Increase in employment despite supply-side inflation shows economic resilience: Governor

By Chandeepa Wettasinghe

The weakening of theoretical economic relationships during a time of crisis shows the resilience in Sri Lanka’s economy, according to Central Bank Governor Dr. Indrajit Coomaraswamy.

“A lot of these economic relationships now seem to be getting weaker,” he told Mirror Business earlier this month, while commenting on the recent increase in employment, despite inflation increasing due to supply-side pressures.

Economic theories suggest that when there is increased inflation stemming from the supply side, employment falls, while the opposite occurs when higher inflation results from an increase in demand. 

Despite inflation remaining stubbornly at the 6-8 percent range due to weather-related supply disruptions, above the 4-6 percent range desired by the Central Bank, the number of Sri Lankans employed during the second quarter of this year increased by 4.1 percent year-on-year (YoY) to 8.1 million. Unemployment too edged down to 4.5 percent from 4.6 percent YoY. Dr. Coomaraswamy said that increasing self-employment may provide some explanation.

“There’s a lot of self-employment and a lot of little entrepreneurial activity going on, which is a good thing. There seems to be resilience in the economy,” the governor said.

Increased employment during the second quarter of this year stemmed from agricultural and industrial activities.

Dr. Coomaraswamy too repeated what Mirror Business had reported earlier, that the increased employment in agriculture may have been a result of a base effect—such as a dip in employment in agriculture 12 months ago.

Such a trend was indeed witnessed in the second quarter of 2016 due to floods and landslides, which resulted in a dip in employment in the agriculture sector.
Floods and landslides had affected crops in the wet-zone paddy farming, tea, rubber and palm oil industries.

Despite the increased employment in agriculture by the end of the second quarter of this year, the economic output of these industries had contracted, except for tea, where production increased by 3 percent.

The ‘lot of entrepreneurial activity’ may offer some explanation, since some social science academics have suggested that many who have classified themselves as employed in the agriculture may in fact be engaging in other economic activities such as driving three-wheelers.