global developments and economic growth
The projected economic growth of over 5 per cent for this year is
difficult to achieve. This, in spite of a high growth rate of 6.2
per cent for the first quarter of the year. Several factors are
likely to impede the predicted economic growth of 5 to 5.5 per cent
for the year. The oil price hike, a possible slowing down of the
global economy and the uncertainty in the furtherance of the peace
process are the main impediments.
instability of the government, the contradictory approaches to economic
policies that are being announced by the government and the economic
fall-out of the strains on the peace process are also unhelpful
to a healthy growth. Therefore to project the growth in the first
four months of the year to the rest of the year could be misleading.
Hard times are ahead.
oil price hike has a multiplicity of adverse impacts on the economy.
The government was certainly attempting to do the impossible task
of shielding the economy from the higher oil prices. Consumers are
meanwhile feeling the pinch of increased prices of domestically
produced goods and the effect of the rupee depreciation. The increase
in domestic food prices is due to lower production. If the rise
in oil prices are passed on, this will not only affect prices directly,
but also through the impact on transport costs. Were this to happen
the projected inflation rate is likely to exceed even the new projection
of 9 per cent by the Central Bank.
the policy of containing inflation through subsidisation may have
a strong logic, as often times the rise in oil prices tends to be
an occasion for other prices to skyrocket too and the spiralling
of inflation is difficult to control. Nevertheless, the country
is imposing on itself significant fiscal and balance of payments
not passing the higher oil prices to the consumer of oil products
and electricity, it is accumulating a large fiscal burden. Besides,
this policy is not helping to curtail domestic demand of either
electricity or diesel and petrol. The attempt to find credit arrangements
for oil purchases from suppliers or their countries could cushion
the balance of payments for a while, but the accumulated liabilities
would hit the external finances at some later time. Their impacts
on the state of public finances are only a matter of time.
current uncertainty in the peace process going forward is a significant
problem for the economy. The expected aid for reconstruction of
the North and East will hardly materialise during the rest of the
year and may be never. Business and foreign investor confidence
is being gradually eroded. Fortunately the attitude of the government
and the LTTE to maintain the ceasefire despite some violations of
the agreement and terrorist acts are keeping the situation in a
state of restricted damage.
the current context of negotiations, the realistic expectation can
only be that of the ceasefire being maintained and of civilian life
remaining little affected in the manner we have come to be accustomed
after the ceasefire agreement was signed. This would ensure a minimum
of disruption in economic activities. Tourism in particular has
benefited from this environment of security. And so too agricultural
production and fishing in the North and East. It is at least this
precarious peace that we can hope would be maintained.
there is no evidence of a slowing down in the global economy, but
there is an expectation that if oil prices continue to remain as
high as it is at present, that a global recession is inevitable.
Although our industrial exports have grown there is some evidence
that it has become tardy in the last couple of months. While industrial
exports would be badly affected by the rise in oil prices, there
would be some advantages for rubber and tea prices. But these are
unlikely to be adequate compensation for the overall adverse impact
of the oil price rise.
such a situation a more unified approach to economic issues could
be helpful. Then the government would be in a better position to
respond to the harsh global situation. This we cannot expect owing
to a preoccupation with the political repercussions on the one hand,
and the different perspectives on economic policy issues by constituent
elements of the UPFA coalition on the other.
affects not only the current economic situation but damages economic
growth in the next few years as well. The instability of the government
only makes the economic predicament more precarious.