Tailgating fairytales

Where is the Sri Lankan economy heading?

Recently HSBC economist Prakriti Sofat created a stir in the local media by saying that the Sri Lankan economy would grow by four percent this year. The stir was created by the beautiful and intelligent Ms. Sofat herself just as much as what she had to say on the economy i suspect but lets leave the idle goss out and focus on the question here; is the economy actually heading for good times?

Exports are down, in all the major sectors as demand from major trading partners is still low (Sunday Leader; Exports down 28%). most of the optimism stems from hopes that the US recession will ease up. but this may take a while yet, and other major markets like Europe will only do better once the US recovers. Demand is strong from other markets like the Middle East and tea is pretty much the only major export product that is doing well as a result.

Consumer spending is down as loosening monentary policy is not being translated into consumer markets as banks are spooked by a 9% industry wide non performing loan rate (Sunday Leader; n.p.ls rise), and also due to the oligopolistic nature of the sector; interest rates are still too high. This discourages spending and limits borrowings for businesses, especially the small to medium scale businesses, which provide most of the employment in the country.

Government spending on development projects should be up, except that the government doesn't have any money to spend. Most forecasts are also betting on the IMF loan coming in, and previous optimism that we'd have enough capital inflows to make it unneccessary is likely to fall flat as foreign investment looks at all the other factors reducing the attractiveness of the market, like the lack of foreign inflows for instance, leading to a catch 22 situation.

In addition, penny wise pound foolish fiscal policies like the absurd taxes for petrol users help only in stunting the spending power of the wealthier sections of the population. Fiscal policy needs to be loosened for growth, and equally distributed to prevent distortions. Wherever money is spent its going to boost the economy, and its better off being spent in the market than being mismanaged by the government.

Inefficiency and corruption is another factor that will hold us back; state servants took away 53% percent of taxes as wages last year and we can bet our bottom rupee that there are more efficient ways to be spending our tax money. The creation of new ministries and the expansion of the cabinet doesn't exactly create a favourable impression of the governments plans for reengeneering and modernizing the state sector.

On the upside our trade deficit is taking a dive (Sunday Leader; Exports down 28%) but only because demand for imports have drastically reduced especially cars and electrical appliances. Foreign remittances are still as strong as last year and have helped balance the BOP.

So optimistic outlook? I don't mean to be a cyinc but yes ok. Though we still need a lot of things to fall into place and go our way. It is easy to be cast under the 'peace delusion' and assume that economic prosperity will come along just because the war is over. But the tough times are only beginning. Remember, we had all the chances to make it in the decades preceeding the war, but we lost our way.

Im still hoping for a clear vision or mission statement coming from the government devoid of any pre election crowd pleasing cheese talk. A serious long term plan, say for the next 30 or so years would be great to see being talked about, at least for a start.


Sigma said...

it does seem strange, these positive growth reports that are popping up when the take is the complete opposite. Well, here's hoping I'm wrong and they are right

TheWhacksteR said...

yeah well.. hopefully we'll see a turnaround soon. since their mostly basing the good forecasts on other forecasts