The Sunday Times Economic Analysis                 By the Economist  

Good signs and bad omens
There could be no better sign of an economic recovery than the significant export surge in August. Given the bleak export performance in the first half of the year, the significant rise in exports in August gives considerable hope for an economic recovery and rapid growth.

There are however other omens of possible setbacks to economic performance. These are the global developments of impending war and on our own soil on the peace and political front.

For the first time this year, there was an improvement in export performance in July, when exports grew by 2 percentage points. This improvement gained momentum in August when total exports rose sharply to US$ 568 million. This was an increase of US$ 138 million over that of July. Particularly encouraging was the growth in industrial exports. Textile and garments exports jumped to US$ 339 the highest earnings since December 2001.

Other industrial exports too registered significant gains. There is other evidence of an industrial recovery as well. Intermediate or raw material imports, that declined by as much as 6 per cent in the first half of the year has picked up. In August intermediate imports were 6 per cent higher than in the corresponding month of last year. Intermediate imports of US$ 458 in August is also much higher than the average intermediate imports of US $ 283 million in the first six months of the year.

This is an early indicator of growth in industrial exports. These figures indicate that there are further prospects for industrial exports and that the declining trend in industrial production may be reversed. These improvements are significant not only because industrial exports constitute by far the larger share of export earnings, but also because there were concerns and anxieties that the country was losing its competitive edge on international markets. We are not suggesting that the concern with "industrial sickness" is no longer valid. In fact the improvement in industrial exports should not blind us to the reality of underlying weaknesses in our industrial sector.

Unless the factors that have increased our cost structures are addressed we could have serious problems in the future. There are other signs of economic revival. The August tourist statistics also show a distinct improvement in tourist arrivals and earnings from tourism. At the end of the eight-month period the decrease in tourism was reduced. This increase in tourist arrivals once again ushered hope of further increases in the coming months that marks the tourist season.

However there are bad omens as well. The export industrial sector is likely to be affected by international developments, as its fortunes are mainly dependent on global conditions. There is uncertainty globally owing to the prospect of an American war in the Middle East. This could affect the demand for our industrial goods, as well as disrupt trade flows.

The massive bomb blast in Bali targeted at tourists would reduce international tourism. The unrest in the East of our own island could be a further setback to tourism. The renewed unrest in the East is a definite setback to overall economic growth. If these factors continue, the trend of increased tourist traffic is likely to be once again reversed and the initial expectation that once again tourists would cross the 400,000 mark may not be realised. The expectation that the tourist industry is on the threshold of a boom may be unrealistic in the light of these developments. The recent events in the East have a far more significant impact on the economic growth process.

There is a growing scepticism about the peaceful intentions of the LTTE. The opposition parties are seizing this scepticism to generate an opposition to the peace negotiations. This in turn adds further doubts about the durability of the current cessation of hostilities. Such an uncertain climate is not conducive to inflows of foreign aid for reconstruction, foreign investment or even local investment.

Unfortunately the many signs for peace that were generated after the talks in Thailand have had a serious set back. A new effort on the part of the LTTE to rebuild confidence in their genuine intentions for peace would be vital if the economy is to grow in a global environment that is also unstable.

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