Economy: There Is Hope In The Horizon

With inflation under control shoppers maybe able to buy a little more flickr.com/photo/micllebflickr

By Raisa Wickrematunge

In the words of Nina Simone, “It’s a new day, it’s a new dawn, it’s a new life.” As indeed it is, for a country emerging from a bitter, 26 year old civil war. The euphoric victory celebrations, however, eventually gave way to a pervasive atmosphere of gloom. For the past few weeks, everyone from unemployed graduates, to teachers, to the CEB and CPC, demanded substantial wage increments. While our eyes are trained on this unfolding drama, we often forget to step back, and look at the bigger picture.

And that picture is not so gloomy. The Sri Lankan economy, in real terms, grew by 1.8% in the first half of 2009 alone, according to a recent Central Bank report. In 2008, the economic growth rate was 6%. Yes, the economy has been sluggish. However, the slow recovery of the world economy, coupled with the amalgamation of the North and Eastern Provinces with the rest of the island, has lead to some growth. The Central Bank estimated that total economic growth would reach around 3.5% in 2009.

Interest rates

In order to boost economic activity, Central Bank Governor Nivard Cabraal has slashed interest rates, hoping to galvanise consumer expenditure, and make up for a slowdown in exports. This relaxation in the country’s monetary policy is not without results.
Inflation in September was the lowest it had been for five years, but in October, rose at a faster pace than in had for five months previously.

The higher circulation of money arising out of a relaxed monetary policy carries with it the risk of a higher inflation rate. Accordingly it has been predicted that inflation might increase. This has been additionally attributed to a rise in spending within the global economy, leading to higher commodity prices internationally. This in turn would put upward pressure on domestic prices. Yet the Central Bank has estimated that inflation will not rise much higher than 5% in 2009. Cabraal has been quoted as saying interest rates might even be cut further if prices remain consistently low.

“Monetary policy in 2010 will continue to support economic activity while containing inflationary pressures,” a Central Bank report says.

Maintaining a delicate balance between stimulating economic growth and a low inflation rate is a difficult task. It appears that thus far, the Central Bank has managed to do so.

Deputy Director of the Central Bank, Dr. Weerasinghe said that the economic situation has improved significantly. “Currently, inflation is at just 1%, while interest rates are at 7.5%,” Weerasinghe said. The Deputy Director observed that the low inflation rate was not expected to rise exponentially in the near future. Weerasinghe confirmed that inflation was not likely to rise beyond 5%, and as such, there was no perceived problem in keeping interest rates low.

The Balance of Payments recorded a surplus by end September, helped by the Stand By Arrangement facility extended by the IMF. The decline in global demand however did lead to a fall in export earnings, a 17.2% drop in the first eight months of 2009. The hardest hit was the industry sector. However, expenditure on imports also reduced by 35%. As a result, the trade deficit was USD 1,627 million in September 2009, compared to a deficit of USD 4,032 million in September 2008.

Despite a fall in export revenue and fall in foreign investment as of September 2009, the country has managed to lower its trade deficit, and shows some signs of economic growth.

It seems that the financial climate of the country is far from gloomy. A golden era of prosperity however is unlikely, but perhaps shoppers might be able to afford much more than their weekly groceries in the near future.