The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Whither economy after tsunami?
We have probably said all we wanted to about the economic consequences of the tsunami, the deficiencies in the formulation and implementation of government policies and the wrong doings that are being committed. It is fairly clear that the task of rehabilitation, rebuilding and reconstruction is shoddily implemented.

After three months, it is time to review the progress and revise the policies and methods of reconstruction and rehabilitation. The government must recognise the problems and retrieve the situation. As we said last week it must give up the rigidity of the rule about the distance from the sea and ensure that lands are available for the government as well as private donors to build houses.

The availability of land is the prime concern -- not the rule it wishes to impose on environmental grounds. In many areas the new houses may have to be built on the same locations owing to the density of population in most affected areas.

The President says the government has received not even five cents in hard cash. Surely this is a gross exaggeration, even if the inflow has been a trickle compared to the pledges. Such statements could damage aid flows. We suggested that the government obtains most of the aid as project loans where the donors themselves complete the construction. If this were done it is likely that the progress on the reconstruction of infrastructure would be rapid and modernised.

A wise government would not be obstinate. It would be willing to change, revise and be flexible in the light of the unfolding experience. The time has come to do this. The signs are on the wal,l of the government digging its own grave. Unless it is flexible and changes its policy stances, the reconstruction would not be effective and speedy.

Meanwhile, where is the economy heading? There are some positive developments in the economy. Agricultural production, especially paddy production, is expected to increase this year. The Maha crop that is estimated to reach nearly 2 million metric tonnes would take care of domestic consumption till the Yala harvest later in the year.

The export earnings from industrial goods are expected to continue with no adverse effects of the Multi-Fibre Agreement (MFA) lapsing. If industrial exports maintain the increasing trend of last year, the earnings should be high.

Tourism that was affected by the tsunami, with a halving of the tourist arrivals in the first two months, is expected to rebound. The Tourist Board expects the number of tourists this year to reach 600,000. Tea production is likely to be high and price trends are also expected to be bright. Foreign investment inflows have also been healthy. All these are buoyant expectations for the rest of the year.

The main economic adversity is the rise in oil prices. The continuing oil price increases are the most debilitating factor in the economy. There is no prospect of the price declining. The most recent rise in oil prices is a huge blow. Although the coming summer would offer some relief, one cannot expect prices to dip to their levels before the rising trend of last year, as prices are known to have a ratchet effect. Even if a downtrend occurs, the stability of oil prices would be at a higher level that of 2003.

Increased oil prices mean increased inflation. The impact of the most recent oil price increases have not been felt by people, as the government has chosen not to pass on the price increases to the consumer. The motivations for this are no secret. An increase in fuel and electricity charges would be a heavy burden in a context of price increases in other basic items, such as bread.

The clogging of the port with tsunami aid has been the latest adverse effect on imported basic food items that is likely to raise prices in the next few months at least.

A government that promised lowering prices before the last election finds itself in a quandary with international price escalations coupled with shortfalls in domestic agricultural production last year, raising prices.

Now with the prospect of another election this year there is an enormous hesitance to pass on the new price increases. Fortunately for the government, the increasing strain on the balance of payments arising from this increase, has been met by the inflow of funds both official and private.

There is however a catch in not passing on the price increases. It would erode the financial viability of the Petroleum Corporation and the Electricity Board and in turn increase the budget deficit. It may perhaps strain the banks financing them too. Since the demand for petroleum products and electricity will not be reduced by an increase in prices, the strain would be on the public finances and the trade balance.

These are nevertheless problems that can be passed on to be faced later. The government could carry on without dwelling on these serious issues. The tsunami will mask many of the country's problems to make them even more difficult to solve in the fullness of time.

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