Economic problem aggravated by the political crisis
Not so long ago Dr. Sarath Amunugama expressed the fear that Sri Lanka may be the Asian country to be left behind in economic development. The rapid growth and modernisation of India, and the even more spectacular economic development in China, were the main reasons for Dr. Amunugama's reflection. His fears seem to be unfolding.

Unfortunately, we appear to be on course for his feared scenario. The Minister of Finance himself is watching helplessly as the economic scene so clouded by the political chaos on the one hand, and the oil shock on the other, is heading for a setback. Instead of being in a position to face the unfavourable international economic developments, the economy is being battered further by political uncertainty and disorder.

The economy is once again on the back burner as the economic crisis is nearly ignored in the chaotic and muddled political context. Political instability, social disruptions and a fading peace make the prospects of high economic growth a diminishing prospect. The hopes generated by the Tsunami aid for reconstruction and its expected multiplier impacts on the economy too are waning. Although it is claimed that the Tsunami aid is unconditional, the capacity to utilise it would place a limit. We may end up with the amount of aid released and utilised by the country to be only a fraction of the pledges received in Kandy. The inability to go on full pace on the reconstruction effort, especially owing to the inability to use the aid in parts of the country would make donors reluctant to release funds. The aid finally received could be a fraction of the expectations. The government, other parties and the opposition alike must find a means of resolving this problem so that the economic predicament is eased by the aid flows.

Meanwhile rising oil prices are once again creating a dent in the trade balance, fuelling inflation, increasing the costs of production and rendering our international competitiveness shaky. Last year the country suffered the worst trade deficit ever of US$ 2.4 billion owing to the sharp rise in oil prices. A trade deficit of such a magnitude is manageable only if there are capital inflows to offset it. The fear is that this year's trade deficit too would be of a similar magnitude.

Last year's export growth was inadequate to compensate for the increased oil prices. The oil price hike resulted in import expenditure rising by a much higher amount than the export growth. Last year's export growth was inadequate to compensate for the increased oil prices. The oil price hike resulted in import expenditure rising by a much higher amount than the export growth. Once again this year exports have grown by 12 per cent but these have been quite inadequate to compensate for the growth in imports. Exports were US$ 1533 million, but imports were higher at US$ 1929 million. Consequently the trade deficit was US$ 396 million: about US$ 100 million less than the deficit in the first quarter of last year. On this basis it is likely that the deficit would be around US $ 1600 million. This slight decrease has been possible owing to other exports being contained by higher import prices owing to both the depreciation of the Rupee and higher tariffs.

This is so with respect of the import of vehicles those have been reduced owing to the exorbitant import prices. If however oil prices rise further, especially at the end of the year with the onset of winter in the northern hemisphere, then the trade deficit may exceed last year's deficit to reach around US $ 2500 million. The government must have been banking on the tsunami aid to give significant relief on the balance of payments, but this may take some time and the country could face a balance of payments crisis. This would result in a further depreciation of the currency that would in turn induce further inflation.

The price rises of essential items are already creating heavy burdens on the poor and the middle classes. The growing dissatisfaction with the governing coalition owing to their dissatisfaction in a government that promised to reduce prices has serious political ramifications. The fact that most of the price increases are due to international price movements is not an explanation that the populace is likely to acknowledge.

The opposition is seizing the opportunity to make the voters disgruntled with the government and to transform their discontent into political unpopularity and protest. This does not help the resolution of the economic problem, it adds to further political disarray and hasty wrong decision making. The instability of the government brought about by the opposition to the P-TOMS or Joint Mechanism is hardly conducive to the resolution of the economic problems. Therefore the economy is in a parlous state with no resolution of either the political or economic problem.
The current economic problem and political crisis could be a serious setback to economic growth. Dr. Amunugama's fears may come to pass.

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