| The Sunday Times Economic Analysis By the Economist | ||||||
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Performing
in a turbulent environment It may perhaps seem not too different to the current state of policies, but the differences arise from the implications of the expenditure proposals and their impact on economic fundamentals. The political developments on the peace front and the macro economic numbers are crucial for the country's economic performance next year. The uncertainty and anxiety arising from divergent expectations on the resumption of terrorist activities are paramount. Whether there would be a re-commencement of terrorist activity is not clear. The stances taken by the President and Prabhakaran make a durable settlement of the conflict distant at best. A prolonged period of discussion and a contained conflict is about the best one can hope for at present. This would enable a reasonable economic performance. Expectations of super growth rates of about ten per cent are pipe dreams that leaders have indulged in for quite sometime. Such growth rates would have to await different political and economic conditions and an improved set of social behaviour. The business community and the general public, including the people in the North and East, may be reconciled to this. The economy has performed modestly over the last two decades, albeit with wide fluctuations, in a turbulent and uncertain environment. Economic performance has often been determined by the state of terrorist activity. Despite an unfavourable political environment, the economy has performed reasonably well this year. In the first half of the year, the economy grew at over 5.4 per cent, with the second quarter's economic growth being 6 per cent compared to last year’s 5.4 per cent. Industrial growth at 7.8 per cent and services growth at 7.7 per cent in the second quarter, were better than their performance in the first quarter. In contrast, agriculture that grew at 0.5 per cent in the first quarter recorded a decline of 2.7 per cent. Earnings from tourism have declined by 11.5 per cent. Tourism next year would be dependent on the state of affairs on the peace front. There were both favourable and unfavourable developments in the economy. Export growth at 11.3 per cent in the first nine months may be interpreted as reasonably good. Yet the overall growth masks some unsatisfactory signals. Agricultural export growth is at a much lower 8.3 per cent, while industrial exports too were lower at 10.3 per cent. In the case of industrial exports, a disappointing sign is that garments exports increased by only 4.8 per cent during the first nine months. The initial growth of garments exports in the first few months of the year gave an optimistic expectation that the discontinuance of the MFA had no serious impact on our apparel export industry. Do the new figures indicate that the country is losing its competitive edge? The cheaper garment exports from China would surely be a threat to the country's main export. It is the much higher growth in leather and rubber goods, mineral exports and other exports that enabled the 11.3 per cent growth. It appears than expansion in these exports would require to now offset shortfalls in garments exports. Despite the export growth of 11.3 per cent, the trade deficit has widened from the massive US $ 1.57 in the first nine months of last year to US$ 1.88 million pointing to a likely year-end deficit of around US$ 2.5 million. The inflow of capital for investment in the stock market, increased private remittances and Tsunami aid flows, are likely to still ensure a balance of payments surplus. Yet the external trade developments must be looked at as unfavourable and needing remedial action through improved export competitiveness and increased availability of export items. It must however lead to a policy of excessive import protection that could be self-defeating. The real problem facing the economy, besides the issue of peace is that economic policies envisaged by the government may create a macro economic climate that is not conducive to economic enterprise. The government must be aware that it is not an issue of giving incentives like tax concessions that matter but the whole gamut of economic policies that affect financial and economic stability. It is a common misapprehension of politicians that the granting of subsidies do not affect business enterprise in general. The fact is that if subsides for unproductive purposes should be of a magnitude that creates inflationary pressures, these could have a serious setback to overall economic growth. If the new 2006 budget results in an overall budget deficit of around 10 per cent, then inflationary pressures are inevitable. And these would have an impact on production costs and export competitiveness. In a harshly competitive global economy, with countries like China and Vietnam able to produce similar goods as our industrial exports, inflation could erode the competitive edge. Efforts to improve competitiveness through depreciation of the currency could be self-defeating, as these too would add to inflationary pressures. The trend of increasing oil prices too cannot be ignored. The budget must take into account the strains arising from oil price increases. Therefore the proposed increases in public service salaries, increased recruitment to an already bloated service, higher Samurdhi payments, the fertiliser subsidy and other subsidies on top of high defence expenditures, large proportion of public expenditure on salaries and pensions and debt servicing, could hamper growth. Political uncertainty and internal shocks are part of the national fabric. Expectations of a durable peace and political stability are too much to expect. Economic enterprises must therefore find ways and means of reducing risks and coping with the inevitable turbulences. The country's business community has developed such resilience in the past two decades. They would have to continue to use that forte in the coming years as well. |
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