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5 December, 2017 00:00 00 AM

Sri Lanka’s trade imperative – Analysis

Amresh Gunasingham

Optimism in Sri Lanka following the end of Mahinda Rajapaksa’s presidency in 2015 saw civil and political freedoms liberalised, ethnic relations improved, and foreign relations with China and India rebalanced. However, the government’s scorecard in managing the economy has been disappointing, with analysts pointing to large excesses in fiscal and monetary policymaking. This has arguably contributed to a slowing economy and mounting debt. This paper emphasises the need for the government to boost exports and foreign investments, revamp the tax system and lower barriers to competition in key domestic sectors to improve the economy.

Sri Lanka should be sitting pretty. Eight years on from the end of a three-decade long civil war, the country must appear to be reaping a peace dividend – growth was initially strong between 2009 and 2014. The new government, elected in 2015, inherited an economy with great potential – Sri Lanka is strategically located within a rising Asia and the Indian Ocean region.

However, economic growth is on the decline, falling from a peak of eight per cent in 2009 to 4.8 per cent in 2015 and 4.4 per cent in 2016, according to data from the Department of Census and Statistics of Sri Lanka. This is expected to remain stagnant in 2017.

The economic recovery in the United States (US) has boosted the country’s exports, although the trade deficit has surpassed $1 billion. Government debt is at 77 percent of the country’s Gross Domestic Product (GDP), which stands at $112 billion this year, while inflation reached five per cent due to increased domestic consumption.

Unemployment, on the other hand, is estimated at four percent. The budget deficit for this year is expected to reach five per cent, mainly due to government expenditure on bureaucratic salary increases and a drought that severely reduced agricultural output.

Growth is expected to improve gradually over the next two years. The Economic and Social Survey of Asia and the Pacific 2017 released earlier this year by the United Nations Economics and Social Commission for Asia and the Pacific highlights agriculture activity to recover from adverse weather conditions experienced last year and in the early months of this year. The banking sector has loosened regulations for granting loans, while construction is resurging, particularly in areas affected by the recent civil war. The service sector contributes 60 percent to GDP.

However, a major challenge will be the fiscal tightening undertaken by the government that will constrain consumer spending and public investment, according to the report.

It concludes that the country’s medium-term economic performance is contingent upon the success of reforms designed to reduce stubbornly large fiscal and trade deficits.

The rest of this paper will examine Sri Lanka’s trade deficit conundrum in greater detail.

Sri Lanka is grappling with a severe trade imbalance, capital outflows and inadequate foreign investment. Due to exports being only a little over half of the country’s import expenditure, the large trade deficits of recent years has been an important reason for the country’s weak foreign exchange reserves. The trade deficit of $10.2 billion in 2013 expanded to $11.4 billion in 2015 and to more than $12 billion in 2016, In the current account, which is the sum of the trade balance, net income from abroad and other transfers, the trade deficit was offset by remittances of about $11 billion and tourist earnings of $4.7 billion. However, these incomings do not paper over the fundamental weakness in the economy of imports being considerably higher than export earnings. The data paints a vivid picture of Sri Lanka and its overreliance on imports and inability to boost exports – an issue that stretches back decades. One major reason is the rising cost of producing goods domestically. In simple terms, as Sri Lanka upgraded to a middle income status country, the wages of labourers rose, making it difficult for Sri Lanka to compete internationally, as production costs are lower in countries like Bangladesh.

The writer is a Research Intern at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore


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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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