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The Gross Domestic Product (GDP), in real terms, declined by 3.7 per cent in the third quarter of 2001 over the corresponding quarter of 2000. This outcome, was a continuation of the low and declining growth rates experienced in the previous two quarters. The Gross National Product (GNP), defined as GDP adjusted for net factor income from abroad, also contracted by 3.2 per cent in the third quarter of 2001, states a Central Bank press release. The release further adds:

"Several adverse factors that confronted the Sri Lankan economy during this period were responsible for this unusual negative growth. At the beginning of the quarter, the economy had already experienced a considerable deceleration mainly due to the slowing down of world economic activity, which crippled the demand for manufactured exports, and the failure of the north-east monsoon, which adversely affected domestic agriculture. The attack at Katunayake International Airport in July with the subsequent imposition of insurance surcharges on sea and air travel and the general political uncertainty leading to the Parliamentary elections adversely affected any economic recovery. Another adverse development faced during the third quarter was the aftermath of the September 11th attack on key economic and military targets in USA, the largest market for Sri Lankan exports. In addition, the continuation of the drought during the third quarter resulted in prolonged power cuts, thereby adversely affecting the performance of most manufacturing and services activities. Under these extremely difficult circumstances, a negative growth rate for the third quarter was unavoidable.

The GDP growth rates for the first and second quarters were 1.3 per cent and 0.4 per cent, respectively. Consequently, the average rate for the first three-quarters of 2001 amounted to a negative growth of 0.7 per cent. In 2000, the corresponding growth rate was 6.4 per cent.

In the third quarter, production levels declined in agriculture (-1.3 per cent), manufacturing (-10.5 per cent), Services (-2.9 per cent) and Mining and quarrying (-2.6 per cent). The construction sector, however, managed to grow by 1.2 per cent. The decline in the manufacturing sector contributed the most (52 per cent) to the negative growth of 3.7 per cent.

The agriculture sector suffered a setback of 1.3 per cent during the third quarter of 2001. Tea production dropped by 14.8 per cent, which was the outcome of the drought that prevailed over a long period. High and mid elevations, especially in Nuwara Eliya, Badulla, Kandy and Matale districts, suffered the greatest setback. Owing to the same reason, Yala paddy production and coconut production showed a negative growth of 7.2 per cent and 8.2 per cent, respectively. The "other" agriculture sub sector, which mainly consists of vegetables, subsidiary food crops, minor export crops and animal husbandry, grew by 0.4 per cent during the quarter. Of this category, vegetable production declined marginally, while subsidiary food crops showed increases. The enhanced production of potatoes due to higher producer prices and substitution of paddy lands for alternative crops were responsible for the increase in the production of subsidiary food crops. The production in the animal husbandry sub sector also improved notably due to the increase in production of poultry meat, eggs and milk. However, the poultry industry faced a crisis due to lower demand from the beleaguered tourism industry and the decline in domestic consumption owing to unfavourable economic conditions. The power cuts that prevailed during the quarter worsened the situation. The impact of these factors will also be felt in future production levels. Meanwhile, fish production increased by 4.3 per cent during the period under review.

In the manufacturing sector, the factory industry sub sector, which contributes around 80 per cent of the manufacturing sector, contracted by 10.6 per cent. The corresponding growth of this sub sector in the third quarter of 2000 was 11.1 per cent. All the sub sectors of factory industries recorded setbacks during the quarter, while the textiles, wearing apparel and leather products sub sector, the largest sub sector in terms of value addition and employment generation, declined by 16 per cent. The decline was largely due to the drop in demand from major buyers in USA and EU countries, which account for over 90 per cent of the total demand, owing to slowing down of their economies. The situation was aggravated by the terrorists' attack at the Katunayake International Airport that generated interruptions in the supply situation of the country. In addition, quota free and concessionary access granted by USA to the Caribbean and Sub-Saharan countries also adversely affected the competitiveness of Sri Lankan textile and garments exports to USA.

The domestic market oriented industries, which performed well during the first half of the year, also recorded declines mainly due to the drop in demand owing to unfavourable economic circumstances. Of this category, notable declines were recorded by chemicals, rubber, plastic and petroleum products (7.1 per cent), fabricated metal products (7.0 per cent), non-metallic mineral products (6.9 per cent), basic metal products (6.1 per cent), paper and paper products (5.5 per cent) and food, beverages and tobacco products (4.6 per cent). The processing of the plantation crops sub sector indicated a negative growth of 9.9 per cent in 2001 due to the setback in the production of tea and coconut. Meanwhile, the value added in the small industry sub sector also declined by 10 per cent, broadly in line with developments in factory industries.

The services sector, which includes transport, communication, port services, utilities, trade, financial services, tourism and public administration, recorded a negative growth of 2.9 per cent in the third quarter of 2001. In the third quarter of the previous year, the corresponding growth was 6.7 per cent. The setback recorded in the two major producing sectors, affected a negative growth in related services.

The electricity, water and gas sector, which expanded by 2.3 per cent in the third quarter of 2000, declined by 4.1 per cent in the corresponding quarter of 2001. Electricity generation dropped by 10 per cent, due to the imposition of daily power cuts for longer durations (upto 8 hours in certain periods) during this period. Electricity generation was impaired by prolonged dry weather conditions that prevailed in the hydro catchment areas and the termination of all the emergency hired plants at the end of June 2001. However, as a result of lower usage of emergency hired thermal power, which had high generation costs the value addition of the electricity sub sector recorded a drop of only 5.2 per cent. During the quarter, 45 per cent of the total electricity was generated thermally, in comparison to 52 per cent in the same period of 2000. Meanwhile, water distribution increased by 2.6 per cent.

The transport, port services and communication sector grew by 2.3 per cent in the third quarter of 2001. The telecommunication sub sector managed to grow at a rate of 23 per cent, and was the sole contributor to this growth. The provision of cellular phones increased by 49 per cent during the period under review, while that of email services grew at a faster rate of 54 per cent. Despite the considerable shrinkage of international trading activities and imposition of insurance surcharges, the decline in the port services sub sector was marginal, 1.5 per cent. The increased efficiency in this service contributed to partly offset the negative impact of the above mentioned factors. The decline in transport services, by 3.9 per cent, largely reflects the decline in road haulage due to the decline in production and trading activities.

The wholesale and retail sector, which includes both external and internal trading activities, declined by 10.3 per cent during the third quarter largely due to the considerable contraction of international trade. Value added in import trade declined by 14.8 per cent, as reflected by the drop in the volume of imports. All the sub categories of imports, consumer goods, intermediate goods and investment goods, recorded declines during this period. The general slowing down of economic activity, depreciation of the Sri Lankan rupee and increase in surcharges on imports (except for certain essential items such as food and pharmaceutical items) by 40 per cent since February 2001 were responsible for the decline in imports. Meanwhile, the value addition of export trade also contracted, by 15.8 per cent, mainly due to the decline in manufactured exports by 18 per cent. The domestic trade sub sector, which reflects the value addition of trading services of domestically produced and traded goods, declined by 3.6 per cent due to the decline in the production of domestic market oriented agricultural and industrial goods.

Despite gloomy economic conditions, the banking and insurance sector displayed a healthy growth of 5.8 per cent during the third quarter of 2001. The insurance sector performed well, attributed to uncertain economic conditions, and maintained a robust growth during the quarter. The commercial banking sector also performed comparatively well and grew by 3 per cent, in real terms.

The services (n.e.s.) category, which includes all other unclassified services such as hotel and related services, advertising, private education and health, private security and janitorial services and personal services declined by 2 per cent. Hotel and related services were greatly affected by the drop in tourist arrivals by 43 per cent when compared to the third quarter of 2000. The occupancy rate in hotels dropped to 32.1 per cent during this period. This was mainly due to the terrorist attack on the Air Force Base and the Airport at Katunayake in late July.

The construction sector, which indicated a healthy growth during the first half of the year, grew by 1.2 per cent during the third quarter, indicating that the slowing down of the economy has already affected this sector. The growth was mainly due to the continuation of infrastructure projects that had commenced earlier.

The mining and quarrying sector declined by 2.6 per cent during the third quarter due to poor performance in the mining sub sector. The gem mining sector suffered a setback of 10 per cent due to week global demand for precious stones. The growth of the quarrying sector, by 1.2 per cent, reflects the low growth in the construction sector, which uses most quarrying materials as inputs".

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