By Dr. S. Colombage
Proving again that Sri Lanka’s economic policies are driven by political motives rather than long-term development goals, the government has offered several concessions on the eve of the general election.
The relief package includes interim allowances for state employees and pensioners, withdrawal of save the nation contributions, reduction of national security levy, reduction of turnover tax on banking and finance, removal of import duty on selected raw materials, reduction in import duty of cement, abolition of the diesel vehicle tax, writing-off of farmer loans, drought relief, and increase in duty rebates for exporters.
In the meantime, the Central Bank is trying to bring down market interest rates by cutting down its Repo and Reverse Repo rates and reducing the Statutory Reserve Requirement. Ironically, most of these concessions were offered after the dissolution of the parliament.
This was not an unexpected move, as this has been the strategy adopted by almost all successive governments since independence during election times to capture votes.
The Treasury Secretary claims that the package is not an election gimmick and the government, in any case, was planning to offer a series of concessions to stimulate the economy hit by the global recession, US terrorist attack and Katunayake airport attack.
It is also claimed that many countries have offered similar stimulus packages recently. The package would give some relief to the masses and provide stimulus to certain production sectors. Hence, we may hail the relief package, which came at a time when we are experiencing near-zero GDP growth, high inflation, and negative export growth.
But we should also be concerned about the macroeconomic implications of the package. Tentative estimates show that the package will raise the fiscal deficit at least by Rs. 10 billion.
The Budget 2001 anticipated a reduction of the fiscal deficit to 8.5 percent of GDP this year from 10 percent in 2000. But the deficit is likely to exceed 10 percent this year due to the relief package and other fiscal slippages.
This is where the government dissents from its own fiscal policies adopted until its collapse. Specifically, the relief package contravenes the MoU between the government and the IMF signed in April 2001, which stressed fiscal consolidation as a key component of macroeconomic policies in 2001-02.
It was stipulated in the MoU that government employees will receive no pay rise during 2001, and outlays on other goods and services will be tightly controlled. In terms of the MoU, the fiscal deficit was to be reduced to 8.5 percent of GDP in 2001. Now it is clear that this target cannot be met.
As I reiterated in these columns earlier, economic mismanagement and delays in implementing the economic reforms are the root-causes of the present economic crisis. Failure of the government to contain the fiscal deficit created a plethora of adverse effects on the business sector.
The government had to resort to the banking system to finance its increasing deficit, and this led to fuel inflation. High government borrowings continued to exert demand pressures in the money market, preempting resources available to the private sector and pushed up market interest rates. In the presence of rising fiscal deficits, the Central Bank has played a passive role by merely absorbing itself a good proportion of Treasury Bills and Treasury Bonds with a view to keep the market interest rates down. This added further liquidity into the system and aggravated inflation.
The business community is depressed by the current political uncertainty, high inflation expectations, market volatility, labour unrest, and high interest costs. Entrepreneurs are to be hit again by another wave of cost escalations emanating from the relief package. Wage hikes offered to public servants will be followed by similar increases in the private sector, accentuating the wage-price spiral. Interest costs cannot be brought down in the present context of extensive government borrowings and high inflation, and therefore, the recent artificial interest cuts of the Central Bank will not be successful. It will take a long time to correct these distortions and restore macroeconomic stability. It is the utmost responsibility of the policy makers, particularly those in the Treasury and the Central Bank, to safeguard the long-term interests of the country, and not to sacrifice the development goals for political gains.
By Chandra Embuldeniya, President, National Chamber of Commerce of Sri Lanka
With the war in Afghanistan appearing to escalate day by day and with a looming threat of biological warfare that might spread like wildfire into the third world, survival of our people in the long run depend largely on self-reliance.
Sri Lanka should be prepared for the worst eventuality that may arise due to lack of essential items for daily living. Therefore it is time for the business community and professionals both in the public and private sectors, to gear ourselves for supply of sufficient food, healthcare, electricity and fuel and land and sea transport in the difficult years anticipated ahead. This is our national priority number one and we should not wait for the government to dish out solutions all the time.
Food Security
There are several ministries and there are many large and small players involved in the food supply chain. There is no better time than now to integrate efforts in a well-coordinated manner and strengthen this chain. This would give a boost to awaken the sagging industry morale. We suggest that immediate steps must be taken to get all the main players together to get down to planning and action.
The ministries involved in Food, Agriculture, Industry, Transport, Water, Fertilizer and Chemicals, should immediately form into a team along with the business Chambers to ensure the supply of adequate food during any crisis situation. While maintaining the contacts to secure supplies from overseas such as neighboring India, it is imperative that we take adequate measures to increase local cultivation of staple food items. This includes rice, yams, vegetables, fruits and other cereals and grains. A key element of the entire program would be to assess the requirements continuously and monitor the progress of measures taken to ensure and secure supplies. Since storage would become a national priority we would suggest that the processing sector be revived and avenues for processed value addition be examined collectively with the private sector.
Agriculture Department, Food Commissioner, Mahaweli Authority, Agricultural Development Authority, Coconut Cultivation Boards, Tea Board, Cooperative Department, National Livestock Development Board are some of the institutions that will be involved. This program will entail coordinating the imports of food items and matching with the local harvests to keep supplies in a healthy balance.
Healthcare
The imminent danger posed by Anthrax bacterium that has surfaced in the United States is a very real one. Anthrax bacteria, one of the biological weapons, has been transmitted through mail carried to unsuspecting victims. This is fatal if not treated during early symptoms. This can happen in any country where the government has vehemently condemned attacks in New York and offered assistance to the US government. We should immediately obtain assistance to deal with this situation in Sri Lanka from WHO. The government should ensure availability of essential medicines in hospitals. Besides, the situation demands security considerations and screening of suspicious people at the entry points to the country.
This is also an opportunity to galvanize support and test our national mindedness among all in the health sector including those in the private sector. As emergency measures that could arise due to the war spilling over to Sri Lanka, we need the health care personnel to be specially made aware of emergency measures and such drills also should be conducted as may be required.
Fuel
While adequate stocks of fuel should be maintained, it need not be overemphasized that in the event of a situation such as the Kuwaiti invasion breaking out encompassing the Middle East, then there will be little hope for us to secure economically priced oil from the world markets. Nevertheless there will be hope if we develop our own alternate sources of fuel and electrical energy. At times like this we naturally think of fuel wood, coconut oil, alcohol, etc. as valuable alternate sources.
Expansion of power supply distributions cannot be continued under the present circumstances and should be temporarily suspended. Presently power cuts have been reduced to two hours and further reductions are anticipated. We feel looking into the future power cuts should be continued until reservoir levels build up to at least 70% capacity for power generation. It appears that the reduction of power cuts are coming at a time with only 35% capacity for power generation.
While the emphasis has been on total power cuts we have not carried out adequate social marketing campaigns to get support for self imposed reduction in power consumption. To start with this could be placed as an education item for the children at school emphasis on immediate action.
Power generation using fuel wood has been in practice in India. This option is visibly the best socially and politically acceptable alternative to the power crisis. The unit of production is usually about half a megawatt or one megawatt. As such hundreds of such generators could be installed throughout the rural areas where fuel wood cultivation could become a domestic industry. The Ministry of Industries along with others have conducted studies on the feasibility and it is now time to give the green light for them to set up the first unit within the next one year. As the Americans say the war is likely to be a prolonged one and as such one year will be rather a short-term prospect. If we could now initiate action then we will have sufficient time to set up a large number of small fuel wood generators throughout the rural sector and the power crisis would have brought a definite positive economic impact on the country. If it is successful these generators could become a boon to the rural sector where power supplies will improve and additional incomes would be generated to rural families from domestic supplies of fuel wood to the generator.
Foreign Employment
We must also pay special attention to our migrant workers who are in the war zone. We should arrange with SriLankan Airlines for emergency evacuation of migrant workers from affected areas if and when it becomes necessary.
Sri Lanka should also identify high-risk countries where employment should be discouraged for a temporary period.
By Arjuna Mahendran
And so the slumbering Colombo Stock Exchange (CSE) is finally aroused from its six-year slumber. Just as the hordes of brokers, analysts, dealers and their retail and institutional clients had all but disappeared in disgust, flickers have emerged from the silent embers of the trading floor. The Echelon Pub has been given a makeover, no doubt in sweet anticipation of reliving those heady time when even the taxi drivers outside scanned the CSE index movements more intently than the race sheets.
But where have all the flowers gone? Many of the familiar faces, with the exception of some stout lads and lasses at Asia, JF and Forbes (sorry to the new owners but the old names were better), have left for ‘better prospects’. Better prospects indeed! Perish the thought. There’s nothing that gets the adrenalin going like the prospect of a full day’s trading on the floor (or screen, damned confounded technology) where millions are made or lost at the flick of the enter key. And the broker gets his commission either way while his or her client is probably headed for coronary intensive care.
So gym membership renewals should improve (buy Transasia) and all those pot-bellies put on in the slump will gradually melt away as five star lean cuisine replaces all that horribly unhealthy buth curry from home. Even the relatively unfit ones trim down as they agonise over what the ‘buy’ or ‘hold’ story (no, never a ‘sell’, for fear of upsetting some corporate honcho and losing those juicy corporate share placement mandates!) for tomorrow should be, losing sleep and the odd calories in the process.
Besides, there’s nothing like a twirl at the Library followed by a pounding at the Blue to revitalize the senses. Followed by some frenzied calls to Hong Kong hedge funds over a 5 am koththu breakfast (no not at Sirisanda, at the Hilton coffee shop) and the days deals are already closed, waiting to be executed. Nothing succeeds like success, they say. Especially when the long-suffering investing public is picking up the tab.
Will there be a revival? My hunch is yes. All the goodies being doled out in the government’s pre-election ‘seeni bola’ package (to quote the redoubtable Dr Peiris) are going to benefit the capitalist roaders. Lower NSL and interest rates mean more corporate cash flow to punt with. In these lean times where domestic and external demand have all but collapsed, what better way to make profits than having a flutter on the CSE? All the better that diesel prices are down, so the honchos (and henchaiyas) can wheel out the turbo intercoolers to dash off to Fort half an hour before the closing bell, when all the dirtiest deeds on the CSE get done.
So local liquidity will slosh around for a while while the CSE index treads water. Some of the smaller foreigners are already pecking at the market so as not to lose out on a sustained rally. The institutional money will flow only post-elections when the shape and form of the new government are more clear. If the Ranil/SB/GL combine wins, the next hurdle will be whether they can convince old Prabha to down his guns and talk turkey. But even that will not entice the big players, who have got burnt so many times with all the promises of peace and/or military victory. If a peace package is signed within a year, only then are we talking business.
The timing couldn’t be better. Economic slumps in the US have typically lasted two years, if we take the episodes of the early 1980s and 1990s. Meanwhile the Fed has pumped over USD 117 bln into the financial markets while the Bush administration looks intent on spending another USD 120 bln to boost the economy next year. Most of this liquidity is unlikely to be fully absorbed into the US stock and bond markets until the impact of the war is fully factored in.
So the liquidity will flow into other markets where there are better prospects of earnings growth and profits.
Already Asia’s more developed markets are showing signs of a gradual upturn, though investors are still tentative and holding onto cash. December/January could be a turning point for Asia as Christmas/Ramazan sales boost consumer spending and (hopefully) the Bank of Japan finally comes out with its long overdue reflationary package.
So don’t uncork the Dom Perignon as yet. But keep it nice and chilled for the first signs of recovery.
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