Sri Lanka set to become upper middle-income by 2025

There are signs of stabilisation in investor confidence in the country

For a largely agricultural country, Sri Lanka is witnessing brisk economic growth, which the government and even international analysts believe will propel it to the upper middle-income country category by 2025.

The government is focused on inclusive growth, good governance and private sector development. Travelling across the island nation, as this correspondent has done on a few occasions, gives one an insight into the tremendous possibilities for growth.

The capital Colombo is a bustling and vibrant city, with most businesses - large, medium-sized and small entities - witnessing continuing growth. Travelling from Colombo to Galle, located in the southernmost part of the nation, gives one a good perspective of the tremendous agricultural potential of the nation.

In contrast to the vibrancy of its cities, Sri Lanka - with a population exceeding 20 million - is a lovely island dotted with wonderful and scenic places, lush green fields, dense forests, quiet beaches, sprawling fields and rich flora and fauna.

Sri Lanka's primary food crop is rice, which is cultivated twice a year. Tea, a major source of foreign exchange, is cultivated in the central highlands, while the other parts of the country produce fruits, vegetables, cocoa, spices, coconut and rubber.

Tea, tourism major source of foreign exchange

While tea and tourism are the major source of foreign exchange, Sri Lanka also exports precious and semi-precious stones. And Sri Lankans employed abroad, including the Gulf, are also major remitters of funds.

On February 4, 1948, Sri Lanka (then known as Ceylon) won independence from the British. According to the World Bank, its social indicators rank among the highest in South Asia and compare favourably with those in middle-income countries.

Sri Lanka had a GDP per capita of $4,073 in 2017, according to the World Bank. "Following 30 years of civil war that ended in 2009, Sri Lanka's economy grew at an average 5.8 per cent during the period of 2010-2017, reflecting a peace dividend and a determined policy thrust towards reconstruction and growth," says a World Bank report.
The Lankan economy is transitioning from a predominantly rural-based one towards a more urbanised economy oriented around manufacturing and services.

The country has also made significant progress in its socio-economic and human development indicators. Growth has resulted in 'shared prosperity' with the national poverty headcount ratio declining from 15.3 per cent in 2006/07 to 4.1 per cent in 2016, says the World Bank.

Surpassed MDG targets

The country has comfortably surpassed most of the Millennium Development Goal (MDG) targets set for 2015 and was ranked 73rd in the Human Development Index in 2015.
Dr. Indrajit Coomaraswamy, the Governor of the Central Bank of Sri Lanka, noted recently that the nation's economy had faced heightened challenges in 2018, emanating mainly from the global economic, financial and geo-political developments that adversely affected the external sector.

"Sub-par economic growth continued in 2018 following subdued growth in 2017," he said. "Favourable weather conditions supported a rebound in the agriculture sector while the expansion in services activities has been broad-based."

But industrial activities slowed in 2018 because of a slowdown in the construction sector. Thankfully, consumer price inflation remained low in spite of temporary ups and downs due to volatile food prices and administrative price adjustments.

Referring to the external sector, the central bank's governor noted that the growth in export earnings was outpaced by the expansion in import expenditure, although earnings from tourism, workers' remittances, foreign direct investment (FDI) and debt-related inflows to the government helped cushion the balance of payments (BOP) to some extent.

Signs of stabilisation, investor confidence

Commaraswamy believes that investor confidence in Sri Lanka is stabilising after the country repaid its $1 billion sovereign bond recently. "We see signs of stabilisation in investor confidence especially after we paid the loan without much difficulty," he told a news agency.

Sri Lanka's banks have also won plaudits from international agencies. The Asian Development Bank (ADB) says the country's banking industry has continued to manage its risks prudently while maintaining a comfortable level of liquidity and capital, and ensuring credit quality.

"The country also has solid foundations led by a strong regulator in the Central Bank of Sri Lanka, one of the premier central banks in South Asia and beyond," said the ADB.
There were more than 30 licensed banks in Sri Lanka at the end of 2017, whose asset base grew by 12.3 per cent because of increased lending to the manufacturing, trading and construction sectors. These three segments account for 43 per cent of the total bank credit exposure.

Sri Lankan President Maithripala Sirisena, who was on a state visit to the Philippines last month, also visited the ADB headquarters there. The bank's total commitment to Sri Lanka this year will add up to $815 million.

"Sri Lanka highly values the assistance provided by ADB to various development plans of our country," said Sirisena. "The economic cooperation extended by ADB is of extreme benefit to the countries grappling with development issues."

Improving public finance

Takehiko Nakao, the ADB President, commended him on Sri Lanka's achievements in reducing poverty to low single digits and improving human development. Building on its achievements so far, Sri Lanka needs to seek higher growth to achieve the goal of becoming an upper middle-income country by 2025.  

"The (Sri Lankan) government has taken encouraging steps to strengthen the country's public finances and it is essential to continue those measures to reduce debt," said Nakao.

Christine Lagarde, Managing Director, International Monetary Fund (IMF), met Sri Lanka's Finance Minister Mangala Samaraweera and Coomaraswamy of the central bank last month.

"We discussed the challenging economic environment and the policy priorities for the country," said Lagarde after the meeting. "The authorities stressed Sri Lanka's continued commitment to their economic reform agenda under the IMF-supported programme."

According to her, a strong policy mix, with effective implementation of that agenda, is key to strengthening confidence, while putting Sri Lanka on a sustainable, high-quality growth path that would benefit its people.

Many analysts expect the island nation to emerge out of the economic slowdown of the past few years and grow at a much more rapid rate - of about five per cent GDP expansion annually.

- nithin@khaleejtimes.com

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