Twin crises hit Sri Lankan Economy

Global economic and financial crisis and the home grown crisis have hit the Sri Lankan economy. To get the advantages of the post crisis recovery, Sri Lanka should be able to improve its balance of payment and budgetary position, make a competitive and investment friendly climate and a rapid phase of export promotion towards diversified markets, said Dr. Sirimal Abeyratne.

Dr. Sirimal Abeyratne

Dr. Abeyratne a senior lecturer of the Department of Economics in the University of Colombo was addressing the launch of Economic and Social Survey of Asia and the Pacific 2009 survey report in Colombo last week.

We have faced a twin crisis global and domestic. Global financial and economic crises have hit our financial sector and the real sector. Since our financial sector is not much integrated to the world the impacts of the financial crisis is less. We feel the indirect impacts of the global financial crisis. Our capital account is not open and FDI is not significantly high. The government borrowing is affected as it is open for foreign investors. As a result foreign reserves have declined.

However, the real sector has been directly hit by the global recession. As our real sector is integrated to the world, we experience serious crisis. Our exports have dropped drastically because the 60 per cent of our exports go to the most affected regions US and Europe. Our agricultural sector is little integrated and is less affected and the domestic food consumption too has not been affected. Locally we face the crisis of fiscal deficit and balance of payment problems seriously. The global economic outlook forecasts 0.9 per cent global GDP growth, 0.3 per cent contraction in high income countries and East Asia and the Pacific a 6.5 per cent growth. Commodity prices including oil have drastically decreased last year and still the prices are falling. Inflation has dropped from over 20 per cent to 7 per cent and still the domestic prices of commodities are increasing at a lower phase while they are decreasing in the international market.

Poor performance

Sri Lanka’s trade deficit is growing since last decade because important sectors are under-performing. Tourism sector has not grown and tourist arrivals have not increased and the figure is still equal to the tourist arrivals 30 years ago. Sri Lanka has failed in attracting FDI and there is a very poor performance. Since policy reforms in 1977 our entire accumulated FDI is only 3.5 billion. We are far behind the other developing countries. For instance Vietnam which initiated policy reforms much later than us gets $ 6 billion FDI annually.

Dr. Abeyratne said that Sri Lanka does not feel BOP crisis due to two factors; foreign remittance and high government borrowing cushion the impact. In 2007 the government has borrowed $ 1.2 billion. Our reserve position is not satisfactory and last June we had $3.5 billion and it has drastically declined. Our reserve position is very low compared to other countries. In this financial crisis even some individuals lost several billions. China fears of losing over US$ trillion it has invested in the US and Russia hundreds of billions.

Fiscal deficit

He said that country’s fiscal deficit will increase due to three factors. First the Government expenditure will increase because the government has to assist the people who are vulnerable to the economic crisis.

Second the stimulus packages have to be given to affected sectors. Third the government will have to spend money for the rehabilitation and reconstruction of the North and the East provinces. However, lower import prices will ease pressure on BOP. While the expenditure is increasing there is no way of increasing income. The government heavily depends on tax income. The only sector that will be least affect by the crisis or boost is the agricultural sector. However the agricultural sector is not taxable and it depends on government subsidies. Industrial production will be cheap but demand will remain low.

Therefore revenue side is under pressure and we have gone to the limit before the global crisis. Dr. Abeyratne said that the agriculture and fisheries sectors in the North and the East will boost and will contribute positively to the economic growth.

However, he said that the agricultural sector has its own limitations and will not be able to significantly increase the income of the people. The sector is not attractive for youth labour.

GW