Dr. N. Weerasinghe (left) and Mangala Yapa addressing the seminar | Pic by Chandana Wijesinghe

While calls for stable economic reforms continue in the backdrop of yet another election, Sri Lanka has identified three areas that need policy priorities in the country’s growth strategy, namely to improve governance, macro sustainability, and enable private sector consistency.

This was explained by Deputy Governor of the Central Bank of Sri Lanka, Dr. N. Weerasinghe during a seminar held at the Ceylon Chamber of Commerce (CCC) on July 20.

Addressing the seminar titled, ‘The Sri Lankan Economy: Post-war Trends, Recent Developments and Outlook”, Dr. Weerasinghe explained the progress of the country after the war and the areas that needed reforms for a stable economic environment in the

He spoke about the much debated revised GDP base, where he pointed out that Sri Lanka may not attain 6 percent growth seen in the first quarter of 2015 for the rest of the year. “We’re still working on the numbers at the moment. Considering the numbers recorded from the second quarter to the fourth quarter of last year, the growth rates had a higher increase, which means there’s a higher base. It will be a challenge for us to at least reach 6 percent growth based on the numbers we see right now,” he said.

He also pointed out that it was technically incorrect to compare the estimates based on 2002 and 2010 base years.

The presentation also focused on the reforms that needed to be implemented in the future. Economic experts and analysts of Sri Lanka had frequently expressed concerns over the government’s failure to formulate a long-term economic policy for the country after the January 8 Presidential polls.

Economists stated that the change in Government had created uncertainty among foreign investors due to the lack of a sustainable policy and political volatility. They also had called upon a future government to prioritize economic reforms once in power.

Effective tax revenue system
Dr. Weerasinghe pointed out several key areas where a future government needed to focus. The key aspect pointed out at the seminar was the necessity to formulate an effective tax revenue system. He stated that there was a necessity to intensify efforts to increase tax revenue collection and further consolidate government expenditure.

“In spite of adopting several measures to simplify the tax system, tax revenue collection as a percentage of GDP has continued to decline over the years. Further simplification of the tax system, broadening the tax base by improving direct taxation and minimizing tax exemptions, and strengthening tax administration are some of the measures to improve revenue collection,” he said in his presentation.

Trade analysts had stated that Sri Lanka needed to focus on an export driven economy combined with attracting foreign investors. Dr. Weerasinghe in his presentation also admitted that a buoyant export performance was imperative for sustaining the growth momentum of the economy.

He pointed out that the concentration of products and market destinations in Sri Lanka’s export structure could lead to instability in export earnings. “Sri Lanka needs to participate at export conventions, indulge in strategic marketing and pursue bilateral and multilateral trade treaties. These would lead to export and product diversification,” he added.

In terms of exports, the Deputy Governor emphasized the importance of focusing more on moving manufacturing up the value chain in the industrial policy to enhance industrial growth in the long term.

He said that the country needed to shift focus on promoting the use of nano technology, bio technology and information technology in high value manufacturing industries

Boost for SME sector
The need to strengthen the country’s Small and Medium scale Enterprises (SME) is also a vital aspect in the overall growth of the economy. The current Chairman of the CCC, Samantha Ranathunga in his inaugural speech after his appointment emphasized the necessity to empower the sector.

“The fragmented SME sector policy has not helped the small and medium enterprises in the recent past. The white paper on the SME sector which was initiated in the year 2010, updated in 2012 has not come to pass, at best the SME sector is confused as helping the SMEs has become an empty slogan for everyone concerned,” he had said.

It was pointed out that the sector continued to be on the backseat owing to lack of access to several key facilities such as finance, human resource and technological capabilities.

Dr. Weerasinghe suggested that the sector could overcome such issues through credit advisory and counseling services, business development services and the setting up of industrial clusters.

Shifting from traditional banking
Dr. Weerasinghe said that traditional bank based financing would not be viable in the long run and therefore, the country would have to focus on promoting market based alternative financing methods. “Traditional model of bank based financing may not be workable for long-term financing due to problems associated with financial intermediation, example, monitoring and transaction costs,” he said.

Shrink in labor force
The slow population growth and the changing demographic profile of the country, according to Dr. Weerasinghe, have added a new dimension to the existing issues in the labor market. “Slow population growth together with the aging population has resulted in a shrinking labor force,” he said.

He pointed out that greater attention must be paid to the agriculture sector and the state sector with a view to increase labor productivity.

Policy consistency
The need for a consistent policy framework was also pointed out by CCC’s Chief Executive Officer, Mangala Yapa. Expressing his views at the seminar, he pointed out that the current regulations contained several loopholes. “For example, if you take the tax system, there are many clauses that spell out the criteria through which tax exemptions could be given. This needs to be addressed,” he said.

Dr. Weerasinghe also stated that it was important for Sri Lanka to maintain policy consistency in assuring a favorable business environment especially for foreign investors.