Economy in crisis
An objective assessment of the state of the Sri Lankan economy is never easy. Political bias tends to lead to contrasting assessments. But for many, the current perception is that the economy is in shambles. Price increases on a weekly basis, and the prospects of continuing hikes signal fundamental flaws in the economy.

Undoubtedly, the main source of the crisis is the sharp increase in international oil (and gas) prices and its sequential chain of consequences. The petroleum price increase has resulted in the costs of imports rising rapidly to choke any gains in export growth. Consequently, we are facing a serious trade imbalance. The magnitude of the deficit - US $ 894 million - Exports vs. Imports, is indeed a cause for anxiety. By the end of this year, the deficit is likely to be US $ 2,000 million. That is no joke. The main reason for the trade deficit is the increase in import expenditure by 18 per cent.

Exports have not fared too badly, but they have been woefully inadequate to offset the increase in import expenditures. Although exports grew in the first five months of the year, it declined from May.

This is ominous. Especially disappointing is the fact that apparel exports -- the country's leading export - is virtually stagnant now. The strain is reflected in the depreciation of the rupee. The underlying reason for the depreciation is the balance of payments difficulties. Its impact would be to raise prices and fuel inflation.

Internally, Government revenue collection fell below expectations in 2003. While the budget expectations were to harness Rs. 331.5 billion, the actual revenue collection was only Rs 276.5 billion. This declining trend is a serious problem for public finances in the country. The indications are that revenue collection is not adequate this year too.

Paddy production however declined from that of the record Maha 2003 harvest. Indications are that the Yala harvest too would be lower. Hence the pressure on rice prices. The government remains in a quandary whether to ease consumer prices by importing rice, or let the price rise benefit the farmer. Importing rice will have an adverse impact on the trade balance as well. Only the services sector has fared well. Tourism, communications and port services are expanding. Tourist arrivals as well as tourist earnings continued to grow by 4.5 per cent.

It is essential that the government explains to the people that price rises are inevitable owing to global conditions. But that is an old song.The government must explain that if it were to maintain prices through subsidies, then sooner than later, the people would have to pay for these in some other ways and that the increased expenditures promised at election time are unsustainable. Finance Minister Sarath Amunugama seems to realise this and has the political guts to say so.

Fundamental weaknesses in the structure and performance of the economy are the root causes of the inflationary trends. Getting the fundamentals right is the real solution: Providing incentives for agricultural production, reducing the cultivation costs, reducing marketing margins and improving the technological skills are the means of improving small-farm agricultural productivity. Such improvements coupled with the JVP-led tank renovation scheme, the launch of which, President Chandrika Kumaratunga sadly decided to snub, could reduce food prices, at least among the vast mass of the rural people. The long-run solution is the strengthening of the economy by productivity gains.

A small island economy that must necessarily be heavily trade dependent is subject to the winds of global economic fluctuations. And governments must be up to it. No doubt, most of the hardships people are facing today are due to the rise in prices of critical goods. Yet, governments can either ease the situation or even aggravate it. Unfortunately, recent pronouncements and responses in the face of the economic crisis may aggravate the adverse trends. Rumblings of controls on the economy are likely to have an adverse impact on investment, capital inflows and export earnings.

The JVP must know that we are increasingly living in an inter-dependent world, however much world lending agencies prescribe a seemingly one-sided pro-West agenda. The political situation and our political culture are hardly conducive for proper economic decision- making. There is the danger that the responses to the global conditions may distort economic decisions, hamper economic growth and exacerbate the problems.

What we have is a right-of-centre UNP economic policy that is pro-West, propelling us to vagaries and the dizzy heights of the international market place too fast, all without our feet firmly on earth. Some of its proponents are also not men of good faith. On the other hand, we find the left-of-centre PA with no economic policy of their own, brandishing a laissez-faire ( non-interference) policy of sorts with a typical cavalier bent (which brought our growth rate once to sub-zero ), and a left-wing nationalist JVP that promotes an autochthonous (rooted in native soil ) style of economy.

The three divergent economic policies are mismatched in today's modern world where being in step with international trade with an eye on the well-being of the vast mass of rural folks needs a happy blend. That happy blend would be the success story for Sri Lanka if it ever can be achieved. A nationalist heart with an internationalist brain.

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