The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

New expectations of higher economic growth
The economic indicators of the first half of the year confirm that the Sri Lankan economy is on a growth path. This is particularly so with respect to the performance in the second quarter of the year. The main source of that growth is the revival of industrial production and exports. Industrial exports had languished for quite sometime, but this year's growth in exports reaffirms the expectation that the country's exports are on the way up. The agricultural sector however had a mixed performance.

Although paddy production reached a new high, tea and coconut production declined owing to several factors beyond their control. A disruption in export markets followed by floods affected tea production and exports, particularly low grown teas. With the effects of these adverse factors out of the way, a higher output of tea in the second half of the year is to be expected. Earnings from tourism and capital inflows have further strengthened the external financial position of the country.

However the poor state of public finances continues to be a fundamental weakness and an intractable problem. These developments are likely to result in the realisation of the projected economic growth of 5.5 per cent for this year. It may even edge to a 6 per cent growth. This does not however imply that the economy is fundamentally sound. The public debt continues to increase, government revenue is below budgeted expectations and economic activities are being crippled by a wave of strikes.

The improved economic performance is also within an unstable political context of another series of elections, political uncertainly and doubts about the sustainability of the peace process, so vital for economic investment and growth. Industrial production grew by 11 percent backed by a strong growth in industrial exports of 23 per cent. Much of this growth came in the second quarter. As to be expected, this growth was due to the strong growth in garments exports that grew by a similar proportion in the first half of the year.

All sub-sectors of industrial exports grew with rubber and leather goods expanding by 15 per cent in the first half of this year. It is of significance that the unspecified category of "other exports" of industrial exports had grown by nearly 44 per cent in the first half to earn US$ 380 million. This category accounted for nearly 20 per cent of industrial exports and accounted for about 15 per cent of total exports.

The growth in exports by 18 per cent and the reduced growth in imports to 7 per cent resulted in the trade deficit in June decreasing to some extent. Yet, the trade deficit continued to grow to reach US$ 700 million at the end of the first half of the year.
Therefore, while the export performance was much improved, the fact is that we have sustained a large deficit in the first half. The trade deficit would have to be reduced much further in the coming months if the deficit is to be contained within an acceptable amount. An important contribution to the balance of payments and economic growth has been the increased earnings from tourism.

Tourist earnings grew by 28 per cent in the first six months to bring in US $ 140 million. It is also relevant to point out that the earnings from tourism have now exceeded the rate of growth of tourist arrivals. This is significant as there has always been a concern that low cost tourists or those strictly not in the category of tourists were increasing the numbers without a real gain in earnings.

While the external assets position of the country has improved owing to the improved trade performance, higher earnings from services, notably tourism and servicing at ports, capital inflows official and private, and remittances from Sri Lankans, the public debt has grown and revenue shortfalls have been significant.

Business confidence appears to be high judging from the rise in share market indices in recent days. Yet all these have a vulnerability to political conditions and the progress of the peace process. If relative political stability is maintained the growth momentum of the second quarter could be accelerated.

This is especially so as the world economy is showing signs of recovery and an improved demand for our exports could be expected. The lower interest rate regime should boost corporate incomes and increase investment. All these lend hope for an improved growth performance in the next few months.

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