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
 -5
0
5
10
15
20
25
30
open Stabilization

open
development

closed development

Inflation

open
stabilization and
GDP Growth

development
Economic Performance

open stabilization
Figure 1 – GDP Growth and Inflation since 1950

9
 Economic Performance
GDP Annual Growth Rate

GDP Annua l Gr o wth Ra te

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
18%
39% 42%

Services Industry
Industry
19%
56% 26%

11
 Economic Performance
Investments and Savings

30

25
As a % of GDP

20

15

10

0
2000 2001 2002 2003 2004

Investment National Savings

12
 Economic Performance

Employment
60 10
50
Labour Force Participation

Unemployment Rate
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
10
per cent

5
0
-5
Jul-03

Jul-04

Jul-05
Jan-03

Oct-03

Jan-04

Oct-04

Jan-05
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
12/3/2003

12/3/2004
6/3/2003

6/3/2004

9/3/2004

6/3/2005
3/3/2003

9/3/2003

3/3/2004

3/3/2005
R e po R a te R e ve rs e R e po R a te We ighte d Avg. C a ll M o ne y R a te
15
 Economic Performance
 International Trade
C o m p o s i t i o n o f Ex p o rt s
Othe r
3% Agr i c ultur a l
pr oduc ts
19%

C o m p o s i t i o n o f Im p o rt s
Indus tr ia l Other
pr oduc ts
0.4% Consumer goods
78%
20.4%
Investment
goods
20.9%
Inter mediate
goods
58.3% 16
 Economic Performance
 Balance of Payments

Balance of Payments
600

400

200

0
2000 2001 2002 2003 2004
-200

-400

-600

17
 Economic Performance
 External Reserves

EXTERNAL ASSETS -2001- 2005 (End June)

3 ,50 0

3,687
3 ,0 0 0

2 ,50 0
USD M n

2 ,0 0 0

2,378
1,50 0

1,0 0 0

50 0

Mont h

Total Gross

18
 Economic Performance
 Exchange Rate
Exchange Rate : Jan 2003 - August 2005
108
106
104
102
100
Rs./U S$

98
96
94
92
90
88

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

REER Monthly Indices

108
106
In d e x N u m b e r

104
102
100
98
96
94
REER -24 currency
92 REER- 5 Currency
90 Series4
Series5

21
 Economic Performance
 Government Finance

Government Revenue (% of GDP)

20

15
Per cent of GDP

10

0
2000 2001 2002 2003 2004 2005
(Est.)

Budgeted Revenue Actual Revenue

22
 Economic Performance
 Government Finance
Government Expenditure (% of GDP)
30

25

20

15

10

5
2000 2001 2002 2003 2004 2005 E s t.

Budgeted Expenditure Actual Expenditure

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

100

80
%

60

40

20

0
2000 2001 2002 2003 2004 2 0 0 5 Est.

Do m es tic Fo reign
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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