The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Adjusting to the global economic fallout
By the Economist
It is likely that the Iraqi war would drag on for sometime. Consequently, the economic repercussions on Sri Lanka would indeed be serious and prolonged. The expectation of a higher economic growth would indeed be difficult to achieve.

The likely increase in oil prices rather than a fall, drop in Middle Eastern remittances, decreased shipments of tea, reduced tourism, increase in other import prices and reduced demand for our manufactured exports would have adverse effects on many facets of our fragile economy.

These repercussions cannot be avoided though some of the effects could be mitigated. There is a need to attempt alternate strategies at least for sometime to overcome some of the ill effects of the global conditions.

It is to these that we would like to turn to in the somewhat despairing international economic scenario. One of the important requirements at this time of international economic crisis is to ensure that the sectors that are adversely affected do not suffer damage of a permanent sort. For instance in the case of the tea industry, particularly the tea small holders in the low country, that produce the majority of our tea and most of the tea to Middle Eastern markets, various measures to support the purchase of their tea at reasonable prices must be adopted.

As we said last week, in as far as the tea market is concerned, it is basically a temporary phenomenon and once the war is over, tea will continue to be in demand as it is a basic commodity of consumption in the Middle East. It is an issue of tiding over a period of time till demand is revived and shipments possible. Innovative methods of storage and shifts in the methods of preservation would indeed be necessary. It may also be an opportune time to increase replanting senile tea especially on the estates and ensure pruning at the proper time of the tea cultivation cycle. Financial support to meet longer-term investments may be particularly needed.

Similarly the country has been used to ups and downs in tourism owing to both global and local conditions. In the event of tourist arrivals declining, it would be necessary to keep the hotel facilities in good condition and continue investment in this sector that could swing back into a significant flourish. Meanwhile attraction of tourists from regions less affected by the war and even tourists fleeing dangerous areas require a conscious programme of action in the current situation.

The adjustment of tariffs and provision of attractive packages for periods of duration that the new circumstances might dictate are among the new strategies that must be explored. It is indeed fortunate that the international crisis occurred at a time of good harvests and a paddy crop that is expected to be adequate for the country's rice requirements. Price policy can also attempt to shift consumer demand from wheat to rice. At present we consume about 50 kilograms of wheat per capita and around 100 kilograms of rice per year.

A reduction in wheat consumption at least this year could benefit the trade balance. It would also be necessary to conserve the use of energy. Unfortunately there is a tendency to not permit international price increases to be passed on to consumers in the hope that consumers would not be adversely affected. If this approach is used then the conservation and curtailment in consumption of petroleum products cannot be achieved.

The wrong signals would lead to increased consumption at a time when it is necessary to reduce imports of oil. There is a need to comprehend that the economic fallout of the war would continue into the rest of the year.

It is very necessary that this recognition be followed up with appropriate policy measures to ensure that the economic setback would not have permanent destabilizing effects. It is also a time when a tightening of belts is needed to conserve imports of commodities that are likely to rise in prices.

To incur a huge import bill at a time when earnings are likely to decline is to court a huge trade deficit and strain on the balance of payments that we can ill afford. The government must make an effort to make people understand the economic implications of the war and explain the need for stringency in the face of this crisis.

The government's focus should not be entirely on the supply and availability of food and other essentials. It must watch over the viability of the economy.

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