Ceylon - Current economic position and prospects

A.S. 15-b RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CURRENT ECONOMIC POSITION A XTY A 114 Lj PROSPECTS OF CEYLON. June 5, 1954 Department of Operations Asia and Middle East C-urren,cy 'onversion $ = Rs. 4.762 Rs. 1 . $0.21 1 , 0 0 0 , 0 0 = $, 0 E%S. APVVV?Vvv ýP4ÂU,UUU TABLE OF CONTENTS Page No. Basi Data Charts IS nt ilrd c ion .... .4.. . . . . .. . . ..--.....--- .-.-.---- ---.......... . The Siuimo%ln YAfnrn t K^orn r (95-5) . .........-f-- 2 -P~~ - - - S K B ................................ III. Balance of PayNments and Budgetary Difficultes ........... 6 ÄV eauet Overcome te n Crisis .... ........... m f mls . 1 eyos Dev%elo.enUtLÄv Prg ram 6 8 9 ... .. ............. * * * * . . . . . .... 12 Vi. BaLc ofPyä t Prospects............... 6 Staistca Appendix t CElLUN Basic Data Area Total: 16.2 million acres (25,332 sq. miles) Cultivated: 3.2 million acres Population (at end of 1953): 8.3 million Rate of growth (1942-1952): 2.8% per annum Density of population (1953): 325 per sq. mile of land 1670 per sq. mile of cultivated land National Income Income Per capita in 1952: US$ 120 Gross national Product (1951; Rs. million, Gross national expenditure (1951 at factor cost) Rs. million, at market price) Tea 800 Consumption: Rubber 571 Irmorted goods 1524 Coconut & products 539 Local goods 1595 Rice 200 Services 3/ 804 Other agricultural Remittances abroad 231 nraduts 1/ 590 Gross canital Industry] 569 formation 665 Trad and trnnanort 66 Services 804 Total 4819 Total 4619 Excise duties and Qnh.iiAM -200 L/ Including forestry and fisheries. fAuLAnuLuc oIuoU'ns vAvu Including Government. Composition of Foreign Trade (1952-1953 averagej percentage of total value) Exports Imports Tea 53 Rice and wheat 30 uXr C, v-Au-- r'vu u0a)^ Coconut Textiles 12 proQucts Vo usU VU14VIou- Other 4 es & fuels 38 Basic Data - 2. Balance of Payments, 1953 (exchange control data; Rs. million) Credit Debit Merchandise 1502 1658 Remittances & dividends 31 126 Services 203 177 Deficit on current account -225 Private capital, errors & omis- sions 27 Total deficit -198 Government_Finance, 1952-53 (second revised estimate) (Rs. Million) Revenues Exnenditures O)rAinpry hiiAoit (tqr. wib_ sidies) 871 691 ona no4haAn Int.) - 11d Railway and electricity 85 96 JS4N~~IR IN.!4 I~n -t, yw4 r _N Tkit M"46at 14n T . -ee 3 114 Long-term sterling debt* 13O Trasdur"y b16J.QA4 Central Bank Advances - Loans from Savings Banks and other agencies 5T Total public debt 935 Government cash balances 43? *Net of capital accumulated in Sinking Fund and excluding War Loan relent to the UK. ./ Including the whole amount of the 65 million floated in 1954. Provisional. Net Official Foreign Exchange Reserves, April 30, 954 Total Re. 602 million y/ Excluding Sterling Loan Sinking Fund. CEYLON FOOD GRAIN SUPPLY ITwOIUANSc nF TfNpS) 1,200 YFÄRLY 1,200 TOTAL SUPPLY. .f i, OTHER IMPO RTS 800- 800 400 --400 0 0 GOVERNMENT FINANCE (MILLIONS OF CEYLON RUPEES) . %0020 FISCAL YEARSl120 TOTAL EXPENDITURES-,CA,PIJAL EXPENDITURES:---- 8001 TOTAL REVENUESM- 080 UNET FFOD NSUBSIDY 600 Äon 800 ^T^^E00 0 1947-48 1948-49 1949-50 1950-51 1951-s2 952-3 953-54 954-55 GROSS NA TIONAL PRODUC ANä OTOFL-N uNKUDD Ni'dmVI4A rrnUIUkj>i AU UZ i~ Ur LIVINldb (BILLIONS OF CEYLON RUPEES) (INDEX, 1947-49=100) YEARLY 250 5 1200 GROSS NATIONAL PRODUCT 4 (4-L EFT SCALE) COST OF LIVING (Colombo) 1 z _ . (RIGHTSCALE--3) 2- 1947 1948 1949 1950 1951 1952 1953 1954 11/17/53 No. 829 IBRD - Economic Stoff GE Y LUN EXTERNAL FINANCE iDi i IAIC nr rcvi AM Dilorec 2.0 2. YFARLY ANET INVISIBLES* 2.0 EXPORTS IMPORTS PLUS 5 NET INVISIBLES 1.0 1.0 .5 . 1947 1948 1949 1950 1951 1952 1953 1954 *Including private capital movements FOREIGN EXCHANGE RESERVES (MILLIONS OF CEYLON RUPEES) 1,000,- 1,.000 YEARLY 800 800 AVAILABLE OFFICIAL rnDric.M rcCroLIrC bUU bUU 4001 400 200I [T7200 0 -0 1947 IQAQ 1949 1950 IO5I 95IQI1A 11/17/53 No.830 IBRD- Economic Staff -1- Summary and Conclusions lift ba"tUl ~~.~ I ±l at'U .Ves I 'e ofl -jUk,1i1y EILV t! VME-Y gvd LO dependence on foreign trade and the rapid rate of growth of the popula- ton9 whic na been 1.21 over the las 10 years. inecy percn^ o1 Ceylon's forein earnings are from exports of tea, rubber, and coconut products. On the other hand, the country has to import a substantial part of its food requirements and most manufactured goods it needs. Con- sequently, movements in the terms of trade, which are quite outside the control of the Government, exercise a great influence on every part of the economy. Except while the Korean boom lasted, the terms of trade have been consistently worse than before the war. 2. During the war Ceylon accumulated sterling-balances which amounted to Rs. 1,260 million at the end of 195. Replenishment of stocks run down during the war and relaxation of import controls caused a sharp decrease in 1946 and 1947. Thereafter the rate of reduction was small until June 1950 when external assets amounted to Rs. 882 million. In the next 18 months the Korean boom brought great (but short-lived) prosperity to Ceylon and external assets rose to Rs. 1,209 million by January 1952. Between 1949 and 1951 national income in money terms increased enormously. Govern- ment revenue rose substantially but government expenditures rose even more, In part the rise in government expenditures was due to increased investment under the six year program on which Ceylon embarked in 1948 with the object of increasing production of food and manufactured goods; in part the rise was due to enormously increased food subsidies. Vith the collapse of the Korean boom and the sharp deterioration in the terms of trade, the position grew rapidly worse. Between February 1952 and August 1953 external assets fell rapidly (i.e., to Rs. 669 million) to a level below that of June 1950 and the overall cash deficit of the Government reached nearly Rs. 500 million. 3. Before the war. adjustments in the balance of payments were more or less automatic with a time lag. A reduction in exports induced a reduction in income and, consequently, in the demand for imports. However, in 1952 and 1953 this relationship between exports, national income, and imports was not kept. Government revenues fell but government exDenditures were maintained. the deficit being met to a large extent by inflationary borrowing. Bank credit was expanded to meet about three quarters of the deficit. bf which the Central Bank provided directly about Rs. 250 million. This deficit financing almost vhollv offset the redution in income indu,ed by fallino exort earnings. 4. The first step taken by the Government to remedy this state of affairs was the announcement of an austerity nrooram in Sentemher 19;. These measures were quite inadequate and early in 1953 it became ,enerally recognicesd that meirA tir nP would have tr in t nnhe tha t inflatAnn- ary poli.cies would have to be stopped. Therefore, in the first instance, -ii- food subsidies were sharply cut in July 1953, a move which was expected to reuWce Ln o11y rOvU.-u=u expeuniure U tUe demand for importU consumer goods by the public. Even so, the 1953-5L budget envisages an overall UW1LJ.V.LU U1. AD* V7 F.L.Ul . nis reversal of previous policies coincidea witn The ena o Tne Six-Year Plan. Between 1947-48 and 1952-53 the Government had spent Rs. Le,240 million on development and social investment, but the increase in output resulting from the Six,-Year Plan was not significant. In fact, the increases achieved outside the program have been greater. The most important increase in these six years appears to have been in the production of rice. 6. The latest budget marks a turning point in the development of Ceylon's economy. Apart from the sharp reductions in the food subsidies, work on most industrial projects started under the first six-year plan was suspended, and the Government decided not to introduce a second six-year plan. Instead, the Government has set itself a target of expenditure on development totalling Rs. 1,500 million, but this will be spent only as re- sources are seen to be available. P. Planning Secretariat has been estab- lished, which will have the task 'of determining the priorities between various projects for the use of such resources as are available from time to time. 7. The change in fiscal and monetary policies has already begun to show results. Ceylon has had a trade surplus since January 1954 and a surplus in its balance of payments since December 1953, although this favorable turn has to some extent been due to an imorovement in the terms of trade. Official external assets rose from a low of Rs. 480 million in December 1953 to Rs. 602 million in Aaril 195L. In March 195L a L9 million sterling issue was successfully made on the London market. Nevertheless, no relaxation of pre- sent nnliniAn will he nen-nih for som tMimA n n-m n n in AAit.in mu h more attention will have to be paid in the future than has been paid in the nast to devoting such resources as are availble for develonment to snund projects assigned to increase food production and other consumer goods. If nresent nolicies are followed. and nrovidad that the terms of trqde do not worsen, Ceylon whose total foreign debt, all in sterling, is' only about !2A millinn- should he able to rvAn % nnirllr out of fonian echange earn- ings a moderate aMount for the service of new foreign debt. introduction 1. Basically, Ceylon's economy is agricultural, specializing in the production of commodities for export. Tea, rubber and coconut products account for 90% of the value of CeylonIs exports. On the other hand, nearly two thirds of the country's requirements of rice, flour, sugar, and other foods and almost all its requirements of fuel and manufactured goods (of which textiles are the most important) have to be imported. Export income in recent years has directly amounted to over one third of the national income. The economy is peculiarly de- pendent on movements in the terms of trade which, as will be seen, have fluctuated violently since the end of W-orld far II. 2. Before the war, Ceylon had in almost every year foreign trade surpluses which were large enough to meet its deficits on invisible ac- count (arising from payments on foreign investment, remittances, etc.). During World 'far II. exports increased while imports were reduced, and large current balance of payments surpluses were achieved despite an ad- verse move in the terms of trade. 3. Between 1939 and l9h5 foreign assets rose from Rs. 275 million to Rs. 1,260.million; currency in circulation from Rs. 45 million to Ra. hh9 million; and net public debt from Rs. 142 million to Rs. 391 million. ). The pntwar history mf Cvnnt nonomv falls into three fairly clearly defined periods: (i) From the end of 1945 to the outbreak of the Korean War 4In.Tima 10<0- (ii) Fromn Jine 10<n ' +.ha bei nn Vo e akiinr 1010 - (iiil F-rnyn+n t hoirmnirka Af Fn'hYnIrV IA9 ton t.he ,t _ - - - I -, - - be pr- en . The adverse terms of trade which obtained throughout the war have not, ex- -Y'n,n+ r^v. +,hn 011^"+~ -mv4w P%A n +Tin Yen m-n -wi Am 4n%rtvne ciievr%A 4 vf4Ynv4ti.Tqr airitnE 1945. This fact combined with the need for replenishing stocks rm down Adu4n +ka -^" tn n,A +I,a +n+ am nmk4+44ae Anal ama+ O+ft"+ m^.Pd that Ceylon had little room for over-optimistic policies. The failure to I LMthe i ft"j,apentC-2-1. facts~ U .14- VjJIJLZ .V%'A UVJ U k~J.LVQ A,% V%VIUU"%L, C64U financial difficulties, However, it is felt that these difficulties whou ld e doure eoe nstabe o oentstrength vo Cu - -c-uu-y which could be developed with good management, - 2 - I. The Situation before the 'Norean War (1945-50) 6. The strong financial position in which Ceylon found itself at the end of the war was not long maintained., Foreign assets (including the assets of commercial banks) declined from Rs. 1,260 million at the end of 1945 to Rs. 947 million at the end of 1947--a fall of Rs. .313 mil- lion. In the next 2-1/2 years foreign assets fell only by Rs. 65 million to Rs. 882 million at the end of June 1950. The rapid fall in the imme- diate postwar years can largely be attributed to the need for restocking and the relaxation of import controls. The comparative stability there- after was due to the fact that the volume of exports rose faster than the volume of imports, both being higher than before the war. The fact that despite this there continued to be some decline is because the terms of trade which had turned against Ceylon during the war showed little improve- ment; in 1948 the index stood at 69 and in 1949 at 77 (1934-38 a 100). The reason for these adverse terms of trade is easy to see. 7Whereas the Drice of rice rose to about six times the prewar level. the price of tea (which accounts for more than half of Ceylon's export earnings) was only three times and that of rubber only 60% above the prewar averaLe. 7. Internally develonments were on similar lines as can be seen from the budgets for the three years beginning in 1947, the first year of Caents independence. In each of the years from 1947-48 to 1949-50 the budgets were in overall deficit; the aggregate deficit during this period amounted to nenrlv Rs. 3O nili-on- ThAse definitsVT were met partly by drawing down government cash balances and partly by borrowing, Cash bal- ances amonted to Rs. 918 million at the aginnine of 10)17-1 aM WA"a reduced by about Rs. 160 million in the three years thereafter. In the same period th Gv.r.nent brrro.vd nrearly s -9 170 ilo,o whichabu Rs. 110 million was obtained by expanding bank credit to the Government, i..M a yrly Irat of+ ^ . 1 A 116 r%V%n Betnxr Septeevr- 101,7 fi"d qSeptv_ ber 1950 net rupee debt rose from Rs. 309 million to Rs. 445 million, but motv' han~ ha,f o~f -his inces reerpre-seente boorroovi.gg J_n Uhee f-.^-r , Treasury bills (they reached the amount of Rs. 78.6 million at the end of lfna 9h-5) rin-;g these thrCe year tf.q E---A4+i_" / 4-+-1- Rs. 350 million, an amount approximately equal to the entire budget deficit J.L %AA~ k L~ %40 v4 Il l uugury pucly J.uy uuru.Lllg ou 4 p u z wi VL ine wVVIuJLU Con- servative. In general the deficits were not excessive although that 11 [Lnugu.Ly UpU.JJg, Uy !,uan P ixen"U-ure 1. meanu capITa expenalture, met from the proceeds of Government long-term borrowings on development projects; but, in fact, not all "loan" expenditures have been on develop- ment projects, and a considerable amount of capital expenditure on develop- ment projects has been met from current revenues. of 1949-50 was larger than those earlier. The overall cash deficit was Rs.153 million as compared to Rs. 156 million of Loan Expenditure. To meet this deficit cash balances were drawn down by Rs. 75 million. The value of Treasury bills outstanding increased by Rs. 62.4 million and Rs. 35 million were raised by floating loans. In spite of the expanding money volume, external assets in 1949-50 were relatively stable. This stability was undoubtedly due in part to the improvement in the terms of trade that occurred after the devaluation of the Rupee in September 1949. In the absence of this improvement it is probable either that imports for consumption could not have continued at the same level or that resources for development could not have been provided except by drawing down for- eiga assets. II. The Korean Boom 9. As it turned out. the terms of trade scored a further sharo im- provement with the outbreak of the Korean War. The boom that followed caused a marked but only temoorarv imorovement in Cevlon's nosition. the effedts of which lasted until approximately January 1952. The prices of almost all expnort commdities rnse so much that the value of exrnorts in thA year after July 1950 was nearly double the level of the preceding year. The volume of Aynnrtn inrerPnA onlv livhtlyv. Thn Phnns in rnnrt nrd imnnrt nrines can be seen from the following table of price indices: (1934-38 - 100) Exports 1949 1950 1951 Tea 303 351 364 Rubber 102 393 o)U Coconut products 641 857 1006 All products 324 439 534 Imorts All nrodnets L23 h3h 51L Terms of trade 77 101 104 10. National income (GNP) increased enormously to Rs. 4,620 million 4. TO le e1A onvownman+ e 4-rom-a A f"ro%n Ra - m41 14n 4n 1 A to Ra. 875 million in 1951-52. The effect of this boom on the balance of '..A n Wa , a n W%t ..§ .. Alm.&."'W A (In Rs. Million) Foreign Trade L949 1950 1MI1 Exports 1063 1563 1904 Imnorts 1029 1167 159 Surplus 34 396 345 }/ Customs figures. 11. Ceylon also began to run a,balance of payments surplus, which was estimated at Rs. 146 million in 1950 and RE. 116 million in 1951, and external assets rose as is shown in the following table: Total External Assets (In Rs. Hillion) End December 1949 93L.O i June 1950 882.4 It December 1950 1076.6 " March 1951 1240.2 t June 1951 1184.7 " December 1951 1185.3 " January 1952 1208.6 12. The effect on the budget is shown in the following table: Government Budgets - Actuals (Rs. Million) 1/ 1949-50e 1950-51 1951-52 (including deficits of Railway and 563.2 730.7 944.3 Of which: net food subsidies 41.2 138.5 252.4 Ordinary Revenue 623.3 835.9 875.3 Of which: customs 355.9 527.7 487.2 ourplus or deiicit k-j on ordinary account 60.1 105.2 -69.0 Loan Expenditure 155.6 146.7 202.9 Overall deficit 95.5 41.5 271.9 Fiscal year October 1 - September 30. 13.. It is significant that, although annual government revenue in- creased by Rs..252 million in this period, ordinary expenditures rose by Rs. 360 million. Much of the revenue increase resulted from the higher customs receipts which was due to a large extent to an increase in export duties. The increase in the expenditure on food subsidies, which accounted for Rs. 211 million of the increase in ordinary expenditure of Rs. 360 million, was also due to government action. In October 1950, to counter the rising cost of living, he Government reduced the rationed price of rice from 36 cents per meisuret' to 30 cents and in December 1950 made a further 1/ A measure of rice is approximately 2.3 lbs. reduction to 25 cents. The price of rationed rice was reduced and kept at this level until July 195 despite a substantial increase in price of the imported rice. The substantial rise in the price of imported rice increased not only the value of imports but also the budgetary outlay on food subsidies. 14. From 1949 to 1951 the Colombo cost of living index rose by about 10%A whereas it is estimated that the average real per capita income rose bY about 20'0; and the index of real wages of estate labor increased from 121 to 157, or by nearly 30% during this period. The relatively small increase in the cost of living index and its stability over a period of more than two years was due to the low price of rationed rice and to greatly enlarged imports of consumer goods in general, made possible by liberal import policies. 16. The increase in national income provided a good opportunity for floating government loans. In the second half of 1950 and in 1951 the Govern- ment raised Rs. 150 million of a Second National Development Loan, the areater part of which was obtained from non-banking sources. These funds and higher revenues enabled the Treasury to strengthen its position considerably. The government cash balances rose from Rs. 56 million in September 1950 to Rs. 140 million in November 1950 and were maintained at this level until January 1952. At the same time. Teasury bills which had nearly reached the legal maximum of Rs. 100 million outstanding by November 1950 were almost all retired in the eleven months following. 17. Cevlon which benefited greatlv from the high ex3ort prices was in a particularly vulnerable position if the terms of trade should suddenly change adversely. For any such chanre would mean that real income and govern- ment revenue would suffer. Nor could it be expected that by the time the torns of trAdA vTnnP. in~cirap mniin+.r wmrildi nnninp-n.qatA to nymr Pzinni-fi cant extent. 18. In fact, in an economy like Ceylon's a rapid rise in the national income resultinq from increased exoort earnings (in the absenen of' rointer- vailing action by the Government) inevitably stimulates the demand for im- nortnd aoods- and this demand oontinies fnr a timp Pmvn affter naionnn1 inonmA declines. .6. --b Balance of Payments and Budgetary Difficulties 18. The financial and economic situation changed sharply for the worse from February1952 onwardsj and the effect of this change on Ceylon's oxternal financial position is shown in the following table: (In Rs. Million) 1952 Exports 1502 ) Imports 1705 ) Trade deficit - Rs. 203 million Balance of payments deficit on current account - 4h6 Reduction in external assets (including commer- cial banks) from Rs. 1185 million to Rs. 837 million - 348 The value of exports declined by 21% although the volume increased by 4;%. Import prices rose by 10% and import volume by 1%. 19. The fall in export earnings due to individual export items was as follows: Fall in 1951 1952 Earnings (Rs. Million) Rubber 582 363 219 Coconut products 320 231 C9 Tea 800 723 77 Others 202 185 17 1901 1 0- LOP Rubber suffered the sharna.t d ran in its nrTnAn- ThR aver=ae nripp mf +.hA best quality rubber in 1952 was Rs. 1.38 per pound in the Colombo market as compared with Rs. 2.1q ner pound in 1951. 9n Thp irt, 'eAA mf impo-rt M1P valu bRs- I)JI Yillion in 1929 WasQ mainly due to the increase in import prices. At the end of 1952 the terms of trAAdepwre 75 asq conmpanred rrit 1014 I t +ha onr rir I * Tho f'1- n- 1 table shows the principal import items in 1952 and their increase over l QCN (In Rs. Million) Foodstuffs 791 (U95) (of which. rirAl (1991 (1991 Petroleum products 132 ($18) Mahinery_ electrieal goods, metals 189 ($15) Textiles 290 1. L1~ The u-nit vlu of rice- rose by-i 38%(f r^om Re 57pemtrconi191t Rs. 823 in 1953). 21. Internally, too, the government financial position deteriorated. closed with a deficit of Rs. 272 million. Loan expenditures rose to Rs. 203 muiLLon and food OusdU;L U Re 424 Mllio At the end ol September 952 the cash balances were reduced to Rs. 66 million, the amount of Treasury bills outstandiug reace RnS. y3 millon, and in addition the Government borrowed Rs. 72 million from the Central Bank. The fiscal position changed from a com- fortable to a very tight one. 22. The budget deficit continued in fiscal 19>2-z3, amounting to s. 195 million; but the cash deficit was Rs. 232 million. The Government made various cuts in proposed expenditures, with the result that the budget expend- tures chargeable to revenue were reduced to Rs. 87 million. The Government found it increasingly difficult to finance the deficit, in February 1953 authority was obtained to increase the limit for Treasury bills outstanding from Rs. 100 million to Rs. 200 million; by the end of September 1953 the amount out- standing was Rs. 184 million, Furthermore, between September 1951 and September 1953 the Central Bank's holdings of Government and Government guaranteed securities had increased by Rs. 142 million to Rs. 146 million. By September 1953, the Government's net rupee debt amounted to Rs. 843 million, which is Rs. 341 million more than in September 1951. But this borrowing only to a small extent represented real savings, Central Bank and commercial bank credit being expanded by about Rs. 300 million. 23. The decline in foreign assets continued at a somewhat slower rate in 1953. In the first six months the balance of payments on current account had a deficit of Rs. i83 million as compared with Rs. 247 million in the first half of 1952; the trade deficit was Rs. 131 million and Rs. 195 million re- spectively. During this period export prices increased by less than 1%. and export volume declined by 6% as compared with the corresponding period of 1952; on the import side. over the same period prices fell by 11% with an increase in volume of 3%. Ceylon's terms of trade improved in the first half of 1953 as compared with the first half of 1952. 2h. External assets declined by Rs. 152 million from the end of December 1952 to the end of June 1953, and to Rs. 669 million at the end of August 1953. The official foreign exchange holdings (excluding the holdines of commercial banks) were about Rs. 611 million. From this amount, Rs. 58 million of sinkina fund on sterling loans has to be dpducted- leavina a total of Rs. 553 million. In the 19 months, end of January 1952-August 1953, ex- tArnal Asts nf CAvInn wPre reduced from R. 19Mn million t. RP. AAQ million, or by Rs. 571 million (S120 million). During the same peried money supply dronned from Re- 1A6 mji1j^" + e 850 mi114on oy tnlr Re 15A m4o114n -8- cline in external assets made it clear to the Government that some remedial by the Government in September 1952, but this was quite inadequate to change thme Niscal .-,A 1-~.1 nna,- -- ,-,-se4+4- ,, v% ,si ursa Wj %A LG.UAj J LU.6WJLk0 VAS COUL"J~1U additional revenues resulting from this program did little more than to com- penat- I y- inae use n othex r-11Z ev.n aceotLyvu uvre, a u CU. # py Wltj M-LLLZL U1 L UZ rmi S C L j)Lop 1;uy UY 11 UU VULLUWU!11 U. ULIC L iU 1UU1 more drastic measures would have to be taken. By this time the authorities L..egan~ ,. J.-L L ..... ..JL C. . . 4.1- J .L.. A.-J.L L?_S.. L L L)~g.L1 . re. "i.±L~t WIL I M A Fu WdCZ a. _L_U11.U WU LM C1~ AV.Illu UV k1111.L(;1i OULIfITZIL iL. U_L_LZ could be financed through inflationary expansion of credit, and the inter- relation between such inflationary financng and the decline of external assets became clear. In other words a country like Ceylon, which is so dependent on foreign trade cannot substitute newly created purchasing power for reduced export earnings, cannot live beyond its means for any length of time. u. These facts were all stressed in the Finance Minister's Budget Speech on July 23, 1953. He said "The worsening of the terms of trade which was due to the continued high price of rice and falling export prices could not by itself have created a balance of payments deficit and caused such a drain on our external assets. ... We must therefore look for other causes, also for the deficit in our balance of payments, The drain on our external assets persists because the internal cause of the drain has not been rectified. The internal cause is that large amounts of money have been released into the economy in order to finance the Government's large overall cash deficits. The drain on our external assets will persist until the deficit is reduced to a level at which it can be financed without creating new money. ... The stabi- lization of our balance of payments and the prevention of further drains on our external assets must become one of the fundamental objectives of budgetar-y policy in the new era, ... Government have therefore decided that in the new financial year it w,ould not be safe for us to have an overall cash deficit of such proportions as would cause any further drain on our external assets by affecting our balance of payments adversely." 28* In other words, government expenditure would have to be reduced to avoid additional inflationary financing. The first and the most important step in this direction was the reduction in food subsidies. On July 20, 1953, the price of rationed rice was increased from 25 cents to 70 cents per measure. This reduction -eliminated any direct budget contribution to food sub- sidies. However, some subsidy of rationed rice and flour was to continue. The Government expected a profit of about Rs. 89 million from sugar sales of which Rs. 54.5 million were to be used as subsidy on estimated impprts of hL0.000 tons of rice (11 cents per measure) and Rs. 30 million on expected imports of 180,000 tons of flour (7; cents per lb.). To alleviate the impact -9- of this measure on the consumer, rice rations were increased by approximately 35% and flour and sugar were made available without restriction and with no increase in price. Moreover, it was expected that the price of unrationed rice (country rice) would decline so that the average price of rice to the consumer would be less than indicated by the price increase of the rationed rice. 29. It was assumed that reduction of the rice subsidy would result in a substantial net budget saving and a fall in income which in turn would reduce imports. 30. The drastic increase in the price of rationed rice caused widespread discontent and serious disturbances all over the island. The wages of labor on the tea and rubber estates were increased in proportion to the rise in the cost of living index caused by the higher price of rice; wages in other occupations and salaries, too. had to be adjusted. The only exception was that of govern- ment employees whose wages were frozen at the July, 1953 level. The cost of living index in Colombo. which had been stable for the two previous years. rose from 1U in July, 1953 to 114 in September (198-100). 31. In order to help consumers, the government decided to pass on to them when the agreements negotiated with Burma and China brought a reduction in the of rationed rice to 55 cents a measure from October 19, 1953. 32. The principal objective of the new financial policy is at least to reduce the overall deficit to an amount which could be financed from real savings. Following are the figures for 1953-54 budget as compared with the 1952-53 budgets / I Only the net deficit or surpluse the Food Commissioner, Railways, and Electrical Undertakings are included. - 10 - IT- Da MJ4114-"N1 Total revenue 871. 850.9 V..L W114I411a c.ustoms 44.0U47C VO.uary expeuudiure U4ve V)'V.L Of which: food subsidies 144 6.0 Balance A24.9 154.8 Loan expendiure 21a 4u0.7 Overall deficit -195.2 -88.9 34. Various measures were introduced to increase revenue. They in- cluded an increase of import duties, a rise in the railway fares, postal, telegraph, and electricity rates, and higher rates of direct taxation. It should be noted however that on balance the reduction in ordinary expenditure amounts only to about the sum budgeted for food subsidies in the previous year. 35. The Government also proposed heavy cuts in development expenditure. It was decided not to start any new development scl!emes ex:tept for two small irrigation projects, and to stop or suspend work on a number of projects already started. However, the estimates of ordinary expenditure were 33% higher than in 1949-50 and 45% more than in 1948-49, in all cases excluding the food subsidies. 36. The effect of the new policies on the internal and external finan- cial position is alreadv noticeable. In the first six months of 1953/54 the Government had a cash surplus of Rs. 43.2 million. To a great extent the im- provement in the Government's cash Dosi.tion has been due to a decrease of govern- ment food stocks which were reduced by Ra. 67.1 million during this period. Had there been no changes in aovernment food stocks the surplus would have been converted into a deficit of Rs. 23.9 million as compared with a deficit of Rs. 68.6 million in 1952/53 established on the same basis. ts ; result of the imnroved nash nosition tha onvernmpnt wma Pble to reduce its short-term-debt. In the seven months of the fiscal year the mntstandina Transury bills wArA reintAd frnm R. 18) million to R. 1)' mil- lion and the debt to the Central Bank from Rs. 70.5 million to Ra. 0.1 million. Money supply within this period fell from Rs. 824 million 'to Dep tAem t.11 in 'ter+ aP 146r4mn 4pAn. 49i m Awi l4cAA seam 11g 4a September to 111 in October apd 108 in 1prt1 1954 which is the same figure as - 11 - 17. The hnlanna of trada hns nlso imnrnvAA_ rAvInn hnad trdA n m- plus of Rs. 87 million for the period, October 1953 - March 1954, as compared v4+-h m Anf4r-i+ A-P Pa 121 m411itsri in t.ho ^n d +nho ?%rav4f,in= fiscal year. In the first three months of 1954 the trade surplus amounted +, D0e 0 -4 114 r11-n 4 m,nwan+ 4, +ha h..1 aP 4.uAn ,sne 4- 1 n,n + due to an improvement in the terms of trade; the index standing at 92 in April L- .7" CL CSC.LLAQ% % Jj JJL LEL2~.LVL J JO LL J.LQ UIJ.J V VIIIW A IP 0 ".46 IJ,A J.L JU~ L.LSL.L'Q prices of tea and also from a reduction in prices of varioue imported commodi- +44 s _A__sA4 m n -4u, A---.&.- U___ -1- - 4m . 4-1- -ao s A -An 4' tieop D6AUA M A.11YVA U0 LACLVCu ti.LQ %&U .Lj.LAWLLj ic VU.lWV A.A &UA imports was 139 in the first three months of 1954, or ten points below the .UALM 4AA ULMV 0C:11V JPUJ.L'.AVU VJ.& L.7,.?o 3.u vi.cial external assets of Ceylon red-c-1 the tlowes lvel I December 1953 when they dropped to Ra. 480 million (excluding the &terling Sinking Fund). Officia external assets began to increase in January ly54 and reached Rs. 602 million at the end of April 1954. On March 25, 1954 the Government successfully issued a b5 million loan in London, at 4 per cent, maturing in 1973-75 with an issue price of 97. Not taking into account' an amount of about Rs. 28 million received from the initial subscription to this loan, there was an increase of nearly Rs. 100 million during this period. These developments have once more illustrated the close relation which exists in Ceylon between inflationary financing and balance of trade. Once the inflationary financing of the Government deficit was stopped, the drain on external assets was arrested with only a short time lag. -12- V. Ceylon's Development Programme 39. In his budget speech in 1948 the Finance Minister announced the intention of the Government to embark on a "Six Year Plan" covering the period 1947-53. The object of the Plan was to reduce Ceylon's de- pendence on imports for its supplies of essential foods and manufactures; but the "Plan" was no plan in the ordinary sense of the term for it con- sisted of little more than a number of unrelated projects some of which were not properly prepared. 40. Government expenditure on development between 1947 and 1953 is estimated at Rs. 1,240 million, including expenditure on many small proj- ects not included in the Plan. It is certain that this represents a level of investment below that forecast at the beginning of the Plan. Apart from the fact that inadequate planning would have made it difficult to reach the original targets. more recently the growing financial crisis made it neces- sary to curtail or abandon a number of the projects originally included. The most imnortant of the nroiects which have been comnleted are a nimhnr of colonization schemes, the first stage of the Lakaspana hydroelectric nroiect. and A cement fnntnrv. rnd nora. haz nl,n han manri with thp large multi-purpose Gal Oya project, the improvement of the port of Colombo, and the modernJ7otJnn of the railywr 14. hsh QA7nr.-ir~W s-i~iyi h priuate secto, es-- pecially in agriculture. About 120,000 acres of waste land in the villages havA honn rprlIimed and irrigted fvy nmd-y and at lea+. as rva+ an nen of unirrigated land has been reclaimed. Although production of manufactured goods, has4 incrnsed ^-1ir '- Co., "o,0 ' v,ahrr n 1 4. 41a 1.ULL MI. "r-O LIAU rJ tL V ~ j~LII±V VVLL~V \.LU WJJ %A1V AJ 4V.L%Or,.LCS U1LA was necessarily on agriculture, since the most obvious and practical way of re-uuu-ug e-pueutres uu .1-urv- uP .unumw gL.u wa v uro. v 0..LUUUJJ± 11r LI.LdUV W11 .L,11JJ._kA U.L UU11OUIUMV. rJVVUZ WcLO IAV .LW,:-1'WaL) OUUO put of foodgrains in Ceylon. Despite a population increase of 18/,between J-7L4 an J.7UL?c ad a s~lgh ~1i~cas inJ cons-wUc4V.1V11 U. LO.. LL1CE VULI.V . imports of foodgrains and flour increased very little. Thus, it appears Wiat the increaseu dequiremenus wlert etI mo st m U11 U"Wiq from. an LiU.eCDt1 in domestic production. According to recent information supplied by the Government of Ceylon, the area under paddy (including double-cropping) increased from 926,683 acres to 1,161,869 acres between 1947 and 1952, or by about 257. The estimates of production of rice varyo As Late as September 1953 in a report presented to the Consultative Committee on Economic Development in South and South-East Asia the Government of Ceylon reported that production of rice was at present 270,000 tons per apnum. The recent figures of the Department qr census and Statistics give the rice production in 1951 as 310,000 tons. &i For 1952 the Department of Census and Statistics puts production at 367,000 tons. One of the important tasks before the Government of Ceylon is to obtain dependable data on the local production of rice. 1/ F.A.0. published the same estimates in terms of paddy. 43. However, the smaller part of this increase has been due to schemes in the Plan designed to bring more land under cultivation. The largest of these schemes is the Gal Oya project -ihich consists of a dam providing water for irrigation and the production of power. The people settled on it get con- siderable assistance from the Government in the form of cash grants and houses. The aim is ultimately to irrig-ate 100,000 acres of land and in addition to re- claim 150,000 acres for rainfed cultivation. It was expected that by September 1953 about 15,000 acres of irrigated land and 10.000 acres of high land would be reclaimed and settled, and that the whole area would be settled by about 1961. The total cost of the project is estimated at Rs. h20 million, and. of the Rs. 212 million spent on agricultural development by the end of 1952, Rs. 147 million was on the Gal Oa project. 44. The other irriration schemes in the Plan are on a smaller scale, consisting chiefly of the rehabilitation of old irrigation "tanks". Con- siderable progress has been made with them and. as was to be expected. the return for the amount of capital invested is of a much higher order than could be expected from a scheme like the Gal Ova project. Under these schemes, by September 1952, 41,000 acres of paddy land and 20,000 acres of high land had been brought under cultivation. The extension of the acreace under cultivation around existing villages was made possible by the sale of large areas of r7overnmPnt waste linni and was stimulated hv thp hit7h nreia obtainable for country rice. In addition, the tea and rubber estates have imnlpr an nrdinann nf 19)il thin Tbiphtmeapn mrvHwna foeod nrnn-, nrA nwvint- a cess; this ordinance increases the incentive to put land under food crops or' grARq as fnnA pricesP. ri.q6 RPehrPPe 195N and! lg -hp ar.-a o)n r-r food or grass increased by about 20,000 acres to about 105,000 acres. 45. Apart*fromn the extension of acreage, the Government has made special c3rts" tz . Io incrase the y r%f naddy r acr bq" ye urg bte methods of cultivation. It has been subsidizing the sale of fertilizers and provements through agricultural cooperative societies. However, in areas uv ua uno noveJyx uou , one .Lv u vUe 0u vvLU.La%rCLU1 vW _Umpi11UVt1 u L C% i nU and methods is consierably reduced b,r the land tenure system, of which share- croppJM-in 0- So pr-OMin,entC a feature.,- "w~e uuwr4 u U L-Ji U -1"uk,e ha ueen d~L vu ted U t o i nce sn fPkJUk production, it has become urgent that the cash crops which form the basis of Ute ejunVn1 ust no eV negltd. The 1ureau om ueuye hue replanuing of rubber estates which was decided on in 1949. In 1953, the Government started LvyLug U l on o Lnuv. e;PU. UD A VuJ.1ict an' frum tne LUILUO b WocoLLucLeu will grant subsidies of Rs. 700 to Rs. 1,000 per acre for the replanting of 14000' U1UG 1 01 MUV.1 VUAU Valetie. AUe sle odL el UbL varU 00 iV.t U-O coconut seedling is also subsidized. However, greater efforts will have to Ue maue W 1m1P1vt1 ufn con"v1oun V1 WUt ±uuewes. 1ne acreage under tea increased from 554,072 to 572,008 between 19h7 and l9q2, or.by about 3-1/2%, ano tea produuWon r(V3 y alouL up auring Tnis.perloa. Tea proaucton in- creased under the stimulus of war and post-war shortages and is now more than 4U/o above the pre-war average, -1h- Other Development 47. The Plan included proposals for establishing a number of manu- _f_cturi nduste, prtly tod Qv-hv _-/lr -%V.~ I vide additional employment opportunities for the growing population. It warnr p .rpose A 4.- 1-,41 A -A4n nrn n.n,,, r+ f,4'.a A +-, ,.fWfl. .7 .%I of the factories which had been built as emergency measures during the war. LI buval cuos was expeou Lu ieJ vau "0 -U.J u L.LL.LJIAO L".Y C u ys U of these proposals has been fulfilled. The only project which had gone into production Uy the enu of the Flan perou Wab a ct-mUenU actory. lis planu cost Rs. 22 million and has a rated annual capucity of 95,000 tons and in addt,ion generates enough power t mee" itAS own neesu anu WAVOU U1 VI VuVV4 of Jaffna; full production has never been reached; in 1951 and 1952 the annual output was about a,u0 tons. The only reorganiations ou sar completeu nave been of the plywood and shoe factories at a total cost of Rs. 2 million. In addition, it is reported that the paper and ceramics factories are nearing completion; it is estimated that the total cost of these two factories will be about Rs. 25 million. 48. Canadian aid has stimulated progress in the fishing inaustry Dy providing both equipment and personnel for research and for training local fishermen. As imports of dried, salted fish, amounting to Rs. 48 million in 1952, was nearly doubled in volume compared to prew-ar, development of the fish- ing industry is one means of reducing imports substantially in the near future. 49. A satisfactory achievement in the public sector during this period was the completion of Stage I of the Laksapana Hydroelectric Scheme. Between 1947-48 and 1952-53 total not output of power stations run by the Electricity Undertakings Department rose from 50 million kwh to 112 million kwh. The Laksapana plant has an installed capacity of 25,000 kw and its completion enabled the EUD easily to meet the growth in load, and even to put more ex- pensive thermal plants on a stand-by basis. It may be expected that the avail- ability of cheap hydroelectric power will encourage industrial expansion. 50. The Government's activity in the field of industry has been severely handicapped by the fact that Government operates these undertak- ings as part of various government departments through the bureaucratic machinery. 51. In addition, the Government has spent substantial sums, on trans- port and communications. Between 1947 and 1953 over Rs. 50 million was spent on the modernization of the-railways and good progress has been made with the improvement and enlargement of the port of Colombo which will be completed by 1955. The total cost of these works is expected to be Rs. 80 million, of which more than half has already been spent. Considerable ex- tension of the telegraph and telephone system has also been made. 52. Furthermore, the Government has spent substantial amounts on social capital. such as hospitals. schools. houses. government buildings. etc. Plans for thp Futurp q3A Thp. rpem1 +.q f the Sir Yer Pln were an the wholA eii.nnnMnt.jn&, As already stated, the object was to lessen the dependence of Ceylon on imnort- 'hntbo-i nf' fnnrlarain r, f nnrlif nf t7nnAm- Rllt-lh 0 there has been in industrial production has so far had no significant effect on import requirements. There has been quite a considerable in- crease in the production of rice; but it is important to note that this did little more than keep pace with the growth of population. Export earnings during this period fluctuated considerably on account of the rapid rise and fall in world prices of the three main export crops. Out- put of these three commodities, of course, is highly dependent on market conditions abroad; and the Government and producers can do little more than to ensure that the plantations are kept in good c6ndition and that methods of production are efficient. The balance of trade during the Plan period was greatly affected by the Korean boom and by government policies which stimulated consumer demand. However, if it is assumed that prices over the next few years will be more "normal" and that sound internal policies will be pursued, it can perhaps be said that Ceylon's position at the end of the Plan was on the whole no worse than at the beginning. 5h. The extraordinary change in Ceylon's position between 1951, when the Bank Survey Mission visited it, and 1953 has necessitated a revision of previous thinking about the possibilities and scope of de- velopment. The Government decided not to formulate a second six year plan as was originally intended. In addition, work on most industrial Dro1ects included in the first Plan but not yet completed has been either abandoned or deferred, partly as a result of the Bank Survey Mission recommendations- However, work must continue on some roiets which were started in the preceding years, such as the continuation of the Gal Oya scheme some minor colonization schemes. Colombo nort. and thA rehabili- tation of the rubber plantations. The 1953-54 budget provided for a tt.nl niifnv nn dvilnnment. mf R.- 1 million but nrnhhly lpss wll be spent than was estimated. Instead of a new plan the Government has set itself a tret of expendit-re on deoelnp.en taingRa 14O0 mi114nn but this will be spent only as resources are seen to be available. A Plannin? SAnrPtnri+. hps hpp, nsta.hlished. whinh will havA thA task of examining any development projects proposed in the future and of determin- ing the priorities betureen varionn pnie.te fnr tha use of nh rAturAs as are available from time to time. It is difficult to forecast to what J%W 4L,U -W .L J6 A.J_ VW as ~~ U W. Q 4 Ua,, L J. AJ5* 0.12 ----- .JA4 . & *lAIl velopment projects; but it is worth noting that hitherto it has received UMAJ CLJu; L 7 V; LILLUS .LIS LV&_.LL Au -oIJ.CaLLu LUuL" uA - L%UVd *Amug The Finance Minister in his Budget Speech estimated that aid under the VoJ -10 a IW 11JAUU~ &. A .in %LL),L ~ J.U V SAJ4 U V%J CLJ.AU V '.-Q9 &.%d £UI..JJ.4&& SmeG novernment was weil aware of tmis. In us assessmen' of the position to the Consultative Committee of the Colombo Plan in October 1953, it stated "the size of the development program in the years ahead will depend largely on the extent to which the current revenue can be increased, expenditure under other heads reduced, and a surplus arrived at on current account."l/ VI. Balance of Payments Prospects . Cety.lon-6 forI.gnL dtrad pattern is relatIVely sIMPl.C EXPorTsU of tea, rubber, and coconut products provide most of the country's export earnings. lea iS the most Important 01 eylon's exports, accounting usually for more than 50a of total export earnings. Rubber and coconut products nave each represented about 1>-2uM of export earnings in The postwar years. Of the other exports, cinnamon, citronella oil, graphite, and cocoa should be mentioned. Since !947 the volume of exports has been higher than in the prewar period; the index rose to 151 in 1952 (1934-38 100). Tea prices maintain a reasonable degree of stability, their trend being approximately in line with general world price movements. How-ever, rubber and coconut prices fluctuate much more. Imports of consumer goods represented about two thirds of the total value of imports before the war and around 70% in the postwar period. They have been very stable in the period 1920-1950 (except for war years), being very close to Rs. 100 per capita in 1950 prices. However, during the period of the Korean boom and even in 1953, imports of consumer goods were at least 20% higher than this average as a result of greatly increased national income. As mentioned in a previous chapter Ceylon usually has an export surplus which is needed to meet the deficit on in- visibles. Ceylon is a member of the sterling area. With regard to dollar earnings, according to the information received from the Ceylonese authori- ties, the recent practice has been to keep the net dollar proceeds of exports invoiced in dollars while dollar proceeds of exports invoiced in s^erling accrue to the central reserves of the Sterling Area. I/ Chapter IV, paragraph 19, Second Annual Report of the Consultative Committee. -17- 57. With regard to the balance of trade, it is not ex- pected that exports of the three main export commodities will increase as rapidly as population. As mentioned previously, there has been a substantial increase in the production and export of tea, and the general outlook seems to offer a fairly stable basis for tea cultivation. Additional exports are expected of cacao. coir manufacture. tannins, and vegetable oils, but it is unlikely that such an addition to exports will affect Ceylon's ex- ternal earnines to any ma-or degree. C8. The Bank Survey Mission. thongh well aware of the difficulties of predicting price trends, attempted to forecast the balance of trade nrosnents. ERnort earninas wArA atimated at an annual rate of Rs. l.OO million for the period 1953-58, on the assumption of about the same * . W. W W W& - UMP,a. Rs. 150 million for other exports. Total exports in 193 (excluding re" + .rn"n "nar +Vn M4ca4w%la n name+n Tea~~ M;1141- 1, Rubber - 217 million lbs. 338 %juqoou prouucts U Other products 73 Total 1406 The following are the volume and price assumptions made by the Bank' s Missiono Rs. Million Tea - 300million los, at Rs. 2.50 (us ots. 52.5)..... 750 In September 1953 the price was US cts, 49. Rubber - 215 million lbs. at Rs. 1.35 (US cts. 28.3)..... 300 In Sept. 1953 the price was Rs. 1.36 (cts. 29) for Grade I rubber as compared to 21 cts. in Malaya. The higher price was due to the China deal. Beginning Dec. 20, the price will be reduced to Rs. 1.20. Coconut products - 750 million nuts concentrated in more valuable products. .................... 200 - 18A - 0-. The fnrAion trade pnsitinin has tankein afnvorAble tmrn in theq last year. Trade deficit in 1953 was reduced to Rs. 40 million as against Rs. 200 mil- linn afic4+ in 1052 Exports ineanaA from Ra .CA0 million 4I 1019 + Rs. 1568 million in 1953. (the volume rose by about 3 per cent) and imports Anal14wnA wN - V. 1'7A' -4 114 -" +- V- 14nA -4114-- k-+ 4-1, -ol.-- ^41 -t - -4. W0 1 M .1140I VA4 & .1 . WW 1'.I J A .WW W S.b.JJA IAU WAV V A-%"U W.L~ LMk0 .&I~W reached a new high with an index of 158 compared with 119 in 1949. A sub- Uvau%0.a.4 part u. ULa W[jro-vfZeu n I u- ag A.u a ueo u Fv-u deal with Communist China. This provided for a purchase of 270,000 tons of rice at abouG b>4 per metric ton (Ceylon paid abouT sou for tne Burmes rice) and for a sale of 50,000 tons of sheet rubber at a price of Rs. 1.75 per lb. for Grade I. The gain in the Ceylonese oa.ance oz trade from this deal may be estimated .at about Ra. 60 million for 1953, The agreement.was concluded for five years but prices nave to be negotiated for each year. CO. The price of rice reached probably its peak in 1952-53 and now shows a downward trend. Ceylon concluded an agreement with Burma for the period 1954-57 providing for a minimum rice purchase of 200,000 tons per annum at a price of 1650 metric ton in 1954 which declines 12 every year, reaching 114 in 1957. The price of rice from China was also reduced to 1h7 but the price of rubber sold to China was reduced proportionately. 61. As mentioned previously in the first three months of 1954 ceylon had a trade surplus of Rs. 93 million; exports being Rs. 30 million more and imports Rs. 33 million less than in the corresponding period of 1953. 62. For the period beyond 1954, there is no reason at present to ex- pect an adverse change in the terms of trade. Perhaps some small improvement may materialize; this will depend mainly on the relative movements of rice and rubber prices, but Ceylon might also benefit from lower prices of sigar, flour, and textiles. Some increase in exports may also be realized, although there is no basis for expecting any substantial expansion in export earnings. The main consideration regarding balance of payments prospects is. therefore., the future trend of imports. In view of the greatly increased imports of various goods in recent years -- in 1953 they were 60% higher in volume than before the war - there is scope for a decline without reducing real per nanitn imnortr of Consumntion poods heoy Tn.trm avernae le-Vels in the past. In the longer run, however, on account of the rapid increase in!popu- lation imports would have tn inprean at a rate of ant R.q 9S millinn a year at present prices if past levels of per capita imports of consumer goods w +o be ma4 A Tn fho nhao"^n, % f n m.n-aA -------+ -n -,Qrnina a future significant expansion in exports and improvement in the terms of rade, such a ka+o n inann i 4mnav wo"n.d + he a atent with longarun balance of payments stability. Therefore, to preserve long-term balance of n n+aa+I-h4+w. ,.y- +hrq4n^ - a+,nAT A+? -^nw+4 n 4m a+nvAA ^f lv4Tjne two essential conditions are necessary. -19. 63, The first is that internal financial stability be maintained through sound fiscal and monetary policies in order to avoid an inflation- ary stimulation of import demand. 64. In the prewar period there had been some automatic stabiliza- tion of the trade balance because of the close relation between exorts. income and imports. Ceylon had a monetary system providing for 100% coverage of the currency with sterling and therefore the vmonev volume automatically followed movements in the balance of payments. As the Report of the Bank Mission statest "The record of CevIonts balance of navments is thus one of fair stability and only occasional difficulty." (This applies to the period nrinr to 1909-1 PeAimp iv1niitq rnntomr zvat.Tn T.n. thane it is not possible to rely on the previous automatic adjustment of imports to the level of ex-ort' e aringes. A .1,l i.s heeoeoteumotimportmnce that U.- co_tr p-rsae a sound financial and monetary policy. The Hission Report emphasizes cor- tions for the maintenance of a balance of payments equilibrium. The experi- enc of e%r2n d_ 'I nf,' A- I- 4 41,- -4-4- 4- -1 .I4 C1, 4, ence oAJ L7) cIk.U .6.- provii.A. at-, L1 LUALU Vo YWJ. ti LA flationary finance combined with adverse terms of trade can upset the ZZ~nt u.i. Aaz~ ancer of± pamet ver "I. ~ UO, Me seconu condiiou of continued vauce uf paymuvaI LalU.LLy is that Ceylon do its utmost to increase production in order to supply an increasing proportion of the requirements of ir growing population from domestic resources. The Survey Mission concluded that the economic potenti- alities of the country, if effectively exploited, are sufficient to maintain the per-capita consumption standards of the rising population. An average annual rate of increase in the national income of about 2.% would be re- quired. An assumption of growth in national income at about this rate does not appear unrealistic in view or levels or total investment and rates of increase in real output in the past few years and in view of the potentiali- ties of the country for further increases in production. The Mission pointed out the substantial projects resulting in saving of imports especially in the large amount of agricultural resources as yet unutilized and also, to some extent, in other fields such as industry and power. In recent years there has been a considerable expansion in output, chiefly in the private agricultural sector, which has been estimated at around 20% in real terms over a six year period. It has been noted, however, that so far th e results of government projects to develop the country's economic potentialities have been disappointing. If Ceylon is to make themost of its real possibilities for expanding domestic production through public as well as privateiinvest- ment, it will be necessary to organize the selection, planning and execution of public investment projects on a more efficient and productive basis; to allocate public resources with greater attention to the means for achieving the maximum possible expansion in domestic output; and moreover to foster and encourage a continued increase in private production. 67. Assuming that the Government (a) maintains a sound fiscal and MoneVary pu"Uiy, \V) doe the umost t unceae proUuction eo- pecially of food and other consumer goods, it is thought that Ceylon should be able To provide annually a moderate amount from IU Loreign exchange earnings for servicing new foreign debt. As Ceylon has been and, as far as can be foreseen, Is lKely to continue to be a net earner in trade with the dollar area, this debt could be incurred in dollars or non-dollar currepcy. STATISTICAL APPENDIX 1. Gross National Product 194* 1948 1949 1950 1951* 1952* TRs. i1llion)- Agricultural production for exportl/ 815 911 982 1377 1779 1381 Agricultural procuction for local consumptionl/ 1482 513 554 579 873 1031 Industrial productaon, construction, and fisheries.1) 281 243 3'15 347 597 625 Services 917 1095 1126 1198 1370 1439 Total 2495 2762 2967 3501 4619 U676 Of whch: Consum2tion of imported gcods / 1113 1069 1128 129 152h 1L26 Consumntion of. local vods and servicesY$7 1563 1635 1768 1992 2630 2848 Gross capital formation/ 9 199 246 452 665 261 Excise duties and subsidies (nt.an) . -17 5 - n.c0 -2n0 --<o At factor cost. Inpluding changes in foreign assets. c no.avEs TDertent of Ceoupus anu 0va4 ovot 2. Principal Crops 1947 1948 1949 1950 1951 1952* Rice (thousand tons),/ 244 270 323 308 310 367 Tea (milion los4) 297 299 299 306 326 317 Rubber (thousand tons) 89 95 90 113 105 96 Coconut (million nuds) ---IWV ---- -4M77 122y ZJ43 Manioc (million cwt) 4.0 21 n,a. 2.8 3.6 14.4 n.a. W Provisional estImate, 1/Refers to clean rice and excludes seed paddy. The estimate has been revised according to a recent sampling survey on paddy yields, which suggeststhat former official estimates wer one third short of actual production. However other recent official estimates give lower figv di 2. 945-1950 average. Onvum^r. "Iepartment o es us =-nd eSta--tsm 3a/1l914%14-WLF1#4Q5.Ai C, . -9. ~pJH .1J __ __ 1 3.Sma.zy of. ruu uraVfls -7 -1~ e% .1~0 -1 ^!v -I ^1- 0 1 ^1- , ^r^ -, _,I , -.1 A Uca proUlc n atO edu fl0 4yo %>t v.o 4o u Imrorts 577 636 6i3 588 700 660 653 Total supply (tons 1000) 797 900 903 933 1038 1006 1060 Population (million) 5.78 6.88 7.09 7.30 7.54 7.74 7.96 Supply per capita (tons) #13d .431 .127 .128 .136 .130 .133 Percentage covered by local production 28 29 32 37 33 34 38 *Including pulses and wheat flour. SOURCE: Department of Census and Statistics. 4. Wages and Prices 1947 1948 1949 1950 1951 1952 1953 1__ (Annual iverages) Cost of T4tr", Q",almh- town, 1938-39 - 100) 252 260 258 272 283 281 286 282 Estate Labor Wages (min- imum wage rate, 1y3y 100) 293 315 320 373 463 468 475 472 }/ First four months. SOURCE: Department of Census and Statistics, and Department of Labor. 5. Money Supply. 1947 1948 1949 1950 1951 1952 1953 1951" (Rs. Million -- end of year) Notes in active cir. - - _ 'j * j f -J I-+ -4 y4 .f JI .J..J X D -' Demand deposits 324 366 405 585 629 537 492 479 Total money supply S OURC E: J& J.%enr 7Lan Vof Celo I/ TP A -r AP-41* SOURCE: Central Bank of Ceylon StaT. Appenaux -- . 6. Government iinancel/ (Rs. 11-illion) 1.947-48 1943-49 1949-50 1950-51 1951-42 1952-53 1953-54 Total Revenue 540.6 576.1 623,3 835.9 875.3 871.4 85109 Of which: Customs (314.1) (329.3) (355.9) (527.7) (487.2) (443:8) (429.2) Ordinary expenditures 622.0 547.9 563.2 730.7 ?44.3 846.5 696al Of which: (1) Food Commissioner (net) (176.6) ( 60.4) ( 41.2) (138.5) (252.4) (1j4.0) ( 6.0) (2) Capital expenditure included in Ordi- nary Budget ( 33.7) ( 37.3) ( 4.0) ( 63.0) ( 63.0) ( 78.0) ( 55.0) Loan expenditure 70.3 122.5 155.6 146.7 202.9 220al 2h3.7 Total expenditure 692.3 670.4 718.8 877.4 1147.2 1o66.6 939.8 expenditures (104.0) (159.8) (199.6) (209.7) (265.9) (298.0) (298.7) un an,, Anf 4a4 .4+4 current expenditures -47,7 65.5 104.1 168.2 -6.0 102.8 209.8 Overall deficit 151.7 94.3 95.5 41.5 271.9 195.2 88.9 Electricity Departments are included, Ex&yra budgetary resources \'Colotibo LanadII tne rubber cess, etc.) are excluded. SOURCE: General Treasury. 1947-5 , final accounts; 1953-54, budget estimate. Stat. Appendix - k. 7. Internal Public Debt 2/ 19h7 19h8 1949 1950 1951 1952 1953 195h" - Rs. MillIon- End of- Setember) 1/ Net funedý ndpht 309 320 36h 366 h72 561 613 603 Treasury bilis - 24 16 79 30 93 18h 145 Central Bk e - - - - - 72 71 - Loans from semi-govern- ment agencies - - - - 3 59 57 Total 309 3hh 380 hb5 . 52 729 927 805 Net of, 4aia-acmlae n RA-nking" Fund and excluding VIar Toan relent to the UK. SoRCE:n'.f ieea reasury,, 8. Foreign Exchange Reserves *1/ 1947 1948 1949 1950 1951 1952 1953 195h~ kiuS us.I.LOn; ena Ul. year/ Net official reserves 787 797 792 853 986 726 h80 602 Sterling sinking fund 39 43 46 50 52 54 60 63 Commercial banks 121 149 96 17 147 57 67 59 Totaý 9>7 989 934 1077 1185 837 607 72>4 LEnd 01 April; provisional figures. SoURCE: Central Bank of Ceylon 9. Foreign Trade 1/ 19>47 19>48 19>49 1950 1951 1952 1953 1951i1 -s. b-illion) Exports, fob, in- ciuding reexports 889 1011 1063 1563 1904 1502 1568 429 Imports, cif. 963 994 1029 1167 1559 1702 1608 336 Trade surplus or deficit -74 17 34 396 345 -200 -40 93 ./ First three months SOURCE: Customs Administration 10. BaAance 01. Paymenlau (RS. Million) J.74 19&77 L750 L7. L 2 1c .73 Merchandise (net) -418 4 -16 289 289 -225 -155 Services (net) 32 52 44 -69 -96 .76 .11 Remittances (net) - 25 .68 -58 -73 -76 -104 -å9. Surplus or deficit on current account -175 28 -30 147 117 -405 -225 Private capital, errors and omism sions -88 14 -25 --8 -9 38 27 Overall surDlus or deficita/ -263 42 -55 139 108 -367 -198 lf Representing a net accumulation or depletion of official foreign assets and liabilities. * Preliminary. SOUR.CE: rentra1 Bank of Ceylon. 1. romrstioh 2nd distrihution of forpign tradR (Rs. Million) (a) Exports (fob, excl. reexport) Tea 650 752 800 723 825 Rubber 123. 4o1 572 373 338 Coconut öroducts 188 275 329 255 250 Other 40 61 122 57 73 Total 1001 1489 1823 1408 1486 408 Of which: *to the sterling area 59 706 989 739 to the dollar area 167 443 288 236 209 62 (b) Imports.(cif) Grains and flour 317 287 387 486 521 nther fnodtuffe 250 2AR 388 3 275 Textiles 142 169 223 2.19 176 Other manufactures and fuel. 320 423 561 602 636 Total 1029 1167 1559 1702 1608 336 Of which: -from from dollar area 98 62 101 189 69 12 Irs quare. k-OULJVROE:D; Cusom AdmiLni uj131stration M A. pendiI - -6. 12., PrIncipal EaorWs to the D9,lar ixrea - - Y - - (Rs. Million) Tea ..170 118 132 131 49 Rubber 229 138 79 2 5 Other kh 32 25 49 8 Source: Customs Administration. *First quarter 13. Volume of Trade 1947 1948 1949 1950 1951 1952 1953 1954 F.YnnrtA 118 129 128 1L2 1hh l1 15 153 Imports 108 110 119 132 149 152 158 14o Source: Department of Census and Statistics. *First quarter. 14. Terms of Trade 1947 1948 1949. 1950 1951 1952 1953 1954 Unit Value of Ex- (1934-38 100) ports 300 305 324 a9 534 45 4S k2 u4 Unit Value of Imports 4.L3 44.3 4--3 4-34 .514 !?.k 505U: 512 Terms of Trade 73 69 77 101 104 75 84 86 *First quarter. Source; Central Bank of Ceylon. N.B. The Survey Mission considered that price increases of imports were overstated compared with the base period, and adjusting the official import price index, arrived at terms of trade about 10% higher. Stat. Appendix -- 7. Changes in the Quantity of Imports Imports of various consumer goods in 1952 and average imports in 193h-38 193h-38 1952 Reer (gallons) 31,35h9 723,86 Biscuits (lbs.) 636,311 1,119,507 Putter, frnn (Ih<.) 649,237 i -,hn),68 Cheese (cwt.) 1,973 3,344 onfectinery (ls.) 916,801 1,863,723 Fsh, dried and salted (cwt.) 366,176 682,293 Fruit> (it.) 23,020 W-,577 Mlk, preserved (lbs.) 3,383,053 10,969,672 Milk foods (b1.c 9231 7 C581,5 Potatoes (cwt.) 242,092 856,4680 Eggs (n.) 7o. ,nn 3i c n,nn Sugar refined (cwt.) 1,380,842 2,417,118 Toa,unmanu-factured (Ib-. -,8Lp 0 2,04kj62 Cotton piece goods, ctred (yds.)29,345,261 37,253,111 ^r %,.L. Ja. L .. f ,Uj-'J Lk, > ,74e Blankets (nos.) 8,041 125,520 M-Ilk, /kme il-.) 15,77 2,5,7 Sugar, unrefined (cwt.) 18,785 129,124 1fish_, tin e-.(/-å.) %5 95 -ir',22Lr- NN E.Lli.,J. 141U~.kW k,*j j; ; L4..) rf: Jellies, marmelades (cwt.) 3,238 12,780 Tobacco, manufactured (Dbs.) J-v9,9 >.6.8>,56 Watches (nos.) 29,042 151,578 Josmetics (ewt.) 5,0JVL4 5,I3