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Macroeconomic Trade and Investment Environment in Sri Lanka

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Macroeconomic Trade and Investment Environment in Sri Lanka Powered By Docstoc
					Situation Analysis and Current
Issues of Sri Lankan Economy
with Special Emphasis on Fiscal
and Debt Issues


      Dr. H. N. Thenuwara
      Director
      Economic Research Department
      Central Bank of Sri Lanka
      30 August 2005
                              1
                Outline
 Salient Features of the Economy
 Economic Environment
 Economic Performance
 Major Fiscal and Debt Issues
 Threats and Challenges
 Strategies

                                    2
        Salient Features
 19.5 mn – Population in 2004
 Rs. 2,029 bn - Nominal GDP in 2004
 US$ 1,031 - Per capita income in 2004
 7.6 % - Inflation in 2004
 Rs. 311 bn – Govt. revenue in 2004
 Rs. 477 bn – Govt. expenditure in 2004
 Rs. 165 bn – Budget deficit in 2004
 8.2% of GDP- Budget deficit in 2004
                                           3
         Salient Features
 35:65 – Hydro-thermal ratio
 $ 64 /brl – Average international price of
  oil in August 2005 (Brent)
 $ 44/ brl – Average international price of
  oil in January 2005 (Brent)
 $ 1,209 mn – Oil import bill in 2004
 $ 1,702 mn – Oil import bill in 2005 (est.)
 11.5% – Export growth (Jan – June ‘05)
 10.3% - Import growth (Jan – June ‘05)
 105.5 - Govt. debt as a % of GDP in 2004
                                                4
Economic Environment

• External Environment
• Domestic Environment




                         5
    External Environment
 IMF projects the global output growth in
  2005 to be around 4.3 per cent
 This growth momentum is expected to
  continue in 2006 at around 4.4 per cent,
  although some downside risks remain, as
  oil prices continue to rise unabated.




                                         6
   Domestic Environment

– Open Liberal Economic Policies
– Extent of the Market
– Dependence on Weather
– Energy Restrictions
– Country’s Budget Constraints
   • Domestic resources constraint
   • External resources constraint




                                     7
   Economic Performance

Per Capita Income – Selected Countries (in US$)

Sri Lanka          1,031 (in 2004)
India              478 (in 2002)
Malaysia           3,881 (in 2003)
Singapore          21,531 (in 2003)
USA                35,060 (in 2002)
                                                  8
  Economic Performance
Figure 1 – GDP Growth and Inflation since 1950




                                                 9
      Economic Performance
GDP Annual Growth Rate

                    GD P A nnua l Gr owt h R a t e
  8
  6

  4
  2

  0
 -2
      2000   2001        2002            2003        2004   2005 Proj.
                                                                         10
                  Economic Performance
     Composition of GDP in Sri Lanka


           1950
                                             2004       Agriculture
Services                       Agriculture
  39%
                                                           18%
                                  42%




                                             Services      Industry
                    Industry
                      19%
                                               56%           26%




                                                                      11
                Economic Performance
                            Investments and Savings

                30

                25
As a % of GDP



                20

                15

                10

                5

                0
                     2000      2001          2002       2003     2004

                                Investment    National Savings




                                                                        12
             Economic Performance

                                          Employment
                             60                                                 10
Labour Force Participation




                                                                                     Unemployment Rate
                             50                                                 8
                             40
                                                                                6
                             30
          Rate




                                                                                4
                             20
                             10                                                 2

                             0                                                  0
                                  2000   2001     2002     2003     2004
                                  Labour Force Participation Rate (Left Axis)
                                  Unem ploym ent Rate (Right Axis)
                                                                                                         13
               Economic Performance
 Inflation

                                      Inflation (Point to Point)
               20
                                         SLCPI
               15
                                         CCPI
    per cent




               10
               5
               0
               -5
                    Jan-03




                                                         Jan-04




                                                                                             Jan-05
                                       Jul-03




                                                                           Jul-04




                                                                                                               Jul-05
                                                Oct-03




                                                                                    Oct-04
                             Apr-03




                                                                  Apr-04




                                                                                                      Apr-05
                                                                                                                        14
              Economic Performance
 Interest Rates

                   Repo, Reverse Repo and Call Money Rates


              12.00
              11.00
              10.00
   Per cent




               9.00
               8.00
               7.00
               6.00
                      3/3/2003

                                 6/3/2003

                                             9/3/2003




                                                                    3/3/2004

                                                                               6/3/2004

                                                                                           9/3/2004




                                                                                                                  3/3/2005

                                                                                                                             6/3/2005
                                                        12/3/2003




                                                                                                      12/3/2004
                Repo Rate                   Reverse Repo Rate                             Weighted A vg. Call M o ney Rate
                                                                                                                                        15
                       Economic Performance
            International Trade
         C omposi t i on of Ex por t s
               Other
                3%                 A gr i cul tur al
                                     pr oducts
                                         19%




                                                               C o m p o s i t i o n o f Im p o rt s
Industr i al                                                 Other
pr oducts                                                    0.4%                               Consumer goods
   78%
                                                                                                    20.4%
                                                       Investment
                                                          goods
                                                          20.9%
                                                                                                 Inter mediate
                                                                                                     goods
                                                                                                     58.3%       16
     Economic Performance
 Balance of Payments




                            17
     Economic Performance
 External Reserves




                            18
     Economic Performance
 Exchange Rate




                            19
       Exchange Rate Management
 Sri Lanka moved to independently floating
  exchange rate regime from 23 January 2001.
 The exchange rate stabilized within a short
  period after an initial overshooting.
 The rate behavior is monitored against a
  basket of 24 currencies.
 The rate has been depreciating at an annual
  rate of about 5 -7% over the past few years.
 Depreciation against US$ in 2004 is about
  6.2%.
 Appreciation against US$ so far in 2005 is
  about 3.7% (as at 26 August)                   20
    Economic Performance
 Exchange Rate Regime




                           21
                    Economic Performance
 Government Finance

                           Government Revenue (% of GDP)
                    20

                    15
  Per cent of GDP




                    10

                    5

                    0
                         2000       2001     2002      2003     2004   2005
                                                                       (Est.)

                                Budgeted Revenue    Actual Revenue
                                                                                22
    Economic Performance
 Government Finance




                           23
          Economic Performance
 Government Finance
           Outstanding Government Debt (% of GDP)
  120

  100

     80
 %




     60

     40

     20

      0
           2000   2001       2002      2003   2004   2005 Est.

                         Domestic   Foreign
                                                                 24
Fiscal and Debt Related Issues
Major Issues
   Declining revenue GDP ratio
   Lower level of public investment
   Persistently high budget deficits
   Relatively high debt/GDP ratio




                                        25
Fiscal and Debt Related Issues
Medium Term Policy Direction
 Fiscal Management (Responsibility)
  Act (FMRA) and related targets
 Medium Term Macroeconomic
  Framework and Fiscal Targets
  therein


                                       26
    Threats and Challenges
 Oil prices
 Trade gap
 Low export base
 Infrastructure
 Adv selection and moral hazard and
  State Owned Enterprises (SOEs)
 Political stability
 Human capital
                                       27
      Threats and Challenges
 Oil Prices
   – International energy prices may continue to be high,
     due to excessive demand from high growing
     economies
   – Oil reserves are adequate for few more decades (only
     for 36 years), but new fields are also being discovered
   – Coal deposits may last at least 200 years, but prices
     may increase
   – Coal usage will also have environmental concerns, but
     new research may pave way for cleaner coal usage

                                                               28
    Threats and Challenges
 Trade Gap
  – Trade gap widens with high demand for
    imports
  – Exchange rate will have to adjust if other
    inflows are not forthcoming




                                                 29
    Threats and Challenges
 Low export base
  – Exports are not yet diverse enough.
  – However, a several initiatives have begun to
    encourage export diversity




                                                   30
  Principal Agent Problem and
    State Owned Enterprises
 Government as the principal has to depend
  on other agents to run state owned
  enterprises
 In general state owned enterprises are slow
  due to rules and regulations imposed to
  avoid the principal agent problem.


                                                31
               Strategies
 Economic expansion to avoid
  – Low purchasing power high consumption
    needs
  – Too many people doing meager tasks
 Floating rates – low reserves
  – Malaysia India Thailand
 Developing infrastructure

                                            32
              Strategies
 Developing Human Capital
 Developing technology
 Encouraging research and development
  (R&D)




                                         33
The End


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