SL economy quite stable despite crisis-economist

In spite of various problems, the Sri Lankan economy is quite stable but is likely to be between five to six percent this year, far below 7.4 percent in 2006, an independent economist has said.

Dr Muttukrishna Sarvananthan, Principal Researcher, Point Pedro Institute of Development, Point Pedro, in his regular quarterly review of the economy, says inflation is expected to remain at the double-digit level. “The security dividend is expected to mitigate the impact of the turbulence in the economy,” his report on a review of the economy for the second quarter 2007, said.

Sarvananthan also expressed the view that the Central Bank’s target to reduce the inflation to single-digit by end of this year ‘is be wishful thinking’ because it is doubtful whether the cost of living could be reduced on a sustainable basis.

Excerpts of his report:
After four consecutive falls in the quarterly economic growth, from the second quarter 2006 to the first quarter 2007, the economy recorded a marginal rise in the second quarter 2007. Thus, the Gross Domestic Product (GDP) grew by 6.4 percent in real terms during the second quarter, which was marginally higher than the GDP growth rate in the preceding quarter (6.1 percent).

However, the second quarter 2007 GDP growth rate was considerably lower than that in the corresponding quarter last year (7.8 percent). This indicates that economic growth is still lagging far behind that of last year. That is, in the first half of last year the GDP grew by almost eight percent , whereas in the first half of this year it grew by only 6.2 percent.

Agriculture
The international price of tea has remained over US$ 2 per kg during the first six months of this year, which is a record. The agriculture sector is expected to partially revive in the second half of this year, because production in the east is set to rebound as a result of stabilisation of the security situation and resettlement of the internally displaced persons (IDPs).

Industry
Bourgeoning industrial exports were helped by the depreciation of the rupee, which had decreased the dollar cost of export items and thereby increased the export volume. Rising interest rate hasn’t hampered the export industrial sub-sector because most of the exporters of industrial goods (such as ready-made garments) are foreign investors who do not borrow from the domestic banks.

Interest Rates
Higher interest rates (particularly PLR) were mainly responsible for the lower industrial and services growth during the second quarter. This was the price paid for attempting to arrest run away inflation.

Inflation
The annual average rate of inflation continued to soar during the second quarter both in terms of the Sri Lanka Consumer Price Index (SLCPI) and the Colombo Consumer Price Index (CCPI). However, the point-to-point rate of inflation declined during the second quarter both in terms of SLCPI and CCPI.

Tight monetary policy pursued by the Central Bank appears to have decelerated the rise in inflation during the second quarter.
Thus, rising interest rate and higher reserve requirement appears to have moderated the rise in cost of living.

Public debt
Total public debt outstanding at the end of the second quarter was Rs 2.8 billion of which 57 percent was domestic debt and the balance external debt. By end of June there was a revenue shortfall of Rs 41 billion and expenditure shortfall of Rs 59.5 billion in terms of the Budget 2007. Hence, the revenue shortfall has been more than offset by the expenditure shortfall.

Reserves
Higher trade deficit and drop in tourism earnings during the quarter under review was partially offset by higher foreign aid and net private remittances received. Therefore, the impact of the significant rise in trade deficit was only partly reflected in the drop in the gross official reserve. Rising import price of crude oil during the second quarter has also depleted the gross official reserve.
The overall balance-of-payments recorded a surplus of US$ 192 million by the end of June, a drop of US$58 million from US $ 250 million by the end of May.

Remittances
Monthly average of net private remittances received during the quarter under review was over US$200 million, which is a record.
Rising net private remittances is due to the exodus of Sri Lankans overseas in the recent past due to the escalating conflict.

Tourism
Total tourism earning during the quarter under review (US$59 million) was half that of the preceding quarter (US$117 million). Hence, the drop in tourism earning was higher than the drop in tourist arrivals.

The monthly tourism earning was also not consistent with monthly tourist arrival. These figures indicate that not only have tourist arrivals declined but that tourism earnings have also declined more than the fall in tourist arrivals.