Sri Lanka Poised to Raise Incomes as War Ends, World Bank Says

By Anusha Ondaatjie, 17th July 2009,Bloomberg.com

Sri Lanka is poised to raise its growth and income levels as the South Asian island rebuilds after the end of a 26-year civil war, the World Bank said.

“Ending the armed conflict definitely is an opportunity for Sri Lanka to graduate from a low-income country to a fully fledged middle-income country,” said World Bank Sri Lanka Director Naoko Ishii.

The island nation needs to strengthen its “business environment” and develop its “educated and skilled labor force” to help sustain higher growth levels, she said in an e- mail today in response to questions from Bloomberg News.

The Central Bank of Sri Lanka this month raised its 2009 growth forecast to as much as 4.5 percent, from an earlier estimate of 2.5 percent, after the government in May crushed the Liberation Tigers of Tamil Eelam separatist rebels. Income per head rose to $2,014 last year from $1,634 in 2007 and $900 in 2000, according to the central bank.

“Reconstruction expenditure will give a short-term boost to the growth process,” said Dushni Weerakoon, deputy director of the Institute of Policy Studies in Colombo. “But if it is combined with a broader reform agenda, it will give the private sector a conducive environment to operate in and make a return on investments.”

Sri Lanka moved up to 29th position in 2008 from 47th place in 2007 for ease of starting a business in the country, according to the World Bank. The island allows 100 percent ownership to foreign investors in all businesses and places no restriction on repatriation of earnings.

Interest Rates

President Mahinda Rajapaksa is seeking aid and investments to help turn the war-ravaged east and north of Sri Lanka into productive parts of the economy.

Central Bank Governor Nivard Cabraal has driven down interest rates this year, taking advantage of inflation at a five-year low, in a bid to spur spending and investment and make up for slowing exports.

The World Bank last year announced a $900 million three- year program for Sri Lanka to help reduce poverty and fund infrastructure development, including in areas affected by the conflict. Heightened violence in the island’s civil war contributed to a 1.1 percentage point “falloff” in economic growth in 2007, the bank said last year.

“The country-assistance strategy emphasizes the importance of our engagement being conflict sensitive and at the same time has chosen development of conflict-affected areas as one of priority,” Ishii said.

“We are in discussion with the government on how our programs can best assist the government’s effort for reconstruction and development of the conflict-affected areas and its people.”

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.