The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Any silver linings in the dark clouds?
In the encircling gloom of political events, are there any economic silver linings? Fortunately there are sectors in the economy that are not much affected by the recent political events and uncertainty.

There are others that have accepted the political upheavals as an inevitable frequent occurrence and built-in a degree of resilience and buoyancy. Unfortunately the political confusion is accompanied by unfavourable global economic factors that are also severely detrimental to the economy. There are no solutions to them, but the political state of affairs is hardly conducive to their containment.

A favourable development is the progress in the garments industry that caused some anxiety last year owing to the impending abrogation of the Multi-Fibre Agreement in 2005.

This year was considered a critical one for the garments industry owing to fears that the discontinuance of the Multi-Fibre Agreement would lead to a sharp reduction in exports of garments. There was speculation as to whether it would affect the capacity of the country to expand its exports of those items of the industry that had enjoyed a degree of protection by the quota system in operation. The more articulate members of the industry had voiced the view that it could cope with it. In the event, it appears that they were largely correct.

The industry had adapted itself and undergone structural changes that have enabled it to survive. Consequently garment exports have increased in value by 10 per cent in the first four months of the year.

This does not mean that the industry is without its share of problems. The lower end of the garments industry that manufactures basic items of clothing has had to cope with intense competition from Bangladesh, China and Vietnam that have lower costs of production.

These garment firms find their margins reduced and their survival may be in question. The inflationary trends in the country and higher costs of production through higher energy prices would exacerbate this problem further. Nevertheless the fact is that garment exports have increased in value though not necessarily in volume. Further changes in the industry are needed and some are on the cards to enable a continual increase in garments exports. In the first four months of this year textiles and garments exports valued at US$ 887.3 constituted 59 per cent of industrial exports and 45 per cent of total exports.

Other industrial exports have also shown an increase. Rubber and leather goods exports (mainly rubber manufactures) increased by 34 per cent and brought in US$ 165.6 million accounting for 11 per cent of industrial exports so far this year. Interestingly these exports are about one half (48 percent) our total agricultural exports.

The record paddy harvest this year is also another positive development. The Maha harvest indicates a leap in the yield levels that auger well for the future of the country. If the recent trend in yields is continued the country could be self-sufficient in rice in the next two decades. The unfortunate development that could affect paddy production adversely is the drop in the farm gate prices for paddy and even serious difficulties in disposing the paddy. The problem of paddy sales at reasonable prices creates serious financial difficulties for farmers in the North Central and Eastern provinces where the surge in production has occurred.
The drop in prices has been brought about by increased imports of rice to cope with the shortfall in production. The import of 222,000 metric tons of rice last year appears to have increased stocks of rice in the country thereby reducing the demand for paddy. Farmers in the North Central province in particular complain they are unable to sell their paddy and that when they do they are at lower than their costs of production. Will these developments deter cultivation in the Yala 2005 season to result in a drop in production? Hopefully not.

Tea production appears to be heading for a new record harvest this year. In the first five months tea production reached 136 million kilograms. This increase in production of nearly 4 per cent from that of last year, if continued may result in tea production topping the 310 million kilograms achieved in 2002. Rubber and coconut production however declined by 14 and 15 per cent, respectively. The neglect of rubber in the past does not allow the industry to benefit adequately from higher international prices.
Tourist arrivals have not been as rosy as the statistics indicate. In fact real tourist arrivals have declined as can be observed in the low occupancy rates in tourist destinations. The statistics however indicate an increase of 8 per cent in the first four months of the year owing to the large influx of persons for Tsunami relief work. The earnings from tourists also disclose an increase of 8 per cent compared to the same period last year. These figures are however suspect as for sometime the percentage increase in tourist earnings have been the same as the increase in tourist arrivals. Nonetheless these earnings have contributed to the balance of payments though they have not benefited tourist resorts. There is some evidence that the coming season from October onwards may see a higher number of tourists.

We have made an effort to strike a happy note in an environment that is not at all conducive to economic growth. These developments may keep the economy afloat, but are totally inadequate to achieve the growth levels that have been repeatedly described as essential to achieve the country's social goals and economic take-off.

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