Financial Times - High growth, rising prices and sustaining BOP surplus

The latest monetary policy release of the Central Bank gives a picture of mixed results i.e. - high growth momentum, rising consumer prices and surplus in Balance of payment and increase in reserves. All major sectors agriculture, industries, construction and fisheries are said to be expanding and contributing to the overall growth of the economy. According to mid-year statistics cumulative exports have grown by 8.8%, imports grew at 20% thus widening the trade deficit, which is softened to some extent by private remittances (growing at 24%). Balance of Payments recorded a surplus of $164 million resulting in gross official reserves moving to $2542 by August 11. Beneath this mixed fortunes the Central Bank cautions and expresses concern over the rise in international oil prices which affects every aspect of the economic activity and the other issue is the continuing rise in the consumer prices as we’ve witnessed in domestic fuel prices in the last few months while the bread prices were revised upward without much noise.

During a recent media briefing Treasury officials stated that though paddy output grew to record heights full benefit to the consumer was not realized due to the non-availability of adequate storage facilities and the inability of the millers to cope with the demand.

It was also said that closure of the CWE and collapse of the co-operatives which acted, as retail price neutralizers were main causes for rising price levels. There’s little doubt that CWE, which catered to meet the demands of the ordinary man, went on a destructive path in trying to match the supermarkets which cater to high spenders and had to put up shutters. The co-operative movement, which once flourished in the country was a model commercial organization with its ownership being held with the simple folk, and was the ‘supermarket’ in the village operating within a low overhead budget and catering to many needs. Even in the city of Colombo there were many well-managed co-operative societies which even paid dividends to shareholders. It must be said that the present parlous state of both these are the result of the policy of “Rewarding Party Loyalists at Voters Expense” practiced by successive governments since the sixties.

Another worry that’s uppermost in the minds of the economists and Treasury experts should be the rising oil prices exerting heavy pressure on the Balance of Payments.. Whilst the rains in catchment areas may give temporary relief in lowering the costs of power generation no short-term solution exists to this major crisis once again reflecting the political mismanagement of the successive governments.

Given the level playing fields offered to LIOC and the Ceylon Petroleum Corporation (CPC) in pricing their products there is a great danger that the government-owned corporation may not be able to withstand LIOC’s potential marketing strategies. CPC and the government have already lost the edge in highly profitable bunkering and lubricant markets now dominated by the private sector.

As stated in the monetary policy review, lending to loss making public corporations (CPC and CEB accounting for major share) are adding to the growth in monetary and credit aggregates thus putting more pressure in consumer prices. Undoubtedly CPC needs a complete facelift to meet the emerging challenges by bringing in fresh talent to their think-tanks as “doing nothing” is not an option for this state owned giant who cannot afford to lose the government’s hold on the vital energy sector.

The underlying message for the government and the politicians is that strong institutions are an essential ingredient in building up strong economies.

Amidst the gloomy forecasts of rising oil prices and the continuing instability in the Middle East, Sri Lanka has once again become a conflict zone with escalated violence in the north and east. Senior public officials speaking to The Sunday FT said that, to a small island economy highly dependent on donor funding with a small export base and private remittances to finance its imports, surviving through this level of conflict is difficult. Loss of human lives, displacement of people, damage to property, resettlement of displaced, refugee maintenance, disruption to schools, higher insurance risk premiums, cancellation of international events and bad publicity are the ill effects of war. Damage caused by more than two decades of war and the recent tsunami have caused enough misery to Sri Lankans of all nationalities and its time conflict resolution to be given priority by all concerned. Mozambique and Uganda are good examples of two sub-Saharan countries that have progressed to sustained growth from conflict as against models of Congo, Liberia and Sierra Leone yet affected in conflict.