This year could be best described as a year of economic recovery when the nation reaped a partial peace dividend. The economic growth for 2010 is expected to be 7.5 per cent. Some have expressed the view that it would be higher at 8 per cent. This may well be realized for after all it is a statistic that has considerable scope for manipulation.
This year’s GDP growth is more than a doubling of last year’s growth of 3.5 per cent and the high rate of growth was easy to attain due to the lower growth of the previous year. Sustaining economic growth at this rate in the coming years would however require, among others, better international economic conditions, higher investment, improvements in macro economic conditions, enhancement of efficiency in export industries and industrial peace.
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Although there is contentment with this economic performance, it was less than the economic potential. Much more was expected after the end of the war, especially in foreign investment and industrial exports. These two areas were rather disappointing. On the other hand, tourism revived to a significant extent. The improvement in tourist arrivals has been even described as a tourist boom. There is every expectation that next year’s tourist arrivals would increase further and perhaps reach one million. This expectation has led to an increase in investment in the hospitality trade, and foreign investments to build large hotels are evident.
The country is reaping what may be best described as an interim peace dividend. The war and terrorism was the most serious impediment to economic development in the country in the last several decades. It was a financial burden, a hindrance for investment and crippled several areas of production in the economy and the economy performed at less than its potential. Peace was expected to bring in a handsome economic dividend that could change the pace and momentum of economic development and usher in an era of economic prosperity. However post war economic progress has not been as favourable as was expected. Foreign investment has been tardy, export growth inadequate and the thrust and momentum of economic activity inadequate.
There are several reasons for this. The world or more precisely, Western countries on whom the country depends heavily for export earnings, have not recovered fully from the financial crisis and recessionary conditions. Although these countries have seen some signs of economic growth, the rate of unemployment remains high. For instance, in the US the rate of unemployment is as high as 10 per cent. This does not augur well for the demand for the types of commodities that Sri Lanka exports. Depressed incomes in these countries and unemployment would have depressed tourist travel as well.
As we pointed out in last week’s column these reasons have partly accounted for the shortfalls in foreign investment and foreign aid for reconstruction and resettlement in the war devastated areas. In turn these have an adverse impact on the pace of economic development. Fortunately in some areas, as in tourism, demand is more diversified. Economic growth in China, India, other Asian countries and the Middle East is easing the situation with respect to tourism and exports of some commodities at present.It would be misleading to place the full blame on these external conditions. The full potential of economic growth has not been achieved for other reasons as well.
The country’s macro economic fundamentals remain weak. The high fiscal deficits, the large indebtedness of the country, massive trade deficit and possibilities of industrial unrest are some of these constraints. The lower rate of inflation, a more investment friendly budget and development of infrastructure are improvements that could have a positive impact on economic growth. Yet these may take time to manifest as increased savings and investments are essential for higher growth.
A serious concern this year that may continue into next year is the country’s export performance. It is quite clear that the country would sustain a huge deficit in the merchandise trade balance this year. By the end of September, the merchandise trade deficit for the first nine months of the year had risen to US$ 4039 million. Although exports have recovered somewhat, the increase in import values have been much more. This trend is likely to continue in the next three months of the year as well with the result that the merchandise trade deficit is likely to be one of the highest in recent times. It is likely to grow to around US$ 6000 million by the end of the year.
However the overall trade deficit will not be very large as worker remittances are now included as part of export earnings. These have increased by 13.4 per cent this year and reduced the deficit considerably. In the first nine months the inflow of worker remittances was US$ 2814 million. The overall deficit (including remittances) was therefore reduced to US$ 1225 million. Consequently the final trade deficit is likely to be less than US$ 2000 million. With capital inflows, increased tourist earnings and services receipts, a surplus in the balance of payments are likely. This and the fact that the foreign exchange reserves are high should not lead to complacency. The need to increase export earnings to cope with import expenditure must be recognized. Improvements in competitiveness, increase in the production of exportable commodities, further diversification of exports to higher value added exports are needed to correct this imbalance.
There is a need to take further steps to ensure rapid economic development. Pragmatic economic policies, reform of public enterprises and institutions, education, health and administrative reforms and realistic diplomatic and political strategies are needed to accelerate the pace of economic development. Increases in investment require better economic fundamentals and confidence of continued favourable government policies. The road to the realization of the post war economic expectations of rapid economic growth is not an easy task. It is one requiring a focus and dedication to reforms, bold economic decisions and building an environment conducive to investment and economic efficiency. It is also essential for the government to be focused on the economy and not be distracted by political power plays. |
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