The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Economic indicators threatening though good in parts
The economic statistics of the first four months, like the proverbial Curate's Egg is good in parts. Official economists would describe them as a "mixed performance", often a phrase used to describe not too good a performance. On the surface they are not bad either. Let's taste the better parts first.

Exports grew by 15.7 per cent. Especially noteworthy was the fact that industrial exports continued to increase by 16.3 per cent and agricultural exports by 22.2 per cent. However the country's leading export, garments grew by less than 10 per cent. Private industrial production grew by 3.9 per cent, continuing its up-trend.

Tea production increased and so did rubber that was at last showing a revival. Coconut production too increased. Paddy production however declined from that of the Maha 2003 harvest that was a record. Tourist arrivals as well as tourist earnings continued to grow by 5.4 per cent. Considering the fact that these months encompassed a period of political instability and elections, there is reason to be happy about this performance.

Nevertheless the direction of other indicators are significant. The trade balance showed a large deficit owing to an increase in import expenditures by 19 per cent. Intermediate imports increased by a significant 15 per cent mainly owing to higher prices of imports, especially oil. Capital goods imports increased by 50 per cent, though this is an unfavourable development for the trade balance, it is a good indicator of investment.

The magnitude of the deficit is indeed a cause for anxiety. The trade deficit had risen to US $ 723 million at the end of the fourth month, a 28 per cent increase in comparison with the same period last year. As the causes for the large deficit has shown no signs of abatement, this means that the country is likely to face an unprecedented high trade deficit of perhaps around US$ 2000 million at the end of the year. Since capital inflows are not likely to offset this large deficit, the Balance of Payments is likely to be in deficit too.

External assets have begun a slide. At the end of May the total external reserves of the country was 2.5 per cent less than at the end of 2003. Government revenues have declined even in comparison with last year's inadequate collection. In the first four months revenue collections were 2.6 per cent less than in the corresponding period of last year. On the other hand, public expenditures have increased in the first four months by 6.2 per cent and are likely to increase further owing to the enforced subsidies.

The public debt that was brought into focus by the previous government has grown rather than diminished during its two-year regime. At the end of April it had risen to Rs 1071 billion higher than the 2003 end year position More disconcerting is the fact that it is likely to grow further owing to the increased social expenditures, subsidies and low tax collections.

The implications of these developments are that both our government finances and our external account are likely to be unfavourable this year. This will in turn exert pressures on the domestic interest rates and the external value of the Rupee. Both are being experienced already. The question uppermost in the minds of people is whether the government would explain the problems it is facing, especially with respect to the effects of the oil price increase and the stringent fiscal situation, and change its policies.

A petrol price increase would raise the cost of living even more and create a wave of unpopularity for a government that promised stable, albeit a reduction of prices. Now that the provincial council elections have been won, will the government have the courage to suspend increases in government expenditure such as on its graduate unemployment scheme and increased salaries for public servants and target the Samurdhi programme to the needy?

These would indeed be bold steps that are unlikely in the context of its doubtful majority in parliament. What we can realistically expect is a continuation of politically motivated economic policies and the postponement of the day of reckoning. In brief economic stability and long term growth are a distant dream.

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