Further regulatory reform of services markets will create fresh opportunities for firms to develop new services, meet emerging global demands and increase  BIS Review 116/2008  3  employment. It will also increase the incentives for companies to innovate and improve productivity growth. With all these, country would reach higher level of economic growth. Before I conclude, I would like to address three broader issues based on three important macroeconomic fundamentals. First, unemployment; second, exchange rate and the third is inflation. What will unemployment reduction do? The declining trend in unemployment to its lowest recorded level in Sri Lanka brings to focus the need for more efficient use of labour through productivity improvements. Precisely, lower unemployment indicates a potential hindrance to future higher growth prospects unless labour productivity is improved substantially. It has been encouraging to observe the continuous improvements in labour productivity over the years, especially in the industry and services sectors, which have contributed well to higher economic growth. However, an increasing mismatch in labour supply and demand is reflected by the high rate of youth unemployment, including graduates, and their desire to join the already expanded public service, while certain sectors in the private sector are finding it difficult to recruit necessary skilled labour. This together with declining labour force available for agriculture employment indicates the need of improving productivity as a prerequisite to achieve the envisaged higher growth targets and a more balanced regional development. What will the Exchange Rate do?

Although we always stress the importance of improving productivity in agriculture and industry sectors, a similar significance should be assigned to the services sector as well. Despite the growing weight in services in economies, productivity growth in services has been slow in many countries and the share of the working-age population employed in services remains low in many countries. If we wish to strengthen economic growth and improve the foundations for the future performance of our economy, the services sector will need to do better. But strengthening growth performance is not the only challenge that we are facing. We are also confronted with the growing globalization of services and with rapid technological change posing the huge challenge of keeping the momentum in the services sector. Addressing such challenges and strengthening the potential of services to foster employment would be definitely through increased productivity and innovation. Certainly a productive services sector would deliver more benefits in a highly competitive environment. Sri Lanka’s telecommunication sector is a good example. In which areas have we been below par? Although Sri Lanka has a huge potential in services such as education, health and tourism, we haven’t done enough. So, also, has it been in the case of ports, financial services, including banking. We have not been able to reduce prices and charges through increased productivity. We may need to open domestic services markets to create new job opportunities and foster innovation and productivity.