Sri Lankan Economy to Boom. Growth Shows Self-Sustainability, Non-Dependence on Policy

13th February 2010, www.island.lk, By Devan Daniel

With the war over and Asia leading the world out of the global recession, an economist says Sri Lanka is charged up and raring to go, showing signs of being self-sustainable with little dependence on policy initiatives but the fiscal situation remains under a dark cloud.

"Sri Lanka’s economy is expected to grow by 7 percent in 2010 and there are signs that this growth is self-sustaining and with little dependence on policy," HSBC Asia Pacific Senior Economist Robert Prior-Wandesforde said in a recent visit to the island nation.

However, ADB Sri Lanka Country Director Dr. Richard Vokes that stable macro and micro level policies are a prerequisite for sustainable economic growth.

Since the war ended there is an estimated 30 percent increase in arable land, access to new markets in the once war-torn region of the North and East with 2.8 million people, FDIs and remittances are expected to boom along with the agriculture and tourism industries. All these factors are expected to affect economic growth along with the reallocation of public resources previously tied up with the war effort.

Wandesforde said policy interest rates were the lowest in five years with the prime lending rates of commercial banks down 7 percent during 2009. Large scale infrastructure developments amounting to 12.5 of GDP and US$ 2.6 billion IMF standby facility are some of the policy measures contributing to economic growth.

Earlier this year, the Governor of the Central Bank too highlighted Sri Lanka’s solid economic performance in 2009, estimated to grow by 3.5 percent despite fighting the last stages of a 30-year-old war and the global economic crisis, which led to an environment of low inflation and low interest rates. But the governor warned all this could be risked if the government does not improve its fiscal discipline.

Wandesforde said the IMF target for Sri Lanka’s budget deficit as a percentage of GDP would be missed.

The target for 2009 is 7 percent but Wandesforde said estimates point to deficit of 7.5 percent.

However, the IMF has already said it would allow the target to be exceeded on account of development and emergency spending on account of the IDPs.