The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Realities of a make-believe booming economy
By The Economist
The Sri Lankan economy that was battered for two decades by internal war has had the misfortune of facing the external shocks of the Iraqi war after a year of cessation of hostilities.

It would be difficult to determine whether the internal shock or the external shock has had a more damaging effect on the economy. What is clear is that each of these has a very serious impact on the country's economic performance. All the pious aspirations of becoming an NIC, reaching a sustained economic growth of 7 per cent or more and such like aspirations have remained unattained.

In the previous weeks this column discussed the serious adverse effect of the war on the economy. At the time of writing, there are expectations of an end to the war. It is these expectations that have revived the market for low grown teas and caused a dip in international oil prices. We must certainly hope that the international economic scenario is about to change and that conditions hospitable to the Sri Lankan economy would emerge.

The fact is that the Sri Lankan economy was in a weak state even before the war began. The war set back any prospect of a recovery. When the UNF took over the government, it kept repeating about the parlous condition of the economy, particularly the negative growth of the economy in 2001 and the massive public debt. Later it has been a story about the economic recovery. No doubt there was an improvement in the economy in the latter half of 2002.The economy is expected to have grown by 3 per cent in 2002 compared to the 1.4 per cent the previous year.

True, exports recovered in the latter part of last year. Even the statistics for January this year confirm an export growth compared to that of the previous January. The moot question, however, is whether the fundamentals of the economy have registered a significant improvement.

Last week we pointed out that despite the improved export performance, we incurred a large trade deficit of US$ 1.4 million. An export growth of 11 per cent in January has not helped the cause of the trade balance. The deficit was as large as US$ 150 million for the single month. This forebodes a much larger deficit this year especially as exports are likely to suffer owing to global conditions.

The public debt that was Rs. 1,450,000 million at the end of 200l has risen to around Rs.1, 700,000 million by the end of 2002. Indications are that unemployment has increased to about 10 per cent. Though last year's rate of inflation was lower, prices rose sharply at the end of the year with many utilities rising in cost and causing a crushing burden on the bulk of the population.

While all this is happening, the effort is to project a happy picture of the economy. What we wish to focus on are not only the factual position of the economy, but the insensitivity to, and lack of realisation of, the critical state of the economy. Sri Lanka's political culture, it appears, is not one that can make the leadership call for "blood, sweat and tears."

Consequently, we continue to increase our debt and pass on the burdens to the future, sell public assets to ease the difficulties temporarily, seek more and more foreign aid and loans and be quite satisfied with obtaining more foreign assistance. The global situation was one that required a tightening of the belts but in the current political situation all that the government can do is to promise more relief.

In the dire economic conditions that we find ourselves, we continue to spend more than we earn. Non-food consumer imports have increased by 34 per cent, with motorcar imports increasing by 134 per cent in January. And that in a country where large stocks of vehicles line the streets not only in Colombo, but the streets of Negombo, Kandy and other cities. In a situation of higher energy costs, we do not hear any exhortations to conserve electricity and fuel consumption

Instead we light our streets to celebrate festivals. Ministers are girdling the globe for all sorts of reasons. We live in a make believe booming economy, while the real economy continues to slide. Do we have the correct approach to regain Sri Lanka?

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