Juggling the economy
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Is Sri Lanka’s economy on the mend or still freefalling?
According to all indicators, it has definitely improved now compared to the same period last year where we faced food and medicine shortages and people queued for vehicle fuel and cooking gas. The International Monetary Fund (IMF) was also due to send a mission in September for the first review of the US$2.9 billion Extended Fund Facility (EFF).
But there are still major economic issues to overcome and this was the topic of discussion when Ruwanputha, my young economist friend, called on Thursday morning.
“So the IMF is coming here next month,” he said.
“They would be reviewing the progress of the loan and assess the steps Sri Lanka should have taken since the loan was approved,” I said.
“Some economic indicators show positive trends particularly in tourist arrivals and earnings, and migrant worker remittances,” he said.
Tourist arrivals were recorded at 767,913 in January-July 2023 compared to 458,670 in January-July 2022, a year-on-year increase of 67.4 per cent. Tourism earnings totalled $1,094 million in January-July 2023 compared to $764.6 million in the same 2022 period.
Workers remittances were $3,363 million in January-July 2023 compared to $1,889 million in the same 2022 period, a 78 per cent increase. This means there are more funds coming through official banking channels than unofficial streams, highlighting the confidence placed in a more stable exchange rate policy instead of the topsy-turvy escalation of the dollar last year amidst ruinous economic conditions.
While the inflation rate has come down to single digit levels in July compared to a near 70 per cent in the first half of last year, the cost of goods and services is still high at last year’s level though its rate of increase has eased. This means you pay the same price for goods or a little higher now, compared to last year.
To the common man, lower inflation is often misunderstood and interpreted as prices coming down. For example, if a kilo of dhal costs Rs. 100 last year, it should come down to say Rs. 80 since inflation has come down. That’s not the case. The price would still be Rs. 100 or more because only the rate (percentage) of increase has slowed down.
“Inflation is often misunderstood by the common man as the authorities often hail lower inflation rates when the real thing is that the price of goods hasn’t reduced,” I said.
While there are positive signs in the economy now compared to the same period last year, people at the bottom rung of the economic ladder are still struggling,” he said.
Some economic issues are insurmountable. For example, paddy farmers have complained about the lack of water which is destroying their crops and it was only weeks of agitation that forced the authorities to release water from the water catchment areas. Still a 50 per cent loss in production in some areas is expected. The delay in monsoon rains is also a worry.
Interest rates are easing but this is a double edged sword. The Central Bank has urged banks to pass on lower interest rates’ benefit to customers and warned it would act if the benefit is not passed onto customers. The banking regulator recently reduced the statutory reserve ratios for banks which denote the amount banks are required to hold in reserve for any contingency issues thus, freeing Rs. 2 billion to the market for lending.
On the other hand, lower borrowing rates have affected depositors particularly pensioners who live on interest incomes.
The government has promised to lower the recent income tax increase for professionals before the IMF’s forthcoming review but nothing has been done so far with doctors and professionals leaving the country in droves. The brain drain is drawing the attention of the government at the highest levels since it is draining human resources particularly in the health sector.
At this point of writing this column, the conversation under the margosa tree drew my attention. “Anthimedi govinta wathura deela thiyenawa. Meka karanna thibbe meeta godak kalin (At last they have released water to paddy farmers. This should have been done a long time ago),” said Kussi Amma Sera.
“Govin loku naya aran thiyenawa waga walata. Mae avurudde waga paadu vindinna wenawa (Farmers have taken big loans for cultivation and will face crop losses this year),” noted Serapina.
“Govin masivili naganawa haal adu milata vikunanna wevi kiyala (Farmers are also complaining that they would have to sell rice at low rates),” added Mabel Rasthiyadu.
From the positives in the economy, banks, a barometer of the progress of an economy, are showing signs of recovery albeit a cautious approach. Corporate sector earnings are improving.
The Hatton National Bank in its half-yearly review ending June 2023 said that the latest quarter underscored the Sri Lankan economy displaying signs of normalisation, with inflation moderating, interest rates gradually pulling down and the Rupee appreciating. “Moreover, the announcement of the much-awaited Domestic Debt Optimisation (DDO) plan and the resulting clarity, marked a significant step towards settling the issues surrounding the debt restructuring programme and its potential impact on the banking sector,” the bank said.
The Hemas Group posted a revenue of Rs. 29.1 billion in the first quarter of 2023-24, a 17.2 per cent growth over the previous year, while the operating profits witnessed a growth of 6 per cent to Rs. 2.2 billion. Year-on-year growth in the inflation rate, which stood above 70 per cent in September 2022, witnessed a significant decline and currently stands at 10.8 per cent as of June 2023, it said.
The team from the IMF is scheduled to visit Colombo on September 14-27 to conduct the first review of the EFF arrangement for Sri Lanka, the IMF said this week. There are still some unfulfilled tasks in the economy as per arrangement with the IMF and it remains to be seen whether this would be a deterrent to receiving the second instalment of the loan.
Kussi Amma Sera brought in my second mug of tea, asking: “Sir IMF eka mokakda (Sir what is the IMF)?” as I completed my column. I smiled at her and rather than get into a long-winded explanation, shifted my thoughts to some of the daunting issues in the economy, particularly the brain drain.
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