 135. In Sri Lanka it would take more than 1300 days and 40 procedures for enforcing a contract. Even in south Asian terms Sri Lanka among middle of others and VIII

international level of best countries this time is less than a year. This situation would result companies turning away from the court knowing that it would takes long time for a resolving a problem. And also there is a possibility of using lengthy court procedures by companies, for tying up competitors to minimize competition. Furthermore this situation would cut paths for increased corruption in the judiciary. Capacity of judiciary on commercial laws should be expanded and at the same time lengthy legal procedures should be shortened and appeal procedure should be modified in order to facilitate the process of shortening time consumption. In terms of closing a business Sri Lanka remain ahead of other south Asian countries. In Sri Lanka for closing down a business it would take about 1.7 years and would be able to recover more than 40 cents on dollar. When it comes to consider how this position in ranking can be improved, adjustment would have to be made in Termination of Employment Act is vital. Apart from those indicators shown in Doing Business report, Dr.Abeyratne directs his emphasis on other two important aspects for not missing the luxury bus at this time. One is country should have to have a sound financial management system and a strong balance payment position. Controlling inflation and interest rates lowering and making it stable are also important. Infrastructures in the country are not in good position to facilitate rapid economic growth in the country. Even around export processing zones conditions of roads are not up to proper standards. But engineering projects launched recently such as Norochchole, Kerawalapitiya and Upper Kothmale power plants and construction of flyovers around Colombo can be mentioned as positive developments in this area. But inefficiency in fat public service and political interference in every matter in the country are two areas to be addressed soon. Establishing rule of law and discipline in the country are also a must for development. Finally it is important to note that Sri Lankas standing on Ease of Doing Business ranking has shown a slipping down every year since the rating was set up. So the government should implement suitable policy changes for the rapid development of the country. Consider an economy that has achieved a higher growth rate in the past. (Ex. Singapore, Malaysia etc) Highlight and explain the lessons we can learn from these economies to achieve the said target. IX

Here said target mean achieving economic growth of 8-10% like East Asian countries, in order to ensure not missing the luxury buss waiting for Sri Lankan people to get in at this time as Dr.Aberatne says in his The Island article. What East Asian country does illustrate much more lesions for us to learn? Here Singapore gives us a good example. Unlike Malaysia at the time of independent Singapore being a small island nation, did not have sizable domestic market or rich natural resources like metal, forestry most importantly oil and gases. So it is fair to believe that Singapore is providing better example for Sri Lanka to learn and rethink about how to shape and focus countrys growth strategy in the future. At the time of independence, Sri Lanka was regarded as a model British colony and unlike India there was no bloodshed struggle for independence; Sri Lanka was at peace, had a stable parliamentary democracy and was Asia's second-wealthiest nation. Per-capita income was one much higher than the South-Asian average. Sri Lanka had a prospering plantation economy and, by developing-country standards, a well-developed infrastructure, an efficient public administration and judiciary, and significant achievements in health and education. Its prospects were golden. When young Lee Kwan Yew visited Sri Lanka he was fascinated by Sri Lankan living standards and watching Flats in Bambalapitiya and expressed his need of rising living standards of his country to Sri Lankan level. Unlike Singaporean leaders, Sri Lankan elite came from small number of landowning families, had mostly British education and was mostly full of socialistic ideas and importantly had no touch with ordinary life of the country. So popular politics in post independent Sri Lanka was mainly biased on Marxist ideas and tried to distribute share of economic pie among all equally or else drive was to achieve that ultimate objective. Colonial Sri Lanka basically had civil service, trading and professional categories dominated by dominated by ethnic minorities in the country. Share of ethnic majority of the country in the economy was relatively little and mostly they were engaged in rural farming. So newly adopted policies of export substitutions, trade protectionism and shifting English from working language status was not beneficial for elite of ethnic minorities of the country. Meanwhile economic policies were also disastrous lot of subsidies were given for unproductive areas just sake of securing vote banks of ruling parties. Plantation based wealth slowly began to disappear and from 1970, trade protectionism was increased and self sufficiency was X

a major slogan. So economic growth of the country became almost minimal and unemployment rose dramatically cutting paths insurgencies among youth in south as well as in north. Again in early 1980s economy of the country was reopened and economic growth was 7-8%. But soon country was covered by terrorism and thus closing possibilities of rapid growth till crushing terrorism in mid 2009. For the purpose of understanding what we can learn from Singapore, at this point it is suitable to turn back and look at the time of independence of Singapore. In the early 1960s Singapore was struggling with internal social and political problems. The newly established state was confronted with communist insurgencies. Singapores main way of addressing the underlying grievances was to put into effect growth oriented economic policies with the view to create opportunities for all. Instead of using all their political energy to quarrel on how to share the existing pie, Singapore launched a set of policies to make the economic pie bigger so that everybody could have a bigger share. So since independence, Singapore focused on economic growth maximization and their politics made policies to support that objective of the country. In order to reduce poverty and create more jobs, Singapore relied on foreign direct investments.1967, the economic development board of Singapore was established to attract foreign investments which was offered attractive tax incentives and access to a skilled industrious disciplined importantly English speaking labor force that was to be paid relatively low at that time. English was never removed from the status of working language of Singapore. So both Chinese and Malay ethnic groups had comon medium of communication. Furthermore this policy was not only to cause bridging the gap between major ethnic groups, but also that strengthened countrys position as regional economic centre. Broad collaboration among government, trade unions and company managements was set up in the event of maintaining industrial peace in the Singapore. Although this policy was subjected to some strikes at the beginning later it brought it plus points to the country. From mid 1960s country managed to grow around 8% annually and they managed to reduce the unemployment rate from 14 percent in 1965 to 4.5 percent by 1973. It should be highlighted that towards mid 1970s Sri Lankan economic growth come to an almost halt and resulting rise in unemployment rate up to 25%. At the same time it should be noted that Sri Lanka was second wealthiest nation in Asia at the time of

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independence. This gives clear indication to understand direction and role of politics and policies of two countries. On the other hand Singapore government engaged in eradicating corruption in the country and modern day Singapore remains as a one of cleaner country in the world while Sri Lanka at the other end of the queue. Furthermore government of Singapore actively involved in constructing Air ports, harbor and other infrastructures. While whole labor force works dedicatedly, government of Singapore aligned its macro economic policies to create more jobs and make the country one of busiest business centre of the world. In modern day, 2.2 million Singapores population has GDP of over 220 billions USD while 20 million population of our country has GDP of 40 billions USD. Singapore while remaining as regional hub of services and industries, is now actively working towards creating knowledge economy with increase emphasis and investments in education and R&D activities thus proving awareness of Singapores planers about direction of wind. Although Sri Lanka started labor intensive textile industries in early 1980s, still couldnt get transferred into the phase of electronic and electrical industries. Despite of proving success stories of rapid industrialization, Sri Lankas love of agricultural selfsufficiency has not diminished yet. In a moment 30 years long war has come to a halt, Sri Lanka again has come to a cross road, in other words there is a luxury bus waiting for Sri Lankan to get in but here Sri Lanka should not forget that world does not owe her economic development. The only way is making Sri Lanka more attractive place for doing business. At this point we can learn a lot from Singapore. All countries wish to achieve high economic and social development over time. Only the private sector in a market economy combined with good governance can make this happen. The formula is simple, but it is often complicated to implement it in practice. Relying on the private sector as the main engine of growth does not make the public sector less important. But the public sector must move out of sectors and areas which are better handled by the private sector. At the same time the public sector needs to be stronger in the essential areas where they can play a role. Like that of developing infrastructure, introducing policies and develop a climate necessary for growth, investing in education and other essential services. Macro economic policies of the country should be made stable and heavily should be focused on lowering cost of doing business in country as well as increasing XII

ease of doing business in the country. Here Singapore illustrates us a living example by remaining on top of World Banks ease of doing business index. Sri Lanka already may be latte in making country ready for a rapid growth. But we should act before it is too late.

Reference: 1. Annual report of central bank of Sri Lanka 2008 2. www.doingbusiness.org/ 3. http://en.wikipedia.org/wiki/Economy_of_Singapore 4. www.economywatch.com 5. www.cbsl.gov.lk 6. www.adb.org/Documents/Fact_Sheets/SRI.pdf 7. www.statistics.gov.lk 8. www.lankabusinessonline.com 9. www.who2.com/leekuanyew.html

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