Financial Times

Better corporate profits seen leading to higher investments
Higher profits in the corporate sector in the first half of this year and tsunami rebuilding work is expected to lead to an increase in investment expenditure in the second half, the Central Bank has said.

It said in a statement on second quarter economic growth that the investment ratio (total investment/Gross Domestic Product) remained at the same level of 25 per cent that prevailed in 2004.

“The stagnation in investment activity was also reflected in the slight drop in imports of investment goods during this period,” it said. “One reason for this stagnation was the high base effect for investment activity that prevailed during the first half of 2004. However, investment expenditure is expected to recover during the second half of 2005.”

This would be the outcome of the increase in corporate sector profitability during the first half of the year and also the expected acceleration of tsunami related construction activities during the second half, the bank said.

The construction sector grew by 5.8 per cent in the second quarter of 2005.
“Re-construction work relating to the re-building of tsunami affected dwellings and hotels also contributed to this growth,” the bank said. “The ongoing foreign funded projects for water supply, road development, port and airport development, rural electrification, irrigated agriculture and rehabilitation and upgrading of small scale infrastructure continued at a higher pace during the quarter as well.”

The Central Bank said that growth of 5.1 per cent for the first half of the year shows that the economy is recovering satisfactorily in the aftermath of the tsunami devastation.

The sectors most affected, the fishing and hotels and restaurants sub-sectors, are recovering with assistance from the government, non-government organisations and foreign donors.

“Despite high international fuel prices and the abolition of the multi-fibre agreement, factory industries performed satisfactorily during this period and will reap benefits from the duty concessions received from the EU under the GSP + scheme,” the bank said.

The export agriculture and domestic agriculture sub sectors are gradually recovering from their setback in 2004, benefiting from the favorable weather conditions in 2005 and performed well, as in the first quarter. The services sector performed better in the second quarter, vis-à-vis the first quarter performance, with the recovery of import trading and tourism activities.

“The growth performance up to the first half of 2005 and available data indicate that the economic growth projected after the tsunami for 2005, of between 5.0 and 5.5 percent, is achievable,” the Central Bank said.
The economy grew by six per cent in real terms in the second quarter of 2005, compared with 5.4 per cent growth during the corresponding quarter of 2004.
The growth in the first quarter of 2005, which was badly affected by the tsunami tidal wave disaster, is currently estimated at 4.4 per cent according to revised estimates.

“The effects of the tsunami continued to be felt in the second quarter of the year as well,” the bank said. “The most affected sub-sectors, fishing, hotels and restaurants and small industry, are still in the process of recovering.”

As in the past, the industry and services sectors performed well during the quarter, and grew by 7.8 per cent and 7.7 per cent, respectively. Most agriculture sector activities recovered strongly, but the overall sector recorded a decline of 2.7 per cent, mainly due to the poor performance in the fishing industry.

Fish production was still low relative to pre-tsunami levels with a decline of 47.1 per cent compared to the second quarter of 2004 and with the recovery in demand, fish prices increased by 18.4 per cent.

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