| The Sunday Times Economic Analysis By the Economist | ||||||
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When
peace is distant, proper economic management is vital In fact the indirect impacts could be even more serious. The much-needed enhancement of foreign direct investment is not only unlikely to flow in but are likely to be diverted to other more stable venues. The continuing escalation of oil prices to new peaks is likely to be a crushing blow to the country's finances and particularly to the public finances and the external accounts. All these mean that the optimistic predications for the economy in 2006 are not likely to be realized. There are also signs of the government procuring arms and military hardware. These would increase the budget deficit beyond the estimated figure given in Budget 2006. It may also result in enforced cuts on developmental expenditure. The much delayed and unsatisfactory progress in infrastructure development is likely to be affected adversely. Most expectations and predications about this year's economic performance had the underlying proviso that they are dependent on the progress of the peace process. The chances that there would be substantial progress are now remote and the economy may take a beating once more. In such a context, it is vital that the government adopts prudent fiscal measures to enable it to spend on essential war expenditure without creating excessive inflationary pressure. This is no mean task. The increase in fuel prices may have an adverse impact on both the fiscal deficit and the balance of payments. Last year the government incurred additional expenditure on government salaries both by increased recruitment, especially of unemployed graduates, and by raising public service salaries. The additional recurrent expenditure on these would be an additional cost this year. The failure of the government to pass on the additional costs of petroleum to consumers caused quite a problem in the finances of certain corporations and ultimately on the budget. The most recent increase in consumer prices of petroleum products too may be inadequate to cover fully the ever-increasing fuel prices. The backlog has anyway created a serious problem for the country's finances. The government should revert to the formula for petroleum prices adopted by the previous government of passing on increases in import costs to consumers at regular intervals. The advantages of this system of pricing is that consumers would be adjusting their demand to actual international prices, the finances of the Petroleum Corporation would not be undermined, the price increase would be more gradual and the strain on the budget would be minimized, if it results in there being no subsidy.The strain on the balance of payments would be less, if consumers respond and adjust their demand to the higher prices. In as far as the balance of payments was concerned there was some relief from the lines of credit obtained from Iran and India. In fact most of the US$ 250 million credit obtained would have to be repaid during the course of this year thereby straining this year's balance of payments severely. The government also faces the prospect of the moratoria on debt payments lapsing and having to pay these this year. As the Asian Development Bank's economist Johanna Boestal aptly described, we have opted for quick fix solutions like taking Panadol to solve a deep-seated malaise. She pointed out the CEB alone had incurred over Rs. 50 billion of short-term debt and payments arrears. Bold economic decisions are needed to ensure stability and growth of the economy. The most critical overall area that must be addressed is the containment of the Budget deficit to the magnitude indicated in the Budget. What we are in fact observing is a state of affairs where there are statements that the deficit would be contained, while at the same time the government is incurring additional expenditure without any increments in revenue. This is a dangerous course of action. Last year the economy was saved by the financial inflows from abroad. In spite of the huge trade deficit of US $ 2.4 billion last year, there was a balance of payments surplus, an increase in foreign exchange reserves and the Rupee was strengthened. We cannot expect such a fortuitous economic occurrence this year. In a political context where peace appears distant, proper economic management is vital. We can only hope that the escalation of violence would be contained and that it would not spread to the South. The other possibility is that international pressure may restrain LTTE violence and that the peace process would recommence. In
hindsight, it may appear that the long drawn out negotiations of
the previous government that achieved nothing substantial was at
least beneficial to the economy. The political outcomes would continue
to have an important bearing on the pace and direction of economic
development. |
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The
resumption of violence and the initial postponement and continued
uncertainty of the Geneva II talks are bad news for the economy.
The recovering fishing industry is being crippled in the Northern
and Eastern waters by the ban on fishing fleets consequent to the
attack on the Naval vessel and the sinking of the LTTE craft. The
escalating violence with injuries to foreigners and fears of fresh
violence is likely to be a setback to the expected revival in tourism.
These are two direct impacts of the current security situation on
two sub-sectors of the economy.
