Dec 09, 2015 (LBO) – With the end of a war and recently built infrastructure, Sri Lanka businesses are well placed to benefit from new opportunities, Eteri Kvintradze, the resident representative of the IMF, said.
Despite external vulnerabilities and concerns about fiscal consolidation, Sri Lanka can be competitive in the South Asia region, Kvintradze said.
She was speaking at the the LBR LBO Debrief: Business Climate Outlook of 2016 full-day conference held in Colombo on Tuesday.
“Sri Lanka could position itself very competitively compared to the region, because if you look at South Asia I don’t think anybody has combination of relative peace and this infrastructure.”
“The transition from war to peace was accompanied with significant infrastructure scale up. Probably 15 years worth of infrastructure was constructed in five years,” she said.
The private sector can now utilize these two dimensions: peace which comes with longer term expectations, and new infrastructure which opens opportunities for businesses.
Although a slowdown in China, declines in commodity prices and the prospect of tightening monetary policy define the current business climate, India is a bright spot and Asia will see higher growth than other regions in the world.
“India is doing quite well, and South Asia is more insulated from China’s impact because there isn’t a strong linkage with supply chains to China.”
“We are projecting Sri Lanka’s growth rate at 5.5 percent growth which is higher than the regional average.”
Prime Minister Ranil Wickremesinghe recently said Sri Lanka may seek an IMF facility next year as a prudential measure given uncertainties tied to the global economy.
The balance of payments is estimated to have recorded a deficit of 2.3 billion dollars during the first three quarters of 2015 in comparison with a surplus of 1.9 billion dollars a year earlier, according to central bank data.
According to Kvintradze, one of the Sri Lanka’s vulnerabilities is the external sector due to relatively low reserve coverage and the annual current account deficit.
“When oil prices declined it should have brought significant savings to Sri Lanka’s current account. It could have been 1-1.5 billion dollars, which is significant in the overall reserve position.”
“However, most of those savings have not materialized. The main reason was significant fiscal expansion through increases in salaries which leaked out through non-oil imports.”
The other worry is fiscal consolidation, Kvintradze said.
Sri Lanka has one of the lowest corporate income tax productivity rates in the region.
As a result, government projections for revenue increases next year look overly ambitious, given tax proposals outlined in the government budget. Analysts at the conference said the budget deficit target could likely only be met through cuts in capital expenditure.
Adjustments to the external environment are likely to come from both the exchange rate, and interest rates, they said.