The economy in the first half of this year
There has been a degree of economic stabilisation and expectation of further improvements later this year. However, the first six months have not been a period of economic growth. Most economic activities have contracted. Unemployment has increased, poverty has risen and malnutrition enhanced. Despite this economic adversity, there is a sense of relief as the availability of essentials has improved.
The discontent is owing to the high prices despite the improved availability of essentials. The decreased real income of people, higher unemployment, increased poverty, and malnutrition are serious concerns.
The first half of the year has been characterised by measures to stabilise the economy. The agreement with the International Monetary Fund (IMF) for an Extended Fund Facility (EFF) is the most significant development this year. The expectations are that there would be a greater degree of economic stability that would lead to economic growth in the long run. The effective implementation of the economic reforms proposed by the IMF is vital to achieve this.
The most encouraging development in the country has been the improvement in the external finances. The external finances have improved significantly owing to increased remittances from abroad and higher tourist earnings.
The increased flow of remittances has been due to the money being repatriated through official banking channels rather than informal methods. This is due to the narrowing of the gap between the exchange rates offered by banks and informal sources. This in turn is a result of the country’s agreement with the IMF. The Extended Fund Facility (EFF), though not a large sum of money, has resulted in international confidence and a more market-oriented exchange rate. The divergence between the official rate and the unofficial has dwindled to an insignificant amount.
In the first half of this year, the remittances are estimated to be about US$ 2.5 billion. The expectation is that by the end of the year, they would exceed US$ 5 billion.
The country’s tourism sector which was badly affected by the Covid pandemic and the April Easter bombing in 2019 has rebounded. In the first four months of the year, tourist earnings are estimated at about US$ 700 million.
Hoteliers and the tourist industry are expecting an improvement in tourists in the latter part of this year and earnings from tourism to exceed US$ 3-3.5 billion. However, there are downside risks and threats that must be avoided. These include the containment of COVID and dengue and the law and order situation in the country.
The most serious drawback to the economy in the first half has been the sharp fall in exports. This has been mainly due to recessionary conditions in Western countries which are the main importers of our manufactured exports. The apparel industry has been the most seriously affected while other industries such as rubber goods and ceramics have also seen a setback. Unfortunately, there are hardly any signs of an improvement in the global recession. The cessation of the Russia-Ukraine war is vital to an improvement.
Consequent to the fall in manufactured exports, a large number of factories have been closed. Some estimates place the number of factories that have been closed to be as many as 100 or more. The consequent unemployment is estimated at around 300,000 persons. This surge in unemployment has depressed incomes and enhanced poverty.
The high rate of inflation has been a serious setback to livelihoods. Although inflation has abated somewhat, the very high prices prevailing in the country have had serious repercussions on the mass of people.
This year has also been characterised as one when there was an exodus of skilled and educated persons. The social development of the country and the development capacity of the economy have been jeopardised by this exodus of educated and skilled personnel. The most serious setback appears to be in the health and education services of the country.
Although there was an expectation that agriculture would rebound with the availability of chemical fertiliser and agrochemicals, the production of both food crops and tea would increase, however, this did not materialise. In the case of food crops, particularly paddy, there have been difficulties in the procurement of fertiliser, besides the financial difficulties faced by farmers. There also appears to have been deterioration in the soil that requires resuscitation. The financial difficulties that farmers have had are due to difficulties in selling their produce at a remunerative price. In any event, the maha crop harvested in the first half of the year is estimated at 30%-40% less than the average yield. Other food crops appear to have achieved higher outputs.
Although the tea plantations were expected to increase their production, with the availability of fertilisers and weedicides, the actual increase in yields has been disappointing. Consequently, tea production in the first half is likely to have gained very little. This is said to be due to the dense growth in weeds that have not been completely cleared.
Consequently, tea exports too decreased in the first half of the year.
The bright spot in the economy is the revival of tourism. The increase in tourism in the first half of the year is expected to continue in the second half as well. The improvement in tourism would have enhanced employment in this sector which saw a severe retrenchment. The revival of tourism has, therefore, increased tourist earnings, and employment and will in due course have an impact on the production of goods and services catering to the tourist industry.
While the first half of this year is remembered mostly as a period of improved availability of essential goods, it is one of economic contractions. This is particularly so in manufacturing and construction.
Agriculture too has not revived to any significant extent. The first half of the year is of much significance in the policy decisions taken to stabilise the economy and undertake reforms that would promote economic growth. The first half of the year was not a period of economic growth but one where the decision to enter into a programme with the IMF gives hope of long-term economic growth and development.