long-term Economic performance
budget speech last month gave us an optimistic
account of what has happened and what bright
prospects there were for the economic future of the
country. Similarly the releases of the Central Bank
give a most glowing account. Economic statistics are
interpreted to buttress this position. Equally
fervent are the accounts that describe the economy
as being on the verge of a crisis. These accounts
too are supported by economic statistics. Where do
we really stand? Is the economy likely to take off
into a trajectory of high economic growth as
indicated in the budget speech or are we likely to
stagnate and watch other Asian countries progress at
The government expects the economy to grow by 7%
this year. This is a doubling of last year’s
economic growth. There are several reasons why this
rate of economic growth is likely to be achieved.
First as last year’s economic growth was low,
statistically economic growth of 7% is not difficult
to achieve. Then there are the economic activities
that have been resuscitated owing to the end of the
war and the peaceful conditions that prevail in the
country. Foremost among these is the clearly evident
tourism boom. An increase in tourist earnings would
also lead to backward linkage benefits to
agriculture, arts and crafts, travel trade and the
gem industry. These would make a significant
contribution to GDP growth.
According to the budget speech the “government’s
vision for future development envisages accelerating
the growth rate to around 8% in the medium term and
placing the country’s growth path around a double
digit level thereafter.” This sustained growth is
far more difficult to achieve as it requires
considerably higher levels of investment and
correcting fundamental macro economic variables such
as the containment of the fiscal deficit.
The budget speech itself recognised this when it
said, “This means our country needs to raise total
investments to around 40% over the next ten years.
As public investment will concentrate more on the
long-term infrastructure private sector investments
need to be increased from the current level. This
increase cannot be mobilised from our domestic
private sector alone as the country does not have
domestic savings to meet such a large resource
requirement. Further, to create a modern economy we
need investments in a wide range of businesses.” The
salient issue is whether the government would follow
fiscal policies that stabilise the economy and
provide incentives for private savings and
In as far as immediate and short-term economic
growth is concerned there is every reason to think
that a 7% growth is likely this year and in the
next. This is due to the peace dividend. However,
unless proper economic policies are pursued the
growth rate will then taper off.
Fisheries and Agricultural growth
There are several sectors and sub sectors of the
economy that will grow immediately. There is a
resuscitation of fisheries in the northern and
eastern waters. This benefit was seen last year as
well. The only dampening factor to growth in
fisheries is the bad weather conditions. Fisheries
could contribute towards the GDP somewhat more than
last year. There is also an expectation of a larger
output of paddy and subsidiary food crops from the
North and East owing to a large area being cropped
this Yala season. The tea crop has been very high in
the first half of the year and it is expected to
reach a record level of 320 million kilograms this
On the other hand, industrial production catering to
the foreign market is likely to suffer owing to the
trend of the country’s most important exports
suffering a setback in export markets. This trend is
likely to worsen with removal of the GSP plus
concession in the European market. The garments
industry has suffered heavily and is likely to fare
badly this year too. Ceramics is another industry
that is expected to have a setback. Industries
catering to the local market may however increase
production to meet a pent up demand in the North.
Adverse Trade balance
A trade deficit of very high proportions is growing.
This trend is not likely to be reversed this year as
the factors affecting the trade balance adversely
will continue. These are the higher price for
petroleum and food and fertiliser prices. In
addition imports are likely to grow with the
reduction in tariffs of motor vehicles and
electronic items. In contrast, exports of industrial
goods are rising by very little and this trend is
likely to continue. There is an improvement in the
export earnings of tea and rubber. Even though these
are quite significant they are not likely to
compensate for the reduction in industrial exports
and increase in imports. A merchandise trade deficit
of about US$ 6000 could be expected.
A favourable development of significance is the
growth of worker remittances in the recent past.
This growth has been gaining in momentum this year.
Last year remittances grew by 13%. These have grown
by 14 % in the first four months and likely to
continue at this rate or even increase somewhat.
However, unlike last year when the merchandise trade
deficit was lower, remittances more than offset the
deficit in the merchandise trade deficit to yield a
trade surplus. This is not likely to happen this
year as the merchandise trade deficit is too large.
Nevertheless it would reduce the deficit.
Tourist and other services income and investment
inflows are expected to result in a small balance of
payments surplus. This, however, is based on a
rather low estimate of the merchandise trade
deficit. It is more likely that we will experience a
balance of payments deficit that will eat into the
country’s foreign reserves of over US$ 6 million at
The foreign reserve of over 6 billion dollars has
been a boast of the government. This is rather
misleading as most of the reserves are borrowed
funds and an increasing amount of it is commercial
borrowings at fairly high rates of interest.
Consequently our debt servicing costs have risen.
The foreign reserves may decline at the end of the
year owing to the deficit in the trade balance.
The public debt has been another area of confusion.
The public debt consisting of both domestic and
foreign debt has been increasing. In fact, both
these components of the debt have been increasing.
However, the budget speech made out that the debt
position was improving by quoting the debt to GDP
ratio that has fallen to 82% from over 100% some
years ago. This is statistically correct.
This statistic should be put in perspective. The
decrease in the debt to GDP ratio is not the result
of debt decreasing but the GDP rising. A further
complication arises as the estimate of last year’s
GDP is questionable. The figures with respect to the
increase in construction, industrial growth and of
agriculture are likely over estimates. Perhaps the
more pertinent issue is that even an 80% Debt to GDP
ratio is far too high a burden.
Despite protests about the rise in the costs of
living, the fact is that the government has been
able to keep inflation at a single digit level.
However, some of the basic food items have risen in
price to make livelihoods of the lower income groups
rather difficult. On the other hand, the price of
rice has declined. The price level may rise somewhat
later on in the year but the expectation is that it
will be at around 10% or less.
The short-term boost in growth must not be taken as
an indication of the country heading for rapid
growth. There are serious weaknesses in the economy
that must be corrected to provide the conditions for
growth. Not the least among these is the need for
fiscal consolidation. Sustained high rates of
economic growth requires higher rates of domestic
savings, reduction in wasteful government
expenditure, attraction of foreign investment in the
form of foreign direct investment and a resolve on
the part of the government to focus more sharply on
the economy rather than political trivialities.