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Present Economic Situation in Sri Lanka

Present Economic Situation in Sri Lanka

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Published by Iroshan Priyantha
Curretn economic situation of Sri Lanka
Curretn economic situation of Sri Lanka

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Published by: Iroshan Priyantha on Nov 06, 2010
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12/22/2012

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The present economic condition in Sri lanka.
1.AbstractCrisis is the most powerful word which makes a horrible feeling for any individual in anycountry at present. Because of nearly all the people in the world become the victims of the greateconomic crisis with knowing or unknowing. As a country which is reaching the border of thedevelopment Sri Lanka also is facing this economical problem. This research paper is used to presentthe facts that the current economical background of the Sri Lanka, what are the social and politicalfactors which are affect to the Sri Lankan economy, why government got a loan fromIMF( International Monitory Fund) , what are the factors concerned by IMF to grant this and predication of the economical future of Sri Lanka.2.Economical Review of Sri LankaIn mainly Sri Lanka economy is developing by largely on agriculture, services, and lightindustry. Agriculture accounts for approximately 21% of the gross domestic product (GDP) andemploys 38% of the workforce. Agricultural output is divided into two categories, cash crops from plantation agriculture and food crops from subsistence agriculture. Cash crops like tea, rubber, andcoconuts are largely grown on plantations. Rice is the principal food crop and the staple food for over 70 % of Sri Lanka's rural population. Manufacturing industries include textiles, ceramics, petroleum products, vegetable oils, fertilizers and cement etc. Manufacturing industries accounts foapproximately 19% of the GDP and employ about 17% of the workforce. The service sector whichconsist Tourism, banking, finance, and retail of is the largest of the Sri Lanka economy, employing 45%of the workforce and contributing roughly 60%.Because of Sri Lanka is a developing country, some citizens who are in below the poverty leveltry to live with many financial difficulties. Over 45% of the population depends on benefits under theincome supplement programs initiated by the government like “samurdi”. The balance of payments problem remains unresolved. The persistent trade deficit
 
has led to increased reliance on foreign aid tomeet the country's import requirements, leading to an inevitably mounting foreign debt.
 
3.The Financial CrisisIn the end of 2007, the world economy was heading towards a recession. The collapse of the UShousing market, the financial system and international banks caused to create a financial storm in allover the world. The financial specialists said that this crisis created by the wrong decisions of American government. Several US presidents granted the housing loans to the citizens who don’t haveown house, to fulfill the election promises. When those people unable to pay their installments, itaffects directly to the banks, then the companies related with banks. That is how this crisis began. Thedeclining economic growth and rising inflation in most countries have resulted in lesser demand for certain commodities. With these developments and stiff global competition, the local apparel industrywhich is one of countrys main foreign exchange earner recorded a less than expected growth.Moreover, the entire industrial sector growth was also affected due to difficulties with increased cost of  production, stemming from high oil prices and the consequent increases in electricity, transportationcosts etc
.
4.
Role of IMF in Sri Lanka
The IMF (International Monetary Fund) was established, along with the World Bank, at aconference in Bretton Woods, New Hampshire, USA, in the closing stages of World War II. They wereconcerned about the rebuilding of Europe and of the global economic system after a devastating war.The IMF and World Bank were both created at the end of World War II in a political climate is verydifferent from that of today. The original purpose of the World Bank was to lend money to WesternEuropean governments to help them rebuild their countries after the war. In later years, the World Bank shifted its attention towards development loans to third world countries.After 1977, Sri Lanka embraced economic reforms and a free market much ahead of India andthe rest of South Asia. Sri Lanka became a member of the Fund in 1950. The IMF is controlled by the powerful western nations. The IMF delayed the final decision on the Sri Lankan loan owing to pressurefrom USA and some EU countries. The reasons were political and not economic. Western countriesdisapproved some aspects of governance in Sri Lanka, most notably, the government ignoring western pressure to stop the war against the LTTE and commence negotiation, the holding of about 275,000refugees in camps in the north and the culture of impunity that prevails in the country undermining the
 
rule of law. When the IMF Executive Board eventually took up the loan application for review in July,USA, UK and France abstained from voting on it. This was a clear signal to the country from the westthat in the coming months their donor assistance, GSP+ and other trade and investment decisions will be influenced by governance issues as much as economic issues.But actually, the outside people can't understand the behavior of IMF. Because of IMF closed itsColombo office in 2007 by saying that they wouldn’t like to deal with Sri Lankan economy, buteconomists and civil activists said the Fund is still expected to keep a watch over these war actions.The IMF left Sri Lanka because it had nothing to do with them here to help Sri Lanka by doing some programs. Also the other nations from Western countries wish to help Sri Lanka by donating & stillthere are many countries out there to aid the help of IMF. So they left Sri Lanka as the situation is not bad for the development of the country.5.IMF Loan and its goalsThe current loan is approximately $2.6b which exceeds the total of $1.5b that Sri Lanka raisedfrom the IMF in a thirty year period between 1977 and 2008. In first IMF agreed to grant $1.9b butfinally they granted $2.6b. It is a 20 month loan that will be released in quarterly tranches with the finaldue in March of 2011. The loan is repayable in four years starting in April 2012. There is a servicecharge of 0.3%. The loan is four times the size of Sri Lanka’s IMF quota. This loan is far cheaper thanthe commercial loans we raised in 2007 and 2008 at about 7.5% interest. The loan is not fodevelopment projects. It is only to augment the country’s foreign exchange reserves.To avoid the adverse political fallout from the loan request President Mahinda Rajapakse publicly claimed that Sri Lanka wouldn't agree to any conditions when borrowing money from the IMF.The Central Bank governor boasted that Sri Lanka could do without the IMF loan. In July the ActingFinance Minister and the Governor of the Central Bank signed a letter of intent agreeing to severalconditions that we must adhere to receive the loan. In late July the IMF approved the loan and sent thefirst installment of $322m. Now some government ministers are hailing the loan as a stamp of approvalof government economic policy. In reality it is not so much a stamp of approval as much as a stamp of redirection of economic policy that tells the government what it has got wrong in its recent policies andhow to put them right. The main reason for taking the loan is the balance of payments crisis that thecountry faced in 2008. The current account balance ballooned from $1,401m (4.3% of GDP) in 2007 to$3,719m (9.4% of GDP) in 2008. Hit by the world recession the growth in the value of exportsdeclined from 11.0% in 2007 to 6.5% in 2008.

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