Financial Times

Robbing Peter and Paul to pay the deficit
A bill board in Colombo had a tag line "ZZZZZ…..", indicating the deep slumber the opposition was in whilst the coalition government was engaged in fun and games. The wise old owl sees the trade unions, the monetary board, the chamber chiefs, business leaders, academics, media and the civil society also in a state of "ZZZZ". In the meantime, the Prince of the Treasury is busy indulging in his favourite pastime of robbing Peter and Paul to pay for the budget deficit.

The Treasury Bill (T-bills) auctions of November 17 and 24 ended with three, six and 12-month auctions closing at 7.25%, 7.40% and 7.65%, respectively. The T-bills on offer for 3, 6 and 12 months were Rs 500, 250 and 750 million respectively and Rs 300, 200 and 500 million respectively. The offer was made in the context of maturing bills of Rs 2.5, 1.3, and 2.9 billion on November 17 and Rs 3.0, 0.8 and 2.5 billion respectively on the 24th. The acceptances were however limited to Rs. 989, 25 and 486 million respectively and Rs. 573, 165 and 262 million. The reserved bill value (being the difference between the amount of maturing and accepted bills) was over Rs 5.0 billion in each of the above auctions.

The overnight call market interest rates during this period were around 8% while bank savings interest ranged around 8%. The 12-month fixed deposit interest ranged from 8% to 9% with an additional bonus for senior citizens.

During the same period the Central Bank reverse REPO (rates at which banks can borrow from the Central Bank against T-bill holdings) increased from 8.5% to 9%.

In view of the gloomy market scenario and the post budget lack of confidence in the economic upturn who are these mystery investors who are locking up investments in T-bills at lower than market interest rates? By any chance are they supporting the curtailing and justification of budgeted interest expenditure?

On the macro economic scenario the latest Central Bank numbers speak for themselves with overall price levels rising in November over October conforming to seasonal patterns.

The CCPI (the official measure of price change within the Colombo Municipality for the lowest 40 percent of income groups) indicated an upturn from October to November of 3.4%.

The CCPI point-to-point increase of November 2004 over November 2003 was 13.1 % (October 2004 comparative index 12.1%). The annual average inflation increased in November to 6.8 % from 6.1% in October. The change in the point-to-point index and the averaging effect of the annual average index both within an increasing trend line firmly indicates the year ahead as one with an inflation level of around 12-14%.

The plot gets thicker as the weeks go by with the Central Bank T-bill auction on December 1 reporting unchanged bill yields despite the Central Bank inflation numbers coming in at a higher level. The total bids received in this auction were Rs 6.9 billion for all three terms whilst the accepted amount was Rs. 3.4 billion.

Can we believe that private commercial banks, primary dealers and private fund managers were the successful bidders with accepted offers? Most likely their bids were at higher rates and were rejected. Who is investing even in the short term with a negative savings yield? In the context of a likely future inflation rate assessed at 12-14%, the successful investors are losing money value of around 5%.

Can we surmise that some wealthy princesses are offering themselves in marriage to the Prince of the Treasury to support budget deficit management? Could the EPF, ETF and NSB investments be dictated to by the Prince? Aren't these investments coming from the savings of the poor working masses? If so, poor Peter and Paul and all the rest who are unfortunately ignorant and helpless are being exploited with their trustees permitting the government to rob them with impunity.

The Monetary Board is sound "ZZZZ." possibly hypnotized by the dictates of the treasury boss. What happened to the governance role expected from four 'independent' musketeers on the Monetary Board? Why are they allowing the sole government nominee to steal the cheese from under their very noses? The trade union leaders are certainly asleep not knowing or caring to exercise their governance role.

The Chamber bosses and the media are also in dreamland knowing fully well what is happening but keeping mum perhaps because their pension savings are not at stake.

Alas! Civil society is comatose when it comes to exercising their civic rights. They appear totally unaware that the big bank robbery by Saradiel junior is in progress. Amidst all this, the opposition and Rathu Sahodarayas are fast a… "ZZZZ", dreaming of the plums of future office.

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