Sri Lankan Economy Needs Long Game

With an aging demographic profile, Sri Lanka needs to put in place policies that will support the deepening and upgrading of its manufacturing and services base

Posted on 01/11/14
By Dushni Weerakoon | Via East Asia Forum
Sr Lankan capital Colombo has emerged as major tourist attraction over the years. (Photo by whl.travel, Creative Commons License)
Sr Lankan capital Colombo has emerged as major tourist attraction over the years. (Photo by whl.travel, Creative Commons License)

Sri Lanka’s post-conflict development aspirations have been fashioned on a simple but socio-politically persuasive argument: sustain growth at high levels and extend its benefits to more people. In this, the government that swept into power in 2010 has delivered both a stronger economic performance and rising living standards for the average citizen. During 2010–13, GDP growth has averaged 7 per cent with visible signs of reductions in absolute poverty as well as falling income inequality across sectors and provinces of the country.

 

Thus, looking at the big picture, Sri Lanka’s short-term outlook seems assuredly brighter than it did four years ago when the country was still enmeshed in a costly, armed separatist conflict. GDP growth in 2014 is expected to exceed 7 per cent, on the back of greater macroeconomic stability by way of a contracting fiscal deficit, moderate inflationary pressure, a low interest rate regime and a stable currency. Indeed, the headline numbers are such that the government can be forgiven for its rampant economic optimism. The danger is that it could breed complacency about the need for reforms.

 

The headline numbers seem to exaggerate changes in the fundamental shape of the Sri Lankan economy. Growth has been spurred by an ambitious public infrastructure investment program. The groundwork for a meaningful structural transformation of the economy that will reallocate factors of production from agriculture — which continues to absorb 32 per cent of the country’s labour force while contributing only 11 per cent towards GDP — to manufacturing and services is yet to be laid.

 

With an aging demographic profile, Sri Lanka needs to put in place policies that will support the deepening and upgrading of its manufacturing and services base, so that employment generation shifts away from the current low productivity sectors such as construction, tourism, retail trade, and the like. Sri Lanka’s capacity for growth has certainly increased over recent years with the infrastructure drive, but farsighted economic policy reforms are a must to address the depth and complexity of sustaining this higher growth momentum into the long term.

 

For now, however, a creditable economic performance has laid the foundation for electoral gains. It appears increasingly likely that the government will call for early elections, a mere four years into a six-year term won in the presidential elections in January 2010 followed by parliamentary elections in April 2010.

 

The 18thAmendment to Sri Lanka’s Constitution, passed by a two-thirds majority in Parliament in September 2010, lifted the restriction on a two-term limit for the president, and has paved the way for the incumbent to run for a third term. With the government’s popularity largely intact, the electoral outcome is almost a foregone conclusion. Indeed, such is the sense of confidence that the budget for 2014 presented in November 2013 departed from the usual electoral politics of vote-grabbing promises of jobs, transfers and subsidies. The government has also benefited from a fractious and weak opposition that has consistently failed to halt the electoral juggernaut of the president, in power since December 2005.

 

For Sri Lanka, then, unlike many of its neighbors in South Asia that have recently seen, or expect to see, electoral upheavals, there is a sense of political stability. But that is not to suggest that there are no fissures in the economy and society. The Sri Lankan economy stands more vulnerable to external shocks today given its heavier reliance on foreign financing for the country’s development efforts. In the post-war context, much of the government’s post-conflict legitimacy is derived from its overall management of the economy. Any derailment will raise opportunities to challenge entrenched interests and the political status quo. Sri Lanka’s hard won peace will then be put to the test.

 

If socio-political stability and reconciliation is to hold beyond the next electoral cycle, besides restoring the country’s physical and social infrastructure, attention must focus more sharply on building on the economic achievements already made to sustain growth into the long term. This calls for a stronger commitment to enact politically challenging growth-boosting reforms, promote good governance, build structures responsive to people’s needs, and strengthen confidence between Sri Lankan citizens and their institutions.

 

Dushni Weerakoon is deputy director and head of macroeconomic policy research at the Institute of Policy Studies, Sri Lanka.

 

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One comment

  1. Manufacturing now uses less labor due to automation/technology/robots. Services can mean low paying jobs. Sri Lanka needs to increase ability of its people to be more entrepreneurial.

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