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News Features  


 

Emerging positive economic trends
Many economic indicators of the first half of the year are positive and encouraging. The Central Bank’s Monetary Policy Review of May 2011 states that the economy is more or less on the projected growth path, despite the setback to agriculture at the beginning of the year. The latest Central Bank Monetary Policy review of June confirms these favourable developments.

Agricultural production has recovered from the impact of floods early this year and weather conditions are favourable for agricultural activity. There is increased production in many crops this year, including tea and coconut. Industrial and Services sectors are expected to contribute to an economic growth of around 8 percent this year too. The expansion of trade related activity and tourism are spurring the economy.
The significant growth in exports should give an impetus to backward linked industries and services. Similarly, the significant growth in tourism should stimulate growth in tourist related activities. The somewhat more stable conditions in the Middle East, the stabilisation of oil prices and an improved international food situation would also assist the country’s development. International prices of the country’s exports have either remained stable or even fallen in some instances.

However, attaining an eight percent growth this year is a challenging task. It is one thing to grow from a low growth of 3.5 percent to 8 percent aided by the peace conditions that expanded economic activity. It is quite another to continue to grow at a rapid pace after an eight percent growth last year. Indications are that the country may achieve a 7 percent growth. Such a 7 percent growth sustained over the next five years would not be a mean achievement. A much higher rate of economic growth would require a higher rate of investment both local and foreign. Unfortunately, there is no evidence of an improved investment climate. 

Export Growth
The performance of the country’s exports so far this year has been heartening. Exports in the first quarter of this year increased by nearly 50 percent from that of the first quarter of last year: an impressive US $ 2.65 billion. Exports in March this year was over US 1 billion. In the light of this performance, the Export Development Board (EDB) expects export earnings to reach US$ 11 billion this year. Increased industrial exports have been responsible for much of this increase. Industrial exports that account for nearly three fourths of total export earnings grew by 50 percent.
Most encouraging is the sign of resurgence in the country’s garments exports that fared inadequately last year. Export earnings from textile and garments increased by nearly 75 percent to US$1.2 billion. What is most encouraging is that exports to USA and Europe that appeared threatened have increased significantly. These are the main markets for Sri Lanka’s industrial exports. There have also been modest gains in exports to the Asian region. There have also been increases in agricultural exports by about 25 percent due to tea, rubber, coconut, spices and fish exports increasing.

Trade balance 
Despite significant growth in exports, the trade deficit this year is likely to be very large. The growth in export earnings, though significant is inadequate to finance the increase in import expenditure. Although the country has averted the prospect of oil prices surging to higher levels, international prices are high, much higher than those of last year. As the Central Bank has observed: “The upward trends that were observed in international commodity prices have decelerated although prices of many commodities still remain high. The geopolitical disturbances observed in many oil producing economies seem to have subsided, stabilising international crude oil prices.” Consequently the import bill would be much higher than that of 2010 when the gap between exports and imports reached a record US$ 5.2 billion. The trade gap is likely to be higher this year unless the spurt in export earnings in the first quarter of this year is maintained. Indications are that the trade deficit would be around US$ 7 billion.

Remittances 
In recent years remittances have made a significant contribution to financing the trade deficit. Last year remittances increased by 24 percent to cover about 80 percent of the deficit. Other capital inflows and tourist earnings covered the remaining 20 percent of the deficit. As it turned out, there was a balance of payments surplus and consequently the trade deficit did not strain the balance of payments or the foreign exchange reserves. If the larger trade deficit this year is to be wiped out this year too, remittances, tourist earnings and capital inflows would require to be increased

There was some anxiety that the remittances from workers in the Middle East would be retarded owing to the unrest in several Middle Eastern countries. However, this has not happened and the inflow of remittances has continued to increase. There is every prospect that tourist earnings would be much larger. Consequently despite the high trade deficit, the country may still have a balance in the payments surplus. Although there has been a large trade deficit, earnings from tourism, workers’ remittances, and the inflows to the capital and financial account have resulted in the balance of payments surplus in the first quarter of the year. 

Inflation
There has been an increasing trend in inflation this year. The rate of inflation increased to 9.8 per cent in April 2011 compared to 8.6 per cent in March. The annual average inflation also increased from 6.2 per cent in March to 6.6 per cent in April. Inflation declined in May 2011 to 8.8 per cent from 9.8 per cent in April and the annual average inflation showed a marginal increase of 0.3 per cent to 6.9 per cent in May. However, it would be possible to contain inflation at single digit level. The Central bank expects the improving supply conditions to moderate prices from May onwards. However, inflationary pressures have already been released. Much would depend on whether the price of petrol, diesel, kerosene and gas would be increased again to reduce losses in the petroleum corporation. This situation would be eased if international oil prices were to decline from current levels as the conditions in the Middle East stabilises.  

Conclusion 
Despite several anxieties in the international economic environment, there are signs of more stable conditions. Export growth has been impressive but import expenditure of a much larger extent will create a large trade deficit. Worker remittances and tourist earnings that are increasing are likely to wipe out the trade deficit to result in a balance of payments surplus of a small amount. The growth in exports and tourism will have beneficial backward linkages to other economic activities. Agricultural production has recovered and yields are likely to be high. In spite of these favourable trends, a real economic growth of 8 percent this year would be difficult to achieve. A 7 percent growth would be more realistic. The emerging challenges are to contain inflation and to maintain fiscal targets. The containment of the fiscal deficit to 6 percent will not be an easy task but must be achieved by reduction in public expenditure and improved collection of tax revenues. There is evidence of improved tax revenues, but public expenditure remains high.