Columns - The Sunday Times Economic Analysis

The year that transformed the nation

From despair to expectations
By the Economist

It is a time for retrospective reflections on the turn of events that characterized 2009. It certainly was no ordinary year. It was a year that began with the economy heading towards a crisis. And then almost at its brink there was a dramatic turnaround. Perhaps no other statistic epitomizes this as the fact that by March the foreign exchange reserves had dipped to crisis proportions, while at year’s end it had exceeded a comfortable US$ 5 billion. With the year coming to an end, we turn to retrospective reflections and perspectives for the future.

At the beginning of the year the country was still in a destructive costly war. In fact it was in the fiercest phase of its three decade war. Peace was attained in May and the country began to be optimistic about its economic future once again. It was one of those rare periods of a country’s economic history when the tide turns swiftly and suddenly from despair to hope and expectations. The year that is to dawn in a few days’ time could be viewed as one where the fruits of peace could be reaped. There is a good prospect of an economic resurgence. The elections would undoubtedly put some of the potential on hold. Political stability and certainty in the direction of policy could consolidate the victory at war and usher in a period of economic stabilization and rapid growth.

A new economic opportunity is at hand. Yet it is quite possible that we may once again miss the opportunity, as indeed the country has done several times in the country’s post independent years. Several economists of repute reviewing the economic performance of the country have characterized it as one of missed opportunities. The first such missed opportunity was at independence, when despite favourable initial conditions, we failed to capitalize on them and consequently lagged behind the achievements of countries like Malaysia, Singapore and other South East Asian and East Asian countries.

Then in 1983, when the economy was on an impressive course of development, the ethnic violence of that year aborted the economic transformation that had commenced. Since then ethnic violence and war were responsible for retarding economic development. The war was an enormous burden so much so that one can even wonder how we achieved what we did in spite of it. This column has frequently pointed out the immense economic and social costs of the war. Undoubtedly terrorism, insecurity and war hampered the economic development of the country. Some estimates place the loss of economic growth to be around 2 percent per year. That is an enormous loss when the annual loss is compounded.

Now that the war is behind us, it is once again an opportunity to commence a period of rapid economic growth by putting in place the conditions needed to generate economic growth and development. It is an opportunity to move from “Development under Stress” to one of seizing the opportunities. The fundamental requirement to achieve higher economic growth is a durable peace through a reconciliation and settlement of ethic and religious causes for conflict. If the country continues to be distracted in its development efforts by religious and language issues, then the priority in establishing the preconditions for development will once again remain unfulfilled. And the opportunity for rapid economic growth will once again wither away.

There has to be recognition that the benefits of economic growth equitably shared should be a prime consideration. Equally true is the fact that if economic opportunities improve then these narrow-minded considerations of language and religion will become less significant. A robust pluralism must be developed in the immediate future to generate economic growth. Mere rhetoric on the equality of all people in the country is quite inadequate. There is a need to generate a confidence in the minorities as much as evolve constitutional provisions to devolve power and protect the rights of all citizens. Without such conditions the economy will once again be dragged down from its potential growth and development to inadequate modest levels of economic growth.

There are several risks and dangers in the current mood of the nation that may well result in a missed opportunity once again. Foremost among this is the false notion that peace alone could achieve economic development. As we have stressed throughout the year, especially after the victory at war, peace only provides a foundation for generating economic growth. The end of the war removed the biggest obstacle to economic development that the country has faced for several decades. Peace provides a new opportunity to put in place conditions that would be conducive to economic growth. Peace is an essential condition, yet that alone will not suffice. In last week’s column we discussed some of these imperatives that a Minister of the Government too recognized as essential for development. He too stressed the need for reconciliation, reconstruction and rehabilitation. These perquisites must not be interpreted in physical terms alone but in terms of values, rights and opportunities as well.

The other danger that lurks in the mind of the nation is that the economic conditions in the country are favourable. Nothing can be further from the truth. The economic fundamentals are woefully weak. The foreign exchange reserve of US$ 5.2 billion consists of a high proportion of debt rather than earnings of the country. The public debt is huge at over 90 percent of GDP and its servicing costs are crippling. Though not solely due to the huge servicing costs of debt, the fiscal deficit continues to be high at over 7 percent of GDP thereby generating inflationary pressures and distorting public expenditure. The domestic savings ratio is inadequate to propel the economy to higher rates of growth that are desired and projected by the government.

There is an urgent need to reform all several fronts and especially the public finances. There is very little hope of achieving higher rates of growth without bringing down the fiscal deficit by the complimentary strategies of increasing government revenue and decreasing wasteful and unproductive public expenditure. There are also much needed reforms in education, public services, health, public enterprises as well as changes in value orientation that are needed to enable economic growth. It is imperative for the government and the nation to devote due attention to these fundamental issues.

The hope and expectation is that this would be done as soon as the elections now distracting the nation is over. The alternative is an economy that goes limping and limping along. Will the necessary steps be taken for the hopes and expectations of economic growth to be fulfilled?

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