Hopes and expectations in the New Year

By the Economist

When writing a column on the 1st of January one is bound to look at the brighter side of national life and the economy and hope for bright expectations in the New Year. Let us all hope that the turn of events during the year would be favourable and that the economy would begin a new and higher trajectory of growth and development. What are then the fundamental aspirations and expectations that we could have to achieve it?

The foremost hope for the economy lies in the expectation that there would be peace and security quite soon in the New Year. On the eve of the New Year the armed forces have said that they would succeed in destroying the LTTE. We must wish not merely for victory in the war but a durable settlement. A victory in the war would be an empty achievement if it is not coupled with a lasting settlement to the problem of the Tamil minority. The weakening of the LTTE should be coupled with a negotiated settlement. We must hope that an agreement would be reached and the ethnic problem would be a thing of the past. If a durable peace is achieved during 2008, then a peace dividend awaits the country. What are the constituent elements of the dividend that has eluded us for many years?

First of all, it means that we could cut the massive military expenditure quite drastically. The size of the forces cannot be cut down, but new recruitment could be reduced or done away with. It may be also possible to deploy divisions of the forces personnel in economic development activities such as, the building of infrastructure—roads, irrigation reservoirs, bridges. Then the wasteful expenditure would be less wasteful as it would result in some goods and services being produced. The biggest advantage would be in the reduction of purchases of costly military hardware that has strained the trade balance and the balance of payments. In addition, the consumption of fuel by the army could also be reduced and consequently oil imports could be reduced.

It is true that military expenditure cannot be brought down to the pre 1971 levels of less that 1 percent of GDP, but it may be possible to curtail military expenditure to around half of what has been for 2007/8. Even the large amount of money voted in the last budget for defence in 2008 may be an underestimate. If the recent hike in military expenditure results in the elimination of the Tigers, then the government may be justified in having incurred the larger expenditure. Once the war is won, military expenditure must be cut down drastically. This would be a significant saving especially of foreign exchange, and public expenditure could be brought in line with government revenue. The consequent reduction in the fiscal deficit would be of immense benefit to the economy.

The gains would not be confined to a reduction in military expenditure alone. The indirect benefits of a cessation of hostilities and the elimination of terrorist attacks are considerable. It will benefit all sectors of the economy. The most direct benefits would accrue to tourism and fisheries. Agriculture, industry and services would be benefited too in several different ways. The climate for investment would change drastically with the biggest benefit being for foreign investment. In fact the entire environment for development could change in a startling manner.

The country has for the last three decades attempted to boost tourism as it was considered a sector that could bring in considerable earnings of foreign exchange. There was an appreciable increase in tourism till 1983. The 1978-83 period was one when investment in hotel construction, transport services for tourists and improvement of amenities was noteworthy. The July 1983 ethnic riots was a huge setback to the tourist industry and the ripple effects of it affected the financial sector and several other economic activities such as the gem trade, transport services and handicrafts to which it had backward linkages.

There were resurgences in tourism after a few years but there were frequent internal shocks that were a setback to the hospitality industry. The target of a million tourists was never reached mostly due to the security situation. Some of the most attractive regions in the country that had great potential for tourist development, such as the East coast, remained out of bounds often due to terrorist activity.

If the security situation returns to the pre 1983 levels there can be no doubt that the number of tourists coming to the country would rise sharply. There has been a considerable amount of investment in tourist infrastructure, especially the development of a wide range of hotel facilities that remain unutilised. Once again tourism could become an important source of foreign exchange earnings that would strengthen the balance of payments. Its benefits could accrue to many other areas of economic activity as well, such as the gem industry, agriculture and transport. The development of these would increase employment and incomes.

Similarly, the country’s fishing potential remains only partially exploited. The seas in the East and North remain often out of bounds for fishermen. The restoration of these areas for fishing means that there would be a significant contribution to fish output that would save foreign exchange on the imports of fish, reduce the costs of living, increase employment and lessen poverty among one of the poorest sections of the population.

One of the most significant ways by which the country would benefit is the possibility of attracting foreign investment. Despite many concessions, the country has failed to attract a significant volume of investment mainly due to the security situation in the country. This applies to especially large foreign investments in technologically more advanced industries. Even domestic investment has been inhibited owing to reduced markets, uncertainty and risk. While emphasising the impact on foreign investment, we may be guilty of underplaying the incentives to local investors, whose perception of risk would diminish while at the same time the profitable avenues of economic investment activity would increase owing to the increased domestic demand for goods and services. Peace and security would have an important bearing on investment flows both foreign and domestic.

There can be no doubt that the surest hope for economic development of the country lies in the attainment of peace and security in the country. It is hoped that success in the war against terrorists ushers in a durable peace and a permanent solution to the ethnic problem. If this be achieved the most important prerequisite for economic development would be in place. However, the process of economic development requires many more actions to ensure development. These include the restoration of the rule of law, property rights, good governance and the pursuance of good economic policies. The whole nation awaits peace that would usher in prosperity.opes and expectations in the New Year