A Happy Tran­si­tion

In the aftermath of the civil war, the Sri Lankan econ­omy has shown im­pres­sive for­ward mo­men­tum.

Southasia - - REGION SRI LANKA - By Kruthagna Na­dini Per­era

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he end of the 26-year-long civil war against Tamil rebels was in­deed a de­ci­sive junc­ture in the his­tory of Sri Lanka. For decades the coun­try re­gressed in many spheres of eco­nomic and so­cial life while the con­tin­ued ten­sion among dif­fer­ent com­mu­ni­ties due to the in­sur­gency pre­vented it from mak­ing any con­tri­bu­tion to world econ­omy. How­ever, the Sri Lankan govern­ment sur­prised many by tak­ing a strong stand against in­sur­gency and stat­ing its re­solve to end it through mil­i­tary ac­tion de­spite the fail­ure of sim­i­lar at­tempts in the past.

The in­tro­duc­tion of an ‘open econ­omy’ in 1978 and a shift from the ‘so­cial ori­en­ta­tion’ the coun­try had adopted fol­low­ing its in­de­pen­dence in 1948, proved a suc­cess­ful ex­per­i­ment. Sri Lanka recorded an an­nual growth rate of 6 per­cent in the re­gion un­til 1986 be­cause of its poli­cies that en­cour­aged pri­vate sec­tor in­vest­ments and its ex­port-ori­ented econ­omy that helped in­crease for­eign earn­ings. When the civil war started, the coun­try’s econ­omy recorded a sig­nif­i­cant de­cline with a 2.7 per­cent an­nual aver­age dur­ing 1986-1989 and around 5 per­cent in the decade af­ter

The mil­i­tary’s vic­tory over the LTTE sep­a­ratists brought in its wake many se­ri­ous chal­lenges – both do­mes­tic and in­ter­na­tional. It was pre­dicted that the econ­omy would suf­fer due to the af­ter-ef­fects of war and aid cuts – a key de­ter­mi­nant of the coun­try’s eco­nomic progress. How­ever, sur­pris­ingly, the con­clu­sion of the war did won­ders for the Lankan econ­omy, mak­ing it one of the fastest grow­ing economies in the re­gion. Even in 2009, growth was 3.5 per­cent de­spite the set­backs in the last stages of the war as well as the global eco­nomic cri­sis. The coun­try’s GDP growth rate av­er­aged at 6.4 per­cent dur­ing 2003-2013, record­ing an all­time high of 8.6 per­cent in De­cem­ber 2010.

In Novem­ber 2009, when Sri Lanka was fac­ing se­ri­ous chal­lenges to the sur­vival and growth of its econ­omy, Dr. P.B Jaya­sun­dera, the Sec­re­tary to the Min­istry of Fi­nance and Plan­ning and Sec­re­tary to the Trea­sury, had de­clared that the coun­try had the po­ten­tial to emerge as a grow­ing econ­omy. “With our in­creased new ca­pac­ity in terms of in­fra­struc­ture, sta­bil­ity, sound poli­cies and the likely in­vest­ments in tourism, al­ter­na­tive en­ergy, agri­cul­ture, man­u­fac­tur­ing, ur­ban de­vel­op­ment and var­i­ous other sec­tors, Sri Lanka will have greater in­te­gra­tion in global trade and fi­nance. I pre­fer not to la­bel whether the coun­try will be a fi­nance, ship­ping or a bunker­ing hub but the fact is that all these fa­cil­i­ties be­ing avail­able here is bound to make Sri Lanka a unique de­vel­op­ment cen­tre in the re­gion. Fu­ture prospects for IT and en­abling ser­vices and in­dus­tries, fi­nan­cial ser­vices, ship­ping, med­i­cal ser­vices are also great,” he said.

He also promised that the govern­ment would sys­tem­at­i­cally build up its poli­cies to .cre­ate a knowl­edge and skill-based econ­omy. “We have shifted from be­ing a lit­er­ate so­ci­ety to an ed­u­cated so­ci­ety. From an ed­u­cated so­ci­ety we are mov­ing to­wards be­com­ing a knowl­edge and skilled so­ci­ety. Our doc­tors have re­vamped our med­i­cal ser­vices and in our own way we have suc­ceeded in at­tract­ing in­vest­ments to this area,” he de­clared.

Mas­sive eco­nomic and so­cial in­fra­struc­ture de­vel­op­ment took place in the fol­low­ing years and Sri Lanka made sig­nif­i­cant progress. The prob­lem of in­ad­e­quate in­fra­struc­ture was tack­led and many de­vel­op­ment projects were un­der­taken that sup­ported the mid­dle-in­come tran­si­tion of Sri Lanka.

The de­vel­op­ment of sea­ports and air­ports has played an im­por­tant role in ful­fill­ing the govern­ment’s aim to make the coun­try a leading avi­a­tion, nav­i­ga­tion and trad­ing hub in the re­gion. The ex­pan­sion of the Colombo South Port, de­vel­op­ment of the Ham­ban­tota Port, ex­pan­sion of Ban­daranaike In­ter­na­tional Air­port and con­struc­tion of a sec­ond In­ter­na­tional air­port at Mat­tala (in the south­ern prov­ince of the coun­try) are some of the sig­nif­i­cant projects un­der­taken af­ter the end of the civil war.

Fur­ther­more, the de­vel­op­ment of high-mo­bil­ity road net­works is seen as a move to ad­dress the de­lays in road de­vel­op­ment and trans­porta­tion caused by the war. The Colom­boKatu­nayake Ex­press­way ( 25km) and the South­ern High­way ( 126km) has been com­pleted, while the Outer Cir­cu­lar High­way (28km) in the Colombo met­ro­pol­i­tan area and the Colombo-Kandy High­way (98km) are un­der con­struc­tion.

Three ma­jor projects were un­der­taken in the power and en­ergy sec­tor. The hy­dropower project in Up­per Kot­male was com­pleted and con­nected to the na­tional grid in July 2011, The Norochcholai coal-power project, too, com­menced in 2011, with the sec­ond phase ex­pected to be com­pleted this year. An agree­ment is be­ing fi­nal­ized be­tween the Cey­lon Elec­tric­ity Board and the Na­tional Ther­mal Power Cor­po­ra­tion of In­dia to de­velop coal-power plants in Tri­co­ma­lee. The project will com­mence this year and will be linked to the na­tional grid by mid-2016.

Ad­di­tion­ally, many small-scale in­fra­struc­ture de­vel­op­ment projects such as the ‘ Maga Neguma’ ru­ral road de­vel­op­ment pro­gram, ru­ral elec­tri­fi­ca­tion projects, mi­nor ir­ri­ga­tion projects and com­mu­nity-based wa­ter sup­ply projects have con­tin­ued to fa­cil­i­tate lo­cal de­vel­op­ment. Pub­lic in­vest­ment on eco­nomic and so­cial in­fra­struc­ture de­vel­op­ment amounted to Rs.388 bil­lion (5.1 per­cent of GDP) in 2012.

How­ever, there has been harsh crit­i­cism of the sus­tain­abil­ity of growth shown through in­fra­struc­ture de­vel­op­ment and GDP rise fol­low­ing post-war de­vel­op­ments.

A think tank, Verite Re­search, has spec­u­lated that the ‘post-war growth bump has hit the ceil­ing’. The group calls for se­ri­ous ad­min­is­tra­tive and pol­icy re­forms to in­crease GDP growth in a sus­tain­able man­ner.

An ed­i­to­rial in a leading Lankan news­pa­per stated that in 2012, the de­cline in con­tri­bu­tions by the im­port trade and trans­port was mostly com­pen­sated for by a huge in­crease in the recorded GDP con­tri­bu­tion from con­struc­tion. “As a post-war driver of growth, it leapt up, tripling its sig­nif­i­cance and adding an ex­tra 1.07 per­cent to GDP growth in 2012. The prob­lem is that the main driver of con­struc­tion in Sri Lanka is govern­ment-fi­nanced ex­pen­di­ture on in­fra­struc­ture. Govern­ment ex­pen­di­ture-led growth will also not sus­tain,” said the ed­i­to­rial.

Crit­ics also point out that al­though Sri Lanka ap­peared to be a highly lu­cra­tive mar­ket for in­vest­ment even dur­ing the time of global un­cer­tainty, the for­eign in­vest­ments were pre­dom­i­nantly port­fo­lio in­vest­ments, not for­eign di­rect in­vest­ment (FDI), which pro­mote com­mod­ity pro­duc­tion and fa­cil­i­tate trans­fer of tech­nol­ogy to the econ­omy.

Nonethe­less, with Sri Lanka’s con­tours chang­ing sig­nif­i­cantly as it tran­si­tions to­wards be­com­ing a mid­dle-in­come econ­omy, the coun­try has proven to the world its po­ten­tial.

Un­em­ploy­ment and poverty rates have re­duced and the coun­try is be­ing rec­og­nized as an early achiever of 10 out of the 21 in­di­ca­tors of the Mil­len­nium De­vel­op­ment Goals, which also in­cludes goals re­lated to pri­mary ed­u­ca­tion and gen­der equal­ity. Un­de­ni­ably, the set­backs faced by Sri Lanka have not con­sumed its po­ten­tial. Rather, they seem to have pushed it for­ward in many ar­eas. The writer is a busi­ness jour­nal­ist based in Sri Lanka. She fo­cuses on is­sues per­tain­ing to trade, health and fash­ion.

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