Financial Times

Beware of ‘Panadol treatment’ over oil
An economist at a top donor agency warned that Sri Lanka should watch the world oil prices carefully without resorting to the quick-fix, 'Panadol treatment', which will result in the economy further weakening.

Johanna Boestel, the Asian Development Bank (ADB) economist based in Colombo, said the Ceylon Electricity Board (CEB) alone has accumulated more than Rs.50 billion in payment arrears and short term debt, whereas the high sustained global oil prices will not help this situation, unless electricity subsidies are reduced. "A key worry is the substantial increase in quasi-fiscal deficits and commercial borrowing from local foreign currency markets," she explained at the Asian Development Outlook 2006 report release recently.
"It’s important to worry about the underlying disease rather than resort to immediate treatment such as the ‘Panadol treatment’, because it can have drastic effects in the longer term," she said. "Maintaining the oil prices artificially low will not help. Higher global oil prices call for similar prices here," she added.

However the ADB commended the firmness of the country's economy, as it had outgrown its (bank's) projections. "Last year the growth was forecast at 5.3 percent, but it grew at six percent backed by agriculture and the construction industry," she said adding that the budget deficit was also controlled reasonably well at 8.7 percent. The ADB expects GDP growth to be at 5.3 percent in 2006 and 5.2 percent in 2007, with the inflation projected to remain high at 8 to 9 percent as administered prices, for petroleum products and power are increased to reduce subsidies.

She said that the debt moratorium expires this year and it will be interesting to see how the government will repay the debts. Boestel commended the country's private sector for being resilient in the face of the tsunami. "Sri Lanka's private sector, which has proved to be resilient in difficult situations, will continue to drive economic growth," she said.

Alessandro Pio, Country Director of the ADB Sri Lanka Resident Mission, said that political stability and sound macroeconomic management will be crucial to maintaining this trend in the long run.

The ADB annual report noted that the fall of agricultural labour productivity by 10 percent in the last five years is a cause for concern and that it is unlikely to be reversed without decisive policy shifts. "We also see the next few years as decisive in how the textile and clothing industry, the country's largest export earner will fare, faced with the post quota challenges," Boestel said.

In terms of risks, the report identifies the situation of the civil conflict as the main challenge to the long term outlook, in addition to the importance of tackling public debt and upgrading infrastructure facilities.

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