The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

First quarter 2003: Growth despite uncertainty
The first quarter of this year was a period of global uncertainty. There was a set back to economic recovery in the developed world and the much-awaited gain in momentum of these economies was halted.

The prospect of war in the Middle East that finally materialized set off an increase in oil prices. Shipments of goods to gulf states were disrupted. Tourism from certain countries was expected to be affected. And finally the SARS epidemic affected the economies of South East Asia and the Far East.

The economic performance of the first quarter must be viewed within this global context. This is especially so as several of these factors had a direct as well as indirect impact on the Sri Lankan economy. It was also an unfortunate timing as the Sri Lankan economy had shown an up-turn during the third quarter of last year and there was every expectation that this growth would result in the economic growth gaining momentum.

Fortunately the uncertainty was short lived. The direct effects of the war were even shorter. Yet some scars of those months have remained in the economic performance of the first quarter and are likely to continue for sometime in the future as well.

Despite these not so favourable conditions the economy fared reasonably well. Total exports increased by 10 per cent. Agricultural exports however suffered owing to a decline in tea exports. Total agricultural exports decreased by as much as 12.7 per cent reversing a recent trend of increased agricultural and specifically tea exports.
The main casualty was tea that suffered a set back owing to tea exports to the Middle East being temporarily suspended. Consequently, tea exports declined.

Industrial exports that had shown an upswing in the last quarter of 2002 continued its bounce. Industrial exports grew by a healthy 14.4 per cent in spite of an expected depressed demand in western countries, especially in the US. This growth is particularly encouraging as it implies a competitiveness of our industrial exports in international markets.

This is especially so with respect to garment exports that had experienced some anxiety. In fact garment exports that accounts for about two-thirds of total exports grew by 8 per cent in the first quarter of this year. Leather and rubber goods exports grew by 4 per cent and other exports grew at a faster pace of 45 per cent. It is pertinent to note that the other goods category accounted for 19.5 per cent of total exports.

Industrial production in the private sector grew by 5.9 per cent during this period. Although tourism was expected to be affected by the prevailing war like conditions, the expected slackening of tourism did not materialise. Tourist arrivals increased to 120,500 and tourist earnings increased by nearly 30 percent to US $ 76 million in the first three months of this year.

This trend may in fact continue, if there is security and peaceful conditions in the country continue. In which case we may see a new record in tourists of around one half million.
The foreign remittances during this period increased. One explanation to this is that the uncertainties in the Middle East made Sri Lankans remit some of their accumulated savings to Sri Lanka for safety. Consequently the remittances (not only from the Middle East) were 11 per cent higher this year than in the comparable period of last year. Remittances amounted to US 334 million compared to US$ 300 million in the first quarter last year.

As always the trade balance continued to be in deficit. The deficit in the first quarter of this year was larger than that of last year's first quarter. The trend of the trade deficit increasing progressively, that has been a feature in the last three years, is disconcerting. The expectation that an increase in exports would bring down the deficit did not materialise in the first quarter as well. The 10 per cent increase in exports was inadequate to offset a 13 per cent increase in imports.

Consequently the trade gap widened to US $ 344 million compared to a deficit of US$ 272 million in the first quarter of last year. This is a substantial increase in the deficit by 24 per cent. A continuous increase in the trade deficit would indeed be a strain on the balance of payments, even though recent capital movements and inflows have been favourable.

Although the economy faced serious threats at the beginning of the year, these did not have a lasting impact. Curiously several sectors of the economy fared well. However there should be no complacency in the coming months as there are some threats to the country's economic progress. The flood damage may be somewhat of a set back to agricultural production. Yet this damage is perhaps being exaggerated by the emotional response to the flood damages.

More important anxieties are the stalling of the peace process that is resulting in a loss of confidence among foreign governments and investors that the peace negotiations will be affected. Without a revival of growth in developed countries our industrial exports cannot expand. The pace of Sri Lanka's economic growth remains uncertain owing to these factors.

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