ISSN: 1391 - 0531
Sunday, October 08, 2006
Vol. 41 - No 19
Front Page Columns
The Sunday Times Economic Analysis

Silver linings in the economic clouds

By the Economist

Three recent developments have generated optimism in the country's economic outlook. These are the decline in the international oil price, the apparent success of the government on the war front and the move of the two main political parties to arrive at a consensus on national issues. Each of these will have a beneficial impact separately on the economy. Together they could raise hopes for the economy to get moving to higher rates of growth. The management and course of these developments would in fact determine the end result. This is especially so with respect to the war and peace process and the arriving of a consensus on national issues. Besides this there is an important and inextricable relationship among them. Let us discuss each of these in sequence.

Cause for optimism: A govt. delegation and UNP delegation trying to work out a consensus on national issues.

Optimism based on the oil price decrease could be short-lived. Economists have argued that the extraordinarily high prices above US$ 70 were not keeping in line with the current supply and demand price for oil. The Iraqi war, the instability of the situation with respect to Iran, aggressive US foreign policy and speculation are among the factors responsible for the sudden soaring of the oil price Nonetheless international prices are on an uptrend that cannot be constrained for long. The international supplies of oil are fast running out and refinery capacity is limited and takes time to increase, while the pace of consumption is increasing. Despite the oil price increases demand is not declining. The decrease in the international oil price to around US$ 60 must therefore be looked at as a respite rather than a resolution of the problem of high oil prices. The massive shock to the economy will continue to batter it, even at a price of US $ 60 a barrel, but we must be mindful of the likelihood of prices rising again.

The apprehension is that this temporary respite will lead to wrong policies. Complacency generated by the decline in oil prices could compound the problem for the future. Proper pricing of oil to ensure its conservation, the development of a long-term energy policy and the seeking of alternate energy sources should not be eschewed. The fact is that even with the decreased price, this year's oil bill is likely to account for nearly a quarter of our import bill and soak up about a third of our export earnings. The oil import bill has been huge and has had a serious dent on the trade balance. The trade deficit that reached US $ 2140 million in the first seven months of the year is ballooning towards the US $ 3000 million mark.

The success on the war front it is hoped would bring the hostilities to an end and decrease war expenditure. Even more important for a durable impact on the economy, it must lead on to a settlement of the fundamental problem. If the higher current war expenditure leads to such a result then the country and the economy would derive what has often been described as a "Peace Dividend". This peace dividend has eluded us so far for many reasons. For a chance of success there must be a consensus on the solution to the problem between the government and the main southern parties. In the past governments fearing that such a consensus was not possible have failed to come up with a concrete proposal. It is in this context that we can view with some hope the discussions of the main political parties to reach a consensus. This would be of utmost importance. There has to be a realisation that some minority parties would oppose a reasonable solution and pander to the Sinhala die hard emotions of the masses.

These discussions are not confined to finding a constitutional and political solution to the problems of the minorities and the finding of a constitutional method of devolving power, but also attempt to arrive at a consensus on other issues of national importance as well. If the main parties could iron out their differences with respect to important economic and national issues, such as a consensus on the broad framework of economic policies, an energy policy, privatisation, education policy, health policy and infrastructure development, among others, then such a consensus could speed up implementation of economic policies. The confidence that is generated would have an impact on investment flows, especially foreign direct investment to the country. It would no doubt have a beneficial impact on foreign aid as well, especially if it were to coincide with the prospect of a durable peace.

One has to be realistic in that there would always be those parties that would oppose both any specific peace proposal and a consensus on economic policies. Unanimity is an impossible condition to achieve, but a majority consensus should be adequate to pursue the national policies with courage and determination. Are we on the verge of a new political era that would boost economic growth or are we expecting too much from our political leaders?

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