A war on the economic front- the need of the hour

By Sunil KARUNANAYAKE

The world is still not free from the devastating global economic meltdown. Mass unemployment, loss of savings and increasing debt has not spared large empires. India and China were the exceptions, but this position too is now changing.

"In America banks earn an average return on equity of about eight percent, which is less than their cost of capital! The only consolation for American Banks is that they are doing better than banks in Europe where the returns are about 4 -6 percent. These returns seem lower than what a customer earns from a deposit"(The Economist).

Sri Lanka escaped somewhat unscathed after an unnerving downturn in 2008 with an IMF bailout. However, by 2011 with the economic fundamentals were beginning to improve with low interest and a stable exchange rate regime. This enhanced foreign and domestic trade and credit was growing rapidly promoting consumption. Towards the year end, trade balance hit a massive $ 8b trade gap, thus threatening the balance of payment and foreign exchange reserves.

The economic imbalance that arose in late 2011, compelled the Government to take certain remedial measures to strengthen the economy such as increasing duty on motor vehicles, increasing the price of many imported food items, fuel/LPG gas price hikes and strictures on state entities engaged in fuel and utility outfits. These measures to some extent will eliminate consumption while bringing hardship to the poor.

The rapid depreciation of the rupee is adversely affecting imports, while on the contrary, exporters are reaping higher returns. Some of these measures may slowdown growth but under the circumstances, these are inevitable. Economists feel that these measures are needed and the country will have to bear the brunt for another one or two years.

Corporate profit growth too will take a fair beating. Sri Lanka Telecom has recorded negativities in PBT and PAT in its subsidiaries. Many businesses with import dependence are facing this dilemma. The adverse effect on the economy could be a loss of tax revenue, limited growth and employee unrest.

The growth versus inflation dilemma has no end. High inflation and high growth do not go hand in hand. This simply explains the major economic imbalance that is affecting the country today. Inflation is vicious , it makes the rich the richer and the poor, poorer.

This is now a familiar scenario as we experience when settling bills. Inflation reflects heavily in utility bills, threatening the monthly cash flow of the fixed-income earner. If this is the situation, we need to tackle these economic imbalances with all the force we can muster, if we are to survive.

Government expenditure, wasteful tamashas, corruption, drain on foreign exchange, incompetence and lawlessness are key enemies that ruin the economy, imposing heavy burdens on us. In this scenario, with the threat of global food and oil price hikes, President Mahinda Rajapaksa spoke to heads of state corporations. Sri Lanka has limited options against enemy forces causing economic imbalance.

State corporations were set up with good intentions but politicisation caused havoc and the results were obvious.

They became inefficient, unmanageable organisations and had to depend on government revenue provided by tax payers.

The plantations, public transport, petroleum and the Railways were the worst affected.

However, the plantations survived, thanks to private ownership and continues to generate much- needed foreign exchange and also provides revenue to the Government by way of taxes.

Public transport and Railways known to be inefficient causing heavy financial burden to the people, now seems to be getting 'new life' with modernisation of the southern coast railtrack that has been given a new look thus minimising travel time.

At the same time it must be said that there are some good ventures such as the State Pharmaceuticals Corporation, the Shipping Corporation, the Colombo Dockyard and the state Banks who through good stewardship continue to benefit the people.

The P and O's involvement in Port services brought in a competitive spirit, thus the Government-owned, Ports Authority too improved their performance. Such strategic alliances should be encouraged for mutual benefit. On the other hand according to news reports some of the privatizations of the past too have been handled badly at a tremendous cost to the public. If this wastage and corruption could be avoided such funds could be directed to provide public utilities as well as subsidies to those who cannot meet rising prices.

Corruption

Corruption though not entirely a new phenomena became a major public menace with the advent of the open economy.

If those stories on buying over legislators are true, one can imagine the level of corruption taking place in Sri Lanka, We are not a Singapore nor do we have leaders of the calibre of Lee Kuan Yew to eliminate corruption but reducing the scale is not impossible. Here too what has to be borne in mind is that corruption places a burden on the public? It is sad that legislative measures introduced by the Government has failed to deliver the desired results. The only known actions were when more than five decades ago when several senior ministers were found guilty of corrupt practices and as a punitive measure their civic rights were abolished.

Foreign Exchange Reserves

Sri Lanka in recent times have been barely managing with USD 2 to 3bn range reserves sufficient for two to three months imports in contrast to developed countries who hold substantially large amounts enabling them to absorb shocks. Reserves provide stability to exchange rate which is a primary determinant of the cost of imported commodities.

This has been a major cause of rising living costs with heavy dependence on imports.

The tea Industry is now working towards achieving a USD 5 billion target by 2020 doing well having and exceeded the coveted USD 1bn mark few years back with strong demand. The industry's potential is immense and too should be a possibility with appropriate direction and the assistance from the state for Brand development and further deregulation. Despite many setbacks tourism sector is showing promise.

Exports

Given the deficiencies in Macroeconomic stability exports must be encouraged to enhance much needed foreign exchange earnings. In this background at the Central bank post Annual report seminar it was announced that the government would pursue with setting up blending centre as international Tea hubs.

However this concept is nothing new & Sri Lanka in 1985 amended the relevant legislation to permit import of specific varieties of teas of different origins to be as used as fillers successfully.

In fact this process taking place even now though certain sections of the society are reacting angrily in the mistaken belief that "Pure Ceylon Tea" image would be damaged. In Sri Lanka we have a highly competent set of Tea experts who would never allow the "Ceylon" image "to be damaged. The need for fillers arises mainly due to limitations in land and crop availability.

While boosting exports some rationalisation is required in imports and in particular the ever increasing oil guzzling vehicles and the duty concessions granted for such be controlled.

War on the serious impediments to economic progress too should be fought with determination commitment, good governance and a strong leader.