Lankan economy not out of the woods
Influenced by the peace process and a successful first round of peace talks, the stock market has been soaring to new levels helped to some extent by waning resistance from the public over the rising cost of living, a major issue some months back.

While consumer prices have risen 11 percent in the past 12 months - high by any standards - public sentiment has been influenced by prospects of peace and the general buoyant mood. This has replaced concerns over an economy that is still not out of the woods.

The real economic position of the country does not look too good - as separately illustrated on this page by a well-known economist. Economists are also pleasantly surprised at the IMF's recent endorsement of policy measures by the government and the fund's own projected increase in the estimate of the growth rate this year despite the disturbing economic data.

The fund, in its annual assessment of Sri Lanka, says the economy would expand by a modest 3.7 to 4 percent in 2002 after contracting last year. It also said inflation could be contained within the 7-8 percent target.

It was anticipated earlier that the economy wouldn't show any marvelous results in the first half of the year after last year's disastrous performance but no one expected industrial exports or garments export earnings to fall sharply by 18 percent and 20 percent, respectively, in the seven months to July.

Look at other figures in the period to July 2002 - the trade deficit has risen to $977 million from $808 million in the same 2001 period; foreign reserves have eased by two percent to $2.2 billion - enough to finance some 10 weeks of imports -; export volumes fell by 15 percent; tourist arrivals are down 18 percent (though there has been a marked improvement in the past two months, particularly in recent weeks due to the ICC cricket tournament) while the rupee has depreciated by seven percent against the US dollar.

On top of all this comes news - once again - of official tinkering with garment quotas for the third time in 18 months. Fingers are again being pointed at some high officials of the Textile Quota Board. They are accused of doctoring quotas even after the Sri Lanka Apparel Exporters Association launched, some months back, a computerized system to track the use of quotas to stop any irregularities in the distribution process.

Though the economy is generally expected to improve in the second half of the year, the pick up in the garments sector is slower than expected. Perhaps worst is the fact that even while volumes rise, prices for our garments have hit rock bottom, which would further affect the trade deficit. Exporters have little choice other than to ship at any price to keep factories working and employees happy.

Exporters say spring orders from the US for December shipments have started coming in providing some respite but at prices much lower than before. Even more disturbing is a warning by a UNDP expert that many small garment factories are likely to close if there is no bail-out package offered by the government.

Economic Reforms Minister Milinda Moragoda's plea - also reported on this page - for foreign aid from the international community should be considered seriously. Moragoda, one of the few pragmatic politicians we have, rightly says the country needs aid now while the peace process is on and cannot afford to wait till a lasting solution is found. He is also endorsing a similar call made by Prime Minister Ranil Wickremesinghe to the UN General Assembly last week

On the positive side, organizers of the 12-nation ICC tournament reckon the event will pump in $25 million (Rs 2.4 billion) into the economy in direct and indirect benefits, quite apart from the wide exposure Sri Lanka gets when the matches are telecast live to an audience of 800 million fans across the world

Finance Minister K.N. Choksy would have a hard time juggling these figures when presenting the budget in November, if the economy does not pick up in the second half as anticipated. Battered by the conflict for years, Sri Lanka needs all the help it can get from the donor community to put the economy back on track.

We need foreign aid
By Milinda Moragoda
(The writer is the Cabinet Minister in charge of Economic Reform, Science and Technology, as well as a member of the Sri Lankan government negotiating team for the peace talks.)

On at least one mat ter in the 19-year

war between the Sri Lankan government and the LTTE there is agreement. Both sides recognise that economic and social development will be the key to a lasting peace.

Disagreements, even among members of a family, can become bitter, intractable and deadly. The people of Sri Lanka have lived this truism for nearly all of those 20 years.

The conflict between the Liberation Tigers of Tamil Eelam (LTTE) and the Sri Lankan government since 1983 has left over 60,000 dead and thousands more severely disabled, while causing untold property damage. It has blighted the lives of families and disrupted the education and productive prospects of two generations of our youth.

Two unrelated events may have contributed to the break in Sri Lanka's cycle of violence that seemed interminable. The first was the attack on the United States on September 11, 2001, which caused universal revulsion at the loss of innocent life. This focused the world's attention on the absolute evil inherent in such acts of mass violence, whatever the motivation.

The second event was the election to office of a new government in Sri Lanka. Opposition Leader Ranil Wickremesinghe had taken the bold decision to centre his campaign for election on a mandate to end the war through negotiation, rather than by military force.

Although that decision was, in the circumstances, a realistic and pragmatic one, it was politically unacceptable to those who looked upon it as motivated by a policy of appeasement.

In the result, a war-weary country responded by endorsing this fresh approach. The people confirmed their support for a negotiated settlement in local government elections some months later by giving Wickremesinghe's government a handsome victory.

The UNF government's achievements to date have pushed the peace process further than ever before. An early victory was to secure a ceasefire with the LTTE on December 24, 2001, just days after the general election. This was followed by the signing of a permanent ceasefire agreement on February 22, 2002. From the very start the approach taken by Prime Minister Wickremesinghe has been a pragmatic step-by-step confidence building exercise.

This has been re-inforced by the determined and unceasing approach taken by the Norwegian government as facilitators. The breakthrough came when the LTTE and the government agreed to hold peace talks on September 16 . As confidence between the LTTE and government grows there has been few serious breaches of the Agreement and no deaths.

Reaching the all-important 160 days confidence building point of the cease-fire agreement greatly reduced tensions. A large number of lives have already been saved and untold property damage avoided.

The well known New York Times columnist, Tom Friedman, who recently visited Sri Lanka, observed: "I feel the gunmen have lost their mandate from heaven."

The Prime Minister's recent visit to the United States and his meetings with President George Bush and senior politicians, were also encouraging. Their support for the government's initiative was manifest in the arrival in Sri Lanka soon after, of Deputy Secretary of State Armitage. Closer to home, the Indian government has provided much support and input to the peace process.

The very success the government has achieved so far has created another problem, it must now be on its guard to avoid becoming a victim of that success. Many seem to believe that they already have peace. They would be wrong.

Peace lies at the end of long, hard negotiations that have only just begun. What could be more appropriate, if not propitious, than that is that these negotiations took place in Thailand under the benevolent wing of its friendly government. Cultural and spiritual ties between Sri Lanka and Thailand are centuries old, epitomised in their common allegiance to Theravada Buddhism. Only a few days ago, Prime Minister Wickremesinghe himself observed that when our ancient kings felt the need for spiritual renewal, it was to Thailand that they went to find inspiration; and that today we follow that tradition in going to Thailand to find the path that will bring back peace to our country.

Meanwhile, losing no time, Prime Minister Wickremesinghe has initiated a plan for the island's re-development, calling it "Re-gaining Sri Lanka". The plan provides for the stabilisation and growth of the economy, to be balanced by ways to produce a "peace dividend", or the tangible benefits of peace, as soon as possible.

The task before the government is a formidable one. As it sets about implementing the stabilisation programme prescribed by the IMF and the World Bank, more than hard work and patience will be called for as we embark upon the processes of reconstruction.

Fresh resources will be needed to fund massive programmes to resettle some 800,000 internally displaced persons, and a million-and-a-half more who fled the country because of the war, and to assist in their rehabilitation, which would include providing housing, schools and employment for them.

Removal of some 1.5 million anti-personnel mines too, will require funds and technologies that lie beyond our capabilities.

Both sides understand the extent and level of the differences that remain. However, there is no going back both sides agree, a fact underscored by the losses of life and the misery of 20 years of conflict.

Now as both sides have reached towards peace they have asked for support not later but now. Often what those at the village level fail to understand is the need to encourage the process through to completion. So often the process rides on a wave of popular support.

With the country's economy shattered, the government of Sri Lanka cannot meet the cost of these reconstruction and rehabilitation processes from its own resources. Donor countries have shown a willingness to help, yet their aid programmes are directed essentially to the hoped-for post-conflict period, and are not necessarily available now, while the conflict is in the process of being resolved.

Here, then, is a dilemma of classic proportions: prospective donors hesitate, awaiting the arrival of peace to release their funds; but the lack of funds now endangers the very process by which that peace is to be achieved.

Assistance is urgently needed now to maintain the momentum of the peace process. Even as the government rallies the people to meet new demands, it must take measures to temper current hardships that threaten to obscure the promise of peace, and undermine confidence in the on-going fragile process of peace making. This is a time of critical sensitivity, when public impatience or disillusion, and siren voices could plunge the country back into a fratricidal war.

There is much that friendly countries can do at this critical juncture. Direct aid, both bilateral and multilateral would make a substantial difference.

Technical assistance, including the loan of experts is vital. Market access for Sri Lankan exports would not only help our economy grow; it would attract foreign investment linked to the country's resolute efforts to reform its economy.

Ours was, until recently, a forgotten war. Now we have come to the brink of what we hope will be a lasting and remembered peace. Remembered by generations of Sri Lankans to come.

The government and the LTTE can say thanks to the leaders of both sides as well as to the governments of Norway and Thailand for assisting this process. Both sides understand the differences that remain. We ask that the world take note of, and afford us support, as we make our determined bid for peace.

Export volumes, revenues still falling alarmingly
By Professor S.S. Colombage, Open University of Sri Lanka
The foreign ex change picture

looks rather gloomy, according to the latest data. The trade deficit, which is the excess of imports over exports, has risen to $ 977 million in the first seven months of this year from $ 808 in the corresponding period of last year. Total foreign exchange reserves of the country declined by 2 percent from $ 2,238 mln in last Decembers to $ 2,200 mln by the end of July 2002.

These reserves are barely sufficient to finance 10 weeks' imports. Given the increasing dependence of the economy on foreign trade and other external transactions, the persistent foreign exchange imbalances have adverse consequences on the overall economic performance.

Several factors have contributed to the weakening of the external finance situation. A major reason is the continuous decline in export earnings.

The country is experiencing a setback in exports for the second consecutive year. Exports fell by 15 percent in the first seven months of the year.

It is rather alarming to note this further decline from a low export figure of last year in which there was an export downfall of 13 percent. The decline in export earnings was largely due to a 13 percent decline in export volumes.

The situation was aggravated by an 11 percent fall in export prices.

The impact of this year's export decline on the foreign exchange position would have been much worse if not for a seven percent decline in imports.

Although the decline in imports tends to ease the balance of payments pressure, low imports of intermediate and investment goods will continue to hamper the growth process.

Imports of intermediate goods have fallen by three percent and investment goods by nine percent. Larger inflows of such goods are needed for the economy to recover from the present near-zero GDP growth.

Earnings from all export categories have fallen in the first seven months. Industrial exports, which account for about three fourths of total export earnings, declined by 18 percent. Garments, the flagship export industry, experienced a 20 percent decline in foreign exchange earnings.

Earnings from most other exports including food, beverages, leather and rubber products also fell. The story with regard to agricultural and mineral exports is no different.

The fall in foreign earnings is not restricted to exports. Net inflows of private remittances, which are a major source of foreign exchange earnings, declined by three percent.

Meanwhile, tourist arrivals fell by 18 percent to 209,000 in the first seven months of this year from 256,000 in the same period last year. Consequently, tourism earnings are down by 18 percent to $ 133 million from $162 million last year.

All in all, we are going to face a larger balance of payments deficit this year, which would result in an increased dependence on foreign borrowings.

Garment exports
A major drawback of the export sector is that it depends heavily on a few exports. Garments, which have become the leading export product after trade liberalisation, account for one half of total export earnings. Tea, the traditional export leader, accounts for about 10 percent of total export earnings.

Thus, these two products account for nearly three-fifths of total export earnings. This clearly shows the limited extent of export diversification.

Other industrial exports contribute about one-fifth of total export earnings. The bulk of them are primary exports such as food and beverages, leather products, tableware, and bunker oil and aviation fuels.

In view of the phasing out of textile quotas fully by year 2005 there is a danger in depending too heavily on the garment sector. With the abolition of quotas, our producers will have to compete with other suppliers in foreign markets.

This means that high quality goods need to be supplied to foreign markets at competitive prices. Export competitiveness is crucial in trade expansion. Low production costs backed by low domestic inflation is essential to sustain the competitive edge. Any excess of domestic inflation over inflation in competing countries should be compensated for by a depreciation of the domestic currency.

The annual inflation rate during the last 12 months was 11 percent. The rupee depreciated by seven percent during that period.

Continuous rupee depreciation in this manner to catch up inflation not only raises the cost of living but also pushes up domestic production costs hampering exports.
GDP growth

The export sector is so important in our economy that the GDP growth closely follows the export growth path. The GDP growth tends to decline whenever the export sector does not perform well and vice versa. In the present context, integration with the rest of the world is essential to achieve higher income growth and better quality of life.

Empirical evidence of developing countries shows that the countries that have not been effective in the integration process get marginalised and continue to stagnate in a low growth path.

A greater commitment on the part of policy makers is needed to reorient the export sector and to resuscitate the economy from the present slump.

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