Work for All: Sri Lanka Country Study Dushni Weerakoon & Nisha - - PowerPoint PPT Presentation

Macroeconomic Policy for Full and Productive Employment & Decent Work for All:

Sri Lanka Country Study Dushni Weerakoon & Nisha Arunatilake Institute of Policy Studies of Sri Lanka

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Introduction

• Around 8 million individuals are economically active
• Amounting to about half the working age (10 plus) population
• About 94% of them are employed

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1990 * 2000* 2009* Population (‘000 persons) 10 plus 11,574 13,564 15,398 LF ('000 persons) 6,001 6,827 7,572 LFPR (% of population) 52 50 49 Employed Population ('000) 5,047 6,310 7,140 Unemployment rate (% of LF) 15.9 7.6 5.7 Employment-to-Population ratio 44 47 46

Source: DCS; Note: Excludes N & E

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Unemployment rate has come down … but,

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2 4 6 8 10 12 14 16 18 Unemployment rate (%)

• Unemployment (UE) rate has steadily comedown over the last two decades

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But, unemployment rate is high amongst

• the educated and the young

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0% 5% 10% 15% 20% 25% Below O/L Passed O/L Passed A/L More than A/L Unemployment rate Education level 2000 2009 0% 5% 10% 15% 20% 25% 15-19 20-24 25-29 30-39 40-59 60+ Unemployment rate Age group 2000 2009

Unemployment rate is still high Amongst the educated, especially those with (only) school education Amongst youth

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Unemployment rate is high amongst

• females and those outside the WP

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0% 5% 10% 15% 20% Total WP CP SP EP NWP NCP UP SaP

Unemployment rate by province and sex

2000 Male 2000 Female 2009 Male 2009 Female

• Unemployment rate is higher for females
• Unemployment rate is higher outside the Western Province
• The reduction in unemployment has not been uniform across provinces

0% 2% 4% 6% 8% 10% 12% Total WP CP SP EP NWP NCP UP SaP

Unemployment rate by province

2000 2009

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Drop in UE rate is partly due to slow LF growth

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• The drop in unemployment rate is partly due to the slow LF growth
• Employed to population ratio has remained constant overtime

1000 2000 3000 4000 5000 6000 7000 8000 Labour force ('000) Employed Population ('000) Unemployed ('000)

Source: LFS data, excludes N and E provinces

10 20 30 40 50 60 LFPR (%) Employed/population (%)

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Slow LF growth partly explained by departures for foreign employment

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50,000 100,000 150,000 200,000 250,000 300,000

Departures for foreign employment

Total Male Total Female Total Total

Source: SLBFE; Note: *Provisional

• Gross annual outflow of workers has increased substantially overtime
• The number of male migrants are increasing
• The proportion of skilled migrants (SM) are small, but increasing ( SM influences LF

more)

50000 100000 150000 200000 250000 300000

Departures for foreign employment, by manpower levels

1994 2000 2008*

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Where are the employed working?

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Employee Employer Own account worker Unpaid family worker Total

Employed, by Occupation Status and Sector (2009)

Formal Informal

• Majority (62%) are working in the informal sector
• More than 40% are own acc and unpaid family workers (proportion has not changed over

time)

• The proportion of public employees have increased overtime

13.4 15.2 42.9 42.1 28.4 29 13 11 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000* 2009* unpaid family worker

• wn account worker

employer Private employee Public employee

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Job Protection and Unemployment Insurance (UI)

Public sector (1.1 million) High level of job protection.

Civil service pension scheme (SCPS)

• Non contributory, eligible to a pension

Formal private sector (1.8 million workers) Restrictions on termination of employment (TEWA, 1971), and considerable compensation (int’l comparisons)

Retirement benefits and survivors benefits under Employers Provident Fund

• Mandatory, Contributory, Lump sum at retirement

Budget 2010 – ‘Employees’ Pension Fund’

Informal private sector (4.7 million workers) Some protection for livelihood related investments Some ad hoc public works opportunities post disasters (tsunami, conflict)

Budget 2010 – Citizens’ Pension and Insurance Fund’

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Informal sector workers are more likely to be working poor

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5 10 15 20 25 30 35 WP CP SP EP NWP NCP UP SaP

Working poor by employment status (%)

Govt/semi-govt employee Private sector employee Employer Own account worker Unpaid family worker

Informal sector workers are more likely to be working poor.

Source: HIES 2006/07 data

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Malnutrition

Source: Department of Census & Statistics, DHS 2006/07 10 20 30 40 50 Colombo Gampaha Kalutara Kandy Matale Nuwaraeliya Galle Matara Hambantota Batticaloa Ampara Trincomalee Kurunegala Puttalama Anuradhapura Polonnaruwa Badulla Monaragala Ratnapura Kegalle

Child Malnutrition (% of children below 5 years below 2SD)

height-for-age weight-for-height weight-for-age

• Gaps in provision, socio-economic conditions (education level, income level, etc ) and

knowledge on health and community health seeking behavior are the main reasons behind these disparities

5 10 15 20 25 30

Colombo Gampaha Batticaloa Puttalama Kandy Ampara Kalutara Anuradhapura Matara Kegalle Galle Kurunegala Badulla Polonnaruwa Hambantota Nuwaraeliya Trincomalee Ratnapura Matale Monaragala

Maternal malnutrition (% of women aged 15-49)

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Better skills are needed for more productive employement

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500,000 1,000,000 1,500,000 2,000,000 2,500,000 Below O/L Passed O/L Passed A/L More than A/L Below O/L Passed O/L Passed A/L More than A/L Below O/L Passed O/L Passed A/L More than A/L Agriculture Manufacturing Services

Employed, by sector and education

• Only 15% of employed have finished high school
• Better education is needed for more moving to more productive employment
• Tertiary and vocational training needs to improve

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Summary

• Unemployment rate has decreased overtime
• But – amongst some group UE rate is still high amongst the
• The drop in unemployment is partly explained by slow growth of the LF

– Increasing outflow of workers a reason (especially skilled workers)

• Majority of the employed are in the informal sector
• The proportion of informal sector workers have changed little overtime
• Better skills and education is necessary for employment in more productive

sectors

• Policies are needed to

– promote opportunities formal productive employment … – And, improve employability

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Resilient growth despite instability

• Resilient growth despite costly

conflict

– 5% average GDP growth – decline in unemployment

• But, economy underperforming

– Lack of political stability imposed by conflict – Lack of related policy stability from high fiscal & other costs

• Experience was of significant

macroeconomic volatility

• 4
• 2

2 4 6 8 10 2000 2002 2004 2006 2008 2010 %

GDP Growth

Agriculture Industry Services GDP growth

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Economic instability harms investor confidence

• Fiscal deficits averaged 8-10%
• f GDP
• Rising public debt to GDP ratio

– Peaked at 105.6% in 2002

• High and volatile inflation

– Swing from 22.6% in 2008 to 3.4% in 2009

• Mirrored in interest rate trends

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20 40 60 80 100 120

• 12.0
• 10.0
• 8.0
• 6.0
• 4.0
• 2.0

0.0 2000 2002 2004 2006 2008 2010 % of GDP % of GDP

Fiscal Trends

Budget deficit Public debt 5 10 15 20 25 2000 2002 2004 2006 2008 2010 %

Inflation and Interest Rates

Inflation rate Interest rate

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Limited policy space in times of crises

• Persistent twin deficit on current

account

– Continuous depreciation of the exchange rate – Depreciated by 40% between 2000-08

• Macroeconomic environment deterrent to long term investment
• Encourages employment in informal/contractual arrangements

– Erosion of real wage gains

• Instability has seen Sri Lanka periodically approach the IMF

– Most recently in February 2009

20 40 60 80 100 120 140

• 10
• 8
• 6
• 4
• 2

2000 2002 2004 2006 2008 2010 Rs/$ % of GDP

External Payments

Current account deficit Exchange rate

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Post-conflict phase of rapid growth anticipated

• Since 2006, two clear objectives behind economic policy framework

– Ensure balanced growth – Support lagging sectors of production

• Policy priorities to achieve objectives focused primarily on

– Rapid investment to improve infrastructure services – Aimed to connect urban/rural and develop conflict-affected regions

• Confident of achieving medium term GDP growth in excess of 8%

– Clear implications for employment, and – Broader socio-economic development outcomes

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Fiscal policy providing near term boost to growth

• Structural weakness: current

spending outstrips revenue

– Capital spending on borrowed funds

• Positive fiscal developments

– Reforms to raise tax revenues initiated – Current expenditures contained and public investment increased

• Fiscal deficit reduced progressively

since 2009

– 9.9% in 2009 to 6.8% in 2011 – Underwritten by $2.6 bn. IMF package

• Higher capital investment expected

to boost growth

5 10 15 20 25 2000 2002 2004 2006 2008 2010 % of GDP

Current & Capital Spending

Current expenditure Public investment 100000 200000 300000 400000 500000 600000 700000 800000 900000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Rs.

Current Exp. & Revenue

Salaries Interest payments Transfers Total revenue

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Lack of fiscal support to improve labour productivity a cause of concern

Public Expenditure on Education & Health: 2008/09

% of GDP

Education Health Malaysia 4.1 2.2 Singapore 2.6 1.6 Indonesia 2.8 1.2 Philippines 2.8 1.3 India 3.1 1.4 Bangladesh 2.4 1.1 Nepal 3.8 2.1 Sri Lanka 2.3 1.8

Source : http://databank.worldbank.org/ddp/home.do

• Public investment geared
• verwhelmingly towards

heavy infrastructure

• Spending on education and

health as share of GDP declined sharply

• Sri Lanka performs poorly

even by global comparisons

• Can higher growth be

sustained without investment to improve labour productivity?

0.0 0.5 1.0 1.5 2.0 2.5 3.0 2006 2007 2008 2009 2010 % of GDP

Public Investment in Education & Health

Education Health

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Concerns on sustainability of fiscal stance exist

• Higher public investment financed

through foreign currency borrowing

– e.g., in 2010, foreign financing of deficit was 4.4% of GDP

• Sharp change in composition of

foreign debt

– Non-concessional/commercial share increased from 7.3% to 37.5% between 2006-10

• Poses significant risks to

macroeconomic health

20 40 60 80 100 30 31 32 33 34 35 36 37 38 2006 2007 2008 2009 2010 % of GDP % share

External Debt Dynamics

Concessional loans Nonconcessional loans Commercial External debt/GDP

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Foreign borrowing also causing other distortions

• Current account deficit suggest

nominal depreciation

– But, ER appreciating in view of borrowing related capital inflows – ‘distortionary‘ real appreciation

• Real appreciation hurting

competitiveness of exports, when

– Exports to GDP ratio declining sharply – Debt service ratio rising sharply

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20 40 60 80 100 120 90 95 100 105 110 115 120 125 2006 2007 2008 2009 2010 2011 2010=100 Rs/$

Nominal & Real ER

Exchange rate REER 5 10 15 20 5 10 15 20 25 30 35 2005 2006 2007 2008 2009 2010 % of G&S Exports % of GDP

Exports & Debt Service

G&S exports Debt service

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Tighter fiscal policy has allowed monetary policy stimulus

• Interest rates brought down

sharply as inflation moderated

• But, risks to price stability remain

in fine tuning monetary policy and ER policy

• Central Bank intervening to keep

ER stable

– Attractive when resorting to foreign currency borrowing

• Intervention expands monetary

base

– Potentially inflationary

5 10 15 20 25 %

Inflation and Interest Rates

Interest rate Inflation rate

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Fiscal consolidation a must

• Calls for fiscal consolidation in SL needs to be understood in above context

– First, lower deficit to manageable levels – Over time, reduce country’s debt overhang

• Need to steer away from costly and risky foreign borrowing
• Consolidation will allow domestic resources for investment

– Needed in education/health, etc. – Social safety programs for the vulnerable

• Only then, can SL be confident of sustaining a high and stable growth

process conducive for productive employment outcomes

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Thank You

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