Despite many adverse impacts caused by the tsunami, surging international oil prices etc., Sri Lanka’s economy reflects displayed its resilience by recording an annual growth of 5.4 per cent in real Gross Domestic Product (GDP) in 2004, the Central Bank said yesterday.

The Central Bank, which submitted its 55th Annual Report to the Finance Minister, said the growth was largely supported by the strong performance in exports, consumption and investment and the resurgence of economic activities benefiting from the continuation of the ceasefire. The bank noted that the country’s per capita GDP exceeded US dollars 1,000 for the first time. With this achievement, it is expected that Sri Lanka would make further progress towards becoming an upper middle income country.

Healthy developments in the Services and Industry sectors contributed to economic growth in 2004 although the Agriculture sector faced a setback due to adverse weather conditions. The Services sector, which grew by 7.6 per cent in 2004, as reflected by the growth of wholesale and retail trade, hotels and restaurants, transport and communication, and financial, real estate and business services sub-sectors, contributed 77 per cent to the overall growth. Strong external and domestic demand helped the Industry sector to grow by 5.2 per cent, contributing 25.7 per cent to the overall growth. The Agriculture sector recorded a negative growth of 0.7 per cent in 2004.

Looking ahead, sustainable growth in agriculture requires increased contributions from both plantation and non-plantation sectors. The plantation sector needs further improvements in productivity and to move towards crop diversification. In the non-plantation small-holder sector, while productivity improvements need to be further continued, `access to finance and land utilisation issues also have to be addressed.

Developments in irrigation infrastructure should be accelerated to support the Agriculture sector. The recent resurgence in developing and rehabilitating tanks and waterways management has a beneficial impact on the sector. The continued development in this area will help the sector overcome any adverse impact of drought cycles.

Investments improved, while savings remained stable in 2004. The investment/GDP ratio improved to 25 per cent from 22.1 per cent in 2003, entirely due to increased private investment. Domestic savings and national savings remained unchanged at 15.9 per cent of GDP and 21.6 per cent of GDP, respectively, in 2004. This led to a widening of the savings-investment gap, which was financed through the increased utilisation of foreign savings and official reserves, as reflected by the widened current account deficit in the balance of payments (BOP). As these levels of savings and investment are not adequate to raise growth and the standards of living substantially, a concerted effort must be made to raise savings and investment at least up to 30 per cent of GDP in the near future. Increased investment needs to be channelled to improve essential infrastructure, which would be most productive in promoting a higher and regionally balanced growth.

Monetary policy during 2004 aimed at containing inflationary pressures, while supporting economic growth. The difficult economic conditions that prevailed in 2004 required tightening of monetary policy. Meanwhile, to contain non-essential consumption such as the importation of motor vehicles, a 100 per cent margin deposit requirement was enforced on letters of credit opened for the importation of motor vehicles for private use. The Central Bank expects to contain monetary expansion at 15 per cent in 2005 to rein in inflationary pressures in the economy.

On the external front, both trade and current accounts in the BOP recorded deficits. A high import growth of 20 per cent, largely due to high international fuel prices, surpassed the 12 per cent growth in exports and the 11 per cent increase in worker remittances. The surpluses in the capital and financial accounts were not adequate to cover the current account deficit due to lower than expected programme loans from the World Bank and the Asian Development Bank (ADB). Hence, the overall BOP registered a deficit of US dollars 205 million and the effective exchange rate (based on the 24 currency basket) depreciated by 11 per cent and 1.1 per cent, in nominal and real terms, respectively.

International oil prices increased sharply in 2004, raising Sri Lanka’s average import price of crude oil to US dollars 37 per barrel from US dollars 29 per barrel in 2003, resulting an increase in the oil bill by US dollars 372 million. This contributed to the worsening of the BOP and the fiscal situation with a substantial increase in subsidy payments to oil distributors, and the continuation of inefficient use of fuel since domestic prices have not been fully adjusted to reflect increases in international prices. The increased subsidy expenditure could have been utilised for raising the level of investment substantially, for instance, meeting the entire cost of a large investment project such as the Southern Expressway.

The conduct of fiscal policy in 2004 was a challenge in the face of internal and external shocks that were threatening to slow down the economy. The government’s overall fiscal deficit increased to 8.2 per cent of GDP compared with 8.0 per cent in 2003. The concomitant public sector deficit, which is the total of government deficit and the operational losses of public sector corporations, was 8.4 per cent of GDP in 2004, compared with 7.8 per cent in 2003, mainly due to the operational losses of the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB). In this context, the government revised fuel prices upwards in 2004. Nevertheless, the revisions were not adequate and the spillover effects of increases in international prices continued to be a heavy burden on the public sector, the Central Bank said.