Sri Lanka's Economic Troubles


It may not be any consolation to an average Pakistani but Pakistani economy is not alone in returning to the bad old days. Sri Lanka is keeping pace with Pakistan.
While Sri Lanka's long running civil war has largely been limited to the north and east, leaving the populous, well-off west largely unscathed, its stresses are beginning to show in the island nation's economy.

The Economist reports that Sri Lanka's annual inflation is close to 30%, the highest in South Asia. The rupee has appreciated against the dollar, further hurting exporters. By one estimate, economic growth—which was 7.6% in 2006—will be 4.3% this year. As elsewhere, inflation is being driven by high food and energy prices. But in Sri Lanka, 25-year average annual inflation is 12%. Monetary policy has been too loose, in part to finance the war. Including the cost of resettling refugees, the war eats up around 30% of the government’s budget.


Sri Lanka's exports and economy have been propped up by special EU preferences for Sri Lankan textiles. Under a concession known as “GSP Plus”, awarded in 2005 to help Sri Lanka rebuild after the 2004 tsunami, Sri Lankan exporters enjoy preferential tariff treatment from the EU. As a result, the EU is Sri Lanka ’s biggest export market, accounting for annual sales of around $1 billion; about half are covered by GSP Plus. But there is a problem with the rules of GSP Plus. Beneficiaries must comply with 27 international conventions, on environmental, labour and human rights standards. And on the last of these, Sri Lanka is struggling. The agreement expires at the end of 2008. The Economist believes that it will not be renewed.

What has upset the EU are various reports indicating government complicity in the abduction or murder of hundreds of Tamil and Muslim men. It is at war with human-rights groups. It has refused to let the UN High Commissioner for Human Rights set up an office in Sri Lanka. The EU cancellation of Sri Lankan preferences would mean 4% cut in Sri Lanka’s garment exports. Overall, it would cost 2% of GDP. If the EU renewed the agreement without progress on human rights, it might be challenged at the World Trade Organization—as happened to an EU trade sop to Pakistan in 2004.

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