SRI LANKA State of the Economy 2009 INSTITUTE OF POLICY STUDIES 99, St. Michael’s Road, Colombo 3, Sri Lanka Copyright C September 2010 Institute of Policy Studies of Sri Lanka ISBN 978-955-8708-55-2 National Library of Sri Lanka-Cataloguing-In-Publication Data Sri Lanka State of the Economy -- 2010 / Colombo : Institute of Policy Studies of Sri Lanka, 2010 . --- 225 ; 21cm ISBN 978-955-8708-59-0 Price Rs. i. 330.95493 DDC 21 ii. Title 1. Economics - Sri Lanka Please address orders to: Institute of Policy Studies of Sri Lanka 99 St Michael’s Road, Colombo 3, Sri Lanka Tel: +94 11 2431 368, 2431 378 Fax: +94 11 2431 395 Email:
[email protected] Website: www.ips.lk This report was prepared by a team led by Dushni Weerakoon, with the guidance of Saman Kelegama, Executive Director, IPS. Contributing authors are Nisha Arunatilake, G.D. Dayaratne, Deshal de Mel, Ayodya Galappatige, Asha Gunawardena, Dilani Hirimuthugodage, Suwendrani Jayaratne, Ruwan Jayathilaka, Priyanka Jayawardena, Tilani Jayawardhana, Roshini Jayaweera, Haren Kodagoda, Malathy Knight-John, Sunimalee Madurawela, Wimal Nanayakkara, Nethmini Perera, Dharshani Premaratne, Parakrama Samarathunga, Athula Senaratne, Manoj Thibbotuwawa, Dushni Weerakoon, and Kanchana Wickremasinghe. Editorial support from Charmaine Wijesinghe and D.D.M Waidyasekera, and formatting support from Asuntha Paul is gratefully acknowledged. Contents Growth and Stability in Post-conflict Economic Recovery 1. Policy Perspectives 1 2. Growth and Stability in Post-conflict Economic Recovery 7 2.1 Introduction 7 2.2 Recovery and Growth 8 2.2.1 Employment 12 2.2.2 Savings and Investment 13 2.3 Fiscal Policy Management 14 2.3.1 Deficit Financing and Debt 16 2.3.2 Fiscal Policy and Macroeconomic Stability 19 2.4 Monetary Policy for Economic Recovery 20 2.4.1 The Impossible Trinity: Implications for Interest Rates and the Exchange Rate 22 2.5 External Sector: Current Account, Capital Flows and the Exchange Rate 24 2.5.1 'Dutch Disease' through a Post-conflict Lens 25 2.5.2 Capital Inflows and Official Reserves 27 2.6 Conclusion 28 3.