The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Is the economy flourishing?
There is exhilaration about the economy. This elation has been brought about by the bullish stock market, a tourist boom, increased foreign aid, increased investment inflows, lower interest rates, enhanced foreign exchange reserves, a bumper paddy harvest and the prospects of a good tea crop.

There is an expectation of economic growth reaching six per cent, exceeding the original projection of a 5.5 per cent growth. Favourable external factors, the continued peaceful conditions and an expectation of a durable peace, have been mainly responsible for generating much of this optimism.

Some of the fundamental problems of the economy however remain unresolved. This is particularly so with respect to the public finances of the country. The public debt continues to grow and the ability of the government to collect revenue falls short of expectations. In spite of some improvement in the trade balance in the second quarter of the year, the trade deficit is large and expectations of it being reduced are fading.

The optimistic economic expectations are best witnessed in the bullish bourse. The indices at the stock exchange recorded new highs. The All Share Price Index reached 1142 points at the end of the week ending September 12, higher than the 1994 high and the Milanka Index rose to a record high of nearly 2200 points.

The turnover too reached new record levels with both foreign investors and local investors bidding for blue chips with an unprecedented fervour. Daily average transactions at the stock exchange exceeded Rs. 500 million with nearly half the investment coming from foreign investors. Corporate profits too displayed an upward trend with statements that their performance this year is likely to improve further.
These were clear indications of the local and foreign business community expecting the year ahead to be one of strong growth.

There has also been an upsurge in Foreign Direct Investment. There has been an inflow of Rs.170 billion in the first half of the year and the Board of Investment expects FDI to reach Rs. 300 billion for the year. It is to be hoped that the new inflows of foreign direct investment would be in industrial activities that would utilise more local resources and provide large employment opportunities.

The tourist boom is also a reason for the euphoric expectations. The 216,000 tourist arrivals in the first half of the year compared with 248,000 tourists in 2002 and 213,000 tourists in 2001 have generated expectations of 450,000 tourists this year. Tourist earnings reached US $ 140 million in the first six months of this year and could surpass US$ 300 million this year, if the improved security situation endures and the international economic recovery gains momentum.

The agriculture sector has also displayed a healthy growth. The bumper paddy harvest is a boost to the economy. No doubt it also raises the pride of the nation that has looked to self-sufficiency in rice as a national goal. The tea crop that declined in the first half of the year by 2 per cent has picked up and there is an expectation that this year's tea production would exceed the previous record of 310 million kilograms.

Rubber production too has seen a growth of nearly five per cent in the first half of the year. However the trade deficit continues to increase. At the end of July it had reached US dollars 823.5 million. Although the export growth in the second quarter has been a reason for satisfaction, it has not been adequate to offset the increase in imports. Although all categories of industrial exports grew in the first seven months of the year to achieve a 17 per cent growth in comparison to last year's first seven months, the import growth has led to this large deficit.

The public debt too continues to grow. At the end of June it had risen to Rs.992 billion, about 5 per cent higher than what it was at the end of last year. Closely related to this was the inability of the government to collect the expected revenues. Revenue collection in the first six monthswas only Rs136.7 billion while government expenditure was Rs 206.4 billion. The revenue collection in the first six months was 42 per cent of the budget expectations for the year.

While the economy has shown signs of growth and several indicators point to an improvement in the economic and financial situation, there are fundamental weaknesses in government finance and the external trade situation is not as rosy as may be expected.

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