The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Can the economy's improving performance be sustained?
The Central Bank has disclosed a higher rate of economic growth last year than what was originally expected. The last quarter's economic performance gave a boost to the tardy growth in the first half of the year. In 2002 the economy is estimated to have grown at four per cent, slightly higher than the three per cent predicted earlier. The main sources of that growth were the services sector and agriculture. Services contributed as much as 80 per cent, while agriculture contributed 13 per cent.

Tourism, trade, port services, communications, energy and financial services made useful contributions to the services sector growth. An increase in paddy production, a record tea crop, a marginal increase in rubber production and an increase in the production of other food crops were responsible for a growth in agriculture.

anufacturing, on the other hand, failed to generate any significant growth. However the final performance of manufacturing was much better than the indications in the first half of the year. In fact the serious set back to manufacturing exports, mainly garments, in the first half of the year had an enduring impact on the overall growth. The improved performance in the second half of the year was inadequate to offset this initial bad performance in manufacturing.

The Central Bank expects a higher rate of growth this year. The projected rate of growth of 5.5 per cent is a fairly high expectation. The Central Bank is however of the view that this is an attainable goal. Last year's four per cent growth was after a 1.5 per cent decline in national output in 2001. While this recovery was an encouraging sign, it must be accepted that it is easier to achieve a four per cent growth on the lower production base in 2001.

Another way to express this is to compare the national output last year with that of 2000. The national income of 2002 was only 2.5 per cent higher than that of 2000. To obtain a 5.5 growth on top of the higher output last year is a more difficult proposition. The confident expectation is that such a growth would be attained and that the economy would once again traverse a reasonably high growth path.

Can we once again expect to achieve a sustained growth of over seven per cent, even an eight per cent growth has been mentioned as possible. The Central Bank itself postulates that to achieve such a growth several conditions must be fulfilled. Among these are the certainty of peace, economic reforms, lower budget deficits and an improvement in global economic conditions.

There is uncertainty that all these conditions could be satisfied. Even the global recovery is still to be seen after the uncertainty generated by the Iraq war. Certainly the worst is over. Yet the recovery of the US economy is not automatic. There is still a lack of confidence in the Bush administration's economic policies. A scepticism that preceded the war. In fact there is likelihood that there would be some negative fall-outs from the war itself on the economy.

If the US economy fails to grow quickly, it would certainly assert an unsatisfactory impact on Sri Lankan exports of manufactured goods for which the US is the main market. Besides this the recovery of the US economy is vital for the up-turn of the European economies and that of Japan. A durable peace in Sri Lanka immediately remains in doubt and this could be an important determinant of foreign investment. In fact the expected aid would also be influenced by the prospect of peace.

The reconstruction of the North and East that could give boost to the economy cannot be realised till the donor community is convinced of a durable peace. The LTTE boycott of the Tokyo conference will not help the reconstruction aid prospects. Meanwhile the stability of the government is also of some concern at present. Economic reforms are another area where the government could face political difficulties.

The inability to implement the proposed labour, trade, financial sector and public corporation privatisation projects would not only affect the efficiency of the economy, but also the availability of concessional aid so vital to the economy at this critical stage. With the improved global and local conditions there is once again hope that the economy would enter a higher growth path whose momentum would accelerate each year. Such a hope and expectation cannot be merely wished. It has to be achieved by providing the prerequisites to growth. Therein lies the rub.

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