ISSN: 1391 - 0531
Sunday, March 18, 2007
Vol. 41 - No 42
Financial Times  

Economic overview -2006

Higher earnings recoups drop in tourism

In an analysis of the fourth quarter 2006 of Sri Lanka’s economy, Muttukrishna Sarvananthan Principal Researcher, Point Pedro Institute of Development, Point Pedro, raises concerns about the impact of ‘national security’ on ‘human security’, tourism, GDP and a new wave of Tamils fleeing to India – this time by air, not by boat.

Excerpts of the report:
The GDP growth rate in the final quarter is expected to be lower than the previous quarter due to lower agricultural output and tourist arrivals. The annual GDP growth rate in 2006 is expected to be around 7%, higher than 6% recorded in 2005. Despite the rise in the annual growth rate the deceleration of the quarterly growth rates throughout 2006 is a cause for concern.

Tourist arrivals in the fourth quarter dropped by 21% to 115,600 from 146,800 in the third quarter while arrivals in the quarter under review were 20% lower than in the corresponding quarter in 2005 (143,700).
Though the number of arrivals dropped by 21%, earnings from tourism increased by nearly 10% in the fourth quarter in comparison to the preceding quarter. Tourism earnings in the fourth quarter was the highest quarterly earnings during 2006. Thus, the loss in tourist arrivals have been partly compensated by higher spending by tourists.

In the agriculture sector, while tea and coconut outputs dropped marginally, rubber output increased marginally during the last quarter of 2006. The Yala season paddy harvest dropped compared to the previous season though data is unavailable.

Tea production during the quarter under review was the lowest quarterly figure in 2006, i.e. 72.7 million kilogrammes, despite favourable weather condition. This was due to industrial action by the workers during December demanding pay hike. Further, tea output in the fourth quarter 2006 was considerably lower than the output in the same quarter in 2005 (75.5 million kilogrammes). Tea production was 1% lower than the previous quarter and 4% lower than the corresponding quarter in 2005.

Rubber output increased marginally to 26.8 million kilogrammes in the fourth quarter from 26.2 million kilogrammes in the third quarter (2% rise). Similarly, rubber output in the fourth quarter 2006 was 3% higher than the output in the same quarter in 2005 (26.0 million kgs).

Coconut production dropped by almost 4% to 685 million nuts in the final quarter of 2006 from 712 million nuts in the third quarter. Nevertheless, it was 7.6% higher than in the last quarter of 2005 (636 million nuts). The Colombo tea auction price continued to soar during the last quarter, particularly in December.
Thus, it rose by 11% to US$.2.12 per kg in December compared to US$.1.91 per kg in September. The rise of tea auction price in December was due to drop in production as a result of the agitation by the workers, and was the highest after October 2004.

Private sector industrial production increased while the public sector industrial production declined during the fourth quarter 2006. However, industrial exports in monetary terms continued to rise during the quarter under review. The private sector industrial production index increased by 16% to 158.3 points in December from 136.5 points in September. On the other hand, the public sector industrial production index dropped by 28.5% to 63.8 points in December from 89.2 points in September.

Besides, the private sector industrial production indices during the last three months of 2006 were higher than in the corresponding months in 2005. Though the public sector industrial production index was higher in October 2006 compared to October 2005 (84.0) it was lower in November and December 2006 compared to the same months in 2005 (93.0).
Industrial exports, in monetary terms, dropped in October but increased in November and December. Industrial exports increased by 3% in monetary terms during the fourth quarter (US$.1,478 million) compared to the preceding quarter (US$.1,438 million). Total industrial export value in the final quarter was the highest quarterly figure during 2006. Nearly 60% of the industrial exports comprised readymade garments.

Interest rates
Interest rates continued to increase during the last quarter of 2006, however they were lagging behind inflation. Although prime lending rate dropped in the last weeks of October and November in comparison to the last weeks of the previous months it increased during the last week of December. Thus, the prime lending rate increased to 15.19% in the last week of December from 14.70% in the last week of September (rise of 0.49 points). Further, the prime lending rate in the last week of December 2006 was almost 3.0 points higher than at the last week of December 2005 (12.24%).

Cost of living continued to soar during the quarter under review. In terms of the Sri Lanka Consumer Price Index (SLCPI) the point-to-point change in inflation increased to 12.6% in October, 16.4% in November, and almost 18.0% in December, which were significantly higher than the previous quarter as well as the corresponding quarter in 2005 (6.0%, 4.6% & 3.6% respectively).

The annual average rate of inflation (in terms of the SLCPI) increased to 7.3%, 8.3%, and 9.5% in October, November, and December respectively, which were significantly higher than the preceding three months but significantly lower than the corresponding months in 2005 (12.7%, 11.8% & 10.6% respectively).

Inflation in terms of the Colombo Consumer Price Index (CCPI) was much higher than in terms of the SLCPI. Thus, the point-to-point rate of inflation in terms of the CCPI was 17.2% in October, 19.8% in November, and 19.3% in December. Similarly, the annual average rate of inflation in terms of the CCPI was 11.8%, 12.7%, and 13.7% in October, November, and December respectively.

The foregoing figures reveal that the 12-months treasury bill rate is lower than the inflation rate, indicating negative real interest rates. The oil price was no more the cause for rising cost of living because the import price of a barrel of crude oil dropped from US$72 in July/August to US$55 in November and US$60 in December . The rising public expenditures and excessive borrowings by the private sector due to low interest rates are the primary cause of rising inflation.

Gross official reserves increased by the end of the first quarter, decreased consecutively by the end of the second and third quarters, and then increased by the end of the fourth quarter 2006. Gross official reserves increased by 5.5% to US$.2,515 million by the end of the last quarter in comparison to the end of the previous quarter. Nevertheless, the gross official reserves at the end of December 2006 was 8% less than at the end of 2005 (US$.2,735 million).

Reduction in trade deficit (US$ -32.4 million), increase in net private remittances (US$38.4 million), higher tourism earnings (US$10 million), and external borrowings and aid flows (US$48.6 million) bolstered the gross official reserve. Total foreign exchange reserves (gross official reserves plus held by the banking sector) at the end of December 2006 was sufficient for four months’ imports. Gross official reserves were bolstered by external borrowings from the international capital market (US$100 million) and individuals through the sale of Sri Lanka Development Bonds to Sri Lankan expatriates (about US$500 million).

Capital markets
Despite the raging conflict and deteriorating security situation trade in the capital market was brisk during the quarter under review. Both the All Share Price Index (ASPI) and the Milanka Price Index (MPI) soared in the fourth quarter. The ASPI increasd to 2,740 points by end of December from 2,355 points at end of September denoting 16% increase. Similarly, the MPI increased by 26% to 3,743 points by end of December from 2,963 points by end of September. Besides the ASPI increased by 45% and the MPI increased by 54% by end of December 2006 in comparison to end of December 2005.

Economy of the conflict region
The economy of the conflict region further deteriorated during the final quarter of 2006, particularly in the north. With the closure of the A9 highway on August 11 and depletion of the stock of goods (food and non-food) in the shops the undeclared economic blockade began to bite the ordinary masses.

There was severe shortage of food items that normally flows from the rest of the country, medicines (including basic painkiller such as panadol), stationery and books, fertiliser and pesticides, animal feed, etc. The Jaffna University remained closed since August 11. Public transport (bus) resumed services gradually. Curfew was gradually shortened and by the last quarter daytime curfew was withdrawn. Travel between the Jaffna peninsula and rest of the country was by ferry to/from Trincomalee. Air travel also resumed in October.

Cost of living
The prices in the conflict region have been quite steady in the east and Vavuniya in the north, but prices in Jaffna was much higher during the final quarter of 2006. There were not many differences in prices of goods in Ampara, Batticaloa, and Vavuniya. However, prices in Jaffna were much higher than the other towns (and indeed Colombo). Nevertheless, price differences between Jaffna and Vavuniya has been declining in November and December compared to October as supplies improved.

Difference in the price of rice between Jaffna and Vavuniya declined from 321% in October to 274% in November, and 237% in December. Similarly, difference in the price of wheat flour declined from 300% in October to 210% in November and 238% in December. Price difference of Mysore dhal also declined from 158% in October to 139% in November and 111% in December. In contrast, price difference of sugar increased from 398% in October to 450% in December (though declining to 385% in November) due to increased demand during the festive season. Difference in the price of milk powder has also declined overtime from 240% in October to 162% in December.

The bread price was steady in Jaffna during the quarter under review, i.e. 25% greater than in Vavuniya. Although the diesel price remained steady (15% higher than in Vavuniya) the price difference of kerosene increased while the price difference of petrol declined during the fourth quarter. In all the four districts of the conflict region surveyed the highest price rises have been in food items; non-food price rises have been marginal in all districts.

However, we cannot be sure about Jaffna because two non-food items, namely LP gas and cement, were not available during the quarter under review. That is, food prices increased by 22% in Ampara during the fourth quarter (total food prices in December compared with total food prices in September), by 16% in Batticaloa, by 30% in Jaffna, and by 22% in Vavuniya. On the other hand, non-food prices increased by only 0.9% in Ampara, by 1.6% in Batticaloa, and by 2.4% in Vavuniya in the final quarter (total non-food prices in December compared with total non-food prices in September).

Total non-food prices declined negligibly (-0.2%) in Jaffna because of unavailability of LP gas and cement during the quarter under review. In Ampara, Batticaloa, and Vavuniya total food prices increased in October and November but declined in December.

However, in Jaffna total food prices increased consistently throughout the quarter under review; the greatest rise has been in October and December. Besides, prices of food items brought from the rest of the country has declined considerably in November and December, while the prices of locally produced vegetables and cash crops (onions and chilies) have increased due to rise in production cost.

Six months have passed since the closure of the A9 highway and there is no end in sight for the closure of the highway in the near future.

Over half a million people are trapped in the Jaffna peninsula with very little access to the rest of the island by sea and air, restricted telecommunications, and skeleton postal service. Air and sea travel to and fro Jaffna is irregular.
Telecommunications (both mobile and fixed lines) are restricted, Internet access is denied, and mail takes over three months to reach the destination. This is the result of precedence given to “national security” by the government, as opposed to human security.

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