Annual Report 2010 - Ministry of Finance and Planning

Ministry of Finance and Planning Sri Lanka > Annual Report 2010Travel Advisories and Tourism: With peace, tourism,which remained stagnant for almost three decades, hasbegun to take off. Many countries that had imposedadverse travel advisories on Sri Lanka have removedthem. With the peaceful situation in the country, there isan unprecedented surge in tourist arrivals boosting thepost conflict economic activities all over the country.Tourist arrivals in 2010 increased by 46.1 percent to arecord level of 654,476 tourists reflecting the positiveimpact of the peaceful situation in the country. Many ofthe tourist attractions which were not accessible dueto the conflict are now open to both local and foreigntourists, which have experienced an overwhelmingresponse. Many tourist attractions, including thezoological gardens, receive a record number of visitors,helping them to achieve new highs in their revenue.Defence Expenditure and Government BudgetDeficit: One of the major beneficiary factors to thecountry in the macroeconomic front is the decline indefence expenditure as a result of the lower expenditureon military hardware due to the absence of militaryoffensives. The defence expenditure as a percent ofGDP in 2010 declined to 3.4 percent from 3.9 percentin the previous year. Investment in security installations(defensive, avoidance, and preventive investment)are diverting to productivity-enhancing installations.Resources are increasingly being channeled forrehabilitation & reconstruction activities and securitypersonnel are also engaged in the reconstruction anddevelopment work. Health expenditure previously usedfor the provision of treatments for injured securitypersonnel and others is increasingly diverted towards theuse of the general public. The gradual decline in defenceexpenditure helps reduce the budget deficit which in turnreduces Government borrowing and thereby loweringthe pressure on market interest rates and releasing morefunds for the use of private sector investments.Inflation: The enhanced supply of agriculture produce inthe conflict affected areas has helped lower the prices inthe domestic market. This has lowered inflation comingfrom the supply side reasons to a considerable extentthereby helping to maintain price stability.Interest Rates: Reflecting the benefits of peace, theinterest rates for Government securities have declinedsignificantly due to the low inflation, favourable inflationoutlook and lower borrowings to finance the Governmentbudget deficit. The yield rate of Treasury bills witha maturity period of 364 days has declined to 7.34percent by end April 2011 from 13.4 percent in end May2009. Following this, the market interest rates have alsodeclined noticeably. Accordingly, the average weightedprime lending rate has declined to 9.17 percent by endApril 2011 from 17.75 percent in May 2009. The lower costof interest makes a significant amount of savings forbusinesses and others which can be re-invested, savedor consumed. Benefiting largely from the post conflictlow interest rate regime, the private sector credit has alsoincreased by 25.1 percent in 2010 compared to the 5.7percent contraction experienced in 2009.Economic growth: Sri Lanka had the potential to keepgrowing even in the worst conditions and despite theprotracted internal conflict. With peace, economic growthhas returned to a high growth trajectory in comparisonto the historical average of around 4-5 percent. This hasalready been demonstrated by the 8 percent growthachieved in 2010. Many positive factors such as peacefulenvironment, improved macroeconomic conditions,revitalized production activity, mobility of factors ofproduction, improved productivity, non-existence ofsecurity related delays, ability to use available land forcultivation, particularly help increase the productionwhile creating new opportunities for the private sector. Inparticular, the improvement in agriculture was supportedby the enhanced extent of cultivated land as the newand abandoned lands are being increasingly cultivated.The gross extent of 1,065,000 hectares of paddy sown in2010 is the highest in the recent past, which has enableda record harvest of 4.301 million metric tons of paddy in2010.The output of fishing, livestock and other field cropsalso have improved significantly. In particular, the fishproduction in the Northern and Eastern provinces hasincreased by 40 percent to 125,840 metric tons in 2010.In addition, many industries that were not operative foryears are also being revamped. The new prosperity thathas been extended to all over the country has boosted thewholesale and retail trade, particularly with the Northernand Eastern provinces, providing more opportunities forpeople in those areas.The 9.3 percent expansion in the construction sector in2010, supported by the 12 percent increase in domesticproduction of building materials and the 18.1 percentgrowth in cement availability, was also a reflection ofthe impact of the peaceful situation on the constructionactivities throughout the country.41