Current phase of global recovery and implications for Sri Lanka

Following is the address delivered by Senior Minister for International Monetary Cooperation Dr. Sarath Amunugama at the fourth South Asia Economic Summit (SAES IV) Plenary Session:

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 for International Monetary Cooperation Dr. Sarath Amunugama addressing the SAES IV Plenary Session

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 liberalisation 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.”1 Some analysts believe the European Union is “internally divided and externally weak.”2

Greece, Ireland, Portugal, and perhaps even Spain and Italy are facing damaging fiscal problems and are in desperate need of financial bailouts. Governments have imposed austerity measures to help curb spiralling debt, and in response there have been protests across Europe. Only yesterday, a general strike took hold of Greece in reaction to tough new austerity measures being voted on by the parliament.

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.3 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%, reaching 13% and 14% in some years. Per capita income grew by more than 6% annually between 1978 and 2003, far exceeding the 1.8% 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 2050.4

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% and above since the crisis.5

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 liberalisation, and as some analysts put it, a sense of “defensiveness” in the World Trade Organization.6

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%.7 Following the global financial crisis, South Asia’s GDP rose to 9.3% 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% in the first quarter of 2011.8

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% in 2009 to 12.7% in 2010.9

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.10 The region’s middle-class has also experienced significant growth, experiencing a 12% surge on an annual basis since 2000.

It is estimated that by 2025, South Asia may have a middle-class of approximately one 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.

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% 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.11

Despite being a member of BIMSTEC (the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation), the trade liberalisation component of the agreement has not been finalised 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% of exports going to Asia-Pacific countries. However, Sri Lanka depends heavily on intraregional import markets, with 73% of all imports coming from the Asia-Pacific region.12

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. India’s primary policy commitments, as outlined during the G20 Seoul Summit in 2010, revolve around prudent fiscal management through a fiscal consolidation program. 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.13

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.14

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 maximise 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%.15

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 10 countries in the region in terms of trade in goods and ranked fourth in terms of services. Exports grew by 17.5% in 2010 while imports grew by 24%, based on value in constant prices.16

Nonetheless, forecasts are less optimistic, showing the country’s export industry growing at 8.6% in 2011 and 7.5% in 2012, whereas the South Asian region on the whole is expected to experience a growth rate of roughly 10% in both years, bolstered primarily by India.17 Sri Lanka has been suffering a continuous merchandise trade deficit during the past decade, recording a deficit of $5 billion, or 10% 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% in 2009, higher than that of India and Pakistan.18

 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% to 60%, have gone to the USA and Europe.19 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% compared to the same period last year.20 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.  

Impacts of global developments on migration flows

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% 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%, 20% and 18% of all overseas workers in 2010.21

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% in dollar terms for 2009 to 2.7% 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% and 1.1% in 2011 and 2012, respectively.22

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% 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.

References:

1 World Economic Outlook September 2011: Slowing Growth, Rising Risks. International Monetary Fund, Washington D.C.: 2 011.

2 Trade and the Global Economy 2011. Presentation given by Dr. Razeen Sally at the Seminar on Global Economic Developments held at the Ceylon Chamber of Commerce on the 16th of September, 2011.

3 Ibid.

4 Wijesinha, Anushka. Sri Lanka in a Changing Global Economic Landscape. American Center Public Lecture held on 22nd September 2011.

5 Trade and the Global Economy 2011. Presentation given by Dr. Razeen Sally at the Seminar on Global Economic Developments held at the Ceylon Chamber of Commerce on the 16th of September, 2011.

6 Ibid.

7 Wijesinha, Anushka. Sri Lanka in a Changing Global Economic Landscape. American Center Public Lecture held on 22nd September 2011.

8 Global Economic Prospects June 2011: Regional Annex South Asia. World Bank, Washington D.C.: 2011.

9 Global Economic Prospects June 2011: Regional Annex South Asia. World Bank, Washington D.C.: 2011.

10 Wijesinha, Anushka. Sri Lanka in a Changing Global Economic Landscape. American Center Public Lecture held on 22nd September 2011.

11 Asia-Pacific Trade and Investment Report 2011: Post-crisis Trade and Investment Opportunities. United Nations Economic and Social Commission for Asia and the Pacific. United Nations, New York: 2010.

12 Ibid.

13 The G20 Seoul Summit Leaders’ Declaration: November 11-12, 2010 – Annex I.

14 Ibid.

15 Asia-Pacific Trade and Investment Report 2011: Post-crisis Trade and Investment Opportunities. United Nations Economic and Social Commission for Asia and the Pacific. United Nations, New York: 2010.

16 Ibid.

17 Ibid.

18 Ibid.

19 Wijesinha, Anushka. Sri Lanka in a Changing Global Economic Landscape. American Center Public Lecture held on 22nd September 2011.

20 Asia-Pacific Trade and Investment Report 2011: Post-crisis Trade and Investment Opportunities. United Nations Economic and Social Commission for Asia and the Pacific. United Nations, New York: 2010.

21 Sri Lanka Migration Profile 2010. International Organization for Migration.

22 Wijesinha, Anushka. Sri Lanka in a Changing Global Economic Landscape. American Center Public Lecture held on 22nd September 2011.

Sources:

Asia-Pacific Trade and Investment Report 2011: Post-crisis Trade and Investment Opportunities. United Nations Economic and Social Commission for Asia and the Pacific. United Nations, New York: 2010.

BBC News: Greece unrest: Strike to continue amid austerity vote. British Broadcasting Corporation World News. Accessed 20 October 2011. Available: <http://www.bbc.co.uk/news/business-15377398>.

BBC News: EU austerity drive country by country. British Broadcasting Corporation World News. Accessed 20 October 2011. Available: <http://www.bbc.co.uk/news/10162176>.

Global Economic Prospects June 2011: Regional Annex South Asia. World Bank, Washington D.C.: 2011.

Sri Lanka Migration Profile 2010. International Organization for Migration.

Trade and the Global Economy 2011. Presentation given by Dr. Razeen Sally at the Seminar on Global Economic Developments held at the Ceylon Chamber of Commerce on the 16th of September, 2011.

Trade Indices – Annual (1990 – 2010). Central Bank of Sri Lanka. External Sector Statistics.

The G20 Seoul Summit Leaders’ Declaration: November 11-12, 2010.

The G20 Seoul Summit Leaders’ Declaration: November 11-12, 2010 – Annex I.

Wijesinha, Anushka. Sri Lanka in a Changing Global Economic Landscape. American Center Public Lecture held on 22nd September 2011.

World Economic Outlook September 2011: Slowing Growth, Rising Risks. International Monetary Fund, Washington D.C.: 2011.