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Sri Lanka’s growth model needs to be modified: Economist
29 Apr, 2015 07:01:41
Apr 29, 2015 (LBO) – Sri Lanka needs to rethink its growth model as the current system is severely constrained due to the Island’s fragile debt dynamics, a senior economist said.
“Over the last 6 – 7 years, Sri Lanka’s growth model has been based on commercial external borrowing led infrastructure development,” Indrajit Coomaraswamy, Deputy Chairman of Pathfinder Foundation, a policy advocacy group said.

“The headroom for continuing this model is now severely constrained due to the fragile debt dynamics,”

“Sri Lanka’s debt to Gross Domestic Product (GDP) ratio is 75 per cent but other countries with the same level of growth as Sri Lanka have a median of 44 per cent.”

According to the governments provisional data, the outstanding debt of the government as at end 2014 was 7,373 billion rupees, which reflects a per capita debt of 357,233 rupees.

The new rulers estimate total debt will increase to 8,817 billion rupees and the per capita debt will also increase to about 427,220 rupees for the last year.

The last regimes Budget 2015 expected total revenue of 1,594 billion rupees, which consisted of 1,400 billion rupees of tax revenue and 194 billion rupees of non- tax revenue.

Total expenditure and net lending was 2,990 billion rupees of which recurrent expenditure was 1,465 billion rupees.

Capital expenditure and net lending was 685 billion rupees. The estimated deficit in Budget 2015 was 521 billion rupees or 4.6 per cent of GDP.

Coomaraswamy says, while the Islands external debt service ratio is 25 percent, the ‘rule of thumb’ is that anything above 20 per cent is ‘amber light territory.’

“Sri Lanka’s total debt servicing absorbs all the government’s revenue,”

“This means that every cent of public expenditure beyond debt-servicing has to be financed through domestic and foreign borrowing,”

“The new growth model would need to be private investment led export expansion and foreign Direct Investment (FDI) would have to play a major role.”

Why FDI

Successful development outcomes can be generated by a whole spectrum of state or private sector structures but this can vary from China and Vietnam at one end hand to Hong Kong on the other, Coomaraswamy said.

However, Sri Lanka’s public debt profile does not provide the scope for a ‘statist’ development model he said.

China’s debt to GDP ratio was 20 per cent at the time of its transformation and private investment was the locomotive of growth and development, Coomaraswamy said.

“If one is to achieve the growth target of 8 per cent, one requires investment to be 34 per cent of GDP. In Sri Lanka it is currently 29 per cent,”

“Given the country’s debt dynamics the shortfall of five per cent of GDP is best filled through non-debt creating flows, particularly FDI. “

The other option, Coomaraswamy says is to squeeze consumption which is not politically feasible in a democratic system.

“The challenge will be to increase FDI from its current 1 billion US dollar level to about 3.5 – 4 billion US dollar a year,’

“Not only does FDI fill the savings and investment gap but it also brings with it technology, markets and knowledge.”

In 2014 FDI increased by 9.2 per cent from 84 million US dollars to one billion US dollars according to statistics from the Central Bank’s annual report while FDI in 2013 declined by 2.7 per cent from a year earlier to 916 million US dollars.

It was reported that Sri Lanka had 1.4 billion US dollars in FDIs last year but it was reduce to one billion US dollars, according to the international way of computing investments.

Why Exports

Coomaraswamy says with a domestic market of 21 million people, one cannot sustain accelerated 8 per cent growth for 10 – 15 years without export expansion.

"All the successful countries in East and South East Asia have adopted the export led growth model,"

"It is important to sustain 8 per cent plus growth over 10 – 15 years or even more. This was achieved by these successful countries."

"Such a growth model places a very high premium on competitiveness as there are over 190 countries competing for FDI and penetrating export markets is extremely challenging."

Therefore Coomaraswamy says, it is important to get policies, pricing and regulation right in the power and energy sector to achieve the level of competitiveness necessary to attract FDI and sustain an export led growth model.

China achieved an average growth rate of 9.3 per cent over the last 30 years, data shows.

In Sri Lanka in the first quarter of 2014 provisional exports totaled 2.8 billion US dollars while the comparative 2013 first quarter total exports stood at 2.36 billion, a growth of 15.7 per cent.

(Updated)

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