New answers to old questions


DOMESTIC ECONOMY COMMENTARY:

New answers to old questions– www.riunit.com

Sharon Melder


With over 40 countries having come together in Colombo in order to get Tuesday’s Commonwealth Finance Ministers' meeting underway, the talks in Colombo will set the tone for issues taken up at the International Monetary Fund and World Bank spring meeting to be held in Singapore on September 19-20.

With the theme of an Agenda for Growth and Livelihoods, this year's meeting has growth and job creation as the underlying focal point. The Commonwealth meeting is also due to discuss another key issue, which is the necessity to give recipient countries the opportunity to prepare and develop their own policies for economic development rather than have preconceived policies imposed of them by institutions such as the World Bank and IMF or by donors themselves.

Budding GDP

The Sri Lankan economy which has seen a notable growth in the first quarter of this year of 8.1 per cent has posted a 7.7 per cent expansion for the second quarter. The statistics indicate an expectation of at least seven per cent growth for the year. With remittance driven tsunami reconstruction efforts leading the way, all sectors have pulled their weight.

While the paddy production is expected to benefit from the prevailing favourable weather conditions a growth momentum in all plantation sectors is expected to continue kindly. The outputs experienced in the tea sector are expected to grow moderately, while higher growth would be recorded in the rubber and coconut divisions.

The rapid expansion in construction activity is also likely to provide a further boost to the industrial sector productivity, with several development projects lurking in the horizon. Mainly the Colombo- Katunayake express way, which depict an astonishing similarity to Santa Claus - he doesn’t exist but he still manages to bring lots of cheer. Also in the offing is the coal power plant, one of the countries largest coal power projects to be located in Trincomalee as a joint venture linking India and one of its largest power producing companies along with the Ceylon Electricity Board. This project is in its final stages of concluding the agreement according to the Secretary to the Ministry of Finance Dr. PB Jayasundara. Although it does make one wonder if Trincomalee will still be available once the final contractual agreement has been signed.

The service sector which records the highest contribution to the National GDP is expected to continue on its growth path according to BMS Research. Its sub sectors like the telecommunication segment is performing exceptionally well with increased investments, wider expansion in coverage around the island and introduction of new technology and value added services.

July’s exports grew by 5.8 per cent largely led by garments, rubber based products, textiles and food and beverages sector. However, imports increased by a thumping 21 per cent, influenced by higher fuel prices

With the expectancy of funds amounting to US $5bn in the pipeline via the Asian Development Bank, World Bank and many development ventures proclaiming to be set in motion, the economy so far appears to be steering in the correct direction with progress indicated in almost all sectors. Having said that, the capricious situation within the island seems to be outlining the script and may have some effects on the economy in the medium and long term.

Up Up and Away

Local inflation which shot up to the two digit mark this year still hovers at the same levels with the month of August posting an index of 4650, a marginal decline of 0.5 per cent, month on month. Although Sri Lanka's unemployment has plunged to 7.0 percent, poverty remains high, with about a quarter of the households earning less than a dollar a day LBO reports, which some economists have blamed on the high inflation that undermines the living standards of low income groups. Prices of essential items continued to rise due to the fuel hikes that lasted till September, while the increase in the cost of bread has offset the lower cost of vegetables.
During the second quarter, Sri Lanka has seen a rise in inflation as losses in state energy utilities rose and the government dipped into the banking sector to fund the deficit. However the government has since taken corrective measures, by adjusting oil prices upwards. Twelve month inflation up to August remains around 15.4 percent, though slightly lower than what was experienced in June this year which amounted 17.7 per cent.
A Slippery Slope
The government’s decision to swell fuel prices ones again within the Ceylon Petroleum Corporation (CPC) materialized with the price of petrol soaring over the 100 rupee mark, while the prices of diesel and kerosene oil followed suit. Even still, the CPC manages to incur a loss of Rs.1.60bn per month due to fuel subsidies. However, even with this latest price hike, CPC’s prices remain below the costs of its sole competitor, the Indian Oil Company. As an easing in global crude oil prices is currently taking place, the pressure to assert further price rises is set to ease, although the CPC will continue to lay a strain on the budget deficit.

Sri Lanka’s oil import costs have sky rocketed to $2.4 billion worth of official reserves according to Dr. PB Jayasundara, representing a hefty increase compared to 1.6 billion dollars imports of 2005.

High Tea

An exceptional performance shown by many Regional Plantation Companies (RPCs) as of last year has lead to a renewed revival in investor interest within the plantation sector. Recently, investors have overlooked the sector due to past experiences of earning fluctuations. It was felt that the main explanation for the success of RPCs was due to the fact that international prices for natural rubber had improved immensely. This phenomenon has been attributed to the rising price of crude oil, a by-product of which is utilized in producing synthetic rubber. In addition, being far less attractive compared to the organic properties found in natural rubber, global demand trends may be moving in favour of rubber.

Bulk tea has registered a minor increase within the international markets while value added tea and organic tea have driven the tea industry to greater heights. These are still rather new variations within the Sri Lankan RPCs and the local response is yet to be seen.

According to a report complied by BMS Research, within the financial year of 2005 Sri Lanka had produced a record 317.2 million kg of tea and 104 million kg of rubber indicating a 2.5 per cent growth in the tea sector compared to last year and 10.2 per cent in favour of the rubber industry. However poor usage of fertilizer in the tea industry and a shortage of ‘rubber tappers’ and insufficient rain guards in the rubber industry has resulted in RPCs suffering a noteworthy fall in their desired yield levels. This issue needs to be addressed in order to better the production levels and ease the rising cost of production if Sri Lanka is to gain from any favourable global market movements.

Fagged-out

Meanwhile, the ‘National Authority on Tobacco and Alcohol’ (NATA) Bill was passed in Parliament in July but is yet to be signed by the speaker. Once finally inked, gazetted and activated, a grace period of 4-5 months will be given to enable all respective companies to align themselves according to the requirements of the Bill.

The stated objective of the legislation is to eliminate tobacco and alcohol related harm through the assessment and monitoring of the production, marketing and consumption of both products. The youth are particularly targeted in order to reduce their tendencies to fall into alcohol and tobacco consuming habits.

The new laws will make it compulsory for the producers to label and display all ingredients and display health warning similar to those carried in many developed nations. Quality tests of products are also set to be introduced.

The original draft bill which took a harder stance included measures to ban smoking altogether from public places and halt sales of tobacco and alcohol from within 100 meters of any premises frequented by children or young adults. However, a Supreme Court ruling has since revised many of the harsher elements and limited its impact to restrictions on marketing and advertising of the two products.

According to BMS Research, the true impact of the legislation will not be to reduce sales of either alcohol or tobacco or the government revenues that are generated from their sales. Consumers too can carry-on consuming the health harming products unhindered. Moreover, the analysis concludes that it will be the three existing players in the sector, each of whom enjoy a virtual monopoly status in their respective areas, who will benefit from the new legislation as new entrants will be deterred, being unable to advertise or pursue consumer awareness.



Copyright Reserved (RIU 2006) – Prepared exclusively for the Business Standard.