Current phase of global recovery and implications for Sri Lanka
In the aftermath of the global economic crisis, there has been a
noticeable shift in economic clout, moving from the USA and the
debt-plagued countries of the eurozone, to the emerging markets of Asia.
Senior Minister
Dr Sarath Amunugama |
The Obama administration has been struggling with economic fragility
at home and is showing ambivalence on trade. The stimulus package drawn
up by the Obama administration has forced the White House to focus
largely on its domestic problems. There have been no key free-trade
initiatives in the recent past and there is a sense of defensiveness
with regards to trade agreements. Moving faster on greater trade
liberalization is currently a low priority for the US administration.
The European Union (EU) is suffering from its own dilemmas. Following
the global economic crisis, the single market for the euro has been
under stress. Several countries are facing sovereign debt problems, and
there is a crisis in the eurozone. There is uncertainty about the
outlook of the euro area, and the duration of the debt crisis has
exceeded the forecasts of certain key analysts.
The International Monetary Fund’s (IMF) World Economic Outlook 2011
report states that the euro area’s sovereign debt and banking sector
problems have “proven much more tenacious than expected.” Some analysts
believe the European Union is “internally divided and externally weak.”
Greece, Ireland, Portugal and perhaps even Spain and Italy are facing
damaging fiscal problems and are in desperate need of financial
bail-outs. Governments have imposed austerity measures to help curb
spiraling debt, and in response there have been protests across Europe.
A general strike took hold of Greece in reaction to tough new austerity
measures being voted on by the Parliament.
Economic powerhouses
On the other hand, economic powerhouses are clearly emerging in the
East. Many of the rising economies in Asia were not as badly affected by
the global economic crisis, and some believe this is due to better
balance sheets and less debt prior to the crisis. Such was the case with
China. With respect to trade, China is now one of the Big Three, in
terms of exports as well as imports. Since the 1980s, the country’s
annual GDP growth rate has exceeded 9 percent, reaching 13 percent and
14 percent in some years. Per capita income grew by more than 6 percent
annually between 1978 and 2003, far exceeding the 1.8 percent growth in
Western Europe and the USA. China is now the second largest economy in
the world, in terms of purchasing power parity (PPP). As of 2010, the
country had a GDP of $10 trillion, with some analysts placing it on the
path to overtaking the USA as the largest economy by 2050.
Another rising Asian economic giant is India. It weathered the global
economic crisis relatively well, with its recovery based strongly on
domestic consumption. Analysts view this economy with optimism, with GDP
growth rates reaching 10 percent and above since the crisis. However,
despite having emerged as a global economic and political power, India
is not in the same league as China. India does not have the same export
power, and its GDP was measured at $ 4 trillion, placing it in fourth
place in global rankings, two places behind China. India has not enacted
significant reforms since 2004, and as such there have been no large
advancements in agriculture, services, or industry. Trade reforms have
also been lacking, with little unilateral liberalization, and as some
analysts put it, a sense of ‘defensiveness’ in the World Trade
Organization.
Regional Economic Performance
However, India has helped lead South Asia into a new era of
development. The region’s growth rate from 2003 - 2008 was roughly 7
percent. Following the global financial crisis, South Asia’s GDP rose to
9.3 percent during calendar year 2010, but large fiscal deficits and
high price pressures have led to macroeconomic policy tightening,
resulting in a slowdown in the region’s growth to 7.5 percent in the
first quarter of 2011.
Rising food and fuel prices have led to reduced private consumption
growth, but the region’s domestic demand has been bolstered by strong
exports to robust developing economies, and according to the World
Bank’s Global Economic Prospects report, there has been an annual
percentage change in exports in the region from 6.3 percent in 2009 to
12.7 percent in 2010.
There are significant demographic transitions taking place that may
foresee the region giving rise to a powerful labour force. Analysts
estimate that by 2020, South Asia will have the youngest labour force in
the world, with 18 million people being added to the working-age
population every year for the next 20 years. The region’s middle-class
has also experienced significant growth, experiencing a 12 percent surge
on an annual basis since 2000. It is estimated that by 2025, South Asia
may have a middle-class of approximately 1 billion people, with India
projected to have the largest middle-class in the world at that point.
This growth will have important implications in terms of regional trade,
with Sri Lanka standing to gain significantly from the increase in
purchasing power among its neighbour’s middle-class.
Trade agreements
However, the degree of regional trade that is currently taking place
is a fraction of its potential. The South Asian Free Trade Agreement (SAFTA)
has failed to produce any significant benefits for Sri Lanka in the
recent past. The country is engaging less in regional trade agreements (RTAs)
compared to its South Asian neighbours, India and Pakistan. Sri Lanka
has four RTAs in place, covering 21 percent of its total trade, and in
addition to SAFTA, has in force the Asia-Pacific Trade Agreement and two
bilateral trade agreements with India and Pakistan. Despite being a
member of BIMSTEC (the Bay of Bengal Initiative for Multi-Sectoral
Technical and Economic Cooperation), the trade liberalization component
of the agreement has not been finalized and thus does not count towards
the number of Sri Lanka’s enforced agreements. Most of Sri Lanka’s
exports reach markets outside the Asia-Pacific region, with only 27
percent of exports going to Asia-Pacific countries. However, Sri Lanka
depends heavily on intraregional import markets, with 73 percent of all
imports coming from the Asia-Pacific region.
Sri Lanka’s level of engagement with the G20 group of countries is
rather limited. In the South Asian region, Sri Lanka can only look to
India to represent its interests to the rest of the G20 group. Despite
the view that large G20 economies like India are expected to discuss
with and relay the needs of smaller economies in its surrounding area,
like Sri Lanka, Bangladesh and Nepal, this is not happening. Most
countries in the G20 group are currently focusing on their domestic
economies and trying to resolve their fiscal problems.
Policy objectives
India’s primary policy commitments, as outlined during the G20 Seoul
Summit in 2010, revolve around prudent fiscal management through a
fiscal consolidation programme. The country aims to achieve this through
targeting a reduction in the public debt - GDP ratio, thereby hoping to
create an environment conducive for investment.
Intraregional trade policies are stated among the policy objectives,
outlining the need to increase engagement with the rest of the world
through regional, preferential and free trade agreements such as the
ASEAN FTA, Malaysia FTA, Korea CEPA and the EU. These agreements, it is
stated, aim to promote openness and fair trade necessary for the
country’s growth and are intended to avoid protectionism.
Despite Sri Lanka’s slow growth in multilateral agreements, the
country’s trade relations with India have been gathering pace. The
India-Sri Lanka Free Trade Agreement (ISFTA) has seen increasing amounts
of trade between the two countries since its inception ten years ago.
Unfortunately, this strengthening of economic relations has not expanded
sufficiently to have led to a signing of a Comprehensive Economic
Partnership Agreement (CEPA), despite prolonged discussions over several
years.
It will be in Sri Lanka’s benefit to maximize economic relations with
its Northern neighbour. India is seen as the gateway for Sri Lanka to
engage in wider regional integration with the rest of Asia. The economic
giant has pursued closer economic relations with its more distant
neighbours by signing Comprehensive Economic Cooperation Agreements (CECAs)
with Japan, Malaysia, Singapore and South Korea, as well as a Trade in
Goods Agreement with the Association of Southeast Asian Nations (ASEAN).
India has also commenced discussions on free trade agreements with the
Gulf Cooperation Council (GCC) and the European Union. Based on the
UNESCAP Asia-Pacific Trade and Investment Report 2011, Sri Lanka’s
exports are well-matched to India’s import demands, with a
complementarity of roughly 59 percent.
Sri Lanka’s export industry
Sri Lanka has nonetheless performed positively in the recent past
with respect to international trade. The country is currently ranked
sixth among ten countries in the region in terms of trade in goods and
ranked fourth in terms of services. Exports grew by 17.5 percent in 2010
while imports grew by 24 percent, based on value in constant prices.
Nonetheless, forecasts are less optimistic, showing the country’s
export industry growing at 8.6 percent in 2011 and 7.5 percent in 2012,
whereas the South Asian region on the whole is expected to experience a
growth rate of roughly 10 percent in both years, bolstered primarily by
India.
Sri Lanka has been suffering a continuous merchandise trade deficit
during the past decade, recording a deficit of $ 5 billion, or 10
percent of GDP, at the end of 2010. The country’s relatively high
export-dependency is reflected in its share of exports in GDP of 17.2
percent in 2009, higher than that of India and Pakistan.
The slow recovery of developed economies following the global
economic crisis may hamper Sri Lanka’s export market and remittance
income. The bulk of Sri Lankan exports in the last decade, ranging from
55 percent to 60 percent, have gone to the USA and Europe. The domestic
problems in America and the eurozone crisis may see demand for Sri
Lanka’s textile and garment industry suffer as consumption and
purchasing power take a dip in the USA and the EU.
The recent revolutions and continued instability in the Middle East
and Northern Africa have led to rising oil prices, leading to domestic
inflation in Sri Lanka, which in July 2011 rose to 7.5 percent compared
to the same period last year. High inflation may dampen private
consumption and increase local production costs, possibly leading to
reduced competitiveness in Sri Lanka’s export sector. Likewise, Sri
Lanka’s tea exports may suffer a drop in the Middle East, one of its key
export markets, due to the recent political turmoil and civil unrest.
The political turmoil in certain Middle Eastern countries and their
associated unrest may not significantly impact Sri Lankan migrant
workers. The Middle East plays a key role in hosting Sri Lanka’s migrant
workforce, attracting over 90 percent of foreign employment departures
from the country.
Most of these workers are employed in relatively stable states. Saudi
Arabia, Qatar, and Kuwait, all of which managed to maintain some degree
of stability during the civil unrest, are the top three destinations for
Sri Lankan migrant workers, attracting 27 percent, 20 percent and 18
percent of all overseas workers in 2010.
Remittance flows are unlikely to have suffered significantly during
the social uprisings, as it is doubtful workers in these countries
suffered substantial real-term decreases in salaries as oil prices rose.
However, in Bangladesh, there have been substantial numbers of migrant
workers returning from Gulf States. Remittances took a dip from 17.1
percent in dollar terms for 2009 to 2.7 percent the following year.
On a separate note, remittance flows from Sri Lankan workers in the
European Union may take a downward turn. The euro crisis that is
currently spreading through the EU may lead to a decreased demand for
services offered by Sri Lankan migrant workers. The International
Monetary Fund projects the eurozone to grow at 1.6 percent and 1.1
percent in 2011 and 2012, respectively.
There is weakening consumer demand, a sluggish job market, and
austerity measures are being imposed by governments across the region.
Nonetheless, the number of Sri Lankan migrant workers in the EU is
relatively low. According to the Sri Lanka Bureau of Foreign Employment,
Cyprus is the only European country among the top 12 destinations for
migrant workers around the world, but is still relatively low, having
attracted only 1.4 percent of all Sri Lankan overseas workers in 2010.
In conclusion, it is evident that the global economic landscape is
changing rapidly. From America’s domestic problems to the EU’s debt
crisis to the Arab world’s civil unrest, there are many transformations
taking place. The implications these have for South Asia are manifold.
However, what will be paramount to Sri Lanka’s successful development
will be that we maintain close ties with our neighbours and strengthen
our regional integration. |