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There are both favourable developments in the economy, as well as uncertainties, risks and threats to be overcome for economic recovery and revival.

Improvements

The improvements in the economy are mainly due to a positive outlook in the country’s balance of payments and the increased external reserves. At present, the foreign reserves are in the region of US$ 3.5 billion. This improvement in external reserves has been mainly owing to an increasing trend in tourist earnings and higher remittances from abroad.

On the other hand, the country’s exports have had a setback owing to the global recession. The main manufactured exports–apparel–have had a severe setback. Similarly, other manufactured exports such as rubber goods have also had a depressed demand. In addition, the country’s main agricultural export–tea–has also not fared well. This has been mainly due to the expected improvement in tea production not materialising.

Remittances

In the past several months, inward remittances have shown an increasing trend. Remittances have averaged more than US$ 400 million a month. This trend is likely to continue owing to a negligible margin between the official exchange rate and the unofficial rate. Remittances of more than US$ 5 billion, together with tourist earnings of about US$ 6 billion would boost our reserves further.

Tourist earnings

In the first six months, there has been a healthy increase in tourism and earnings were about US$ 3 billion. Hoteliers and those in the tourist trade expect this trend not only to continue, but increase in the last quarter of this year. The expectation is that tourist earnings would reach more than US$ 5 billion.

Risks

Tourism in Sri Lanka has had severe setbacks in the past. These are too well-known to be stated here. The same kinds of threats, as well as some new developments, could affect tourism.

These are the spread of dengue in the country and COVID internationally. Furthermore, the current political unrest and social upheavals owing to people’s opposition to several deteriorating conditions, reforms and denial of relief measures to Samurdhi recipients could threaten tourist security and travel.

If this were to happen, travel advisories asking tourists to be cautious could deter the expected tourist boom.

Global conditions

An important factor determining the country’s economic revival would be global economic conditions. While the global recession has affected Sri Lanka’s exports, particularly of garments, the current increase in tourism is difficult to explain. The recessionary conditions together with high inflation in developed countries appear to have reduced the purchase of consumer items. On the other hand, it appears that expenditure on recreation, including travel has expanded. This has been an unusual phenomenon, where people are spending less on consumer items like clothing, but eating out and travel expenditures continue.

Whether this phenomenon will continue as global recessionary conditions persist, remains to be seen.

Global recession

At present, there is no reason to believe that the global recession would recede. The evidence is heavily stacked towards a worsening of recessionary conditions.

One of the main reasons for the recession has been the Russian-Ukrainian war. Recent developments indicate that both Russia and NATO countries are determined to continue the conflict.

Impact

As far as Sri Lanka is concerned, this conflict has raised the prices of essentials, particularly petroleum and minerals and depressed demand for our exports.

Agriculture

Sri Lanka’s Agricultural production has been affected by severe problems. The availability of fertiliser and agrochemicals was expected to enhance food production and export crops. This has not materialised to the extent that was expected. Apparently, there are continuing problems with soil in both food crops and tea. Hopefully, these would be resolved in due course and agricultural production would reach pre-crisis levels in 2024.

This would reduce food imports as well as enhance agricultural exports and improve the country’s external finances.

Discontent

On the other hand, there is considerable farmer discontent about the price at which they could sell paddy. They claim that the market price for paddy is lower than their cost of production. Whether this is correct or not, farmer discontent is not conducive to getting agriculture moving.

Prospects

There are prospects of economic improvements this year and next year. There are both reasons for such expectations, as discussed, as well as, difficulties and challenges.

The global recession is likely to be a severe setback to exports. The country’s manufactured exports have fallen since the third quarter of last year and there are no signs of global economic recovery. In fact, international economic conditions could deteriorate, if the Russia-Ukrainian war and the Sino-American trade war slacken international trade and global growth.

However, all economic conditions are not bleak. There are several likely favourable developments as far as Sri Lanka is concerned. These are the freer availability of raw materials, the decreasing rates of interest and a continuation of the revival in tourism. There could be a slight improvement in agriculture, but the extent of that improvement is not likely to be much.

Construction

The prospect of the construction sector expanding is less likely owing to the high cost and unavailability of building materials. There are indications of increased availability of imported building materials that could revive construction to some extent.

Liberalisation

The relaxation of import controls in September will be a boost for industrial production. Many industries have suffered from the unavailability of imported essential raw materials.

Interest rates

As a consequence of the domestic debt restructuring, interest rates are expected to decrease. This together with the lowering of import tariffs could give a boost to industries that became unprofitable owing to the high cost of production.

Favourable

The most favourable developments in the economy are that the net result of the issues discussed above will lead to an improvement in the country’s external reserves. The dollar crisis, as it was commonly called, is over owing to the remittances, tourist earnings and foreign assistance, especially as project loans.

Conclusion

The economy is recovering but challenges have to be overcome to generate economic growth. The most significant development has been the improvement in the balance of payments and external reserves that would enable many of the country’s constraints to an economic recovery to be eliminated.

Although there is an economic recovery, long-term growth requires many prerequisites to be satisfied. These include economic reforms such as the privatisation of state-owned enterprises. Such reforms are difficult to implement in the country’s socio-political context.