Columns - The Sunday Times Economic Analysis

End of a turbulent year for the economy

By the Economist

We would wish to end the year on a happy note. Yet the year has been a turbulent one. It has been a year of confusion, uncertainty and global economic recession. Never has the world witnessed such an escalation in the price of oil to a record of nearly US $ 150 and then a tumbling down of oil prices to less than US$ 40 per barrel. “No Cheap Oil”, the London Economist said in a cover story. And we now have unbelievably cheap oil prices.

“Good Bye to Cheap Food”, the London Economist said as prices of food and milk escalated. Now the commodity boom is over and commodity prices are at a low level. All this has been within the span of a year, a year that is nearing its end, not with a bang but a whimper.

A high rate of inflation characterised most of the year. The prices of essential items rose to unprecedented heights causing severe difficulties to the common man. The price of rice, flour, bread, sugar, dhal, vegetables, coconut oil, gas, bus fares, electricity, diesel and petrol rose to make it difficult for most people to make ends meet. The ongoing war and international prices were blamed for much of this inflationary trend. The successes in the war and prospects of peace made people bear the burden in hope and expectation of better times. The rate of inflation has fallen from 28 percent to only 16.3 percent in November. The fears of high increases in prices, we are told, are over.

“The significant decline in inflation”, the Central Bank says “is attributable to the pass-through of the rapidly declining international commodity prices, the stringent demand management policies adopted by the Central Bank and improvements in domestic supply conditions.” We can expect a “continued decline in inflation to acceptable levels.” The Central Bank bases this expectation on several factors. “The sharp deceleration in the monetary aggregates, together with recent favourable developments in relation to international commodity prices is expected to bring down inflation at a rate faster than previously expected.” So the rate of inflation will decelerate even faster than expected earlier. The Central Bank notes that “Further deceleration in inflation would help investors as well as consumers in their effective decision making process, improving the growth outlook for the economy.”

The trade deficit running at US$ 5170 million at the end of the first ten months is likely to reach a massive US$ 6000 million at the end of the year. Further the bust in the commodity boom, particularly the fall in oil prices, has resulted in prices for tea and rubber falling. These price drops, after their sharp increases, have caused severe strains on both rubber and tea producers. In as far as the trade deficit is concerned, the lower oil and commodity prices, new controls and additional duties would prevent such a massive deficit next year. There is a prospect of lower international prices of imports as “international prices of most of the commodities have drifted downwards in the wake of lower demand emanating from the global economic slowdown. Therefore, the low growth of imports witnessed in this month (October) will continue to prevail in the greater part of the next year containing the import bill. Hence, it is expected that all these developments will favourably impact on the trade deficit in the near future.” This decline in the trade deficit is expected despite the likelihood of export earnings declining next year.

Official reserves declined sharply in October. The decline in the official reserves to US dollars 2,374 million is, in the view of the Central Bank, not a matter to be concerned about as “financial market conditions are now gradually easing and a significant amount of short term funds have already flown out…”! Therefore the “foreign exchange market is expected to stabilize in the next few months.” Impliedly there would be no depreciation of the currency. This is bad news for the export industry that has to contend with rising costs of production that makes exports less competitive in export markets. Growth in industrial exports has consequently suffered. Exports grew by only 9.5 percent in the first ten months of the year. The bleak record in exports is with respect to industrial exports and especially the country’s largest export—garments--that grew by a mere 3.8 percent in the first ten months. Industrial exports grew by only 4.9 percent. The glad tidings we receive at the end of the year was the extension of trade concessions under GSP plus. However this would not solve the fundamental problems of industry.

Sri Lankans working abroad are the saviours of the economy. Their remittances have been the most important support to the economy. The good news is that these remittances are growing. “Worker remittances increased by 22.4 per cent to US dollars 2,219 million during the period January-September 2008. It helped finance 45 per cent of the trade deficit in the first 9 months of 2008.” And then the good news to expect is that “worker remittances are projected to increase further by about US dollars 800 million by end of 2008.” This favourable development it must be recognised has nothing to do with the performance of the economy.

Statistics indicate that unemployment has fallen to a historical low. The government played its part in this achievement. The recruitment of over 40,000 to the public service, recruitment of teachers and then the continuing recruitment of soldiers are solving the scourge of unemployment that has characterised much of the country’s post independent history. The slower rate of population increase is also helping.

The Central Bank of Sri Lanka appears to believe that the economy is on an even keel and that most of the troubles that the economy faced this year are now over. It states: “The country recorded an economic growth of 6.3 per cent for the third quarter. A notable growth of 12.4 per cent was observed in the Agricultural sector, while the Industrial and Services sectors expanded by 5.6 and 5.5 per cent, respectively. The overall growth during the first three quarters has been 6.5 per cent while the economy is estimated to grow by around 6 per cent in 2008.” The Central Bank Annual Report for 2007 pointed out we maintained an economic growth of over 6 percent for three successive years that was a record.

An economic growth of over 6 percent for three successive years had not been achieved before. The good news is that we are now heading for another year of good growth. The economy is estimated to grow by around 6 per cent this year and so we will have four successive years of over 6 percent growth.

In a world where country after country is feeling the global meltdown in their backyards, it appears that the Sri Lankan economy is unscathed “In spite of the turmoil in global financial markets”. Although the public debt has reached a huge proportion, the trade deficit is likely to be massive and the fiscal deficit likely to exceed the estimated figure, Sri Lanka’s economy is expected to record an economic growth of 6 per cent. Can Sri Lanka be an island of economic growth in a sea of global recession and financial crises?

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