With a tax revenue crisis emerging, reduced inflow of dollars and a liquidity crisis, an uncertain financial picture is emerging that would hit Sri Lanka in the immediate three to six months in the New Year.
The crisis has been exacerbated by the Supreme Court ruling to cut prices of petrol to Rs 100 per litre, a decision that the government is taking some time to implement (as this edition went to print) saying the court verdict hadn’t been received. The government is concerned about the revenue loss from this measure.
Some economists say this is the worst economic and political crisis the government is facing in recent years given the way residents are going to court to seek redress on every possible issue.
It has also triggered a debate over the role of the judiciary and the executive since executive decisions are being overturned by the courts on fundamental rights petitions like for example the resignation of Dr P.B. Jayasundera and the suspension of Ceylon Petroleum Corporation (CPC) Chairman Asantha de Mel, even though for the right reasons.
On the flipside, the government’s inability to respond to concerns of the public has led to despair over the rising cost of living, no reduction in fuel prices, issues over examinations, school admisssions and other administrative issues that affect the public. Thus in desperation people are going to the courts for relief on issues that should be settled at an administrative level.
“There’s no doubt a crisis but the people seem to have few options and are depending on the courts to deliver the goods,” a political analyst said. The resistance to reduce the price of petrol is also out of place given that fuel prices are collapsing in the world market. Sooner or later the government would have had to bring it down. World markets have slid to $39 per barrel on Thursday from $143 in July.
The Central Bank (CB), after Governor Ajith Nivard Cabraal said in the early weeks of the global financial crisis that there doesn’t appear to be an immediate crisis, has now realised that financial uncertainty is hitting Sri Lanka and putting together some counter measures.
With a shortage of foreign exchange envisaged, the CB is looking at attracting the Sri Lankan diaspora to pump in more remittances through several incentives including an additional interest as a bonus the government will pay on remittances in addition to the bank interest on NRFC accounts. Sri Lankan expatriates are also being encouraged to invest in treasury bills and bonds. Whether these methods will help to partly overcome the crisis remains to be seen.
Across the board in the corporate sector and other sections of society, there is a tight squeeze for cash and a major liquidity crisis. Several companies are cutting costs, reducing or doing away with the annual bonus’ and trimming other perks offered to staff. In one company, staff was complaining that despite a crisis in the firm, its chairman had acquired a 25-million-rupee vehicle.
In other companies some executives are also losing their cars or car allowances. The crisis is indeed worsening. Orders have dropped by 50 % in some companies and payment bills are outstanding. Banks are in some cases putting on hold even approved loans in an environment where the default rate is rising and banks are possibly facing serious decisions to write off bad debts. The breakdown in governance often results in no one believing or having faith in the arms of government or Central Bank data. In any case there was always a doubt about government data particularly on the cost of living and inflation.
In its latest statement, the CB said inflation fell to 16.3 % in November from 20.2 % in the previous month saying it was for a number of reasons including stringent policy management. Others including economists disagree on the reasons. The CB also says the economy will grow by around 6 % this year, another figure that is being disputed.
The global financial crisis that has turned into an economic crisis will hit Sri Lanka any-time in the next six months and make deep inroads into corporate budgets -- even if fuel prices are reduced further.
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