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The Sunday Times Economic Analysis By the Economist

The boom should not end up in a bust
Is the nation now poised for rapid economic growth? Are the external and internal shocks that we have experienced in the past two years, behind us? Are we about to see a new period of economic prosperity? No doubt the most hopeful signs come from the prospects of peace. A period of reconstruction with foreign assistance could see a boom in economic activity. The reconstruction of the North and East would have significant ripple effects on the South. There would be new employment opportunities. Firms in the South would have new opportunities in engineering and construction work. The additional incomes in the reconstruction areas would increase demand for goods and services elsewhere. Tourism is already on an upswing. Trade and commerce, that languished in recent years, would be revived. The first signs of all this is already to be seen. Economic activities would gain momentum in the coming months if there is no setback to the peace process.

The economy could regain its lost momentum and vigour especially next year. The global recession that sparked off a decline in our industrial exports too is over. Although the global recovery showed no signs in an increased demand for our exports in the first half of the year, there is evidence of a more hospitable international market now. For the first time this year, there was an improvement in export performance in July. Industrial exports that had declined by as much as 20 per cent in the first half of the year picked up 2 percentage points in July when industrial exports were US$ 343.5 million. This was an improvement compared with both the exports of US$ 1833.7 million in the first six months of the year, as well as with the export earnings in July last year. The industrial export earnings of July were about US$ 95 million more than the average for the previous six months.

This is the first month in which there has been an improvement in industrial exports and there is an expectation that industrial exports would catch up in the remaining months of the year. There is other evidence of an industrial recovery as well. Intermediate or raw material imports, that declined by as much as 6 per cent in the first half of the year has picked up. In July intermediate imports were 16 per cent higher than in the corresponding month of last year.

This is an early indicator of growth in industrial exports. In July this year intermediate imports amounted to US $ 335 million compared to US$ 288.7 million in July 2001; much higher than the average intermediate imports of US $ 283 million in the previous six months. These figures indicate that the declining trend in industrial production may be over. The increase in imports would place an initial strain on the balance of payments. However, this would be offset in due course when export revenues increase. The country's reserve position, strengthened by the recent IMF facility, increased tourist earnings and foreign aid for reconstruction would enable us to withstand this temporary strain. In due course the increased export revenues that are expected to rise progressively will counter balance the import costs.

As to be expected there has been a revival in tourism. Tourist statistics show a distinct improvement. Tourist arrivals increased to 35,800 in July compared to 28,600 in the same month last year. This increase in tourist arrivals in a non-seasonal month is hope of further increases in the coming months. If this trend continues it is likely that once again tourists would cross the 400,000 mark.

The expectation that the tourist industry is on the threshold of a boom is seen in the sharp rises in share prices of tourist hotels. Tea production has increased marginally by 2 per cent in the first seven months to 182 million kilograms.

The increase in tea production by 3.6 million kilograms in the first seven months is not much, yet it is significant as an improvement over last year's performance. The annual production is expected to exceed 300 million kilograms. Fortunately international tea prices are also holding up.

The Yala paddy harvest that is being currently harvested is indicative of a good production ending the reversal to paddy production in the last few seasons. Lower rice prices and low imports of rice would also help the economy. Coconut production is however much lower than that of last year. There are adequate reasons to be optimistic about the country's economic recovery and growth. The signs of a durable peace are indeed the most important factor. The global economic recovery is reviving export industries. Tourism is likely to get a boost in the coming months owing to the improved security situation as well as an enhanced curiosity to see the North and East of the country. With the international aid for reconstruction and other assistance the balance of payments and the foreign exchange reserves are likely to improve.

Improved economic policies and more effective implementation of policies are all likely to assist in the recovery. We may once again see an economic boom in 2003. It is however essential to manage the boom conditions to ensure a sustained high growth. The boom should not end up in a bust.

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