SL needs to make policy changes to achieve 8 per cent growth, says IMF Representative

If Sri Lanka is to become the wonder of Asia, the country needs to tap some of the key elements and make changes for economic growth, said Dr. Koshy Mathai, International Monetary Fund (IMF) Resident Representative making the keynote speech at the 47th AGM of International Chamber of Commerce Sri Lanka held at Galadari Hotel in Colombo this week.

"On current policies of the IMF analysis, the Sri Lankan economy can grow at a rate of 6.5 per cent to seven per cent. We often hear the government talking about 8 per cent growth, but how is it possible to achieve this, is the question. There are some policy changes needed to achieve this target," Dr. Mathai said.

Elaborating on macro- economic conditions, he explained, "Most crises in the world started with fiscal origins. Too much government spending leads to financial deficits, inflation and increase in interest rates makes private sector growth difficult."

"Economists had gone back and forth over the years in exchange rate management. Today the professionals' best understanding is the flexible exchange rate regime. We have to acknowledge that there are small foreign exchange markets in the country. Very small transactions can disrupt things and prices can move quite dramatically," he added.

With regard to the investments in Sri Lanka, he said, "Looking at the national accounts, the savings ratio in Sri Lanka is about 24 per cent of GDP. The national investment is around 30 per cent which needs to rise to 35 per cent based on the historical investment patterns, if the country is to attain 8 per cent growth."

"Investments come from the public and private sector and the government needs to set the right climate for private sector investment. Having consistent policies will enable increase investment. Direct public investments need to strengthen up. Only 6 per cent of the GDP is allocated for investment and it needs to increase. China, Malaysia and Thailand have substantially high public investment ratios. Revenues are low in Sri Lanka. If you look at corporate and personal income taxes together, it adds up to only 2 per cent of GDP, whereas in Malaysia it's 12 per cent of the GDP," he noted.

Financial market development is also a key element for growth, he said. "The banking sector in Sri Lanka is relatively small. The key weakness of it is that it does not exempt long term finance. The reason is that the private sector finds it difficult to get long term finance unless they are retainers. Also the corporate debt has begun in a big way. Sri Lanka needs more public trades into the stock market and more companies to be listed and broaden the base of ownership."