With the end of the war it is quite natural to be optimistic about the country’s future, especially the nation’s economic prospects.
The economy was plagued, stifled and strained by the on going war that took so much of the country’s resources and energies, on the one hand, and prevented the needed priorities in economic activities and investments on the other. The public finances of the country were strained by the large public expenditure on the war. The country probably spent nearly 10 percent of GDP on pursuing the war over nearly three decades. Consequently the country’s public debt has risen to enormous proportions approaching almost the amount of the annual GDP; and 90 percent of revenue is expended on servicing the debt. As a result, the public finances were distorted with many sectors of public expenditure under funded and much needed development expenditure curtailed.
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For many years the war was deemed the single most serious impediment to rapid economic growth and development. The economy was affected in many ways. There were several sectors of the economy that could not perform at their potential. These included fisheries and agriculture in the North and East and commercial activity. Internal trade and commerce in these areas were seriously curtailed. The set back to the economy was not restricted to these regions, but to the entire economy that was operating at far lesser potential than could be expected. Among the most important set backs was the tourist industry. Now that the war is ended it is reasonable to expect these areas of economic activities to be more productive once again.
Apart from this, investments foreign and local were stifled owing to security concerns. Foreign investment was dissuaded and even domestic investment was limited owing to security concerns as well as limited opportunities in several sectors of the economy and weak economic fundamentals. There is therefore an expectation that there would be a flow of foreign direct investment that would contribute significantly to increasing the productive capacity of the country and raise export earnings.
There is also an expectation that the current balance of payments problem would be solved by large sums of foreign funds being contributed by foreign governments for the resettlement of the internally displaced persons (IDPs) and for the reconstruction of the North and East and that these would replenish foreign exchange reserves.. The Tsunami experience, when the country was saved from its balance of payments crisis of the time is fresh in the minds of many. The hope and expectation is that such an inflow of foreign assistance would replenish the country’s foreign exchange reserves that are at a critically low level and the country would thereby have a comfortable reserve position. This relief is expected quite apart from the IMF loan facility that still remains uncertain.
In as far as the higher output in the affected sectors, one could certainly expect a higher production in fisheries. With the restrictions on fishing in the eastern and northern waters lifted there would be many more hours of fishing. This could be expected soon. There could also be some increases in agricultural production. Some of these benefits could be expected in the short run. This is more so in respect to fisheries than in agriculture where it may take some time for stable conditions conducive to agricultural production to materialize. There would be much greater gains in agricultural production once stable conditions are established in the East and North. The possibility of transporting agricultural produce from the North to the South would also enhance production in the North of many agricultural crops that grow in this fertile region.
The expectation that tourism would be revived must be viewed with caution. No doubt the security situation was a serious constraint to tourist arrivals. Several significant tourist originating countries issued travel advisories that it was too dangerous to travel to Sri Lanka. While this disadvantage has been overcome as the world realises that the country is safe for tourists, and some of the most attractive beach resorts would once again be available to tourists, the global economic recession would moderate the impact. Therefore the expectation of large numbers of tourists flooding the country may be optimistic. However a new focus on attracting tourists from countries that have not been as adversely affected by the recession, such as China, Russia, India and some Middle Eastern countries could result in an improvement in tourist arrivals. The era of peace that has dawned is an opportunity to gear the tourist industry to a more propitious time when the recession passes away perhaps in about a year and a half. There would be some immediate gains in tourism but the full potential of the tourist industry would take some time to realise.
Similarly an expectation of large inflows of funds for rehabilitation and reconstruction too may be affected owing to the current economic situation in developed countries that are still spending much money putting their own houses in order. Again the flows of foreign assistance may be mostly from Asian countries such as China, India and Japan. It must also be recognised that much of the inflows would be in kind; some of the inflows of capital would be used to import requirements that would result in their outflow as well. There would be a large import content in the rebuilding and reconstruction expenditure. Therefore much of the funds that come in would boost foreign exchange reserves temporarily but would flow out to finance needed and increased imports quite soon. Furthermore, the actual amount of foreign funds that would be made available would be much less than those promised, as was the case in the Tsunami aid.
At this time of optimism it is necessary to be guarded in our expectations. First there must be a realisation that the benefits of the peace would take some time to come to pass. What the peace has conferred on the country is an environment conducive for economic activity. There are other conditions that have to be established. The macro economic fundamentals have to be improved. For instance inflationary pressures must be contained so as to ensure competitiveness of our exports abroad.
There is a need for institutional and legal reforms that would be favourable for economic investments, such as changes in labour legislation that are helpful to investors and ensuring property rights. Some of the benefits would not only take time for fruition but also involve costs. Inflows of capital as aid would confer largely temporary benefits to the balance of payments and foreign exchange reserves. There is a need to strengthen the balance of payments through other appropriate economic policy measures. The economy will not achieve its potential merely because the war is over. Prudent management of public finances and an economic policy framework conducive to development must be put in place. A great prospect for economic revival is before us. Let us not miss the opportunity. |
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