Comment - Prudent fiscal management vital

The Dollar exchange rate crossed the Rs. 114 mark on Wednesday and the Sri Lankan rupee is shrinking continuously proving that all predictions and justifications by officials of the Central Bank are incorrect. During this year the rupee depreciated by 8.56% against the US dollar.

Last week's crude oil price hit US$ 82 per barrel, recording the highest due to the tumbling of US crude reserves.

All these factors make the rupee depreciation a vicious cycle leading to multiple issues in the economy.

The CB's solution to the crisis is hilarious and there is no difference between the milk powder importers' solution to the higher milk price.

At present some milk food importers maintain the price of milk powder by offering a 300g packet at the earlier price for a 400g packet. Similarly, a report said that the CB Governor was attempting to keep the rupee stable by discussing with bankers and money dealers.

It is now very clear that the CB is not playing its role as an independent institution by giving correct and timely advice to the Government on management of the economy.

Instead of showing the Government the correct path the Governor is apparently performing a different role, justifying wrong policies and decisions of the Government. He made this known at a special press conference recently and is repeating it in his public speeches.

Soaring inflation would not keep the rupee stable. Economic analysts say that this depreciation and inflation would continue as a vicious cycle until the Government manages the foreign currency inflow and outflow.

According to the Department of Census and Statistics, the annual inflation rate in August (12 months moving average) registered 17.3, 6.5% higher compared to the corresponding period last year.

The year-on-year (point to point) inflation rate of the Colombo city for the month recorded 17.3%, only 0.3% lower compared to last month.

Controlling foreign currency outflow is a must at present but no measures have been taken so far. Even at over $80 per barrel crude oil price, we have not taken any measures to save fuel, check waste and find alternative sources of energy.

The world is looking for alternatives such as ethanol. A barrel of ethanol is sold in the world market at $20, one-fourth the price of crude oil. It is used by blending petrol and diesel. We can produce ethanol and if the industry starts it on a small and medium scale it would help rural farmers tremendously. We have not even given thought to such solutions for the crisis.

To earn foreign currency our exports should grow at least by 20% and today it is 12%. The advantages of the rupee depreciation such as improving our export competition is not significant, because we are highly dependent on imports.

Instead the Government has chosen the most risky solution for the crisis. At a time interest rates are at a peak in the international credit market, as a result of the recent credit crisis, the Government is about to issue bonds to raise money.

Financial analysts who have warned against such a move point out the crisis faced by Argentina in 1999, as a result of being heavily dependent on the international capital market.

The economy collapsed and Argentina went bankrupt after the crisis. Sri Lanka has a huge international debt burden and servicing it is becoming costly with the depreciation of the rupee. If the anticipated US$ 500 million is inadequate to maintain rupee stability this credit would be a huge burden on the country.

Factors such as war, corruption, waste, inefficiency in the state sector, burden of certain state utility ventures and low productive economy would not help to stabilise the rupee by raising $ 500 million.

Without taking steps to overcome this situation borrowing at higher interest rates would certainly not solve the issue. The country needs more prudent and wise fiscal management.

The CB should guide the Government at this critical juncture instead of toying with imprudent Government policies and pandering to the day dreams of politicians.

The CB has so far failed to reverse this trend and its top officials prefer to show their political loyalty in public rather than the independence of the institutions. In this scenario people would be somewhat sceptical of the assurance of the CB in the future.