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Lankan
economy not out of the woods While consumer
prices have risen 11 percent in the past 12 months - high by any
standards - public sentiment has been influenced by prospects of
peace and the general buoyant mood. This has replaced concerns over
an economy that is still not out of the woods. The real economic
position of the country does not look too good - as separately illustrated
on this page by a well-known economist. Economists are also pleasantly
surprised at the IMF's recent endorsement of policy measures by
the government and the fund's own projected increase in the estimate
of the growth rate this year despite the disturbing economic data. The fund, in
its annual assessment of Sri Lanka, says the economy would expand
by a modest 3.7 to 4 percent in 2002 after contracting last year.
It also said inflation could be contained within the 7-8 percent
target. It was anticipated
earlier that the economy wouldn't show any marvelous results in
the first half of the year after last year's disastrous performance
but no one expected industrial exports or garments export earnings
to fall sharply by 18 percent and 20 percent, respectively, in the
seven months to July. Look at other
figures in the period to July 2002 - the trade deficit has risen
to $977 million from $808 million in the same 2001 period; foreign
reserves have eased by two percent to $2.2 billion - enough to finance
some 10 weeks of imports -; export volumes fell by 15 percent; tourist
arrivals are down 18 percent (though there has been a marked improvement
in the past two months, particularly in recent weeks due to the
ICC cricket tournament) while the rupee has depreciated by seven
percent against the US dollar. On top of all
this comes news - once again - of official tinkering with garment
quotas for the third time in 18 months. Fingers are again being
pointed at some high officials of the Textile Quota Board. They
are accused of doctoring quotas even after the Sri Lanka Apparel
Exporters Association launched, some months back, a computerized
system to track the use of quotas to stop any irregularities in
the distribution process. Though the
economy is generally expected to improve in the second half of the
year, the pick up in the garments sector is slower than expected.
Perhaps worst is the fact that even while volumes rise, prices for
our garments have hit rock bottom, which would further affect the
trade deficit. Exporters have little choice other than to ship at
any price to keep factories working and employees happy. Exporters say
spring orders from the US for December shipments have started coming
in providing some respite but at prices much lower than before.
Even more disturbing is a warning by a UNDP expert that many small
garment factories are likely to close if there is no bail-out package
offered by the government. Economic Reforms
Minister Milinda Moragoda's plea - also reported on this page -
for foreign aid from the international community should be considered
seriously. Moragoda, one of the few pragmatic politicians we have,
rightly says the country needs aid now while the peace process is
on and cannot afford to wait till a lasting solution is found. He
is also endorsing a similar call made by Prime Minister Ranil Wickremesinghe
to the UN General Assembly last week On the positive
side, organizers of the 12-nation ICC tournament reckon the event
will pump in $25 million (Rs 2.4 billion) into the economy in direct
and indirect benefits, quite apart from the wide exposure Sri Lanka
gets when the matches are telecast live to an audience of 800 million
fans across the world Finance Minister K.N. Choksy would have a hard time juggling these figures when presenting the budget in November, if the economy does not pick up in the second half as anticipated. Battered by the conflict for years, Sri Lanka needs all the help it can get from the donor community to put the economy back on track. We
need foreign aid On at least
one mat ter in the 19-year war between
the Sri Lankan government and the LTTE there is agreement. Both
sides recognise that economic and social development will be the
key to a lasting peace. Disagreements,
even among members of a family, can become bitter, intractable and
deadly. The people of Sri Lanka have lived this truism for nearly
all of those 20 years. The conflict
between the Liberation Tigers of Tamil Eelam (LTTE) and the Sri
Lankan government since 1983 has left over 60,000 dead and thousands
more severely disabled, while causing untold property damage. It
has blighted the lives of families and disrupted the education and
productive prospects of two generations of our youth. Two unrelated
events may have contributed to the break in Sri Lanka's cycle of
violence that seemed interminable. The first was the attack on the
United States on September 11, 2001, which caused universal revulsion
at the loss of innocent life. This focused the world's attention
on the absolute evil inherent in such acts of mass violence, whatever
the motivation. The second
event was the election to office of a new government in Sri Lanka.
Opposition Leader Ranil Wickremesinghe had taken the bold decision
to centre his campaign for election on a mandate to end the war
through negotiation, rather than by military force. Although that
decision was, in the circumstances, a realistic and pragmatic one,
it was politically unacceptable to those who looked upon it as motivated
by a policy of appeasement. In the result,
a war-weary country responded by endorsing this fresh approach.
The people confirmed their support for a negotiated settlement in
local government elections some months later by giving Wickremesinghe's
government a handsome victory. The UNF government's
achievements to date have pushed the peace process further than
ever before. An early victory was to secure a ceasefire with the
LTTE on December 24, 2001, just days after the general election.
This was followed by the signing of a permanent ceasefire agreement
on February 22, 2002. From the very start the approach taken by
Prime Minister Wickremesinghe has been a pragmatic step-by-step
confidence building exercise. This has been
re-inforced by the determined and unceasing approach taken by the
Norwegian government as facilitators. The breakthrough came when
the LTTE and the government agreed to hold peace talks on September
16 . As confidence between the LTTE and government grows there has
been few serious breaches of the Agreement and no deaths. Reaching the
all-important 160 days confidence building point of the cease-fire
agreement greatly reduced tensions. A large number of lives have
already been saved and untold property damage avoided. The well known
New York Times columnist, Tom Friedman, who recently visited Sri
Lanka, observed: "I feel the gunmen have lost their mandate
from heaven." The Prime Minister's
recent visit to the United States and his meetings with President
George Bush and senior politicians, were also encouraging. Their
support for the government's initiative was manifest in the arrival
in Sri Lanka soon after, of Deputy Secretary of State Armitage.
Closer to home, the Indian government has provided much support
and input to the peace process. The very success
the government has achieved so far has created another problem,
it must now be on its guard to avoid becoming a victim of that success.
Many seem to believe that they already have peace. They would be
wrong. Peace lies
at the end of long, hard negotiations that have only just begun.
What could be more appropriate, if not propitious, than that is
that these negotiations took place in Thailand under the benevolent
wing of its friendly government. Cultural and spiritual ties between
Sri Lanka and Thailand are centuries old, epitomised in their common
allegiance to Theravada Buddhism. Only a few days ago, Prime Minister
Wickremesinghe himself observed that when our ancient kings felt
the need for spiritual renewal, it was to Thailand that they went
to find inspiration; and that today we follow that tradition in
going to Thailand to find the path that will bring back peace to
our country. Meanwhile,
losing no time, Prime Minister Wickremesinghe has initiated a plan
for the island's re-development, calling it "Re-gaining Sri
Lanka". The plan provides for the stabilisation and growth
of the economy, to be balanced by ways to produce a "peace
dividend", or the tangible benefits of peace, as soon as possible. The task before
the government is a formidable one. As it sets about implementing
the stabilisation programme prescribed by the IMF and the World
Bank, more than hard work and patience will be called for as we
embark upon the processes of reconstruction. Fresh resources
will be needed to fund massive programmes to resettle some 800,000
internally displaced persons, and a million-and-a-half more who
fled the country because of the war, and to assist in their rehabilitation,
which would include providing housing, schools and employment for
them. Removal of
some 1.5 million anti-personnel mines too, will require funds and
technologies that lie beyond our capabilities. Both sides
understand the extent and level of the differences that remain.
However, there is no going back both sides agree, a fact underscored
by the losses of life and the misery of 20 years of conflict. Now as both
sides have reached towards peace they have asked for support not
later but now. Often what those at the village level fail to understand
is the need to encourage the process through to completion. So often
the process rides on a wave of popular support. With the country's
economy shattered, the government of Sri Lanka cannot meet the cost
of these reconstruction and rehabilitation processes from its own
resources. Donor countries have shown a willingness to help, yet
their aid programmes are directed essentially to the hoped-for post-conflict
period, and are not necessarily available now, while the conflict
is in the process of being resolved. Here, then,
is a dilemma of classic proportions: prospective donors hesitate,
awaiting the arrival of peace to release their funds; but the lack
of funds now endangers the very process by which that peace is to
be achieved. Assistance
is urgently needed now to maintain the momentum of the peace process.
Even as the government rallies the people to meet new demands, it
must take measures to temper current hardships that threaten to
obscure the promise of peace, and undermine confidence in the on-going
fragile process of peace making. This is a time of critical sensitivity,
when public impatience or disillusion, and siren voices could plunge
the country back into a fratricidal war. There is much
that friendly countries can do at this critical juncture. Direct
aid, both bilateral and multilateral would make a substantial difference.
Technical assistance,
including the loan of experts is vital. Market access for Sri Lankan
exports would not only help our economy grow; it would attract foreign
investment linked to the country's resolute efforts to reform its
economy. Ours was, until
recently, a forgotten war. Now we have come to the brink of what
we hope will be a lasting and remembered peace. Remembered by generations
of Sri Lankans to come. The government and the LTTE can say thanks to the leaders of both sides as well as to the governments of Norway and Thailand for assisting this process. Both sides understand the differences that remain. We ask that the world take note of, and afford us support, as we make our determined bid for peace.
looks rather
gloomy, according to the latest data. The trade deficit, which is
the excess of imports over exports, has risen to $ 977 million in
the first seven months of this year from $ 808 in the corresponding
period of last year. Total foreign exchange reserves of the country
declined by 2 percent from $ 2,238 mln in last Decembers to $ 2,200
mln by the end of July 2002. These reserves
are barely sufficient to finance 10 weeks' imports. Given the increasing
dependence of the economy on foreign trade and other external transactions,
the persistent foreign exchange imbalances have adverse consequences
on the overall economic performance. Several factors
have contributed to the weakening of the external finance situation.
A major reason is the continuous decline in export earnings. Decline It is rather
alarming to note this further decline from a low export figure of
last year in which there was an export downfall of 13 percent. The
decline in export earnings was largely due to a 13 percent decline
in export volumes. The situation
was aggravated by an 11 percent fall in export prices. The impact
of this year's export decline on the foreign exchange position would
have been much worse if not for a seven percent decline in imports.
Although the
decline in imports tends to ease the balance of payments pressure,
low imports of intermediate and investment goods will continue to
hamper the growth process. Imports of
intermediate goods have fallen by three percent and investment goods
by nine percent. Larger inflows of such goods are needed for the
economy to recover from the present near-zero GDP growth. Earnings from
all export categories have fallen in the first seven months. Industrial
exports, which account for about three fourths of total export earnings,
declined by 18 percent. Garments, the flagship export industry,
experienced a 20 percent decline in foreign exchange earnings. Earnings from
most other exports including food, beverages, leather and rubber
products also fell. The story with regard to agricultural and mineral
exports is no different. The fall in
foreign earnings is not restricted to exports. Net inflows of private
remittances, which are a major source of foreign exchange earnings,
declined by three percent. Meanwhile,
tourist arrivals fell by 18 percent to 209,000 in the first seven
months of this year from 256,000 in the same period last year. Consequently,
tourism earnings are down by 18 percent to $ 133 million from $162
million last year. All in all,
we are going to face a larger balance of payments deficit this year,
which would result in an increased dependence on foreign borrowings.
Garment
exports Thus, these
two products account for nearly three-fifths of total export earnings.
This clearly shows the limited extent of export diversification.
Other industrial
exports contribute about one-fifth of total export earnings. The
bulk of them are primary exports such as food and beverages, leather
products, tableware, and bunker oil and aviation fuels. In view of
the phasing out of textile quotas fully by year 2005 there is a
danger in depending too heavily on the garment sector. With the
abolition of quotas, our producers will have to compete with other
suppliers in foreign markets. This means that high quality goods need to be supplied to foreign markets at competitive prices. Export competitiveness is crucial in trade expansion. Low production costs backed by low domestic inflation is essential to sustain the competitive edge. Any excess of domestic inflation over inflation in competing countries should be compensated for by a depreciation of the domestic currency. The annual inflation
rate during the last 12 months was 11 percent. The rupee depreciated
by seven percent during that period. Continuous
rupee depreciation in this manner to catch up inflation not only
raises the cost of living but also pushes up domestic production
costs hampering exports. The export
sector is so important in our economy that the GDP growth closely
follows the export growth path. The GDP growth tends to decline
whenever the export sector does not perform well and vice versa.
In the present context, integration with the rest of the world is
essential to achieve higher income growth and better quality of
life. Empirical evidence
of developing countries shows that the countries that have not been
effective in the integration process get marginalised and continue
to stagnate in a low growth path. A greater commitment on the part of policy makers is needed to reorient the export sector and to resuscitate the economy from the present slump. |
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