Reflecting on economic growth prospects in 2012

There has been a setback to the momentum of economic growth this year. The high growth rates of 2009 and 2010 were themselves partly responsible for this slowing down. The balance of payments crisis that emerged was, to an extent, the result of high domestic spending and investment, especially in infrastructure. The flood of imports could not be sustained without commensurate export growth and capital inflows. The result was a balance of payments crisis.

Whether the corrective measures taken by way of increasing tariffs, depreciation of the currency, higher interest rates and other measures to curtail demand would contain the trade deficit is uncertain. These policies are, however, likely to bring about a deceleration of economic activity and a slowing down of the high trajectory of economic growth that was envisaged. The slowing down of the global economy and the volatility in oil prices too would contribute to the slowing down of Sri Lanka's economy.

Economic growth

Economic growth this year is likely to fall by one or two percentage points. The Central Bank expects growth to fall by only about one percentage point to around 7 to7.5 percent. Most other assessments of the economy are of the view that this rate of growth would be difficult to achieve. They predict an economic growth of around 6 to 6.5 percent that should be good enough. There would have to be considerable improvement in global conditions for achievement of a higher economic growth rate.

The growth rate of an economy reflects the aggregate growth of all its economic activities. Therefore, it is the performance of the various economic activities that will determine this growth rate. It is too early to be rigid on what would be the final count as there are many factors that could change for the better or worse. The early performance could, however, be tentative indicators of the expected economic growth prospects and potentials this year.

Agriculture

The performance of agriculture has become progressively less important to the growth statistic as it now contributes less than 12 percent to GDP. Nevertheless it is an important one as a high proportion of people depends on income streams from agricultural output, either directly or indirectly.

IMPERATIVES FOR ECONOMIC DEVELOPMENT

The output in agriculture, that includes livestock, fisheries, and forestry, is also important for employment, incomes, the trade balance and in containing inflation. Therefore, the performance of agriculture cannot be viewed within the narrow confines of the GDP calculation.

Weather is an important determinant of agricultural production and, therefore, there is a difficulty in predicting its growth prospects at this early time of the year. Nevertheless there is every prospect of growth in agriculture as a whole as the current balance of payments crisis and its aftermath of policies are likely to have little effect on agricultural growth.

Already the Maha harvest of paddy has been substantial. Unlike last year when part of the paddy crop and other food crops were damaged, this year's production has been high. The decrease in prices of vegetables and domestically grown food items that were witnessed in the first quarter of this year is a good indicator of higher production.

Although the February tea crop declined slightly, the production for the first quarter is expected to be higher than that of last year. If weather conditions are good, tea production is likely to exceed that of last year. Where the tea industry is concerned there is some anxiety on international demand owing to the Iranian situation and volatility in the region. Rubber production too is expected to continue its growth. Coconut output too may be higher. Besides this additional extents of land coming under cultivation too would contribute to national food output. Overall the agricultural sector is likely to contribute to growth.

Industrial growth

The performance of the industrial sector is vital for economic growth as it contributes as much as 30 percent of national output. Indications are that the industrial sector is likely to grow only to a limited extent, as there is uncertainty about international demand for industrial exports. The export figures of industrial goods for January disclose a limited growth.

In January 2012, industrial exports, which contribute about 80 per cent to total exports, grew by 3.3 per cent to US$ 733 million. This is a much slower growth than the 30 percent achieved last year. If monthly industrial exports continue at these amounts then the 2012 industrial exports would be only US$ 8796 million or only 9.7 percent higher than in 2011. This indicates the slow growth in exports owing to global conditions.

Textiles and garments exports, which have been resilient in the recent past, are the major industrial export. Last year these exports grew by 26 percent. But the first month's growth was only 1.6 per cent. When the January export value of US$ 367 million is extrapolated for the full year, the value of textile and garments exports would be U$ 8796 which is only 4.8 percent higher than that of last year.

There have been better export performances in rubber-based products that increased by 20.7 per cent; gems, diamonds and jewellery increased by 44.6 per cent; and earning from machinery and equipment increased by 28 per cent in January 2012 compared with the corresponding month of 2011. However, export earnings from transport equipment, food, beverages and tobacco, printing and leather products, travel goods and footwear, which contribute about 11 per cent of total exports, declined by 32.1 per cent in January 2012.

This is an unfavourable development as these exports had shown a healthy growth in recent years.

The expectation is that the depreciation of the currency would make industrial exports competitive. The export growth of the previous year requires to be exceeded in order to cope with the increasing trend in imports.

The performance of the services sector would be critical to the economy's performance as services contribute nearly 60 percent of GDP. The performance of services is likely to be mixed as several activities adjust to the new interest rate regime and exchange rate changes. Internal and external trade is likely to grow minimally or decline. Import trade and perhaps retail trade would experience a slowing down. The performance of financial services is difficult to ascertain at present. Tourism is the robust sector. It is growing apace and expected to contribute significantly to offset the trade deficit. Tourist earnings are likely to contribute over US$ 1 billion and be a useful support to the balance of payments. Besides this, the backward linkages of tourism to many activities are likely to be significant contributory factors stimulating growth. The growth in newer services such as information technology services provides a window of opportunity for export earnings. Whether information technology related services would expand significantly this year is worth monitoring.

Conclusion

The economy is likely to register a lower rate of growth from the 8 percent witnessed in the last two years. It is likely to be between 6.5 to 7 percent in 2012. Most analysts attribute this slow down to an overheating and overexpanding of the economy. The economic expansion of 8 percent in 2011 resulted in imports being double that of export earnings resulting in a massive trade gap. Commentators point out that the Sri Lanka is ill-equipped to run external imbalances as it has a very low cushion of official foreign exchange reserves, The reserves have fallen from a peak of US$ 8 billion in August 2011 to US$ 5.8 billion at the end of January this year.