EXTERNAL BUSINESS ENVIRONMENT

Govt. Economic Policy

What we aim to cover.

Government economic policy: aims and influence; employment policy; inflation;

balance of payments; economic growth in industry sector; current issues

Economic Policy

Monetary policy and fiscal policy refer to the two most widely recognized "tools" used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central bank.

Fiscal policy is the collective term for the taxing and spending actions of governments. In the United States, national fiscal policy is determined by the Executive and Legislative Branches. In SL by the Central bank and parliament.

Sri Lanka current economic Policies GDP growth of Sri Lanka over the last five year period has

been maintained at a healthy average of over six percent per annum with the rate for 2010 estimated at 8 percent. The annual average growth over the next five years beginning 2011 is expected to be over 8 percent per annum.

The government’s Medium-Term Macroeconomic Framework (MTMF) presents a positive outlook reflecting a favorable macroeconomic environment, characterized by conditions of sustained peace, low inflation, improved business confidence, stable fiscal management and low interest rates.

Sustainable economic growth at a high average rate is expected to facilitate higher employment generation. Macroeconomic and financial stability together with attractive investment and trade policies, enhanced business confidence, and labour mobility would facilitate market expansion

Secretariat for senior ministers Sri Lanka.

Economic Policy

Monetary Policy Central banks have typically used monetary

policy to either stimulate an economy into faster growth or slow down growth over fears of issues like inflation. The theory is that, by incentivizing individuals and businesses to borrow and spend, monetary policy will cause the economy to grow faster than normal. Conversely, by restricting spending and incentivizing savings, the economy will grow less quickly than normal.

Why control Economic Growth Advantages of Economic Growth Growth has a number of economic and social benefits: Improvements in living standards: Growth is an important avenue

through which per capita incomes can rise and absolute poverty can be reduced in developing nations. Professor Paul Collier has argued that “growth is not a cure-all; but the absence of growth is a kill-all”

More jobs: Growth creates new jobs – although the pattern of employment will also change

The accelerator effect of growth on capital investment: Rising demand and output encourages investment in capital – this helps to sustain GDP growth by increasing LRAS

Greater business confidence: Growth has a positive impact on profits & business confidence

The “fiscal dividend”: A growing economy boosts tax revenues and generates the money to finance spending on public and merit goods and services without having to raise tax rates.

Potential environmental benefits – as countries grow richer, they have more resources available to invest in cleaner technologies. And, as nations develop, energy intensity levels fall.

Why control Economic Growth Disadvantages of Economic Growth There are economic and social costs of a fast-expanding economy. Inflation risk: If demand races ahead of aggregate supply the scene is set for

rising prices – many of the faster-growing countries have seen a trend rise in inflation – this is known as structural inflation

Environmental concerns: Fast growth can create negative externalities for example more noise

pollution and lower air quality arising from air pollution and road congestion Increased consumption of de-merit goods which damage social welfare The huge increase in household and industrial waste. These

externalities reduce social welfare and can lead to market failure. Growth that leads to environmental damage may lower the sustainable rate

of growth.  Examples include the destruction of rain forests through deforestation, the over-exploitation of fish stocks andloss of natural habitat and bio-diversity created through the construction of new roads, hotels, retail malls and industrial estates.

Growth and the Environment: The Sustainability of Economic Growth Many of the world’s most valuable finite resources are being extracted at

such a rate that it questions the sustainability of growth. Renewable resources are also being depleted because of over-consumption.

Why control Economic Growth

Sri Lanka Monetary policy

The overall direction of monetary policy will be determined by the major target of maintaining stable prices to facilitate sustainable economic growth. Stable prices would help maintain low interest rates, facilitating higher investment and buoyancy in economic activity, thus leading to an expanded process of employment creation.

 Given the size, structure and the development stage of the economy, there is some agreement that a rate of inflation of around 4-6 percent over the medium term would facilitate the growth momentum and employment generation in the economy.

Monetary authorities are therefore, expected to conduct monetary policy to facilitate the maintenance of the rate of inflation at the above level, while keeping interest rates sufficiently stable at levels desirable for promoting private investments and for maintaining real positive returns for savers.

Sri Lanka Monetary policy

At present, monetary management in Sri Lanka is based on a monetary targeting framework, which sets out the path for monetary growth as determined by the desired level of economic growth. The Bank would review policy rates periodically and adjust appropriately, if necessary, to bring reserve money to the targeted path through its open market operations.

Reserve money: Given the expected real GDP growth of over 8 percent and inflation rate of 4-6 per cent as per the medium-term macroeconomic framework, broad money growth should be maintained at 15-16 percent during 2012-2015.

Targets of Net Foreign Assets (NFA): NFA of the Central Bank is expected to increase gradually over the medium term with the expected improvement in the balance of payments while, net foreign assets of commercial banks is expected to remain unchanged.

Sri Lanka Monetary policy

Anticipate future inflationary trends in order to be able to work out corrective measures in time. Necessary analytical models for such forecasts of future inflation and to differentiate between supply side and demand side factors behind inflation are required tools of monetary authorities.

Fiscal Policy

http://www.treasury.gov.lk/images/depts/fpd/docs/reports/annualreport/2013/chapters/Chapter3.pdf

in the context of Sri Lanka consolidating as a rapidly developing middle income

country, the Government in 2013 continued to address the concerns of the still vulnerable areas to further diversify the economy in terms

of Mahinda Chinthana: Vision for the Future - the Development Policy Framework of the Government. Several reform measures were

witnessed in power and energy, banking and finance, public financial management, legal and judicial and ICT spheres, facilitating to

well position Sri Lanka in the challenging and competitive global economic environment.

Sri Lanka has been successful in maintaining low corporate and personal income tax rates at a maximum of 28 percent and 24 percent respectively, being among the most competitive tax regimes in the Asian region.

Sri Lanka Fiscal Policy

The budget for 2011 introduced a comprehensive reform of the tax system aimed at simplifying the tax system while broadening the tax base to improve revenue mobilization. However, given the current status of government revenue, introducing further steps to simplify the tax system, to make rates more appropriate, to broaden the tax base, to rationalize tax concessions and exemptions, to reduce the complexity of the import duty structure, and to improve tax administration, while introducing new technology to improve tax collection, will be helpful to improve revenue collection

Social policy commitments as well as public investment imperatives lead to an almost unavoidable escalation of government expenditure despite the  Medium-Term Macroeconomic Framework vision of maintaining the budget deficit below 5 percent of GDP over the medium term. The government is committed to keep recurrent expenditure within limits and to improve the performance of public enterprises.

Sri Lanka Fiscal Policy

Measures to be taken to contain government expenditure include the following:

Organizing of government transfers like subsidies, and pension payments, while ensuring that vulnerable sections of the society are protected by appropriate and targeted safety nets.

Improvement of public debt management to reduce the overall interest cost of government debt.

Revitalization of loss making public sector enterprises including the CPC, the CEB.

The rate of public investment will be increased to and maintained at around 6-7 percent of GDP in order to build up required physical and social infrastructure for long term growth and creating investment friendly environment for expansion of private sector activity in the country

The employment Policy

The Government of Sri Lanka, through the Secretariat of Senior Ministers, commenced the formulation of the National Human Resources and Employment Policy (NHREP) in June 2011

Vision - “Sri Lanka - the Wonder of Asia” in which all persons of working age become globally competitive and multi-skilled, and enjoy full, decent and productive employment with higher incomes in conditions of freedom, equity, security and human dignity

Human resources in Sri Lanka have considerable potential to steer the country's growth trajectory from its current low-skilled, low productive and low income earning workforce to one that it highly-skilled, dynamic, and globally competitive.

Inflation

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year.

Most countries' central banks will try to sustain an inflation rate of 2-3%

Inflation

Inflation in Sri Lanka

Inflation is the annual change in the consumer price index.

In Sri Lanka, the Consumer Price Index (CPI) is composed of two main groups: Food items (41 percent) and Non-food items (59 percent).

Food items are mainly composed of: bread and cereals (7.9 percent), fish and sea food (6 percent) and vegetables (5.7 percent).

The most important non-food items are housing water, electricity, gas and other fuels (23.7 percent), transport (12.3 percent), and restaurants and hotels (5.8 percent).

This page provides - Sri Lanka Inflation Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news. Content for - Sri Lanka Inflation Rate - was last refreshed on Tuesday, January 20, 2015. 

Inflation in Sri Lanka

Inflation is the annual change in the consumer price index.

Balance of Payments

A statement that summarizes an economy’s transactions with the rest of the world for a specified time period.

The balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts.

Balance of Payments

The balance of payments classifies these transactions in two accounts – the current account and the capital account. The current account includes transactions in goods, services, investment income and current transfers, while the capital account mainly includes transactions in financial instruments. An economy’s balance of payments transactions and international investment position (IIP) together constitute its set of international accounts.

Balance of Payments

balance of payments and international investment position data are critical in formulating national and international economic policy. Certain aspects of the balance of payments data, such as payment imbalances and foreign direct investment, are key issues that a nation’s economic policies seek to address.

a country may adopt policies specifically designed to attract foreign investment in a particular sector. Another nation may attempt to keep its currency at an artificially depressed level to stimulate exports and build up its currency reserves. 

Balance of Payments Sri Lanka The balance of payments markedly strengthened in the first 6

months of the year. Exports grew by 16.8% as imports fell by 1.2%, generating a 20.1% reduction in the trade deficit to $3.5 billion.

All major exports - garments, other manufactures, tea, and other agricultural products - recorded double-digit growth. Imports fell as moderate increases in consumer and intermediate imports could not balance a decline in investment goods.

With thermal power generation increasingly deployed to offset hydro generation shortfalls on account of the drought, oil imports are likely to increase in the second half of the year. Invisible earnings were buoyant, as tourism surged by 33.8% to $1.1 billion and workers’ remittances rose by 10.6% to $3.4 billion. Foreign direct investment doubled to reach $442.3 million. With a substantial overall surplus, gross official reserves increased to $9.2 billion by the end of June 2014.

Economic growth in industry sector GDP - composition, by sector of origin:

agriculture: 11.1% industry: 31.5% services: 57.5%

Industries:processing of rubber, tea, coconuts, tobacco and other agricultural commodities; telecommunications, insurance, banking; tourism, shipping; clothing, textiles; cement, petroleum refining, information technology services, construction.

Economic growth in industry sector Industrial

production growth rate:

10.3% country comparison to the world: 15.

 

Economic growth in industry sector Industrial Production in Sri Lanka

increased 1.48 percent in May of 2014 over the same month in the previous year. Industrial Production in Sri Lanka averaged 5.89 Percent from 2004 until 2014, reaching an all time high of 35.20 Percent in July of 2010 and a record low of -7.95 Percent in September of 2012.

Industrial Production in Sri Lanka is reported by the Central Bank of Sri Lanka.

Current Issues – Sri Lanka Economy Sri Lanka’s newly elected president has sworn to

defeat corruption and reduce dependency on China. Can South Asia’s fastest growing economy continue its winning streak under the new broom

Under Rajapaksa’s leadership, Sri Lanka posted economic growth averaging 7 percent a year since the end of the civil war in 2009, with inflation declining along with unemployment, poverty and inequality. In its latest country report, the International Monetary Fund noted the 69th-ranked economy’s progress toward developed country status.

Current Issues – Sri Lanka Economy Sri Lanka has made notable advances in recent

years, and appears to be on its way to joining the ranks of upper middle income countries. Per capita GDP has increased from $869 in 2000 to $3,256 in 2013, and there appears to be an ongoing shift toward higher value added industrial production, as well as rapid expansion of services,” the IMF.

Sri Lanka posted real GDP growth of 7.3 percent in 2013, rising to an estimated 7.5 percent in 2014, although the IMF has projected growth will ease to 6.5 percent this year and next.

Current Issues – Sri Lanka Economy Sirisena has also pledged to avoid being overly

reliant on support from China, which has been the biggest investor and second-largest trading partner under Rajapaksa’s rule.

One such Chinese-funded project, a $1.4 billion complex on reclaimed land in Colombo port, would be the nation’s biggest foreign investment ever but likely will be nixed by the new president. In his manifesto, Sirisena vowed equal relations with China, India, Japan and Pakistan, as well as improving ties with Indonesia, South Korea and Thailand.

Current Issues – Sri Lanka Economy The Foreign Direct investment (FDI)

component even though said to increase from around US$ 230 million in 2013 to over 1 billion by 2014, remains a value that has be improved substantially.

Economic policy makers publicly said investment as a percentage of the GDP was at 31%, and it needed to increase to 33% of GDP by 2016 if Sri Lanka is to sustain its middle income status.

Current Issues – Sri Lanka Economy Other concerns included the trade deficit averaging

around US$ 9.4 billion, which in turn pressurized the Total Foreign Assets (US$ 8.5 billion as of 2013 ) and the exchange rate, which hovered around the Rs.129 mark, continues to remain.

Meanwhile, Moody’s ratings agency said recently that Sri Lanka’s new President has taken over a fast-growing economy, but one with a large government debt burden.

Sri Lanka’s government debt stands at 78 per cent of its Gross National Product (GNP) and 40 per cent of its revenue is spent as interest on loans obtained.

Current Issues – Sri Lanka Economy

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nt&view=article&id=71:macroeconomic-policies&catid=38:documents&Itemid=59&lang=en

http://tutor2u.net/economics/revision-notes/a2-macro-economic-growth-costs-benefits.html

http://www.nhrep.gov.lk/images/pdf/nhrep_final.pdf http://www.investopedia.com/terms/i/inflation.asp http://www.investopedia.com/terms/b/bop.asp http://www.adb.org/countries/sri-lanka/economy http://thediplomat.com/2015/01/sri-lankas-economic-c

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