An economy unreservedly dependent on peace
There is anxiety about the nation's future as the first rays of sunlight envelop our homes in the New Year. Concerns of security no doubt are the main causes of that anxiety. The economy, perhaps, is next. The fluctuating fortunes of the economy have been closely related to security conditions.

Another year has dawned amidst serious concerns and anxieties about the economy. What are the economic prospects in the New Year? As in the recent past, three factors are likely to have an overbearing impact on the Sri Lankan economy: The state of war and peace, the international economic environment and the government's economic policies and their implementation. Of these three the security situation may be the most pervasive, the least tractable and the most difficult to resolve. That indeed is the great tragedy of the country and is the most damaging to the economy.

The war is no longer only an issue of costs and their detrimental impact on the economy. That has been a concern the country has lived with and continued to bear its burden. Even if the war were to end this year, the massive burdens of the costs of the war in the past will continue to plague us in the form of the accumulated debt burden and the huge debt servicing costs. In fact these are higher than the annual costs of the war. The imminent danger is that the breaches of the ceasefire agreement would require the country to spend more on defence. This would increase both the current costs to the economy, as well as lead to an increasing debt burden for the future.

The continuing insecurity will impair the economy most. The expectations of higher economic growth, repeated each year and dashed to the ground as often, are very much owing to the insecure environment within which the economy has to operate. Some sectors remain largely unaffected by the war and provide a degree of resilience. Yet the ability of the economy to grow adequately to resolve its problems of low income, high incidence of poverty and unemployment has been stifled by the anxiety generated by terrorist activities and the continued armed conflict.

The ceasefire agreement provided some relief to a war-torn economy by reducing current defence expenditures and enabling crippled sectors of the economy to perform better. The expectation that the ceasefire agreement would be a step forward towards a durable peace remains shattered as we begin a New Year. The state of war and peace would no doubt be the most important determinant of the state of the economy this year. We can hope for peace, but we have to prepare for war.

The most significant factors in the international economy bearing on the economy are the price of oil in international markets, the growth of the international economy, specifically our main exporting countries, and the relative competitiveness of the Sri Lankan economy vis a vis its competitors. As far as oil prices are concerned no respite could be expected as the increasing trend in oil prices reflect the dwindling oil resources, on the one hand, and the increasing demand for oil generated by the growth of industrial production by giants like China.

Living in the expectation of declining prices is a vain hope. Conservation of energy induced through appropriate and realistic pricing and alternate sources of power generation locally are the only strategies that could alleviate the situation of the nation that now spends around 25 percent of its export earnings on oil imports.

The expansion of export earnings is the other way by which this burden could be reduced. Yet recent experience has been that export earnings have not grown adequately to offset the much higher import expenditures. The trade deficit of US $ 2.2 billion in 2004 is likely to have been exceeded in the year just ended to reach around US $ 2.4 billion.

This has been despite an export growth of about 10 percent last year that could not meet the much higher import growth expenditure of 14 percent.
The prospects for 2006 are no better. The oil import bill is likely to rise, while other export incomes too may suffer a setback. This is especially so where tea exports are concerned owing to an expected decline in prices due to international tea supplies exceeding expected demand. The growth of garments exports by less than 4 percent last year has also raised some anxieties. As for the growth of the international economy the forecasts are those of a modest growth as oil price increases are expected to exert a downward impact on several developed economies. This is not a propitious one for our industrial exports.

In this context bad macro-economic policies are likely to aggravate the economic difficulties of the country. The most likely effect of the last budget is that the implementation of several measures envisaged in it would generate further inflationary pressures. The consequent increase in the public debt would once again increase the future burden, while inflation would impact on the costs of production and export competitiveness.

The outflow of foreign capital from the stock exchange and inadequate foreign investment coupled with a poor performance in tourism spell severe strains on the balance of payments and the economy in general.

These adverse developments can only be reversed by the cessation of war and movement in the direction of a durable political settlement. Can this be achieved in 2006?

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