Economy expected to perform better in last quarter

The economy is expected to recover in this year’s last quarter, which begins today. The improvement in foreign reserves, liberalisation of imports, lower inflation, and reduction in interest rates are expected to revive the economy in the last quarter. It is expected to perform better than the previous three quarters owing to these favourable factors.

Governors

The favourable developments in the economy have been captured by both the Governor of the Central Bank of Vietnam and the Governor of the Central Bank of Sri Lanka.

Vietnam’s Central Bank Governor succinctly summarised Sri Lanka’s success when he met Sri Lanka’s envoy to Vietnam.

He told him that Sri Lanka had succeeded in reducing inflation from 65 percent to 5 percent within 12 months and achieving a marked reduction in interest rates, increased foreign reserves, and stabilisation of the national currency.

Vietnam’s success

He added that micro and macro-economic policies, as well as monetary and fiscal policies, were the reasons for Vietnam attaining unprecedented economic growth during the last two decades.

Sri Lanka

Sri Lanka’s Central Bank Governor, Dr. Nandalal Weerasinghe, addressing the Global CEO Forum Sri Lanka on September 21, captured the change in the economy in an intriguing manner.

He said, “There was a clear shift in discussion by business leaders compared to what they were talking about just a year ago.”

The Governor said he was delighted that many business leaders who came to him griping about fuel shortages, power cuts, US dollar liquidity issues, and uncertainties in executing export orders on time just a year ago were now talking about robust corporate leadership and innovative ideas for the growth of their companies.” He said, “This in itself is a great transformation.”

Improvements

The improvement in foreign reserves, the progressive liberalisation of imports, the improving availability of essential raw materials, lower inflation, and the reduction in bank lending rates are expected to stimulate the economy.

Manufacturing (including construction) and services are expected to perform better in the last quarter.

Previous performance

The economy contracted in the last three quarters of this year, with the rate of decline moderating. In the second quarter of 2023, the GDP contracted by 3.1 percent, compared to a higher contraction of 5 percent in the first quarter. The economy is expected to have performed somewhat better in the third quarter.

Negative

In the second quarter of 2023, the industrial sector declined by 11.5 percent, while services fell by 0.8 percent. Agriculture grew by 3.6 percent.

Foreign reserves

Foreign reserves have been increasing steadily in the past several months. By the end of August, foreign reserves were slightly lower than at the end of July, when they were US$ 4.7 billion.

Yearend

At year’s end, the reserves may exceed US$ 6 billion owing to the increasing trend in remittances and earnings from tourism.

Remittances peaked at US$ 500 million in August, up from about US$ 400 million a month at the beginning of the year. Remittances are likely to exceed US$ 6.5 billion this year.

Tourist earnings

Earnings from tourism have been on an increasing trend. A tourist boom is expected in the last quarter. The year’s earnings from tourism are expected to exceed US$ 4 billion.

Foreign reserves

As in past months, the increase in remittances, earnings from tourism, assistance from international financial institutions (including the second tranche of the IMF facility of US$ 299 million), and other assistance from international agencies are expected to boost reserves to about US$ 6 to 7 billion, in spite of an increase in the trade deficit.

Trade deficit

In contrast to these favourable developments in the balance of payments, the trade deficit is likely to increase owing to increased imports and lower export earnings.

Imports

The comfortable level of reserves has prompted the government to remove import restrictions on a number of imports that are expected to enable the production of goods and services.

Removing constraints

The improvement in the foreign exchange situation will remove one of the constraints on manufacturing. The unavailability of essential raw materials hampered many of the country’s manufacturers and the construction sector. The availability of raw materials and spare parts for many economic activities could get the economy moving once again.

Manufacturing

This is especially so for industrial production and construction, which have been stifled by the non-availability of raw materials. Small and medium industries (SMIs) too were incapacitated by the lack of raw materials.

Employment

Many informal workers lost their employment. This had an adverse impact on employment and poverty.

Import liberalisation

The liberalisation of imports is essential to getting the economy functioning at a higher level of production and fuller employment. However, the liberalisation of imports has to be implemented selectively, as a large outflow of foreign currency is not possible.

The government and the Central Bank have assured the country that imports of only goods for the enhancement of production will be permitted, while nonessential consumer items will not be permitted.

For instance, motor vehicles will not be imported. Such selectivity is critically important due to the modest reserves, the fragility of the balance of payments, and the need to have adequate reserves to meet foreign debt obligations next year.

Interest rates

The reduction of interest rates and lower inflationary pressures are expected to stimulate investment.

Political factors

The political uncertainties that were discussed in last Sunday’s column, though of consequence next year, could influence investment decisions adversely.

Rainfall

The onset of the inter-monsoonal rains and the expected northeast monsoon later this month would reduce energy costs and enhance agricultural production.

Summary

The last quarter that begins today is likely to be one of economic revival and recovery. The improvement in foreign reserves will enable the gradual liberalisation of imports, which will improve the availability of essential raw materials. Lower inflation and a reduction in bank interest rates would enhance investment and stimulate the economy. All three sectors of the economy are expected to perform better. Agriculture, manufacturing (including construction), and services are expected to perform better in the last quarter.

Conclusion

The continuing improvement of foreign reserves, enabling the liberalisation of imports, lesser inflation, and lower interest rates, is expected to increase investment, employment, and incomes. The expected revival of the economy in the last quarter of this year is due to the continuing improvement of foreign reserves, the liberalisation of imports, declining inflation, and lower interest rates.

Although the economy is poised to grow in 2024, the political developments of an election year are serious threats to economic development next year. The implementation of the reform programme is vital for economic stability, revival, and growth.