External and Internal Shocks Serious Setbacks to Economic Growth

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External and internal shocks serious setbacks to economic growth July 2012
IMPERATIVES FOR ECONOMIC DEVELOPMENT
Economic growth is likely to fall to below 2 per cent this year as external and internal shocks are serious setbacks to the country's economic growth. The Central Bank has not revised its economic growth forecast for the year, but current conditions suggest that economic growth would slip from 1.7 to 1.3 per cent that it estimated earlier this year to even below 1.5 per cent, if global demand for exports continues to be unfavorable and the prevailing drought conditions persist. The falling international oil prices are the one favorable development that could mitigate the economic slide. Global conditions

The international economic downturn is widespread. Even China's state capitalism has been unable to weather the global storm and the Chinese economy is expected to slow down this year. China's shaky recovery is losing steam, adding to pressure on its new leaders to shore up growth after a surprise first-quarter decline and launch new reforms. The Indian economy may experience a precipitous decline in its growth. India's economic progress that had been impressive in the last decade has been halted and its first quarter economic growth dipped to just 5.3 per cent. India's slower growth could affect the Sri Lankan economy in several ways. India is an important trading partner. About 5 per cent of our exports are to India.

Furthermore, foreign investors tend to view investment prospects regionally. India's troubles could intensify foreign investor concerns on Sri Lanka as a destination for FDI. Moreover our long term economic expectations are linked to the fortunes of India. The most pertinent global developments for Sri Lanka in the short run is the instability of European economies that have slowed down and reduced their purchasing power of commodities exported by us. European countries and the US that accounted for 54 per cent of our exports last year is a sizeable one for industrial exports. The decrease in exports to Europe is being felt in the trade statistics this year. The American economy too has not recovered adequately, and this being an election year, is not expected to regain a growth momentum. With these two main markets affected, our industrial exports have faced a drop of 3.1 per cent in the first four months of the year. What is particularly disconcerting is that there is a trend of decreasing industrial exports, especially of garments. In March industrial exports declined by 10.2 per cent and in April it declined by 8.7 per cent, compared to the respective months of last year. Tea exports to the Middle East and Russia too have been adversely affected and in the first four months, tea exports decreased by 11.8 per cent, contributing heavily to the decline in agricultural exports by 11.7 per cent compared to the previous year's first four months. Total exports declined by 3.1 per cent in the first four months of this year compared to the same period last year. Indications are that both industrial and agricultural exports would face adverse conditions and are not likely to recover. Imports

Imports continue to make a serious dent in the trade balance. Although consumer imports declined by 3.3 per cent, intermediate and investment goods continued to increase. Imports were much higher than exports and resulted in a trade deficit of US$ 3.3 billion in the first four months. If this trend continues the trade deficit could be as much as US$ 10-11 billion. This would certainly strain the balance of payments as it is too large to be bridged by worker remittances, tourist earnings, other service earnings and capital inflows. The expectation of higher amounts of foreign direct investments is unlikely. Therefore once again there would be a drain on reserves or increased foreign borrowing to meet the trade deficit, as well as repay capital borrowed earlier and to service interest payments. Economic...
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