The State of the Economy report is an annual publication of the Institute of Policy Studies of Sri Lanka (IPS). It provides a rigorous assessment of Sri Lanka’s economic performance and highlights emerging socio-economic issues in key areas of medium-term policy relevance for the country. The central theme of the report is that better infrastructure and improved public services are needed not only to increase growth, but also to ensure that the benefits of that growth are spread more widely.
The report notes that the most promising feature of Sri Lanka’s economic performance in 2005/06 was a steady acceleration in GDP growth to a rate of 7.4 per cent in 2006. Nonetheless, there are increasing signs of a gradual slowdown in economic growth – with the growth rate slowing in the first quarter of 2007 to 6.1 per cent and to 6.4 per cent in the second quarter of 2007. The report notes that Sri Lanka’s economy displays a number of signs that demand is rapidly outpacing supply with the predominant policy concern being that inflation may fail to moderate sufficiently. The risks in the interim is that the macroeconomic environment is likely to be tightly constrained and volatile – leaving limited policy options in the face of any domestic or external shock – with very little tolerance margin for any policy errors. The report emphasizes the need to re-orient government expenditures to priority and growth enhancing areas and to implement necessary reforms to boost the economy’s supply capacity.
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