The Sri Lankan government has embarked on a massive infrastructure development program in the country,

mostly on borrowed funds. Critically analyze how this will determine (shape & reshape) the economic
growth & development of the country in the coming years.

There are a range of views on the definition of infrastructure and what constitutes investment in
infrastructure. Infrastructure has been defined as assets that facilitate the movement of goods, people and
services through the economy. For other participants, infrastructure has a broader definition that includes
both social and economic infrastructure. Social infrastructure includes education facilities, health facilities and
prisons. Economic infrastructure includes highways, airports, rail ways, water supply, communication and
energy.
There are a number of characteristics that are attributable to infrastructure such as physical nature, high
barriers to entry, monopolistic and long term cash flows. This investment can fund major capital expenditure
and assist in expanding the capacity of existing assets.
The implication of the above definition is that there are in reality only two sources of infrastructure funds are
available for governments: an allocation of general taxation revenue or direct user charges. Where projects
cannot be funded by user charges governments must allocate taxation revenue. Naturally governments have
the choice to fund current taxation revenue, or by borrowing to complete the infrastructure
The development of economic and social infrastructure is vital for rapid economic development. Inadequate
infrastructure has been a serious obstruction for the countrys economic development. This was made
dramatically clear when our economy was seriously endangered by the War against the Terrorists LTTE. The
war affected industrial production adversely to such an extent that the countrys economic growth was
negative.
The setback to economic development owing to poor infrastructure in other areas is less apparent, though no
less devastating. Unsatisfactory road conditions, congestion of traffic, long hours to pass through relatively
short distances are among the obstacles to rapid development. The development of highways, ports, bridges,
public transport, railways and telecommunications are important for an economys development.
These constitute essential economic infrastructure whose development is vital to support investment. The
efficiency of investment is determined by the Sri Lankas infrastructure. The significant contribution of social
infrastructure to economic development though less noticeable but it is more important. Education and health
make significant contributions to support economic development and higher levels of economic achievement
are incredible without higher skills in science, technology and management.
The countrys infrastructure has been underdeveloped in many areas to support a high rate of economic
growth. Comparisons with less developed countries have often led us to contentment in the need to focus on
infrastructure development. Financial constraints have restricted the capacity of governments to invest as
much as is needed for the development of infrastructure. In fact government finances have been so limiting
that in many years financial difficulties have resulted in cutting back of even voted capital expenditure. In
many past years there have been cuts in capital expenditure owing to inadequate finances.
It is to the credit of the government that infrastructure development has been an important focus in the
countrys development strategy. This is particularly so with respect to developing the countrys energy
capacity, development of roads. However there are many areas of infrastructure that require to be addressed.
This is especially so with respect to the free education and health. The economics of infrastructure
development, especially the methods of financing, require serious evaluation.
While the importance of infrastructure development is undeniable and the recent progress in the
development of infrastructure admirable, the means of financing large investments in infrastructure have
important economic effects. Two characteristics of economic infrastructure investment are that they are large
and their economic returns take a long period of time. In many cases it is even difficult to determine precise
benefits of infrastructure investment. Therefore the manner of financing infrastructure investment is a
significant issue.
However beneficial investments in infrastructure are, if they lead to large fiscal deficits these would lead to
inflationary pressures. Further, as there is a large import content in many infrastructure investment projects,
such investment would increase import expenditure and strain the trade balance and balance of payments.
Foreign financing is a means of avoiding these drawbacks, but large foreign borrowing too would result in high
foreign debt servicing costs.
For these reasons the phasing out of infrastructure investment is needed. Even more important is the need to
ensure that there is a prioritization of investment in infrastructure and to ensure that infrastructure projects
lead to higher export earnings or reduce import expenditure. Investment in energy would no doubt increase
the production capacity of the country and help export industries. In the case of roads and bridges, some
highways would be economically more beneficial than others. Similarly, the development of ports and other
transport infrastructure has a range of cost-benefit ratios. Therefore the prioritization of infrastructure on the
basis of costs and benefits is important. Import costs, export earnings and the impact of financing on the
public finances and debt servicing costs should be considerations in infrastructure investment.
The Institute of Policy Studies State of the Economy 2012 report has discussed some of these issues. Gearing
Sri Lankas labour force with the necessary skills to be productively employed is a must to sustain long term
growth and related development objectives that the country has set for itself. This requires investments,
particularly to strengthen Sri Lankas tertiary education sector. In the absence of productivity gains, and more
savings and investment, especially the heavy outlay on physical infrastructure will weaken itself. The greater
reliance on costly sources of foreign borrowing that has underpinned Sri Lankas development effort, means
the country has to generate sufficient foreign exchange earnings to service its debt repayments in the coming
years.

GDP (purchasing power parity):
$128.4 billion (2012 est.)
country comparison to the world: 67
$120.6 billion (2011 est.)
$111.4 billion (2010 est.)
GDP (official exchange rate):
$59.41 billion (2012 est.)

GDP - real growth rate:

6.4% (2012 est.)
country comparison to the world: 37
8.2% (2011 est.)
GDP - per capita (PPP):
$6,200 (2012 est.)
country comparison to the world: 146
$5,900 (2011 est.)
$5,500 (2010 est.)
note: data are in 2012 US dollars

Unemployment rate:

5.2% (2012 est.)
country comparison to the world: 47
4.2% (2011 est.)
Distribution of family income - Gini index:

49 (2010)
country comparison to the world: 24
46 (1995)
Public debt:

77.7% of GDP (2012 est.)
country comparison to the world: 30
78.4% of GDP (2011 est.)
Inflation rate (consumer prices):

7.5% (2012 est.)
country comparison to the world: 182
6.7% (2011 est.)
Sri Lanka is yet too dependent on US and Europe for exports. The country needs to promote private sector
investments and boost foreign direct investments which are currently better than many countries in South
Asia. Sri Lanka should do more to improve its business environment. An investment in infrastructure
development especially urban infrastructure development is essential.
Sri Lanka's economy revived after the battle against terrorism, but growth slowed down last year due to weak
global economic conditions. Many infrastructure projects are in the planning stage in Sri Lanka or under
construction. These include ports, airports, power plants, highways and rail networks. Most such projects are
funded by loans or grants from foreign governments and international aid agencies.
The governments current infrastructure investment is heavily financed by foreign borrowing. Foreign funded
large infrastructure projects should have potential for increasing foreign exchange earnings or reducing import
expenditure or else it would be a burden on the balance of payments. Further, there is need for prioritization
of infrastructure investment on the basis of cost benefit analyses and the development period of such
investment. All infrastructure investments are not of high benefit.
One of the achievements of the government has been the improvement of the countrys economic
infrastructure. This is especially so with respect to the enhancement of energy that was a serious constraint to
economic development. Many obstacles and challenges were overcome to develop new power plants. Some
may still argue that these power plants have adverse environmental impacts, are damaging to the
environment. Nevertheless there is no denying the fact that they have augmented the countrys power supply
at reduced costs through additional thermal power generation. Energy costs are high. Therefore the
development of new sources of cheaper energy is vital. Efficient administration of public utilities too has a
bearing on energy costs.
On the other hand, there are concerns that some economic infrastructure developments may not be cost
effective. The methods of financing including large foreign financing of infrastructure projects have been
questioned. Financing additional expenditure through savings from other expenditure has been suggested to
reduce the inflationary impact of infrastructure investment. There has also been little attention to public-
private partnerships for infrastructure investment.
However important infrastructure development is for the country, expenditure on infrastructure investment
should consider the costs and benefits of such investment and how they are financed. All infrastructure
investments are not equally valuable to the countrys economic and social development. In view of the extent
of infrastructure investment there should be a prioritization of infrastructure investment.