The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Oil prices keep haunting the economy
The projected 6 per cent growth keeps being revised downwards. It is more likely to settle around 5 per cent than 6 per cent by the end of the year. When the tsunami reconstruction is discounted, the net growth is likely to be only about 4 per cent. The increase in average per capita incomes with this rate of growth would be less than 4 per cent. This is a growth rate that has been found to be quite inadequate to cope with the problems of poverty, unemployment and the progressive aspirations of the people for a better life.

The initial growth rate projected by the Central Bank may require to be revised downwards. A 6 per cent growth was postulated on the basis of an increased output of agriculture, increased industrial output based on continued export demand, the revival of the tourist trade, the partial restoration of fisheries and the growth of construction. Some of these predictions may have been somewhat optimistic.

Paddy production has increased significantly, but there appears to be hiccups in tea, with a decline in tea production in the first two months. Any significant recovery in fishing can hardly be expected with the slow implementation in the provision of fishing craft and disruption of housing of fishing communities. It is of course too early to predict the final out turn in agriculture, as weather conditions in the next nine months would have a significant bearing on the out put of agricultural produce.

Industrial production and exports are faring well. Yet, there is some anxiety as to whether the oil price escalation would slow down growth in industrialised countries and consequently reduce the demand for our industrial exports. Rubber prices would benefit but we sell so little rubber now both due to reduced production and a high domestic consumption.

The predictions of the Tourist Board on tourist arrivals have turned out to be rather optimistic. The tsunami effect has deterred tourists owing to the coastal areas not being cleared of the rubble and debris and fears of coastal areas. Arrivals this year are likely to dip rather than grow. In the first two months tourist arrivals fell 20 per cent. Even if there is a reversal it is likely that tourist earnings would dip by about 10 per cent. This would also have adverse impacts on the gem, handicraft and travel sectors.

However it is not the issue of the growth rate per se that is pertinent, haunted by rising oil prices and their invidious and pervasive impact on the economy is likely to cause serious difficulties. The immediate impact of oil prices is being avoided by keeping the price of petroleum products lower than their cost. With increasing prices the burden of the subsidy would rise.

It is crippling other institutions. Worst of all there appears to be sharp divisions in policy on how to handle the problem. The issue of reorganising the Petroleum Corporation and Electricity Board has become a contentious one which could no longer be adequate to cope with the rising prices.

The respite given by the tsunami relief funds may be running out too. The political repercussions of the oil price escalation could be even more damaging than the direct impact of the price rises. The real perverse impact on the economy this year would be the rising oil prices. The forecasts for oil prices are stunning. They are expected to nearly double from the present high levels. This means that by the end of this year, prices would have about tripled in the two years. Although the direct impacts of these prices are being delayed through administrative decisions, they are making holes in the economy. What is worse is that political dissension; strikes and political instability are consequences flowing from this price rise.

It may also affect aid flows, as the recommended policies of the IMF may not be followed. The distortions in prices could have serious direct and indirect impacts that would be escalatory in impact. The seriousness of the crisis is little understood by the people. The limited increases in prices passed down to the consumer have not led to a significant curtailment of consumption.

There is no consciousness of a need to conserve oil and electricity use. Consumption of these products continues as if there has been no change in import costs. The problems are being aggravated rather than resolved. The full and diverse impact of the oil price rise cannot be avoided. We may turn a blind eye only to be struck down in a stunning manner in the near future.

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