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The critical economic challenge for the country is to sustain the economic recovery that has been achieved and propel it on a higher trajectory. Achieving such an economic takeoff is, however, a formidable challenge due to severe economic constraints, political compulsions and uncertain and unpredictable international economic developments. Floods, droughts and animal damage are setbacks to agricultural production.

Political pressures, too, are not conducive to the adoption of the needed economic reforms and policies for development.  In addition, climate changes, floods, droughts and animal damage are impeding agricultural production.

Remarkable recovery

The economy recovered fairly well last year to grow at 5 percent. The IMF has observed that the country has achieved a remarkable and commendable economic recovery.  However, it is fraught with risks, uncertainties and severe difficulties.

Poor

Furthermore, the improvements in macroeconomic indicators do not appear to have improved the living conditions of the poor. Increased poverty, hunger and malnutrition still remain major concerns.

The next phase of economic growth must address this through grassroots economic growth and increased social spending.  Increased agricultural production and revival of small enterprises and employment are vital to enhance low incomes.

Reforms

The IMF observed that the new government is committed to a reform programme that is bearing fruit with low inflation and the prospect of economic growth. “Nevertheless, the economy is still vulnerable, and restoration of debt sustainability and external financial sustainability depends on the continued implementation of reforms.”

Economic growth

Economic growth is vitally important to resolve the country’s fundamental problems.  The IMF has repeatedly said that the economy is fragile and that the implementation of the IMF’s economic reforms is essential.  In fact, economic growth is dependent on a large number of economic and non-economic factors.

Growth

The economy is expected to grow by more than 5 percent this year. There are signs of growth in manufacturing, especially in garments. However, there is considerable uncertainty in US tariff policy that is of utmost importance, as the US is the main market for our garments. The access to international markets would be a significant factor in the performance of merchandise exports and their manufacture.

Construction

The construction sector has not seen significant growth yet. The resumption of halted infrastructure projects this year should give an impetus to the industry later this year. High costs of materials appear to have deterred construction activities.

Vision

The government’s vision must be on reviving agriculture, expanding manufacturing, revitalising construction, increasing exports and developing a self-sustaining growth momentum.  These are no easy tasks.

Politics

Sri Lanka’s economy is highly vulnerable to political compulsions, popular demands, trade union demands, strikes and upheavals.

The national New Year next month and the local government elections in May could result in adverse economic decisions that are detrimental to the economy.  For instance, additional government expenditure on subsidies and giveaways could affect the fiscal consolidation.

It is vitally important for the government to contain the fiscal deficit within 5 percent of GDP for economic stability and growth.

Agriculture

Reviving agriculture has proved particularly difficult.  The Maha paddy harvest is likely to be low owing to soil conditions after the fertiliser fiasco, drought, floods and crop damage by animals.  Reviving other food crops too has faced the same severe difficulties.

Coconut

Coconut production has been drastically reduced by last year’s severe drought and by monkeys destroying coconuts. While tea export prices are firm, tea output is stagnant owing to labour shortages and inadequate replanting on estates. Other crops too have faced these same problems.  Consequently, getting agriculture moving is an onerous task.

Manufacturing

There is evidence of increased production in export industries, especially garments. Whether this momentum could be increased depends on the prospects of international trade in the context of the current trade and tariff wars.  Some garment manufacturers believe the country will benefit from tariff wars.

International trade

The prospect of an economic take-off is doubly difficult in the current international uncertainties and trade and tariff wars.  Both the country’s essential imports and merchandise exports could be adversely affected.  If the current trade wars result in higher prices for petroleum, fertiliser and food, the country’s balance of payments could be adversely affected.  Similarly, our manufactured exports too could be affected by likely inflationary conditions.

Summary

Transforming the economic recovery that has been achieved to a higher trajectory of sustained growth is difficult for the reasons discussed.  Achieving an economic take-off is a formidable challenge due to severe economic constraints, political compulsions and unpredictable international economic developments.  Political pressures on the eve of local government elections, trade union demands and strikes are not conducive to the adoption of the needed economic reforms and policies for development.  Climate changes, floods, droughts and animal damage are impediments for agricultural production.  The impact of the current trade wars and tariffs is uncertain.

Conclusion

All things considered, the prospect of an economic takeoff is a formidable challenge.  Yet, one must hope that the initial growth momentum would be accelerated to achieve a take-off to sustained high growth.  Consolidating the economic recovery to achieve economic growth is imperative.