The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Industrial exports bounce back
One of the anxieties of the economy in the last two years has been the poor performance in industrial exports. In 2001 industrial exports declined by 13.4 per cent. In the first half of 2002, when there was an expectation that industrial exports would rise again, this did not materialise.

It was only around July last year that there was clear evidence of an industrial export recovery. The last few months of 2002 saw a good recovery of industrial exports. The export statistics for the first quarter of this year have confirmed this trend. This is particularly encouraging as the first few months of this year was not a particularly hospitable one.

The US economy, as well as European economies, faced considerable uncertainty and distractions owing to the Iraqi war clouds and the war itself. Fears of sky rocketing oil prices, prolongation of the war by chemical warfare and the global divide on the conduct of the war did not augur well for economic growth of industrial countries and our export growth.

Despite these unfavourable developments our exports of industrial products grew by as much as 14.4 per cent compared to the industrial exports of the previous year's first quarter. Some may contend that this high growth is a comparison with a low level of exports in the first quarter of 2002.

Certainly this is a consideration of significance and any celebration of our industrial export growth may not be warranted. Conversely, the inhospitable international climate must be factored in an evaluation of our industrial exports.

The greatest anxiety lay with our main industrial exports. Garment exports have shown a declining trend. Since more than two thirds of the industrial exports are garments, the declining trend sent shock waves regarding our future export prospects. Although the diversification of our industrial exports has been much talked of, there has been only a minimal degree of success in achieving any significant diversification.

The impending discontinuance of the Multi Fibre Agreement (MFA) agreement quotas in 2005 implied a need to be seriously concerned with the competitiveness of garment exports. The Central Bank however indicated recently that Sri Lanka's garment industry did not have reasons for anxiety on account of the impending MFA agreement lapsing. This was partly due to the reputation that some firms had developed in the quality of their products and their reliability in delivery. There has also been a diversification in the garments industry as well.

Firms have moved more into up-market garments. Sri Lanka now appears to have a competitive advantage on more sophisticated garments, while countries like Bangladesh, China and Vietnam appear to have a competitive advantage on basic garments, better known as quota items.

Industrial exports grew by 14.4 per cent in the first quarter. Garment exports increased by 8 per cent and was responsible for increasing the overall industrial export growth. Earnings from garment exports amounted to US$ 602 million. Leather and rubber product exports grew by 4 per cent, while the category of "other exports" grew by a very significant 45 per cent and these two categories accounted for nearly a third of all industrial exports. It is hoped that these increases in exports signal a real recovery in industrial exports.

The months ahead are not likely to be rosy for industrial exports. Industrial economies are still in disarray. A meaningful economic recovery is likely to take some time. In fact the International Monetary Fund expects it to be delayed till 2004. The Japanese have spoken of a deepening of the crisis. Therefore it is not realistic to expect our industrial exports to expand very rapidly in the remaining months of the year.

Meanwhile we have had a setback to agricultural exports first owing to the Iraqi war and now owing to the flood damage. In the first quarter agricultural exports declined by 12.7 per cent entirely due to the lower exports of tea to the Middle East.

The floods are now giving a double blow to smallholdings' tea production in the South. In this context a growth in our industrial exports would be vital for export earnings. This is particularly so as our imports are continuing to increase at a higher rate and by a larger amount than exports. Consequently the trade balance is continuously deteriorating. In the first quarter of this year the trade deficit was US $344 million, 24 per cent higher than the deficit in the comparable period last year.

The performance of our industrial exports during the rest of this year would matter much. This is especially so as our imports are growing and agricultural exports cannot be expected to increase this year. However it would be optimistic to expect a significant growth in industrial exports owing to the predicted slack global economic recovery.

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