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Investments Need To Increase From 19% To 27% G.D.P.

Jun 12, 2010 3:11:25 PM - thesundayleader.lk

The country’s growth rate can increase from 6% to 8% of g.d.p. if private sector investments grow from the current 19% of g.d.p. to 27%, a World Bank (W.B.) official said.
Ernesto May, W.B.’s South Asia Region Economic Policy Sector Director however admitted to reporters here on Monday that to achieve an eight percentage point gain in private investments was a humongous task  (1% of g.d.p.=Rs. 50 billion). Those included f.d.i. and domestic investments.
A B.o.I. official said that f.d.i. inflows in the first five months of the year was U.S.$ 100 million (2% of g.d.p.) which was the same as last year. He attributed this sluggishness to the elections here, coupled with the global economic crisis. B.o.I. targets a U.S.$ one billion (20% of g.d.p.) f.d.i. inflow for the year.
Central Bank of Sri Lanka (C.B.S.L.) in its 2009 Annual Report expects the economy to grow by 7-8% in the medium term and says that the required investment to achieve such growth is 30% of g.d.p.
The economy is expected to grow by 6% this year, double that of last year’s growth rate of 3½% of g.d.p.
For an 8% growth, the private sector should be “crowded in,” said May.
“Creating fiscal space is the most challenging, especially giving fiscal space to the private sector.”
Economists blame that due to the country running huge budget deficits (it was 9.8% last year),that that has crowded out private sector investments due to high interest rates which make borrowings too costly.
Last year private sector credit growth by commercial banks was in negative terrain (-5.7% (Source: C.B.S.L.)) and this year to date it has been sluggish.
May said that the private sector is the engine of growth.
He said that the W.B. has a programme in place to facilitate access to finance for the s.m.e. sector.
“Sri Lanka was recently ranked 105th in the W.B.’s ‘Doing Business’ indicator, it’s sliding down in its competitiveness,”’ warned May. There are other countries to which investors can go to.
May further said that public investment has been targeted at 6% of g.d.p. But that investment needs to complement private sector investment. “It’s important to know to which areas public investments are directed at.”
Former Central Bank Governor W.A. Wijewardena in a recent lecture said that the Mexican Government in the 1980s invested in a world class port from the monies they got from exporting oil. “But no ship docked in that port,” he added. Shades of Hambantota Port, eh what?
May also emphasised the importance of increasing tax revenue. Tax revenue to g.d.p. was 15%, said May. He added that a 2½% g.d.p. cut in the fiscal deficit would add to a “1.5% per capita income gain.”
Sri Lanka’s per capita g.d.p. income last year was U.S.$ 2,053 according to C.B.S.L. President Mahinda Rajapaksa in a recent interview to a foreign newspaper said that his intention was to double Sri Lanka’s per capita income to U.S.$ 4,000 by the end of his tenure in office which is 2016.
May also warned of the dangers of running huge public debt. “In this part of the region public debt is over 60% of g.d.p.,” he said. Sri Lanka ran a public debt of 86% of g.d.p. last year, with Government revenue virtually eaten-up by debt servicing.
“Recent events in Greece and Portugal have shown the dangers of running huge public debt,” said May.
He also emphasized the importance of restructuring state owned enterprises and proper subsidy targeting. “Petroleum sector and subsidies eat-up to between 4-6% of g.d.p.”
The end of the conflict would however result in a 2% gain to the economy, provided the right policies are in place.
May placed the importance of sustainable peace, especially finding jobs to the ex-combatants and the youth of this country.
W.B.  Country Director in Sri Lanka Ms. Naoko Ishii said that the recent restructuring of ministries geared to be private sector friendly was a welcome sign. The public sector is questioning the role of the state which is also a welcome sign.
The public sector needs to be a facilitator, with the right policies in place, so that the private sector could take-off. Space is being provided to the private sector.She said that in their programmes in the North and East, those are targeted at the grassroots levels, in particular listening to the “voice of the people,” in formulating their development strategy. She stressed the importance of not only rehabilitating the physical infrastructure in the war torn areas, but also its human capital. It was also told at this briefing, which was a video conference focusing on  South Asia (S.A.), and linked up with W.B. offices in Nepal and Washington, the importance of S.A. to “go East,” giving the example of Maldives, which now attracts a high volume of Chinese tourists.