Reviving the economy a paramount need in the 75th year of Independence

The manner of celebrating the anniversary of Independence was never as controversial as of yesterday’s 75th anniversary. What is not controversial is that the paramount need of the country is the revival of the economy that has been performing far below its capacity and potential.

Weakening capacity

There has been a weakening of the country’s capacity for development in recent decades. The post-Independence brain drain accelerated from last year weakening the country’s capacity for economic development and social improvement. This vitiation of the economy over time has to be reversed to achieve economic growth and social development.

Current performance

This year’s economic growth is projected to be a further contraction of about two to three percent from last year’s contraction of around nine percent. Can the economy perform better than this in 2023?

Economic recovery

This year’s economic recovery has to be achieved by getting all sectors of the economy functioning. This is a challenging task owing to the recessionary global conditions, inadequate foreign currency, unavailability of adequate raw materials, power cuts and political instability and social unrest.

Imports

Constraints on importing adequate raw materials and fuel for power generation that are essential, makes economic revival an uphill task. In addition, global recessionary conditions threaten the country’s manufactured exports. Social unrest and political instability too are serious setbacks to a concerted effort for economic development.

Decline in output

All three sectors of the economy are performing at a low capacity due to power and fuel shortages and shortages of essential raw materials.

The aggregate value of goods and services produced in the country (GDP) shrunk in 2021, fell by a further nine percent last year, and is expected to decline by a further three percent this year.

Consequences

The consequences of the economic retardation has been unemployment, low incomes, increasing poverty, hunger and, malnutrition.

All sectors

All three sectors of the economy, agriculture, manufacturing and services, have been adversely affected. Construction, a subsector of manufacturing, has had a severe setback and employment has been reduced drastically. This decline in construction is expected to continue in the foreseeable future.

Causes

The underlying causes for this serious deterioration in the economy have been the unavailability of much needed raw materials, their high costs and diminished demand for many consumer items. Power cuts and fuel shortages have disrupted production in many economic activities. Raw materials

Most industries are dependent on imported raw materials for their production. Imported raw materials constitute as much as 70 percent in some industries. Even many local crafts require imported raw materials. Shortages of imported raw material have hampered many small and medium industries and services.

Electricity

Most economic activities have had setbacks owing to the unavailability of diesel, gas, kerosene and petrol. Their productions have been disrupted by power cuts.

Agriculture

Agriculture that is considered the backbone of the economy faced the severest setback owing to the Government’s ban on chemical fertiliser and agrochemicals in 2020. Food production was severely disrupted by the unavailability of chemical fertilisers and agrochemicals.

Self-sufficiency

One of the island’s post-Independence achievements was the attainment of self-sufficiency in rice, the staple food.

At Independence and a few decades after, the nation of about seven to ten million people that imported over one half of the country’s requirements of rice, achieved self-sufficiency for a population of more than 21 million several years ago. The country also achieved near self-sufficiency in a wide range of food and poultry. This was shattered by the ban on chemical fertilisers and agrochemicals.

Food imports

In 2021/22, rice imports were needed to meet the basic food requirements of the country owing to the drastic reduction in the rice crop due to the unavailability of chemical fertilisers and agrochemicals that reduced rice and other food production.

Tea production

Tea, the country’s main agricultural export suffered a setback that reduced tea exports. Last year’s tea production fell to about 260 million kilogrammes that was the lowest since 1996. Tea production fell from 310 kilogrammes in 2019 to 290 kilogrammes in 2020 and 280 million kilogrammes in 2022. Consequently, the exportable surplus of tea decreased. Unfortunately, this decline in tea exports coincided with an increase in tea prices. Consequently, export volumes of tea decreased to US$ 1.2 billion last year though export prices were high.

Manufacturing

In spite of severe constraints, including disruption of electricity, diesel and other fuel, export industries fared well till September last year. Since then, exports have fallen owing to decreasing global demand. This decline in manufactured exports is likely to continue this year unless there is a reversal of the recessionary conditions later this year.

Construction

Construction has been severely curtailed owing to the shortage of cement, iron and other raw materials and their high prices. The construction industry has come to a virtual standstill creating unemployment for thousands. The revival of the construction industry is only possible after the country’s financial crisis is resolved. Causes

The root cause of the economic under performance has been the inability to import essential raw materials and energy shortages due to a severe shortage of foreign currency. The resuscitation of agricultural production requires adequate chemical fertiliser and agrochemicals. A wide range of imported raw materials are needed for manufactures and the availability of electricity, petrol and diesel is imperative for all sectors.

Reducing constraints

The achievement of an immediate and shortterm recovery requires the removal of shortages of raw materials and fuel essential to get agriculture, manufacturing and services functioning at a higher capacity.

Resolving the crisis

These constraints are difficult to resolve as the country faces severe shortages of foreign currency for imports. This implies the prioritisation in the importing of raw materials, exploring avenues of obtaining these resources by international assistance and an improvement in external finance.

Priority

Priority must be given to making available electricity, petroleum, gas and diesel. Imported raw materials must be given to those activities that have a greater impact on the economy. Agriculture and export industries are undoubtedly priorities. Some economic activities that have a lesser impact on reviving the economy may have to continue impaired by shortages.

Foreign earnings

Nevertheless, there are a few favourable developments that could be conducive to the alleviation of economic conditions. There is a likely improvement in external finances that would enable increased production in several sectors.

Apart from the expectation of the International Monetary Fund’s (IMF) Extended Finance Facility (EFF) that has been awaited for a long time, there could be an improvement in the external finances due to increased remittances from abroad and earnings from tourism. These could offset the larger trade deficit this year. Remittances are expected to reach about US$ four billion and earnings from tourism are expected to be about US$ 2.5 billion.

Conclusion

Reviving the productive capacity of the economy is the foremost priority. The Government must focus on removing the constraints to production that have been responsible for the reduction in output and ensure the availability of fertiliser and agrochemicals for agriculture, essential raw materials for industries and kerosene, diesel, petrol and electricity for all economic activities. An improvement in the external finances would be invaluable.