Requirements for economic stabilisation and revival
It is vitally important that the economic stabilisation and revival process we are now undergoing is not disrupted in any way.
The current stability in the economy has been achieved by entering the International Monetary Fund’s (IMF) Extended Credit Facility (ECF) and an improvement in the external finances.
It was not the modest finances that the IMF involvement brought into the country that helped stabi-lise the economy, but the confidence generated and the economic reform programme agreed upon that were of vital significance in the stabilisation of the economy.
The economy has achieved a measure of external financial stability. The balance of payments was in surplus, and the external reserves were at US$ 3.7 billion at the end of June. They are both facing a rising trend.
Much of the improvement in the external finances has been achieved by increased remittances from abroad and growing earnings from tourism. This improvement in external finances is expected to in-crease in the second half of the year.
The external reserves at the end of June, at US$ 3.7 billion was mainly due to increased remittances of about US$400 million per month, or about US$ 2.5 billion in the first half of this year.
The reason for this improvement in remittances was the stability in the official exchange market that led to a narrow margin between the official and the unofficial exchange rates. At present, the differ-ence between these two exchange rates is negligible.
This narrowing of the exchange rates was brought about by the confidence generated by the IMF pro-gramme. This confidence is likely to grow with the higher reserves and liberalisation of trade and pay-ments soon.
It is imperative that the current favourable conditions are not eroded by political and social unrest. Every effort must be made to not only continue current conditions but also improve them.
Any destabilisation of the economy by social unrest could have a severe setback for economic revival. This is especially so with respect to earnings from tourism. On the other hand, political and social un-rest does not lead to an investor-friendly climate. This could make Sri Lanka’s attempts to attract For-eign Direct Investment (FDI) to the country futile, although the latter depends on several other fac-tors.
It is crucial that neither social unrest nor disruptions caused by strikes, protests and threats affect tour-ism. Rule-of-law issues and disruptions to travel could reverse the current revival in tourism.
Unfortunately, the country’s political context is such that political parties perceive the current situation as an opportunity to oppose reforms, discredit the government, and upset the process of economic revival to gain popularity.
Social unrest and political protests in the country are a continuing threat to tourism. It is also impera-tive that the country’s economic activities continue without disruption.
It is a time when the people’s efforts to keep the economy going are vital. Whether it be manufactur-ing, agriculture, or services, there is a need to redouble efforts to enhance productivity and produc-tion.
The country is still grappling with problems created in the recent past. The most well-known and seri-ous setback was the prohibition of imports of chemical fertilisers, weedicides, and other agrochemicals for agriculture. It severely affected agricultural production in the country.
As we have pointed out in earlier columns, though there is an availability of these, there are problems of soil degradation and weeds that are hindering an increase in agricultural production. This is true both in paddy cultivation and tea.
It is necessary that the setbacks mentioned above be overcome and agricultural production next year and even in Yala this year be revived.
According to the Minister of Agriculture, the extent of paddy cultivation this year is the highest ever. This, we hope, will ensure self-sufficiency in rice.
Export manufacturing has been seriously jeopardised by the global recession. Being a small economy, Sri Lanka has no control over this. We can only hope that the factors that brought about this global re-cession will be resolved and that global demand for goods produced in the country will revive.
While this is a hope, there is a need for the manufacturing sector to seek ways and means of finding new markets and diversifying into other commodities that have demand. Export market and product diversification are crucial for the country to sustain the improvement in foreign exchange earnings and to face any adverse market conditions in the future.
Some of the constraints on manufacturing have already been eased. The government has announced that it will be relaxing many of the import controls. The removal of these import controls will enable manufacturing exporters to obtain raw materials and reduce their production costs. It will also enable the revival of some industries that were constrained by the unavailability of essential raw materials.
On the other hand, it is vital at present to retain a degree of control over imports that are non-essential for livelihoods and production. We cannot afford to fritter away our foreign earnings to im-port luxury consumer items that cater to a minority of the population. It is likely that the liberalisation of imports would occur in tandem with high rates of import duties on luxury goods.
For Sri Lanka to sustain its economic momentum, it is vital that the improvements in the country’s ex-ternal finances and production continue. There are severe threats that we must be mindful of. The possibility of social unrest affecting tourism, in particular, must be avoided. The political conditions may push political parties to disrupt the economy to make political capital for the forthcoming elections. It is time political leaders gave priority to the country’s long-term economic and social development.
Sri Lankans must realise that they must contribute through their hard work to get the economy mov-ing. Some factors, such as the global recession, are beyond the country’s capacity to alter. However, the resilience and innovative capacity that entrepreneurs have displayed have to be redoubled to cope with such disadvantages.