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PPPs Ensure 8% Growth

Jun 11, 2011 3:27:44 PM - thesundayleader.lk
  • Govt. Unable To Increase Investments

Dr. Saman Kelegama

Public private partnerships (PPPs) are the way forward for Sri Lanka to sustain an 8% annual growth rate as targeted by the Government, an economist said.
Institute of Policy Studies (IPS) Executive Director Dr. Saman Kelegama delivering the 106th birth anniversary lecture of Dr. N.M. Perera on Monday  said that for Sri Lanka to grow at a sustained rate of 8% per annum, an annual investment of 32-33% of GDP is required on the basis of current economic indicators.*
IPS is a semi-government think tank.
Last year investments in the country amounted to 27.8% of GDP.
As such a 5% increase in investments is required to take it up to the targeted 32-33% of GDP level, he said. Three per cent of this increase may come from domestic investments and the balance 2% from FDI, he said. Average annual FDI is 1.5% of GDP, this therefore has to be upped to 3. 5%, said Kelegama.
Even domestic private investments will have to be increased by 3-4% of GDP to maintain this growth momentum.
Kelegama said that foreign investors look at international indicators such as the World Bank’s “Ease of doing business” and “logistical performance” indicators before moving in to a country. Logistical performance indicators also capture a country’s customs regime.
Sri Lanka has fared poorly in those indicators, being ranked 102nd from out of 181 countries in the ease of doing business indicators and 137th out of 154 countries in the logistical performance indicators.
Sri Lanka also fares poorly in the various international corruption indices which readings are also taken in to account by prospective foreign investors.
Kelegama also said that public investments at 6% of GDP have been stretched to capacity. With a current expenditure of 17% of GDP and revenue of 15% of GDP, there is a deficit in the current account, he said, so public investments cannot be increased further.
Kelegama said that wages and salaries, interest payments and subsidies and transfers take up 14.3% of GDP equivalent to 95% of revenue. Therefore the demand for wage increases by the university academia poses new challenges to the Government, he said.
With the Government therefore cash strapped to make further investments, public private partnerships (PPPs) are the way forward, Kelegama said. He cited the success of a blue chip company’s involvement in the expansion of the Colombo Port as an example in this regard.
The Public Utilities Commission (PUC) was established in 2002 to ensure a fair price for both the consumer and the investor, however only CEB and Ceylon Petroleum Corporation prices are currently regulated by the PUC by gazette notification, he said.
Kelegama also pointed out that over the years exports as a percentage of GDP had fallen from 24% to 18%.
He said that in contrast Vietnam’s export revenue last year was US$ 72 billion, while that of Sri Lanka’s was a mere US$ eight billion. Vietnam’s per capita GDP income was US$ 1,174; while that of Sri Lanka’s was US$ 2,399.
Kelegama emphasized the importance of Sri Lanka going in for high tech. exports.
Senior Minister (Prof.) Tissa Vitarana in his speech said that only 1.5% of the island’s exports go as high tech. exports.
Peradeniya Univerisity’s Political Science Professor Dr. Sumanasiri Liyanage another speaker, here questioned the wisdom of the Government narrowing its goals in the sphere of education to only IT and English. “Why not make a target of achieving 10% of exports as high tech. exports,” he asked.
Meanwhile Kelegama warned of falling in to the middle income trap because of the inability to go in to the next level due to not making the necessary second round of reforms. Kelegama cited Thailand and Argentina as examples in this score.
He said that to move over from US$ 800 to US$ 2,500 per capita GDP income was comparatively easier than moving up to the next level, from US$ 2,500 to US$ 6,500.
Kelegama further said that some of the Taxation Commission’s recommendations to increase tax revenue to the 18-20% of GDP level had been incorporated in Budget 2011.
He said that because of Sri Lanka’s ageing population dependents were increasing. A way out was to increase women’s participation in employment which is still low despite the fact that women play the predominant role in Sri Lanka‘s top three foreign exchange earning sectors, Kelegama said. Female participation in the labour force is 35%, he said.
Kelegama also said that in the Government’s five hub status plan, to achieve some of those, India cannot be ignored.
In connection with making Sri Lanka an air hub, he said that the island is ideally located between two hubs, Dubai and Singapore, to make this a reality. But for it to happen, open skies arrangements and such like will have to be on board.
*Aggregate level growth is mostly determined by the investment level in the economy and its efficiency in converting that investment to output (called the incremental capital output ratio (ICOR)). The economy’s current ICOR is close to five, but if we assume that with all the improvements made in the economy and with better connectivity that ICOR reduces close to four, then with an investment level of between 32-35% of GDP Sri Lanka will be able to sustain an over 8% growth rate, Kelegama in a note said. (See also page 44).