Economic Review:

Bleak global economic indicators threaten emerging economies

by Sunil KARUNANAYAKE

Despite strong statements issued by leading global institutions such as Fitch, Moody Standard and Poor, the Central Bank has firmly defended their stance that the country’s economy is stable.

The Central Bank states that with low inflation, a steady eight percent growth and unemployment at 4 percent, Sri Lanka is well ahead of most of their European counterparts whose debt ridden status is once again threatening global economic stability.

The US is reported to be targeting a 2 percent growth with recovery in employment and housing. Housing is a catalyst to rejuvenate an economy due to its multiplier effect.“ Emerging economies are less dependent on debt, less vulnerable to volatile investment sentiment and are rethinking the role of capital flows” (IMF). Emerging economies which managed to survive the global financial crisis in 2007/2008 appear stronger and seem capable of meeting the threats of volatile capital flow. Emerging economies now view international capital flow as an irritable episode that could cause imbalance in their economies.

The Central Bank has managed to keep interest rates down, thus the business sector would not be adversely affected.

The Central Bank has continuously urged Banks and large conglomerates to seek credit facilities from overseas sources to keep the cost of capital low. Records indicate that many businesses have made use of this facility in keeping with Central Bank guidelines.

The initiatives taken by the government to help the agricultural sector by giving them the facility of the fertiliser subsidy has paid rich dividends thus increasing supplies and lowering prices, similarly paddy production too has benefitted. The rapid development of the road network including rural roads too benefited the farming community.

These factors clearly demonstrate that the country's economic status is stable and that there was no immediate reason for caution.

One of the major negative factors affecting the economy are the loss-making state institutions that have to be supported by the tax payer.

This grave situation needs to be brought under control with tough measures.

While the Central Bank consistently advocated that the Sri Lanka Rupee is stable and the currency export sector vehemently argued for a flexible exchange rate to boost exports and the government effected a 2 percent devaluation in the 2012 Budget. These mechanisms have been used even by the South Asians by boosting exports and building strong economies.

External trade continued to remain resilient in October 2011.

Reflecting the high base of exports in October 2010 and contraction in exports of tea, rubber and minor agricultural crops, earnings from exports declined by 4.9 percent to $ 882 million in October 2011. However, during

the first ten months of 2011, the cumulative earnings from exports increased by 23.4 percent to $ 8,702 million compared with the same period of 2010.

At the same time, expenditure on imports, driven by high growth in investment and intermediate goods, increased by 41.4 percent to $ 1,751 million in October 2011 compared with the same month in 2010.

The cumulative expenditure on imports for the first ten months of 2011 increased by 50.7 percent to $ 16,436 million,compared with the corresponding period in 2010.

As a result, the trade deficit for the first 10 months in 2011 stood at $ 7,734 million, a significant portion of which was on account of infrastructure imports for related projects of the government that have been funded mainly by foreign loans.

In that context, the total inflow to the government, including the proceeds of the International Sovereign Bond issue, amounted to $3,507 million, during the first ten months of 2011. (Central Bank of Sri Lanka)

Meanwhile, the World Bank has stated that the effects of post war recovery now on the wane and Sri Lanka is vulnerable to risks associated with declining export prices and worker remittances. Consequently, growth is expected to decline to 6.8percent.

These outcomes are associated with the financial turmoil that’s placed Europe in a difficult situation. Sri Lanka’s tea and rubber export prices that moved to record highs in the good part of early 2011 i.e.: The Colombo Auction average moving up to $4 and rubber too moving up to similar levels.

As at present these price levels have come down sharply and losses are incurred by plantation companies as well as small holders which may become an issue to Bankers too with mounting debts.

Textiles and apparels however continue to perform well with good demand, but Industry sources state their biggest issue is acute labour shortage and the high turnover.

Meanwhile, the US government recently restored the GSP facility.

This is an industry that has fared extremely well to weather many storms.

It is believed that South Asia is somewhat protected from International financial market turbulence, however the region is likely to be under pressure and the repercussions could be adverse.