Economic turnaround likely in the second half of this year

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There are expectations of at least a modest economic recovery in the second half of this year. However, there are serious difficulties and challenges, risks and threats that have to be averted.

Debt restructuring

The past week has been one of financial uncertainty with the parameters of the domestic debt restructuring creating much anxiety. It is important that such domestic restructuring does not lead to financial destabilisation.

Recovery

The sources of this recovery are the freer availability of raw materials, the decreasing rates of interests, and a continuation of the revival in tourism and inward remittances which are expected to result in a balance of payments surplus and an improvement in the external reserves.

There could be a slight improvement in agricultural production, but the extent of that improvement is not likely to be much. The export manufacturing sector is not expected to revive owing to the recessionary global conditions. The prospect of the construction sector expanding is remote owing to the high costs of materials and the unavailability of building materials.

The trend of increasing tourism is dependent on the country’s containment of dengue and the containment of COVID internationally.

SMIs

One of the sources of revival is expected to be small and medium industries (SMIs). The freer availability of raw materials that had been denied for many months is the reason for the growth expectation.

The higher demand for crafts by tourists is another favourable factor. On the other hand, the depressed SMIs may have difficulties in recovering. These would include problems of closure of industrial ventures and the high costs of inputs.

The reduction in interest rates and the depreciation of the rupee could be favourable factors in reducing the costs of production.

Rates of interest

The decrease in the rate of inflation and the reduction in bank interest rates are positive developments in economic recovery. Hopefully, many industries would find it profitable to resume their production with these factors reducing the costs of production.

Another factor of importance would be the costs of electricity. There is an expectation that the electricity tariff would be reduced, particularly for industrial users of electricity, and a concessional electricity tariff will be introduced for industries. At the time of writing, there are signs of such reductions, but no significant relief yet.

Construction

One of the economic activities that will continue to be seriously jeopardised is construction. Although some reduction in the raw material is expected, whether it would be adequate for the revival of the sector remains in doubt. Indications are that some of the imported raw materials will continue to be restricted or subject to high tariffs. This condition would have to change for a revival of the sector, an important component of industrial output.

Agriculture

Although there was much expectation that the availability of fertiliser and agrochemicals, particularly weedicides, would revive agriculture to at least its earlier levels, this has not happened in the first half of this year. Although some improvement is expected in the second half, this is not expected to be sufficient to increase the production of plantation crops and food crops in the second half.

The underlying reason for this is that the damage caused to soils and the growth of weeds, particularly on the tea plantations, has made an agricultural revival below expectations.

We may have to wait for next year for a bountiful harvest of paddy, other food crops and tea. Agricultural production is, however, dependent on climatic conditions, particularly rainfall, and it is not possible to predict what weather conditions we would have next year.

Industries

The biggest setback to the country’s economy was from the export manufacturing sector. It was severely disrupted by a steep fall in demand for our export manufacturers. This is particularly so with respect to the main industrial export of apparel. The global recession in Western countries resulted in a serious slump in demand for our apparel. A large number of factories had to close and as many as about 150,000 employees are estimated to have lost jobs. The revival of apparel exports is not likely until the global recession ends, especially till North America’s and Europe’s economic conditions improve. When that would be so is not yet certain or predictable.

Tourism

The bright spot in the economy has been the revival of tourism. In the first half of the year, tourism had bounced back although tourist arrivals in May were somewhat less than in April. However, hoteliers expect an uptrend in tourism in the second half, particularly in the fourth quarter.

There have been significant increases in tourists from India and China and increasing tourists from Western countries as well. The flow of tourists from Western countries is expected to increase with the onset of winter later this year. Chinese tourists, too, are expected to increase. These expectations are based on some of the main hoteliers indicating that they have reservations in their hotels that would result in tourist earnings of US$ 3.7 billion this year.

Linkages

The growth of tourism would have backward linkages with other sectors of the economy, especially travel and hotel requirements of food, beverages and handicraft.

Concerns

The serious concern for the recovery of tourism is the maintenance of law and order in the country and the containment of dengue and COVID. These are threats to the tourist revival. Any deterioration of this condition will lead to travel advisories that tell foreign tourists of insecurity or health hazards. This is a serious threat to the tourism sector. Every effort must be made to ensure that this does not happen as in the past.

When the country reached tourist earnings of as much as US$ 7 billion, the terrorist attacks resulted in a horrendous setback to tourism. The political conditions in the country are such that a similar terrorist attack could be engineered to raise communalism to benefit a particular political party. One cannot discount a repetition of this with expectations of elections whether they be parliamentary or presidential. There should be public awareness that such acts of communal discord are politically motivated and seriously impair the country’s economy. We can hope that there is political maturity gained by previous actions and the country is now in a position not to be provoked by instigators of ethnic and religious communalism.

This factor is relevant for the tourism industry regaining momentum and would have a comprehensive impact on the economy. The economy that is struggling to revive could face a severe setback that would once again jeopardise economic recovery, revival and development. The entire reform programme that has been initiated with the assistance of the IMF could be derailed to the extent of it being hardly revived again.

Conclusion

Hopefully, the country’s economy is on a path of economic growth that would accelerate later this year and in the next. This is very much dependent on the implementation of the IMF programme’s economic reforms and political and social conditions conducive to its implementation. We are a strange sort of country that often takes steps forward and then take steps backwards to remain an underdeveloped country.

 

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