The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Diminishing prospects of higher economic growth this year
Till recently the Central Bank was confident the economy could grow by 6 per cent this year. This projection was perhaps based on an optimistic political scenario or at least one that is not excessively disruptive.

Now that an election has been called for, it is most unlikely that the economy could grow by 6 per cent. Even a 5 per cent growth may be difficult to achieve in the current political context. Nevertheless one must recognize the resilience of certain sectors of the economy and the possibility of a post election economic resurgence.

This year's economic performance could vary in the four quarters. The first quarter has moved from one of political uncertainty to one likely to be disrupted by the elections. Other factors that could impact adversely on the economy include the spate of strikes that have disrupted several key sectors; the continuing drought conditions that could have an adverse effect on agricultural production, as well as on the energy supply; the uncertainty on the progress of the peace process and the consequent disbursement of aid and foreign investment.

Election years are a set back to the economy. This year's first quarter's economic performance would reflect the lesser performance of several sectors. The elections would impact on the economy in several different ways. The cost of the election is not insignificant an expenditure in the context of a very stringent fiscal situation. There are likely to be other further expenditures as the caretaker government is likely to grant subsidies, salary increases and other benefits to woo voters. There would also be costly promises by both parties irrespective of the capacity of the government to bear them that would increase the fiscal burden. The curtailment of the budget deficit and fiscal consolidation would once again be postponed. The election results would no doubt determine the economic expectations thereafter. There isn't much hope for the economy whatever the result.

If the UNP is once again able to form a government with an even larger majority in Parliament, the same conflict that we witnessed between the Prime Minister and President is likely to erupt. This time the conflict may very well be more confrontational and disruptive. If the alliance wins a clear majority, then its confused economic policies are likely to affect adversely many areas of investment and economic activity.

The uncertainty of the new alliance's economic policies could deter foreign and local private investment. Hopefully there would be greater clarification of economic policies of the PA-JVP alliance during the run up to the election. There is however a serious credibility gap with the business community, foreign investors and donors not giving credence to the announced policies of the alliance owing to the JVP's earlier proclaimed policies that are diametrically different to the policies of the SLFP. No doubt one of the expectations on which the Central Bank forecast a 6 per cent growth was that industrial exports would continue to increase. The industrial export recovery was below expectations last year. The global economic recovery may assist. However export growth, especially in garments, would require redoubling to impact significantly on overall growth. Hopefully the elections and political strikes will not unduly disrupt this sector. Another sector on which there were high expectations was tourism.

There is every reason to expect at least a temporary set back to tourism in the next few months, as the country's reputation of violence during election time would deter many visitors. However in the post election period tourist arrivals could reach at least last year's levels, if current security conditions prevail, no regional wars disrupt travel and the adverse conditions in some tourist destinations persist. As far as the agricultural sector is concerned much cannot be expected.

The Maha 2003/2004 crop is likely to be less than last year's harvest and the Yala crop too may be lower as the weather conditions are not expected to be favourable. Coconut production too is likely to be less owing to drought conditions in some parts of the country last year. Tea production could recover from the fall of last year to reach 310 million kilograms the production level of 2002. Once again weather is an imponderable factor in this forecast. There is also a tendency for fresh wage demands at the time of elections when trade unions are able to exploit the elections togain their demands.

If the prevailing drought continues, it will affect the energy supply significantly. The Minister of Power and Energy, Karu Jayasuriya has assured that there would be neither power cuts nor an increase in electricity charges. If these assurances can be maintained, the industrial sector will not be adversely affected. The economy would however be adversely affected by the drought as the energy costs would rise and result in heavierlosses to the government. The country is dependant on about two thirds of its power from thermal generation in a normal year. Currently this dependence has increased to about three fourths at a time when international petroleum prices are rising and is around US$ 28 per barrel. Hopefully the monsoon rains in May would alleviate this situation.

Apart from the reduction of foreign investment, the committed aid package, mainly for reconstruction of the North and East, would be postponed till there is clear evidence of the resumption of the peace process and clearer indications of a durable settlement. This prospect is fading, as the utterances of the Alliance have not been conducive to a realistic solution.The best hope is for the UNF's "negotiated non-settlement" to continue so that an extended period of cessation of hostilities continues.

The partial peace dividend that the country has enjoyed in the last one and a half years is perhaps the most likely and realistic expectation for the present. Will the elections result in political stability after the elections, with reconciliation among political parties and a consensus on national issues to enable the economy to reach a higher trajectory of growth?

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