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World economies

July 08, 2012


Sri Lanka: THE Sri Lankan economy recorded a real growth of 8.3 per cent in 2011 economic, the highest ever annual growth rate. The previous high was 8.2 per cent, achieved in 1968 and 1978 respectively. Consequently, 2011 nominal GDP) rose to US$ 59.2 billion, while per capita GDP rose to US$ 2,836. The GDP implicit price deflator was 7.8 per cent for 2011. The economy is currently estimated to grow 7.2 percent this year and at a higher rate of 8 percent in 2013. Further, the rate of growth is expected to accelerate to 8.3 percent in 2014 and to 8.5 per cent in 2015. The International Monetary Fund, however, predicts that the island’s economy may slow to 6.75 per cent this year, slower than 7.2 percent forecasted by the Central Bank of Sri Lanka.

According to the central bank’s revised estimates, the balance-of-payment account is expected to swing to a surplus of $1.25 billion in 2012 from last year’s $1.06 billion deficit, as exports and foreign investment increase significantly. During next year and in 2014, the surplus is expected to rise to $1.70 billion and $2.40 billion respectively. The central bank estimates inflows from exports to grow to $11.7 billion this year, and continue to grow strongly in the next three years. Sri Lanka has emerged as a strong developing economy in South Asia in the first decade of the 21st century. Sri Lankan stock market was among the world’s best performing markets with 100 per cent gain in 2009.

However, high budget deficits and debt interest payments pose major challenges in the growth of the economy.

The $59 billion economy expanded by 7.9 per cent year-on-year in the March quarter, slowing from 8percent in the same quarter last year and an 8.3 per cent in the fourth quarter of 2011. The farm sector jumped a record 11.4 per cent growth year-on-year in the first quarter, from a contraction of 4.3 per cent last year, which officials attributed to favourable weather conditions. The industrial sector expanded at 10.8 per cent from 11.1 per cent a year ago, while the service sector gained 5.8 per cent, its lowest since the last quarter of 2009 and down from a 9.5 per cent. Sri Lanka has a very good potential to be a top tourist destination in the region and is unique in its natural beauty, against any competitor in the region.

Annual inflation moderated in the first quarter of 2012, averaging four per cent, compared with 4.9 per cent in the previous quarter.

However, in April consumer prices were up by 6.1 per cent, the fastest rate of increase since September 2011. Inflation is expected to average 5.9 per cent in 2012, following which it will average 5.4 per cent in 2013-16. Private consumption will be the main driver of economic expansion, fuelled by rising incomes and remittances from Sri Lankans abroad. Investment will be supported by four pillars: reconstruction efforts in the north and east; public spending on infrastructure. Real investment growth will average 9.8 per cent annually in 2012-16 but could be exceeded if the housing market booms or if foreign investment surpasses our modest expectations.

Sri Lanka’s budget deficit has doubled in the first four months of 2012, with current spending growing at twice the rate of tax revenues and leading to unprecedented reliance on bank financing. Total revenues grew 7.2 per cent to 305.5 billion rupees up to April 2012 from a year earlier, while current spending raced ahead at 23.4 per cent to 445.3 billion rupees with fertilizer subsidies doubling. The revenue deficit rose 86 per cent to 139.8 billion rupees equal to 1.8 per cent of projected gross domestic product, when an ambitious budget had projected a balancing of the current budget. The budget for 2012 hoped to extract a trillion rupees in taxes from the people, up 23.6 per cent from a year earlier. The fiscal operations in the year as a whole are expected to remain consistent with the targeted deficit of 6.2percent of GDP.


Fragile economy of Bangladesh is now riding on the edge. Proposed budget just placed to the parliament could not usher in any hope. Not only the current or the next fiscal year crisis looms large for economy over midterm. In 2012-2013, the Government will face major challenge to arrange huge resources that will be required to attain very ambitious GDP. Pressure of significant liquidity, absence of required policing, weak banking sector, and limited risk management may make banking sector unstable. Increase of investment in Private–public partnership, investment in infrastructure of government sector and social sector will greatly increase import bill. All these will create new crisis in new financial year.

GDP growth has moderated from 6.7percent in FY11 to 6.3 per cent in FY12 due to unfavorable external economics and internal supply constraints. Bangladesh has maintained the average growth of the last three years through 9.8 per cent manufacturing growth and 10.4 per cent growth in remittances. However, private investment has declined from19.5 per cent of GDP in FY11 to 19.1 per cent in FY12 and the national savings rate from 26 per cent of GDP to 25.2 per cent. This does not bode well for near-term growth. Bangladesh anticipates 7.2 per cent economic growth in the coming fiscal year from increased export earnings and more remittances from Bangladeshis abroad.

Inflationary pressures, particularly from an increase in non-food prices, have worsened. Inflation continues to be volatile, touching double digits. Food price increases have declined from 13.8 per cent in September 2011 to 8.1 per cent in April 2012, good news for the poor.

However, non-food price increases rose to an unprecedented 14 per cent in March 2012 before declining slightly to 13.8 per cent in April.

Expansionary monetary and fiscal policies have driven the increases by expanding aggregate demand, which has also led to large nominal depreciation of the taka.

The Unnayan Onneshan, an independent think-tank, in its latest monthly economic update states that the economy has been experiencing an accelerated growth of import relative to export, resulting in an augmented imbalance in trade in 2011-12. The trade deficit has widened by more than $5.8 billion during the seven months of 2011-12 due to soaring costs of oil import and a sluggish global economy sapping the demands for ready-made garments exports. It warns that the trade deficit as a percent of GDP might be increased 1.56 percentage at the end of the year than that of the last year, reaching at 10.02 per cent from 8.46 per cent in 2010-11.

Import has risen by 16.14 per cent to $19.73 billion while exports have risen by 14.28 per cent to $13.9 billion during the first seven months of 2011-12 than that of the same period of the previous fiscal year. The government has set its export target at $26.5 billion for 2011-12, higher than nearly 16 per cent from 2010-11. The research organisation alerts that under the business as usual scenario, export might reach at $24.3billion, import at $35.6billion and trade deficit at $11.32billion by June 2012. Trade deficit is likely to increase in 2011-12, if growing imports of petroleum products along with non-essential items continue in the remaining five months of the year.

Meanwhile, the Finance Minister has unveiled the budget for 2012-13 in Parliament and estimated that growth in 2011-12 was around seven per cent — higher than the official Bangladesh Bureau of Statistics’ revised estimate of 6.3 per cent. The budget focuses on power and other infrastructure development to spur growth and aims to cap the deficit at 5percent of gross domestic product. The government would install new oil-fired power plants and import power from neighboring countries such as India, Nepal and Bhutan to help cope with a shortage. The proposed budget is targeting a 22 per cent increase in tax revenue by bringing more people under the tax net. Last year’s revenue collection increased largely thanks to a crackdown on tax evasion.

Growth is expected to be driven largely by higher income from exports, especially of garment products, and increased remittances. Already, about 10 million Bangladeshis work abroad, mostly in the Middle East, sending home $10 billion each year. The government hopes to send more people abroad in the coming year. Despite encouraging development, the economy faces daunting challenges. Amid dwindling foreign direct investment, implementing the government’s new budget will be challenging because of high inflation, the protracted global economic crisis and growing subsidies in various sectors.

The government will need to borrow 338.84 billion taka ($4.18billion) from domestic banks, non-banking institutions and savings certificates in 2012-2013. The budget promised to increase social spending by providing subsidized grain and cash incentives to the poor.

Almost 40percent of people in Bangladesh live on less than $1 a day. The government also pledged to rein in inflation. Last month, the average annual inflation stood at 10.76percent. The Finance Minister is optimistic that inflation would be reduced to 7.5percent in the coming year.


The outlook for Bhutan is bright. The Royal Government is taking important steps to spur economic growth through private sector development to achieve increased employment, particularly for the rapidly growing number of educated youth, reconstruct after recent natural disasters and improve access to and the quality of basic services, particularly roads, education and health facilities for remote populations. Bhutan has already attained or is on track to achieve most of the Millennium Development Goals (MDGs). Through its partnership with the International Development Association, Bhutan will continue to focus on a range of initiatives to further improve its people’s lives and emerge as a middle-income country.

Bhutan has embarked on a far-reaching development strategy that has been articulated in a series of five-year national development plans.

The Tenth Five-Year Plan’s (2008-2013) objective is to reduce poverty to 15percent by 2012-13 from 23.2percent in 2007. At the same time, Bhutan remains vulnerable to macroeconomic volatility because of its dependence on hydropower revenues and external assistance, as well as potential overheating from higher development spending and credit growth. The government projects national economy to grow by 12.5percent in 2012-13 against an estimated 9.9 per cent growth in 2011-12.

The national budget for financial year 2012-13 was presented by finance minister in the National Assembly. The total projected budget is estimated to Nu34.5 billion down from the previous year’s Nu37.9 billion. However, government’s current expenditure shot up to Nu18.3billion, an increase by Nu1 billion from the previous financial year. Current expenditure covers government spending on items that are consumed and only last a limited period of time such as wages and salaries, rent, interest payments. Salaries and wages are estimated to account for about 43 per cent of total current expenditure and 37 per cent of the domestic revenue. The total revenue including grants was projected at Nu31.8 billion.

The total gross domestic product projected for 2012-13 is about Nu102.3 billion. 1.56 per cent of GDP is the fiscal deficit estimated for 2012-13. However, the fiscal deficit is expected to drop in the two outer fiscal years with 3.21 per cent of GDP in 2013-14 and 0.33 per cent in 2014-2015. The overall balance of payment is also projected to be in deficit but expected to be back to surplus in the subsequent years. As indicated by the projections of royal monetary authority (RMA), the gross international reserves will be $806.63 million which is expected to be adequate for 21.5 months of essential imports.

The government task force report on the rupee shortage has predicted a grave economic future for Bhutan if the rupee crisis continues unabated, impacting millennium developmental goals, socio-economic development, external debt servicing, dollar reserves and trade balance. After 2012-2013, the convertible currency or dollar reserves of Bhutan is anticipated to violate the constitutional requirement of having enough foreign exchange reserve to finance at least 12 months of essential imports. The government’s planned activities may have to be scaled down if appropriate and practical alternatives are not found to address the rupee shortage.