Business and Corporate Affairs

Sri Lankan vulnerability –Are we sitting on a volcano?

By Sunil Karunanayake

The depreciating rupee and rising interest rates are disturbing trends amidst involvement in war for a quarter century. Adding to the woes global oil prices are rising, exerting further pressure on foreign reserves and government finance. The widening current account deficit is narrowed by worker remittances coming mostly from semi skilled workers employed in the Middle East. In brief we are on a tight rope as a highly import dependent country with a persistent trade deficit. This is the present economic scenario of Sri Lanka

Past experience
This is not the only occasion oil prices threatened to destabilize our economy. In 1973 with OPEC Sri Lanka was plunged into a crisis leading to serious import restrictions and food crisis resulting in controls, queues, shortages and major hardships to people. Then in the early eighties close on the heels of the unification of the exchange rate and a series of economic liberalization, uncontrollable oil prices put the country into disarray.

However on both occasions the governments sprang into action and alerted the whole nation. In fact in 1973 “Waga Sangramaya” (war on production) was launched that saw items like Kurakkan and Manioc taking precedence in the dining tables of even the affluent. Then in the subsequent crisis of the eighties the then government banned the use of private cars for nearly three to four hours on Sundays. Not that we totally agree with these measures nor advocate such restrictive procedures but the important point is governments moved fast and took action to prevent further damage to the economy. Doing nothing is not an option.

The Central Bank Governor recently went public alerting that Sri Lanka’s oil bill is beyond its resources with a clear message no more subsidies would be forthcoming. The time has come for the government as well as people to think of this matter seriously.

Figures speak
Sri Lanka’s imports rose to US$10.2 billion in 2006 from US$8.8 billion in the previous year while exports recorded a nominal increase of US$0.5 billion during the same period. The petroleum import bill increased to US$3 billion from 2.8 billion and the increase for 2007 is expected to be much higher. The worker remittances that recorded US$ 2.3 billion in 2006 are now a major foreign exchange earner. Behind these figures Sri Lanka’s vulnerable scenario is clearly visible.

Worker remittances cannot be depended upon as a regular source due to the political instability of most Middle East countries. Garment exports averaging US$ 2 billion (approx) constitutes almost 33% of the export earnings. Two of the major markets for garment exports are Europe and the US who have recently expressed concern over the governance issues of Sri Lanka thus adding an element of risk to the future growth of this valuable export resource and particular note should be taken of concessions currently extended by EU.

Power crisis
The other disturbing matter is the negative signals originating from the energy sector with a likelihood of power cuts becoming a reality. Lack of adequate rainfall and total lack of planning for increased demand for over a decade poses a real danger no second to the debilitating effects of the war. Thermal power is not an answer to a country that’s already burdened with a huge petroleum bill. CEB the sick energy sector powerhouse, has just seen the third chairman in three years, an indication of the state of affairs of key public institutions. With increasing pressure on the oil import bill private motor car imports to Sri Lanka increased by 60% in 2006 and trishaws too recorded a similar increase; possibly these will be higher in 2007.

Very recently the government gave clearance for concessionary car imports to certain category of public servants. Well, investment in transport is a positive sign of an economy but the question is can we afford these luxuries at the present moment over other necessary priorities. There’s been a righteous indignation over the current un-declared Inland Revenue policy of not settling refunds. Most of the affected victims are from the SME sector whose working capital constraints are virtually driving them out of business. Another is the pruning of allocations to provincial councils which sometimes may be a blessing due to poor governance and management of these institutions; however these measures appear as alarm bells of an impending crisis.

These imminent threats to economic stability deserve concern and the highest priority of the government. While the war prolongs conflicts seem to deepen with south- south confrontations, intra party and inter party squabbles taking priority over governance and economic issues. Politicians as elected representatives of the people appear to be neglecting their prime duty.