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News Features  


Short and long-term Economic performance

The 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 unprecedented pace?

Economic growth
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 investments.
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 year.

Industry decline
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.

Remittances
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 present.

Foreign Reserves
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.

Public debt
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.

Inflation
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.

Long-term growth
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.