From economic contraction to economic growth in 2024View(s):
There is little doubt that the economy would contract by about 3 percent this year. There is an expectation that the economy would get on to a growth path next year. However, there are several global and domestic downside risks.
There is little doubt that the economy would contract this year. All three sectors of the economy have contracted in the first quarter of the year and indications are that they would not revive during the course of this year.
Manufacturing has been adversely affected by exogenous and domestic factors. Export manufacturing has been dealt a severe blow by the global recession. The country’s most important merchandise export — textiles and garments — have been severely curtailed by a decrease in global demand. This is also so in respect of rubber goods and several other manufactured exports.
The recession in western countries has not only reduced demand in the past four months, it has reduced demand in the foreseeable future as well. Export orders for the rest of the year appear drastically depressed.
In addition to the global downturn in demand, industries have faced severe difficulties in production.
The economic crisis led to the escalation in the costs of production. The increase in electricity and fuel costs escalated production costs to uncompetitive levels. Although the depreciation of the currency conferred benefits, they were offset by the increased production costs and rise in raw material imports.
The closure of many export manufacturing industries resulted in large scale unemployment and undoubtedly enhanced poverty. The estimated loss in employment is huge.
The redeployment of this labour would await a revival of export industry. And when this would be is uncertain. Meanwhile, large numbers of skilled workmen are seeking employment opportunities abroad. Consequently their outmigration would have a permanent impact on the country’s capacity to revive.
This phenomenon of skilled manpower educated and technically skilled personnel is a serious threat to the long-term economic and social development capacity of the country.
One of the achievements of the country in the post independent years has been the country’s social development. Health and educational indicators have been far higher than other countries of comparable per capita countries.
This has been seriously threatened by the outflow of medical personnel and the educated professionals. The Institute of Policy Studies (IPS) has warned the country that it may not be able to achieve the expected social development goals. This is discussed in detail in the IPS’s latest State of the Economy report.
The construction industry that was severely affected is not likely to recover owing to escalation costs and lesser demand. Although a slight revival can be expected late this year and in 2024, it would not reach the levels of earlier years.
Although agricultural production was expected to revive from the previous year with the availability of chemical fertiliser and agrochemical, the recovery has been slow and below expectations.
This was owing to some of the adverse effects of the fertiliser and weedicides ban affecting production. This is particularly so with respect to tea on the plantations. Tea production has not recovered as the plantations have problems in widespread growth of weeds that has reduced production. Consequently tea exports have declined further in the first quarter.
The increased supply of vegetables and the fall in prices is evidence of a recovery in these food crops. However, there are wide fluctuations in price owing to severe weather conditions and transport difficulties. In contrast the poultry industry appears to have been severely affected by the unavailability of feedstuffs.
The good news is that agricultural production is expected to increase in the Yala crop and in 2024. Nevertheless this is very much dependent on the rainfall later this year and next year. There is a definite expectation of a revival of tea production with the waning of the severe problems created by the banning of fertiliser and glyphosates.
The silver lining in this dark and gloomy picture is the revival of tourism. The first four months have witnessed a revival of tourism. The hospitality trade is optimistic of a surge in tourism in the latter months of this year and next year.
It is vital to ensure that the country remains safe for tourists and being “the country like no other”.
Threat facing the country and tourism in particular is the escalation of dengue fever in the country. If this is not controlled there could be travel advisories that warn tourists of the dangers of contracting dengue in the country. Hopefully this would be averted by effective measures to control the disease. On the other hand, the threat of social upheavals has decreased and would remain inconsequential for tourism.
In spite of an improvement in the external finances that has eased the living conditions, the global recessionary conditions and the escalation of prices have resulted in the manufacturing sector being unable to revive.
In fact many export industries have moved out of the country and established their factories in countries where the cost of production is much less. Even when the recessionary conditions abroad improve, the revival of industries would require their cost of production to be reduced. The electricity charges as well as the fuel costs and raw materials need to be much less in order to be competitive. The recovery of agriculture would, however, be more likely as the current problems abate and the rainfall that has already commenced enhances the productivity of crops.
The onset of the monsoon is of vital significance not only for agricultural production but also for a larger share of power through hydro. As the larger share of hydro electricity would reduce the cost of electricity production, it would be possible to reduce the cost of electricity especially for industries and the lower income consumers.
An economic recovery and growth remains a distant goal.
The economy will continue to contract this year. The hope and expectation is that the country’s manufacturing would revive next year to achieve a modest growth. Long-term economic growth requires political stability, law and order, pragmatic economic policies and their effective implementation.
The current economic conditions have also had a damaging impact on the long term economic capacity and social development owing to the exodus of skilled educated persons.
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