Columns - The Sunday Times Economic Analysis

Tea and rubber prices bounce back: signs of recovery in tourism

By the Economist

Three vital areas of the economy are showing signs of a rebound. Tea, the country’s main agricultural export is experiencing a price uptrend that is likely to continue into 2010. Rubber prices are on the up owing to the initial recovery from the global recession and rising oil prices. Peaceful conditions in the country are attracting tourists as the first signs of global economic recovery are evident. Furthermore we are experiencing the beginning of a recovery that is likely to grow in momentum in 2010.

The extents of the benefits we reap due to the favourable trends depend on policies and actions at home. Just as much as external shocks could be mitigated by domestic responses, benefits of favourable international developments depend on countervailing measures to reap their full advantages. Improvements in global economic conditions coupled with the advantages of peace when taken in the flood could lead on to economic fortune.

Tea prices are rising again. In fact they have reached more or less the level of prices in the first half of 2008 when they reached a record high. As readers would recall, in the first nine months of 2008, world tea prices rose to unprecedented levels and then declined owing to the global recession. The expectation of price declines accentuated this downward trend. International tea prices are expected to maintain their upward trend as a result of a low supply of tea in the world market and the increasing demand for tea, especially from Middle Eastern markets.

Lower production is expected from Kenya owing to civil unrest and drought conditions. Drought conditions and depressed prices affected Sri Lanka’s tea production in the early part of the year. India’s reduced production due to drought conditions has also contributed to this uptrend in prices. As against this, the demand for tea is growing and this growth in demand is likely to continue in the foreseeable future.

Remunerative prices are important not only to boost export earnings but for the profitability of growing these crops. When prices fall they are a disincentive to production, sometimes even a constraint to productivity and future production as well. The decline in prices affected smallholdings production of tea as growers did not have adequate resources to invest in necessary inputs like fertiliser. The depressed international prices tend to reduce production and thereby reduce export quantities and export earnings. This has happened noticeably in the case of rubber where declining prices for rubber resulted in the area of cultivation being reduced over time and proper cultivation practices not being followed, especially with respect to fertilizer applications.

The Asian economic crisis in the late nineties depressed rubber prices and had a serious impact on the production of rubber in Sri Lanka. Once international prices rose due to the oil price hike increasing the costs of the manufacture of synthetic rubber, there was once again an incentive to increase rubber production. The global recession that followed was another serious setback to rubber production as the global demand for rubber fell at the same time as oil prices declined. Fortunately there are signs of global economic recovery and the demand for rubber is increasing. The fall in international prices of natural rubber affected the country’s rubber production adversely in the past. Fortunately rubber production has recovered and in the first seven months of this year it has increased by 3.5 percent.

Tourist arrivals have been increasing from mid year. In June tourist arrivals increased by over 10 percent. The increase in July was higher at 28 percent. This is not much of an increase as we are comparing figures with low tourist arrivals the year before. However it is an indicator of an upturn. The tourist industry expects 500,000 tourists this year and around a million in 2010. This optimism is captured in the hotel and travel index (CSEHT) that reached a new all-time peak of 2613.19 points. The signs of recovery from the global recession add further hope that the flow of tourists would accelerate.

Meanwhile the tourist industry has also seen an increase in domestic tourism. The beach resorts on the west coast and in the east have seen spectacular growth in domestic tourism with many hotels fully booked during weekends.

The three sectors are benefiting from the global economic recovery. In the case of tea an added factor is that the increase in demand is not matched by an increase in supply. This mismatch is expected to continue into 2010 and hopefully beyond it. The industrial recovery and rising oil prices are giving a boost to rubber prices. Yet the plantation sector is currently facing strikes that could reduce production. It is unfortunate if the country is unable to reap the benefits of the price increases due to reduced production and a low exportable surplus. In fact in the first seven months of this year tea production fell by as much as 20 percent from 198 million kilograms to 157 million kilograms in the first seven months of this year. Tea production was improving when the trade union demands disrupted production. Rubber production that increased by 3.5 percent in the early part of the year would benefit from the international price increases.

The current trade union dispute will affect rubber production much less as most rubber producers are smallholders. In the case of tea, the continuation of the dispute on wages would affect only the plantations that produce merely 40 percent of tea. Yet this is a significant volume for the exportable surplus of tea. A speedy settlement is indeed vital for the economy.

Both peace and the global economic recovery offer the country an opportunity for improved performance in these three sectors of the economy. There are however domestic conditions that must be fulfilled to gain the full advantage of the favourable conditions. This includes keeping inflation in check and maintaining an exchange rate that is beneficial to exporters and tourists without harming consumers. The speedy settlement of the wage dispute on the estates is another important condition.

The light at the end of the tunnel appears visible. However economic optimism must not lead us to economic complacency, especially as the glimmer of global economic recovery could be an illusion that could flicker away.

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