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News Features  


 

The Nation Economy
A Silver Lining in the International Economy

  • Food and oil prices decline

by Arthika Wishleshaka

In as far as the trade balance is concerned the advantage of decreased import expenditure would be more advantageous than the fall in export earnings. The decrease in the oil price could be of much benefit to the country. The recovery of the international economy that was somewhat sluggish prior to the reduction in oil prices and was expected to rise by only 1 percent may gain momentum. The decrease in international oil prices may give a new boost to several important economies. This would in turn increase international demand of many commodities and could benefit Sri Lankan exports.

The fall in international prices of oil and food will boost the Sri Lankan economy. Expectations of global economic growth too may be higher and such recovery in international economic conditions would be favourable to the Sri Lankan economy so dependent on international economic conditions. However there are some drawbacks as well, but these are of lesser consequence.
In recent months the increases in international prices of food, fuel and fertilizer have wiped out the gains made in export earnings. Although this year’s export earnings were impressive, import expenditure outpaced this growth. Therefore, despite the gains in exports, the country was heading towards a massive trade deficit. This may now be averted owing to the reduction in oil prices in particular.
Export earnings of both agricultural and industrial exports were high this year. In the case of agricultural exports, the gains were mainly through higher prices of tea, rubber and other export crops such as spices. Industrial export growth, especially in March, was quite surprisingly good and the reasons for the industrial export growth were indeed encouraging. Yet the country’s trade balance had widened with the trade deficit likely to reach a new peak of around US 7 billion. There were fears that even this may be exceeded if fuel prices were to rise further. This concern has been averted. Now that oil prices are coming down and have already decreased to below US$ 100, the export-import outturn could be more favourable. The reduction in oil prices would be favourable in containing inflation and reducing the fiscal deficit too.
The global scenario
The global economy was expected to grow at a slow pace this year, reversing earlier expectations of higher growth. The reasons for the slow recover of the global economy were several. The tsunami in Japan that dislocated its economy, disrupted supply chains and dislocated industrial output around the world was an important contributory factor. Japan’s exports declined somewhat while the demand for raw materials and other requirements for her industry too decreased. Perhaps the perception of the Tsunami’s impact on the rest of the world was even worse than what happened. Adding to this pessimism was the surge in oil prices earlier this year.
Higher fuel prices eroded consumer confidence, particularly in the US where gas prices play a critical role in economic expectations and decision making. Policies in emerging countries too were not conducive to global economic growth. Emerging economies tightened monetary policy in response to high inflation. This was so in China where consumer-price inflation accelerated to 5.5 percent in May, while India’s wholesale prices jumped by 9.1 percent. Therefore these economies took monetary measures that preferred slower growth to high inflation. This too was expected to retard growth globally.
International prices of imports
In the first quarter of this year food prices declined from their high levels. There have been further decreases in food prices last month. The international price of rice fell around 15 percent. This is not of much consequence as rice imports are very small. However the fall in the price of wheat by as much as 24 percent and the decrease of the sugar price by 26 percent will benefit the country. The decline in prices of sugar, milk and wheat are of much advantage for the country. About 12 percent of the import costs of last year were on these foods. The largest benefit for the country would arise from the decreasing prices of oil.
At the time of writing’ oil prices have fallen to US$ 94 per barrel from its peak level in April. There are indications of further decreases in international prices of oil. Downward speculation could bring down oil prices further as it was not the supply demand situation that resulted in the sharp increases in oil prices but the speculation caused by the flare up in the Middle East. It is likely that this trend of falling prices would continue till another adverse development occurs. For the present it will bring significant relief to the trade balance.
Effect on exports and trade balance
This favourable development in import expenditure is not without some adverse effects on the country’s exports. Some of the country’s exports too would face price decreases. Rubber prices would be directly affected as the reduction in oil prices has a direct relationship with synthetic rubber prices. With reduced prices for synthetic rubber the prices of natural rubber would decline. Tea prices have been falling in recent weeks. The lower oil revenues in oil producing countries are likely to assert downward pressure on tea prices. Export earnings are likely to suffer owing to the reduced export earnings from tea.
In as far as the trade balance is concerned the advantage of decreased import expenditure would be more advantageous than the fall in export earnings. The decrease in the oil price could be of much benefit to the country. The recovery of the international economy that was somewhat sluggish prior to the reduction in oil prices and was expected to rise by only 1 percent may gain momentum. The decrease in international oil prices may give a new boost to several important economies. This would in turn increase international demand of many commodities and could benefit Sri Lankan exports.
The increasing trend in manufactured exports could continue their momentum. The recent history of the country demonstrates that the Sri Lankan economy benefitted whenever there was a boom internationally and suffered whenever there was an international crisis, as was the case with both the Asian Financial crisis in 1997 and the financial crises in the US and other western countries in 2008. The converse is likely now with the upturn in the global economy owing to the declining oil prices. Manufactured exports such as garments, rubber and leather goods and electrical goods would be boosted by the reduction in the oil price. Air fares are likely to come down from the current high rates and hereby encourage people to travel. The current tourist boom and expectations of further improvement in tourist traffic could be more easily realised.
Future: Cautious optimism
The decrease in oil and food prices would be of immediate benefit to the trade balance. These could also reduce inflationary pressure and have lesser strains on the fiscal outturn. An improvement in the global economy would benefit the country’s exports. These favourable developments must be viewed with cautious optimism. The economic recovery in the western world is still weak and vulnerable. There is still a possibility of a reversal of these developments. Instability in the Middle East could send prices soaring again. Sudden climatic changes could increase food prices. Therefore economic policies must look at long term prospects while reaping the gains of the current favourable international economic developments.