Can we be satisfied with last year’s economic performance?
The Central Bank's 56th Annual Report for 2005 was preceded by a Finance Ministry Annual Report for the first time. Whether this routine would be continued only time would tell. They both had a similar rate of growth both claiming around a 6 per cent growth with the Finance Ministry placing it two decimal points higher. Does it matter? There is no need to quibble about the decimal. The pertinent issue is the reliability of the statistics and quality of the economic growth achieved. An important theme of the Central Bank Report is that despite the tsunami and the escalating oil price the economy demonstrated resilience and fared well.

Nevertheless it is careful to point out that a 6 per cent growth is inadequate to resolve the persistent problems of unemployment and poverty and raise incomes adequately. In the words of the Central Bank, " Economic growth needs to be accelerated further to 8 per cent to alleviate poverty, reduce unemployment and raise the standard of living on a sustainable basis,….." That is the key challenge that must not be masked by the kind of growth we have had in recent years.

The upside of last year's economic performance was that all sectors contributed to the growth. The Agriculture Sector that had been a drag on overall growth in the recent past grew by 1.3 per cent. However it was once again left to the Industrial Sector that grew by 7.9 per cent and the Services Sector that grew by 6.3 per cent to propel the economy to its 6 per cent growth. This can be seen in the contribution these three sectors made to growth.

Agriculture, in spite of its good performance, contributed only 4.1 per cent, while industry and services contributed 35.7 per cent and 60.2 per cent, respectively, to GDP growth in 2005. The reason for this apparent contradiction is not often understood. The underlying reason for this is that the agriculture sector (including livestock, fisheries and forestry) contributes only 17.2 per cent to GDP, while the Industrial sector contributes 26.9 per cent and the Services Sector makes the major contribution of 55.9 per cent.

Nevertheless the good performance of agriculture last year must not go unrecognised. In 2005, both paddy and tea production reached record levels.

Paddy production in both the Maha and Yala seasons reached their highest levels ever of 2,012 thousand metric tonnes and 1,233 thousand metric tonnes, respectively. Tea production that has grown in the recent past reached a record high of 317.2 million kg. Rubber output that had declined since the seventies rebounded in the last four years to reach 104 metric kilograms in 2005. The much-improved international rubber prices have been the main factor for this recent up trend.

It is reported that vegetables and other agricultural crops too increased in 2005. Coconut production stands alone with a cyclic downturn that should be reversed this year. As was to be expected the output of fish production fell by 43 per cent. The economy's growth rate has built-in statistical problems. There is the problem of determining the correct output of many economic activities in the country. This applies to the components of the agriculture sector, as well as industry and services.

Tea statistics are good as there are production statistics from the factories and the export statistics provide a basis of checking whether the production figures are broadly correct. Similarly rubber production figures are generally correct. This is not so with respect to coconut and food crops, including paddy. Although a statistically reliable method of estimating paddy production was developed over 50 years ago, these methods, officials themselves reliably inform us, are not practised faithfully.

The current paddy situation even prompts one to think that the actual output of paddy could have been still higher than the official figures. The output figures of other crops are vague guesses of persons rather than systematic collection of statistics. However we cannot say with any confidence whether vegetable production, for instance, is higher or lower than the official figures. It should be remembered that this deficiency matters as food crops other than paddy account for nearly 50 per cent of total agricultural production.

There are also several other conceptual deficiencies in national accounting that were of particular significance last year. These deficiencies include the value of output of the public services and the armed forces. The convention in national accounting is to value the output of these services at the cost of incurring them. So last year's recruitment of 42,000 graduates added to national output, as indeed did the increase in salaries to public servants. Consequently the contribution of these services to GDP increased from 5.1 per cent in 2004 to 6.5 per cent in 2005.

If you deduct this bloating from the growth figure it brings the growth towards the 5 per cent mark. Similarly construction's contribution to growth increased from 8.3 per cent to 9.3 per cent. No doubt much of this 1 per cent increase in contribution was due to the tsunami reconstruction. There is nothing wrong in this method of accounting but we must be aware that the increase was a replacement of the capital stock that existed rather than an addition.

If one reads between the lines and examines the detailed data contained in the Annual Report of the Central Bank, it is clear that the economy performed well or as well as it did owing to the tsunami. Paradoxically and ironically the economy would have faced several crises had the tsunami not come to the country's rescue. These are especially with respect to the external finances and fiscal imbalances.

These in turn would have destabilised the economy and affected production and exports. The set back to the economy due to the tsunami was slight. It affected the tourist industry in several ways though it brought in large numbers of foreigners into the country. No doubt fisheries were affected considering the fact that in 2004 fisheries contributed only 2.3 per cent to GDP and in tsunami-affected 2005 it contributed 1.3 per cent. So while there was physical damage in the loss of buildings, fisheries harbours, houses and economic infrastructure, these did not come into the GDP calculation. On the contrary the rebuilding of these contributed to economic growth.

Official pronouncements and reports tend to bend backwards to praise incumbent governments. There is a Sinhala saying that when farmers bring in a good harvest the King is praised, but when the harvest is bad the farmers are blamed. May be the 2005 Annual Report and the Ministry of Finance Report is a variation on the same theme. What is important is that we must not be lulled into complacency by the 6 per cent growth, but work towards a much more substantial and sustained growth in the future.

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