Apr 17, 2013 (LBO) - Sri Lanka should depend less on foreign capital to bridge a savings investment gap, to make the economy more resilient to external shocks, the Central Bank has said.
Sri Lanka had an investment ratio of 30.6 percent of gross domestic product in 2012 but domestic savings were only 17 percent. National savings were higher at 24 percent mostly due to remittance flows. "We should increase domestic savings," Central Bank Governor Nivard Cabraal said at the release of the bank's annual report on the economy for 2012. "By 2016 we hope to generate resources for investments domestically." The Central Bank is projecting investments to rise to 33 percent of GDP by 2016 and domestic savings to 28.4 percent. National savings which include remittances are projected to rise to 34.2 percent. Sri Lanka has been borrowing heavily abroad in recent years, with the state also borrowing for consumption expenses. Regulations for borrowing by private firms have also been relaxed by the Central Bank but the monetary authority sounded a note of caution in its 2012 annual report. "Also, foreign capital may be used to partly bridge the savings-investment gap, yet, it may not necessarily constitute a perfect substitute for domestic savings, because of the external finance premium attached to it," the Central Bank said. "Hence, over the long term, increasing the economy’s potential income by improving productivity of capital may yield sustainable outcomes. "Further, for the corporate sector, financing investments from external sources may not be difficult in good times, but the possibility of a reversal in capital inflows could create economic vulnerabilities…" Critic says a key reason for Sri Lanka has a low domestic savings rate compared to East Asia is due to overspending rulers, who are net dis-savers. Last year the central government ran a 1.4 percent deficit in the current account of the budget. Meanwhile state enterprises also make losses, further undermining savings. In 2012 state energy utilities alone lost about 2.0 percent of GDP, state airlines lost close to half a percent of GDP. But state enterprises are classed as 'private sector' due to a classification problem. Central Bank officials have said they will produce dis-aggregated data in the future.