The Hindu Business Line : `Our major problem is poor progress of economic reforms'

INFLATION of nearly 13 per cent and lack of political will to carry out economic reforms, particularly in the public sector, is a great cause of worry for the Sri Lankan economy, Ms Dushni Weerakoon, Deputy Director of the Institute of Policy Studies, Colombo, told Business Line in an interview.

Excerpts:

With the peace process in limbo and the tsunami havoc, what is the state of the Sri Lankan economy?

This year, we're not expecting a major rebound of the economy; in fact there has been a downward revision of the GDP growth to 5.3 per cent. Last year, it was 5.4 per cent. The anticipation is that next year, with the donor money coming in and the reconstruction process getting under way, we will see a bounce in the economy.

But the major problem is that Sri Lanka has not had any kind of economic reform agenda being pushed through since last year. We've been fairly stagnant on the economic reforms front. We had a weakening of macroeconomic indicators last year; the rupee depreciated by about 8 per cent against the dollar, foreign reserves were climbing and inflation was picking up. To some extent, in the post-tsunami environment, things have changed and helped the Government because of the donor money coming in.

How much money has come in?

The donor package was $2.2 billion for the tsunami reconstruction, to be spread over two to three years. Normally we get about $800 million a year; with the additional tsunami inflow it will increase to $1.2 billion in 2005. But reconstruction is not actually steaming ahead; there are problems with allocating land for housing reconstruction, so things have slowed down.

But the major indicator of macroeconomic weakness is that inflation is running nearly at 13 per cent at the moment. The Government has been a bit hesitant in tightening monetary policy to reign in inflation. Credit growth is running at 20 per cent in both public and private sectors and we're subsidising the petroleum corporation trying to absorb the increase in global oil prices.

So that means that unless there is a policy tightening in these areas, we can expect to see inflation continuing to remain high... about 12.7 per cent on an annualised basis. And the fiscal situation is also not entirely stable.

We're talking about a deficit of 9.6 per cent this year; the original target was 8 per cent.

What are the key economic reforms that you're looking for?

The key reforms we're looking for in terms of stability of the macro-economy pertain to the public enterprises.

This Government, when it came in, decided it will not go aggressively for privatisation, and will limit itself to restructuring of public enterprises.

That, again, has run into problems because the trade unions have been striking when any of that is even mentioned. So the Government has been postponing or delaying things. We have Ceylon Petroleum Corporation, the Ceylon Electricity Board, etc that are absorbing so much of subsidies and there is no clear indication where the restructuring process is headed. So the primary area where we need to see reforms is in public enterprises.

How is the agriculture scenario and how much is your economy dependant on it?

The agriculture sector contributes about 19 per cent to our GDP. But that isn't truly reflected in terms of its importance to the rural economy because it still provides about 37 per cent of the labour force. Almost 80 per cent of our population is still considered to be rural. The main driving force for the Sri Lankan economy is the services sector.

This year, we had a fairly good harvest. But it is not the most dynamic sector and we don't expect it to be the most dynamic sector in terms of driving economic growth.

Meanwhile the peace process is in limbo?

Yes, in a sense. But it's a bit unfair to say that the lack of progress on the peace process has been the key reason why the economy has not progressed.

It is not a fair excuse. If there was a very clear policy programme, reforms were happening, things were moving... the economic performance is de-linked from the peace process. Earlier the key link was that if no bombs went off, the tourists came in. Of course, if we had permanent peace, the economy would respond to it, but even now I don't think we can blame the lack in economic progress to the tardy progress of the peace process.

How is the tourism sector doing?

Tourism was hit quite a bit in January and February due to the tsunami but by March-end, the numbers were improving.

Again, there was a lot of optimism that the tourist industry would recover and people are quoting statistics to say, look, tourist arrivals have increased. But a lot of that increase in arrivals is not really linked to tourists but to the donors and foreign NGO travellers. Indian visitors have increased after the free visa on arrival.

The hotel industry still says their occupancy rates continue to be low, especially in the coastal areas. Even the local tourists are reluctant to go to the beaches. Last year, we had the highest number of arrivals at 5,00,000 and there was a certain degree of expectancy that we'll improve on it in 2005. But unfortunately

I don't think we'll even get close to that number this year.

Do you get upper-end tourists?

We're slowly changing and the tourism industry is now marketing eco tourism and wildlife, they're trying to draw the high-spending tourists.

But the majority of our tourists are still the lower end... beach and sand type of tourists coming in holiday groups.

Do professional women like you feel sad that the country's economy — particularly foreign remittances — are dependent on so many Sri Lankan women going abroad as domestic help?

Yes, this contributes 6 to 7 per cent of the GDP. We have about 8,00,000 workers in the Middle East, mostly women; and that is the legal number.

Yes, I do feel it is sad that we're still exporting labour in this fashion and from all the studies that we have done, their working conditions are very harsh, and there are a lot of cases of abuse. But paradoxically, about two years ago, when the garments industry in the Kattunayake export processing zone advertised for 15,000 workers, there were no takers for those jobs. But you still find this outflow of the same category of young females going out to the Middle East.

I think it's also got to do with the glamour of going overseas and more money.

But unless and until we start providing better employment opportunities, this will continue. The problem is more complex; with the phasing out of the garment quotas, a good portion of the 3,00,000 largely female workers in the industry might be laid off in the next two to three years. So, again, the sole source of employment they had in Sri Lanka in the garments industry may be under threat.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page