| The Sunday Times Economic Analysis By the Economist | ||||||
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Iraq war spells disaster for Lankan economy The apprehensions
of a war in the Middle East are already sending shock waves to our
economy. A small export-import dependent economy such as ours is
particularly vulnerable to global developments. We hardly require
this to be illustrated over and over again. Even before
the war has commenced we are facing severe problems. The first two
casualties are tea exports and increase in crude oil prices. These
are two of the most significant items on the export and import sides
of the country's economy. Tourism is likely to be the next casualty;
the first effects have probably already reached our shores. Garment
exports, especially to the US, are likely to be affected shortly.
Middle Eastern remittances would no doubt dwindle. All these are
severe blows to the economy. Their impacts
are not merely on the balance of payments and the long-run economic
growth and performance, but on the immediate conditions of living. These affect
very directly the economic well being of particularly the poorer
sections of our people. Increasing prices of essential commodities
are reducing the real incomes of people drastically. It is for this
very reason that the opposition is exploiting the rising cost of
living and the government attempting to respond in various ways
that are mostly ineffective. Oil prices The international
increase in crude oil prices is a severe strain on the balance of
payments. Oil imports in a normal year accounts for about 13 per
cent of total imports. With the price increases, the expenditure
on oil is likely to rise to over 15 per cent of import expenditure. In terms of
export earnings, the country spends around 15 per cent of it on
oil imports. With a likely drop in exports as well owing to the
war, oil imports are likely to absorb a much higher proportion of
export earnings. Consequently, it will be a severe strain on the
balance of payments. The impact
of this international price increase translates itself into an increase
in prices of petroleum products. This in turn has a multiplicity
of impacts, besides the direct increase in transportation costs.
Transport costs in turn raise prices of locally produced commodities
owing to transport costs of these produce. These price increases
tend to be much higher than the actual increases in costs of transport.
It is for this reason that the government has decided to absorb
the increase in the price of diesel. The price of kerosene has been
kept down to relieve the poor. When consumer prices don't reflect
international price increases, the wrong signals are sent to consumers.
The need to
conserve the use of these products cannot be achieved. Curtailing
the demand for these products is vital in the current economic context,
but cannot be achieved when prices are not raised sufficiently.
On the other hand increases in prices have a severe impact on the
costs of living. We are certainly trapped in a Catch 22 situation. There is still
another dimension to this problem. The increase in thr price of
petrol products raises the costs of production of exports. This
could be especially so if the price of electricity too rises. In
a situation where the country's exports are already said to suffer
from relatively high costs of production and international demand
is sluggish, the prospects for our exports is further weakened by
the higher costs of fuel. Tea exports A substantial
proportion of our tea market consists of buyers from Middle Eastern
Countries. Middle Eastern countries buy about 40 per cent of our
tea. Iraq itself accounts for around 6 to 7 per cent of our tea
exports. At the Colombo tea sales, prices fell to US$ 1.50 from
US$ 1.59 per kilo. Although a
revival in prices was seen early this week, the behaviour of prices
would depend very much on the probability of war. It is indeed very
unfortunate that there is instability in the tea market at the very
time when the country's tea production has reached the highest production
ever of 310 million kilograms. It was hoped
that 2003 would usher in a tourist boom with half a million visitors.
Last year's increase in tourist arrivals was expected to continue.
With tight security around international airports amidst fears of
attacks on low flying aircraft and terrorist retaliation in the
US and UK in particular, western tourists are likely to stay at
home. The much-awaited revival in tourism is most unlikely in the
first part of this year. Once again
we are indeed unfortunate that at a time when security conditions
are good and tourists were beginning to arrive in larger numbers,
global security concerns are affecting the industry. Our industrial
exports are not likely to be spared. Decreased demand for our main
exports, especially garments, is inevitable. The New York Stock
market appears to have been depressed by expectation of lower consumer
demand in the US. This depressed demand would affect Sri Lankan
exports of garments adversely. A slowing down of economic growth
in industrialised countries would decrease demand for our industrial
exports. The Free Trade Agreement with the United States is hardly
likely to help in such a context. Middle East remittances are an important contribution to the balance of payments. The total amount of remittances received is larger than our earnings from all our agricultural exports. Compared with our total export earnings they are as much as nearly 20 per cent. However, the total of remittances is not from the Middle East. A fair amount of remittances are also received from other countries. The remittances from the Middle East that are a significant proportion of these are likely to be affected both in the short-run and even after. |
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