Fueling the economic crisis and stifling an economic recovery
The near shutdown of the economy owing to the unavailability of fuel has further weakened the capacity of the economy to resolve the balance of payments difficulties. It could worsen the foreign currency crisis, increase the economic difficulties faced by people and threaten livelihoods.
No prospect
At present, there is no prospect of obtaining fuel. The earliest supply of fuel is expected only in mid-July. Even that is uncertain.
The expansion of the economic shutdown is inevitable in the months ahead. This would vitiate the production capacity of the country and aggravate the economic woes of most people.
Production capacity
Whether the current state of the economy is called a lockdown, a semi-lockdown, a slowdown or travel restriction, its impact would be to reduce the production capacity of the country and worsen the external finances. The economic crisis has certainly got worse. The dysfunctional economy will aggravate the crisis by crippling the production of goods and services.
External finances
It is certain that the country’s balance of payments is likely to weaken further with the widening of the trade deficit, decreasing inward remittances, and minimal earnings from tourism. Merchandise export earnings too are being threatened by the current dysfunction of the economy.
Exports
Despite several constraints and difficulties, the country’s merchandise exports have fared well. In the first four months of the year, merchandise exports fetched US$ 4.2 billion compared to US$ 3.8 billion in the same period last year. This 11 percent increase was partly owing to the international hike in prices. Can this momentum in exports be maintained with the current curtailment of transport and fuel for industry?
Constraints
It would have been possible to increase export earnings to about US$ 14-15 billion this year, if not for the current constraints in production.. Now it is more likely that merchandise exports will dip below this. This is a setback to the trade balance, as import costs of essential imports, especially of fuel and fertiliser are continuing to increase.
Imports
Despite the severe restrictions in imports and shortages experienced this year, import expenditure has increased in the first four months of this year. This increase in imports was owing to the surge in international prices of food, fuel, fertiliser and transport costs.
Trade deficit
Consequently, the trade deficit in the first four months of this year expanded by 8.9 percent, from US$ 6.75 to US$ 7.35 billion. If this large trade deficit continues, the economic plight of the country would be unimaginable.
Cannot import
Ironically it cannot happen as the country does not have the currency to import. This incapacity to import essentials would also limit exports. Without essential imports export manufacturing that is highly dependent on imported raw materials, will be hampered. Export industries would have to find ways and means to import the required raw materials.
Dysfunctional conomy
The current state of the country is best described in the Sinhala phrase KottaUda.The problem of such a dysfunctional economy is the economic problems and woes of people will worsen as the production of goods and services diminish, the export capacity of the country will be weaken and the trade deficit and balance of payments will widen. Consequently, the economic crisis would reach severe proportions.
International assistance
It is owing to this bind that international assistance is needed to retrieve the economy from its depths and revive the economy. Without such assistance, the wheels of industry cannot function.
Priority
First and foremost, the country has to be retrieved of its current scarcities of essentials as early as possible. In the current conditions of scarcities of fuel and other essentials, there is no prospect of economic revival.
Immediate foreign assistance is needed to make essential imports of fuel, fertiliser, medicines and other bare necessities available. This includes humanitarian aid to avoid hunger and starvation among the increasing number of unemployed people and poor households.
Commitment
There has been commitment of humanitarian aid from international organisations, countries, charitable institutions and even individuals. The United Nations ( UN), UNICEF, The World Food Programme, India, USA, Australia, China and Japan among others, have provided or promised aid to reduce hunger, malnutrition and starvation. There have also been gifts of rice, other food and medicines from these countries.
Finance
Such assistance is also essential to ensure the production capacities of the country. Immediate international assistance to meet our essential import requirements and get the economy to revive is vitally important.
So far the country has received mostly expressions of wanting to assist rather than substantial aid. Emissaries have returned from countries empty handed. Even the International Monetary Fund (IMF) credit facility is still uncertain and expected to take many months. One wonders whether this reluctance is owing to the political conditions in the country.
Such assistance from friendly countries like India, China, Japan, USA, and European countries as well as assistance from international organisations is vital. We have obtained a certain measure of such assistance which has prevented a calamitous situation in the country.
Survive and recover
We need further assistance to enable the country to survive and the economy to function. Whether adequate amounts of such financial aid would be forthcoming is an important determinant of the country’s ability to recover.
Conclusion
The first part of Prime Minister Ranil Wickremesinghe’s oft-repeated ‘prediction’ that it will get worse has come to pass. The economic crisis has certainly got worse. The economy has come to a grinding halt.
The dysfunctional economy will aggravate the crisis by crippling the production of goods and services. As to when the economy would be getting better is as uncertain as before. In fact, it will worsen even further with the capacity of the economy to revive weakening further.
In spite of the severe economic conditions in the country, there appears to be no united and concerted national effort to charter a course to economic recovery and stabilisation.