All governments have attached high priority to Foreign Direct Investment (FDI) since the 1970s. It is important to understand why this has been the case and pose the question whether the Strategic Development Act (SDA) contributes to creating an investor friendly environment.
There were recent press reports that a number of trade unions have submitted proposals to the National Pay Commission requesting establishment of; 1. a National Wages Commission for the private sector; 2. a national minimum wage; 3. an unemployment benefit insurance scheme; 4. a pension scheme for EPF members. In addition, a medical insurance and social security scheme for the informal sector employees has also been proposed.
A recent IMF study used a number of statistical and modeling based methodologies to conclude that Sri Lanka’s current potential economic growth rate is 6.7%.This implies that the economy is likely to over-heat if the growth rate exceeds 6.7% on a sustained basis, i.e inflation would rise above the mid-single digit target and the balance of payments/reserves would come under pressure. The government growth target is 8%.The challenge, therefore, is to explore ways and means of raising the potential growth rate (6.7%) to reach the target rate(8%), assuming that the IMF estimation of the potential growth rate is credible.
Chief Minister of the Northern Province, Justice Wigneswaran, has elaborated upon how diaspora remittances have deleterious effects. He has said that these remittances were having a very adverse impact on the lifestyles of the Tamils in the North. In his view, it was causing irreparable damage to the community, especially young people. Historically, the North was known as a socially conservative society which attached very high priority to education, a strong work ethic and simple living. The Chief Minister has rightly highlighted that the easy money received from abroad was fueling consumerism and traditional values were being abandoned. It can be argued that these are modernizing trends which are inevitable in a community coming out of a 30-year conflict and being exposed to the globalised world of the internet and satellite television. More worrying is the Chief Minister’s assertion that a new culture was being embraced where youth smoked, consumed alcohol and drugs and were distracted by a looser attitude towards interaction with the opposite sex. At the same time, the traditional work ethic was being eroded. Justice Wigneswaran, in his speech, stressed the importance of the economic upliftment of the North and urged the youth of the area not to be interested only in migrating abroad or living on remittances from the diaspora.
There is a strong consensus that entrepreneurship is crucial for driving the innovation and change that is essential for successful development in a highly competitive global economy. It is particularly so for small economies that are more reliant on external demand (exports) to achieve high growth on a sustained basis. Entrepreneurial success is also an important means of achieving equitable and regionally balanced development as it is an important determinant of spreading the benefits of growth to women, youth and other groups who have difficulty in starting and growing businesses.
The US Federal Reserve Bank (Fed) announced a tapering of its bond buying program (QE3) following a meeting of its Federal Open Markets Committee (FOMC) last week. Its purchase of US bonds ($40 billion) and mortgage-backed securities ($35 billion) has been reduced by $10 billion from $85 billion to $75 billion a month. The announcement, while anticipated in the near future by markets, came earlier than expected. Only 37% of economists polled by Bloomberg expected the Fed to announce the commencement of its tapering program at its December 2013 FOMC meeting.
Two years ago, it was officially announced that the Doha Round had reached an impasse after 10 years of negotiations. Pascal Lamy, who was then Director-General of the WTO, admitted this publicly. It is encouraging, therefore, that the world’s Trade Ministers were able to agree on a package of measures, even if it was very limited, at their meeting in Bali recently. It is important to stress that the outcome is a far cry from the ‘single undertaking’ that one normally expects from a Round of Multilateral Trade Negotiations. This was recognized by the Ministers who have agreed that work on a number of important outstanding issues should commence immediately at the WTO in Geneva.
In recent days, following the Budget Speech, there has been much discussion about the relative merits of import substitution. There has been pressure from some quarters for protection for specific goods. This tends to reflect the narrow interests of specific vested interests which do not take into account the broader interests of the economy, consumers or even other producers of goods and services for local or export markets. It is important to address the relative merits of exports and import substitution pragmatically, taking into account historical experience in Sri Lanka and abroad.
The Budget Speech has become a major landmark in the nation’s calendar. It is much more than the government’s income and expenditure statement for the forthcoming fiscal year. It is much more important as an indication of the direction and priorities of government economic policy. As such, a Budget Speech becomes an important determinant of investor confidence, both domestic and foreign. In the modern world, where the domestic and international economic landscapes change very quickly, economic management is a continuous task. It is not uncommon for fiscal measures to be introduced at various times of the year to stabilize or boost the economy.
Sri Lanka is in the midst of hosting the Commonwealth Heads of Government Meeting (CHOGM) and H.E. President Mahinda Rajapaksa is about to assume the position of Chair-in-Office for the next two years. It is, therefore, timely, to consider how best Sri Lanka can leverage its position as one of the founder members of the association for the benefit of the people of this country.
It has been widely reported that Sri Lanka has come down in the latest World Bank Doing Business Index (DBI) from the position of 81 to 85 among 189 countries in the world. The ranking two years ago was 79. The process of improving Sri Lanka’s business climate to be within the top 30 countries was launched with a big bang. The Central Bank, Board of Investment and the Ministry of Economic Development were initially in the forefront launching a major campaign to identify and implement necessary reforms in the regulatory environment of the country. Monthly, quarterly and other periodic reviews were given high media publicity at the time of announcing various programs to achieve this target by 2016.
The Monetary Policy Committee’s 50 BP reduction in interest rates can be timely. It can boost growth without undermining stability provided there is sound fiscal/monetary policy harmonization and the pursuit of a flexible exchange rate policy.