Financial Times - Economy records 7percent growth in the first quarter

According to the latest Monetary Policy review of the Central Bank the economy has grown by 7% during the first quarter of 2006 and the striking factor is that all key sectors of the economy have expanded. On the negative side the trade balance has widened but the balance of payments have recorded surplus with financing from increasing official capital inflows and private remittances that have shown a steady increase. In short foreign reserves are steady, exchange rates are stable but inflation is rising.

According to a recent IMF survey the nineties saw countries around the world implementing sensible reformist policies in lower import tariffs, fewer restrictions, trade facilitation, governments’ exiting from commercial activities, financial sector reforms and encouragement for private enterprise. It is said that the 90’s reforms were unprecedented with many developing countries reaping benefits by way of high per capita incomes, etc. The nineties also marked the fall of the communism reflecting a new resurgence in Eastern Europe that has now become major players in the global trade. India a highly controlled economy went through a series of reforms and provided market access to the world. China has earned the title of “Worlds factory” and is aggressively pursuing reformist policies.

Sri Lanka an early entrant to liberalized economy has been aggressively following a policy of export led growth since 1977 with emphasis in manufacturing. These policies have resulted in building up a strong apparel manufacturing sector that has successfully weathered the post MFA shocks. Liberalization of the services sector has resulted in huge expansion of the telecommunication sector and also port activities now contributing to economic growth. However Sri Lanka’s reforms and the resultants growth prospects have yet failed to utilize its potential due to a number of reasons.

The government has gradually increased the private sector’s role in the economy motivating them to invest in agriculture, exports and manufacturing in contrast to trade. In this scenario some of the recent company reports provide interesting reading. The Chairman of Hayleys group a indigenous business group now having established many overseas subsidiaries has emphasized the need of right policies and institutions now accepted as catalysts of good governance. Recent World Bank research on the nineties success has further affirmed this belief. According to Hayleys inconsistent government policies have compelled them to scale down export of their major purification product activated carbon due to inability to source adequate raw materials. They claim that despite raw material capacity being just sufficient for the existing manufacturers government policies have resulted in an entry of foreign player with full BOI incentives. They charge this will affect loss of jobs in well-paid categories paving the way for low waged new jobs and low export prices.On the other hand persistent delays in VAT refunds have made serious inroads to their working capital blocking nearly approximately Rs 500 million causing a severe blow to stake holder returns, irrational VAT exemption granted to tea sector has increased the input costs of the plantation companies.

John Keells which improved their net earnings despite heavy losses incurred during the tsunami disaster speaks of the “positivism” amidst numerous challenges and surrounding uncertainties that helped them to stage a grand recovery. During this period Keells made a bold strategic move to exit from plantations that has been very close to their core and struggled against the adverse effects of avian flu in their food segment.

Both these companies have taken bold steps to invest abroad and fuel growth through acquisitions. Hayleys and Keells together have generated a profit of Rs 5 billion according to their latest results and the contribution they make to the national economy by way of taxation, employment foreign exchange earnings etc is significant.

Maintaining the growth momentum in an economy from year to year is a gigantic task and right government policies and strong institutions should encourage economic activity.

Reforms
Amidst many a crisis and setbacks we Sri Lankans have to live with, knocking at our door is the “Major energy crisis”. Obviously no immediate solutions exist to meet the increasing petroleum prices nor can the subsidies be continued leading to financial crisis. The high cost of energy will impact on poor adversely. However it is disturbing to note that whatever efforts taken by present and past governments to reform the ailing electricity giant CEB has met with failures. The CEB is the successor to the Department of Government Electrical Undertakings (DGEU) that was set up many years ago to cater to conditions at that time. Reforms have to be effected from time to time to meet changing conditions the mechanics of which are debatable. However trade union agitation or simply pleasing few politicians is not a solution. Governance is not pleasing a few at the expense of a majority.

Industries have already invested a disproportionate share of their resources on generators thus restricting their productive investment. The nineties theory backed by research confirm that reforms of this period enabled better capacity utilization, strengthen competition and improve efficiency contributing to economic well being.

Thought for the week
The Sri Lanka cricket team in the UK scored a hat-trick of victories ie: Test, 20-20 and ODI over England in the midst of Tourist Board promotion held in UK. Amidst the dark clouds of war these pleasant events should boost the country’s image but unfortunately the present atmosphere prevents us from reaping its full benefits.