More private sector investments key for higher growth – ADB

By Uditha Jayasinghe

The Asian Development Bank (ADB) yesterday emphasised that favourable and consistent policies leading to higher private sector investments were critical for Sri Lanka to achieve higher growth.

In its Asian Development Outlook (ADO) for 2012 released in Colombo yesterday, the ADB said that despite the improved political and economic environment, growth in private investment - domestic and foreign - is falling below planned levels.

It opined that one reason is that the Government has taken only a few steps to reduce red tape and improve the business climate needed to create the conditions for ramping up private investment. Although Sri Lanka’s position in the World Bank’s Doing Business index has improved in 2012 to 89 (out of 183 countries) from 98 in 2011, some challenges still deter private investment (Figure 3.21.9), especially paying taxes.

“Investor confidence is a key factor in attracting investment and this requires a predictable policy environment as articulated and reinforced through the legal, regulatory, and institutional framework. Thus the lack of such an environment for the private sector is a major obstacle to private sector development. Developing that framework will reduce uncertainties in the business environment and avoid unplanned actions that may send mixed signals to potential investors,” the ADB said.

It went on to say that the need for higher private sector investments was in line with Government policy.

“The Government’s Development Policy Framework for 2010–2016 aims to raise GDP growth to above 8% in the medium term and to nearly double per capita income from $ 2,400 to $ 4,200 at the end of the period.  The Government has therefore embarked on an ambitious plan to remove infrastructure bottlenecks. It has already undertaken significant investments in some sectors, especially among the major infrastructure development initiatives,” the ADB added.

“The Government, as seen in the framework, would like to see a greater role for the private sector through increased investment by both domestic and foreign investors, as investment is key for increasing supply capacity and bolstering growth. The framework also seeks private investor participation (beyond the traditional areas of industry and commerce) in infrastructure. The framework projects private investment to rise from around 21% of GDP in 2011 to about 26–28% in the next few years.”

The ADO forecasts a 7% GDP growth for Sri Lanka in 2012 but estimates it to improve to 8% in 2013.

However the 7% prognosis is down from the Government expectation of 7.2%, which was downgraded from 8% earlier in the year. Nonetheless economic growth is projected by the ADB to return to 8% in 2013.  

ADB Country Director Rita O’Sullivan told the media yesterday that Sri Lanka, which grew by 8.3% in 2011, still has many positives.

She insisted that despite the projected slowdown, inflation would remain at single digit figures leveling out at around 8% and predicted that tourism, apparel and IT sectors would all continue to grow.

 “The impact of currency depreciation on external debt, additional Budget borrowing and slower growth is on course to worsen the debt to GDP ratio in 2012. Export growth is expected to fall to 11% mainly owing to weaker demand.  Still the trade gap is projected to stabilise as import growth will also be much slower as higher interest rates, tighter credit and a market depreciation in the exchange rate are felt,” she said.

Describing Asia’s growth as “subdued but steady” the region is expected to ease to 6.9% before picking up to 7.3% in 2013. The region’s Gross Domestic Product (GDP) moderated to 7.2% in 2011, down from 9.1% in 2010.