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
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.
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$1.2 billion.
What is most encouraging is that exports to USA and
Europe that appeared threatened have increased
significantly. These are the main markets for Sri
Lanka’s industrial exports. There have also been
modest gains in exports to the Asian region. There
have also been increases in agricultural exports by
about 25 percent due to tea, rubber, coconut, spices
and fish exports increasing.
Despite significant growth in exports, the trade
deficit this year is likely to be very large. The
growth in export earnings, though significant is
inadequate to finance the increase in import
expenditure. Although the country has averted the
prospect of oil prices surging to higher levels,
international prices are high, much higher than
those of last year. As the Central Bank has
observed: “The upward trends that were observed in
international commodity prices have decelerated
although prices of many commodities still remain
high. The geopolitical disturbances observed in many
oil producing economies seem to have subsided,
stabilising international crude oil prices.”
Consequently the import bill would be much higher
than that of 2010 when the gap between exports and
imports reached a record US$ 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.
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.
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.
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