1st June 1997

ECONOMY NOT SO ROSY

There is a tendency to equate the per formance of the economy with the behaviour of the share market. Though there is some relationship between the two, the links are not as direct as is often presumed. When the share market turns bearish and there is a downturn in share prices, pessimism out of proportion to the actual performance of the economy appears to grip the business community. Often the fundamentals of the economy are not necessarily affected, either for better or worse, as much the share market may tend to make us think.

The economy’s performance, particularly in a country like Sri Lanka, where the share market covers only a small part of the economy, can be quite unrelated to the fluctuations in the share market. Nevertheless it is a barometer of business confidence and the investment climate. And this in turn could be related to economic fundamentals.

Recently Colombo’s stock market has been quite bullish. Both the All Share Price Index and the Sensitive Price Index have increased significantly this year. There appears to be a levelling off at the moment partly due to the price earnings ratios rising and foreign funds not being as eager to chase after Colombo’s shares. Nearly two thirds of the investments in Colombo’s market are foreign. Yet the narrow nature of Colombo’s share market together with a lack of liquidity necessarily means that foreign investments are limited.

The foreign driven nature of Colombo’s market implies that foreign funds have much to do with the market’s performance and foreign funds are so often dependent not only on the investment opportunities in the country, but the behaviour of the money market and investment opportunities world-wide.

If we look at the state of the economy we cannot say that it is as bullish as the stock market. Although the Maha paddy crop increased from the drought stricken crop of last year, plantation crop production is faring badly. Tea production in the first few months is down 8 per cent, rubber output is nearly 5 per cent lower and coconut is at its downturn largely owing to drought conditions last year. To add to the plantation sector’s slight misfortunes is the decline in tea and rubber prices.

Unless there is stepped up production of tea in particular in the latter part of the year we are likely to have a shortfall from our peak production achieved last year. Although in the first quarter of this year our agricultural exports increased by 7 per cent, if tea production and prices are down, our agricultural export earnings would be much lower.

As to be expected tourist arrivals have increased and caught up with levels prior to last year’s reversal. If all goes well, and there are no setbacks owing to terrorist attacks, it is likely that tourist arrivals could reach around the 400,000 mark. Increased tourist traffic is no doubt a contributory factor in improving not only the tourist sector but other enterprises dependent on tourism.

Industrial exports have increased by nearly 13 per cent in the first few months compared to the production last year. Fortunately we have not had power cuts and industrial production has by and large proceeded without interruption.

The garment industry, which accounts for a substantial portion of our export industrial output, has grown and exports have increased by 13 per cent - about the same extent as total exports.

Less important exports have grown at a higher rate. Leather and rubber goods in particular have shown an increase of as much as 24 per cent and so have other industrial exports. Yet the growth is not as substantial as these figures suggest as was a year when such exports were low.

The foreign exchange situation is reasonably strong though reserves have fallen by 4 per cent in the first quarter. Increased portfolio investment, some direct foreign investment and the possibility of further multi-lateral funds and donor assistance for reconstruction, offer the prospect of a strengthened foreign exchange situation later this year. Added to this are the borrowings of commercial banks in the foreign money market.

On balance, this year’s economic performance has been so far much better than that of last year. If uninterrupted, we may achieve a higher growth than last year’s. Yet the rate of growth that is likely to be achieved does not appear to be of a level adequate for the resolving of the country’s problems. There isn’t adequate impetus for foreign investment. Strikes in several sectors continue to be a serious obstacle to investment and bureaucratic lethargy stalls and postpones private investments.

The bottom line of many companies may turn out to be better than in the recent past, partly aided by lower corporate taxation rates and reduced interest costs. Yet the country’s economy is not necessarily vigorous and robust as one might wish it to be. There is still a lack of a sense of urgency and resolution to pursue economic goals. The rise in share prices is much higher than the economy’s growth.

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