Japan’s Special Envoy Yasushi Akashi said Sri Lanka should have a freer trade regime, liberalise its capital account and urged the government to take steps to create an enabling environment for the private sector to contribute towards development activities.

"The private sector should be engaged to develop agriculture, fisheries and the environment and the government should expeditiously remove all obstacles from their path. There should also be freer trade and more capital inflows," Akashi said, addressing the inaugural session of the Sri Lanka Economic Summit in Colombo last Tuesday.

Prime Minister Ratnasiri Wickramanayake, who was the Chief Guest, said the government was conscious of the fact that the private sector would have to take the lead in developing the country.

"The resilience of our economy despite the harsh conditions caused by high food and oil prices and the global financial crisis is largely due to the private sector and the government is conscious of this fact," he said.

The Prime Minister said every thing would be done to lay down the much needed infrastructure facilities which would allow the private sector to be more effective but there will be more attention given to developing the country’s rural economy.

"The government’s policy is more towards achieving regional economic growth so will be improving the infrastructure facilities in rural areas because we want to push for equitable development," Wickramanayake said.

On the need to liberalise the country’s capital account, Akashi stuck a chord with some senior economists of the Central Bank who believe it could help the country.

A senior Central Banker earlier this year said the failure to liberalize the country’s capital account and allow the inflow and outflow of medium to long term capital would result in painful repercussions which the country cannot escape from.

"Policy makers should now think of proper mechanisms to gradually liberalize the capital account," Deputy Governor of the Central Bank, W. A. Wijewardena, told a public seminar on Foreign Exchange Liberalization: Perceptions, Realities and Way Forward last January.

Assistant Governor of the Central Bank P. Samarasiri said the following economic implications could be avoided if the capital account was liberalized to the same extent as the current account:

A major problem for countries like Sri Lanka, Samarasiri pointed out, is the lack of domestic savings mobilization to finance investments required for high economic growth, this is called the circle of poverty, hence the need to attract investments.

Samarasiri said liberalizing the capital account, contrary to popular notions, would generate more inflows of foreign capital rather than the outward flight of capital.

It would also allow domestic companies to setup businesses overseas which could generate more foreign exchange revenues.

"We need to get rid of the case-by-case basis approval process," he said.

"There has to be gradual liberalization of capital inflow and outflow to match the current account," Samarasiri said.

"Since the current account deficit has been increasing, it has to increase further in order to facilitate accelerated economic growth," he said.

"The deficit financing has to be through government’s foreign borrowings or reduction in official foreign assets if the capital account is not liberalized in order to facilitate the private sector to raise foreign funds to finance their domestic resource gap."

Samarasiri pointed out that in most years, 60 to 90 percent of the current account deficit had been funded though long term foreign borrowings of the government.

Akashi said Sri Lanka should have a freer trade regime, sentiments economists in favour of free trade, especially with India, also share.

Prof. G. L. Peiris, delivering the special address at the inaugural session of the Sri Lanka Economic Summit said since the Free Trade Agreement was signed with India, trade between the two countries had grown four fold.

However, according to trade analysts the FTA is yet to iron out problems relating to non-tariff barriers such as bureaucratic red-tape.

A comprehensive economic partnership with India, where services and trade would have been included apart from trade in goods, is now in limbo.

Prof. Peiris said top Japanese companies have been able to invest in Sri Lanka and export to India where rules of origin and value additions allow these exports to be free of tariff.