Modest economic prospects in 2004
Several imponderables render a forecast of economic prospects in 2004 difficult, if not impractical. Internal security, political stability and the progress on the peace process are among these. Weather and climatic factors also play a significant role. Being a highly trade dependent country, global economic conditions have an important bearing on our economy and these have been volatile and unpredictable in recent years.

International prices for our exports and of important imports such as petroleum, chemicals and essential consumer items such as wheat flour, milk and sugar have an important bearing on economic performance and the well being of people. Of all these factors none are more difficult to predict and more important overall determinants of economic progress than political stability and progress in the peace process.

In as far as political stability and the peace process are concerned, the stalemate may not be cleared early in the year. Consequently, several aspects of the economy, particularly those that depend on foreign funds would be adversely affected. While the peace process may be stalled and a durable peace settlement most unlikely, equally realistic is an expectation that terrorism and fighting would not erupt once again.

Therefore most economic activities would function largely uninterrupted. However the flow of international finance would not reach the expected high levels. On the other hand, these uncertainties appear to have been factored in and foreign investments of a modest level appear to be flowing in. The behaviour on the Colombo Stock Exchange and the continued flow of tourists into the country since November warrant this point of view. Tourism has been hardly affected by the political developments.

By end November tourist arrivals reached over 442,000 giving rise to the expectation that by the end of the year, the figure would reach the anticipated 500,000 mark.

The most significant effect of the political uncertainties has been on foreign aid. Much of the promised and committed aid of US$4.2 billion is not likely to reach the country. Even multilateral agencies have placed on- hold the funds allotted for poverty reduction till a clearer picture on the political front and the peace process emerges. This means a considerable reduction in resources for development.

The massive reconstruction of the devastated areas would have set in motion a series of multiplier benefits that would have propelled the economy to higher levels of growth that would have in turn generated further momentum in the economy. The productive capacity of the North and East would have also been enhanced.

All these benefits appear to have been delayed, if not lost in the foreseeable future. What about other factors determining the performance of the economy in 2004? The industrial sector should be able to perform better owing to the expected improved global economic performance. The US economy, EU economies and Asian economies are expected to grow at higher rates than last year.

The World economy as a whole is expected to grow by around 3 per cent. Although Chinese economic growth is expected to decline from its high level of 10 per cent, by around 1 per cent, this should not assert much influence on the Sri Lankan economy. Nonetheless, the industrial sector in Sri Lanka must maintain an improved efficiency through enhanced productivity if it is to benefit as several competitors are threatening to compete away Sri Lanka's light industrial exports, especially garments.

High costs of energy and other costs as well as industrial strife and inability to enhance labour productivity are threats to export expansion. Agricultural production is likely to be mixed. There is a prospect that tea production could return to its recent growth trend, increasing from around 300 million kilograms to about 310. Tea prices too may hold. Both paddy and coconut are subject to cyclical variations.

Paddy output may decline next year owing to weather conditions not being favourable. An increase in rubber production is expected owing to improved prices for rubber internationally. However this is likely to be of limited impact on the economy as the significance of rubber has diminished considerably both in terms of exports and contribution to GDP.

Much of the economic growth in the last two years has been in the services sector. Tourism has grown significantly last year. Since the recent political events appear to have not had any damage, the tourist sector is likely to grow further this year barring any catastrophic developments.

The growth in construction is likely to continue. Financial services that have grown rapidly may experience a setback owing to the falling interest rates. On the other hand the lower interest rates may spur investment.

The most likely scenario for 2004 is an economic growth around the country's historical levels of about 5 per cent. The higher growth trajectory that was projected may not materialise owing to the external finances not forthcoming as expected, the political uncertainty and the possibility of a disruptive election.

The Sri Lankan economy it appears is destined for another year of modest growth, with higher rates of growth remaining a dream for the future.

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