New Year Blues:Government mismanaging the economy unlike Kandiah’s grocery store!


by Rajan Philips

Last week’s (April 8) Sunday Island carried an interesting quip in its political column, attributed to the UNP’s crisscrossing deputy leader, Karu Jayasuriya, while on his return journey from the government to the UNP: ‘the Rajapaksa government is being run like Kandiah’s grocery store’! The political columnist used the simile to describe the government’s Geneva fiasco. The simile is equally or more appropriate to the management of the national economy. Looked at it another way, the parallel is inappropriate as it is arguably an insult to the very successful management of what used to be the stereotyped Tamil shop in Wellawatte and in Pettah.

In the aftermath of the 1983 riots some of us used to meet periodically at Hector Abhyavardhana’s Chitra Lane home, mostly for fraternal political therapy after the shock of Black July. It was in fact the continuation of the Marx Centenary Committee that Osmund Jayaratne started earlier that year to commemorate the centenary of Marx’s death in March 1883. Almost the entire left spectrum – from Edmund Samarakoddy to N. Sanmugathasan (Shan) – attended those meetings. On one occasion, Shan brought up the subject of Tamil shops burnt out of business and reported the quiet rejoinder from some of the owners (‘Kandiahs’) whom he had met: "we will be back."

Hector took over from where Shan left. The former People’s Bank Chairman and one of the two drafters (Hector and Bernard Soysa who were both named as ‘outsiders in the Finance Ministry’ by Felix Dias in parliament after the LSSP was expelled from the UF government) of NM’s budgets, characteristically went on to explain the economics of the Tamil shop. The Tamil shop, Hector said, relied on the volume and variety of sales, painstakingly stacking a wide variety of goods and selling them on very small margins to be competitive. A Tamil shop would hardly ever go broke or bankrupt. It kept its borrowing to the minimum even though its credit worthiness was always high with the banks as well as among private creditors. It could only be put out of business by setting fire to it.

95% unpatriotic

The same cannot be said of the national economy today, the keepers of which, unlike private business owners, print and supply new money apparently to help the economy but usually to make it worse. In Geneva, the government spoke from both sides of several mouths providing a sumptuous buffet of embarrassing contradictions. On the economic front at home, it is a case of too many cooks throwing each one’s special ingredient in the cauldron, the potions from which is making the people sick.

None of the ills of the economy –the free falling rupee, shrinking external reserves, growing trade deficit, falling revenue and rising expenditure, high debt repayment, market liquidity, business uncertainty, credit squeeze on small businesses, low prices for local producers, and high cost of living for all – can be attributed primarily to global economic forces. The ills are primarily the result of the government’s mismanagement of the economy.

While on paper government’s economic wizards keep painting rosy pictures of the economy, the peoples’ assessments of their own situations are quite the opposite. The economy grew at 8.3% last year, the highest ever, up from 8.0% in 2010. The per capita income went up from (US) $2,400 to $2,836. But in a Gallup global wellbeing survey, postwar, only 5% Sri Lankans consider themselves ‘thriving’, while 75% think they are ‘struggling’ and 20% feel they are suffering. Is somebody in the government going to say that 95% of Sri Lankans are not being patriotic?

The government has gone the full circle in taking contradictory measures in regard to exchange rate, balance of payment, government debt, and, above all, its showpiece area of infrastructure development. Last year, it sacrificed external reserves to sustain the rupee, devalued the rupee to enhance external reserves, and finally gave up on the rupee. In the budget, the presidential finance minister, rather his hidden hand, cut import duties on cars and trishaws, and now they have been raised but only selectively. For some time, the government was hesitant about accepting the remaining tranches of the IMF loan program, but in the end it could not do without it and has accepted the eighth and penultimate installment.

For the record, IMF’s resident representative in Sri Lanka, Koshy Mathai, has stated that the IMF was not a party to the recent increases in duties for vehicles. He managed to ‘speak up’ the economy by not seeing it to be in bad shape, but expects the growth in 2012 to drop to 7-7.5% and inflation to rise. Other observers expect the growth to drop even further – to 6%, and attribute the postwar spurt in economic growth numbers (from 5% during the conflict period) to increased expenditure in conflict areas. The point to note is that such expenditure while boosting growth statistics is not contributing to sustained economic development, nor is it appropriate to the basic needs of the conflict areas.

China in the saddle

Although the government did not meet the fiscal and monetary targets set by the IMF, it did other things such as free floating the rupee, increasing interest rates and hiking fuel and electricity prices to qualify for the latest IMF handout. The receipt of $426.8 million from IMF has pushed the foreign exchange reserves to $6.1 billion, which was once at $8 billion eight months ago. Worrisomely, the government’s short term debt including securities stands at $5 billion, or 80% of the reserves. The current account deficit is at 7.8% of GDP, while the trade deficit has more than doubled from $4.88 billion in 2010 to $10 billion in 2011. This leaves foreign remittances insufficient for the government to use them to bridge the trade deficit.

Except for raising interest rates, import duties and prices, the government does not appear to be doing anything credible to increase revenue and cut expenditure. Increasing interest rates and prices is creating more problems for the economy and hardship for the people. For example, playing yo-yo with import duties on vehicles, while it is not enough to protect external reserves, has thrown a big section of the import sector into uncertainty and has hit hard the lower strata of the population relying on three wheelers for income and mobility. A major part of any long term solution would involve increasing the export earnings, but the government does not appear to be having any strategic plans for helping with the two main export sectors: garment and tea. Nor does it have any strategy to help the small export industries that have been developing on their own initiative. Industries that produce for the local market, which already have to compete with cheaper imports from India and China, will now be affected by the credit squeeze on consumers.

Reducing expenditure has to start with defence but that seems to be a non-starter. The government is spending more on defence ($300 billion) than the combined expenditure ($230 billion) on health and education, which should be the areas to invest for the future. The defence expenditure is now being justified by the non-military work that armed forces are being ordered to perform – from street cleaning to renovating the Central Bank building. This is neither here nor there economically, but anything goes in Sri Lanka.

The government’s plans for urban land and infrastructure development using Chinese help are also questionable. One of the reasons for the balance of payment crisis is the increasing import bill for infrastructure projects funded by foreign loans. So the government is working at cross purposes in enforcing credit squeeze to curtail imports while allowing infrastructure projects to continue at high import costs. The Ministry of Industry and Commerce has reportedly quoted a "businesswoman from China" about plans to invest $50 billion over 5-10 years to build another piece white elephant infrastructure in Hambantota – this time a new trade port! If true, China appears to be in the saddle driving Sri Lanka’s development and infrastructure.

The news from the Treasury is that the government is going to encourage the private sector to play a major role in undertaking all future infrastructure projects. The most needed infrastructure projects are water supply (55% of the population has no pipe water), sewage collection and treatment (currently serving only 2.5% of the population), and storm water management facilities to control the flooding problem. The Treasury estimates that $15-20 billion will be required for providing water supply and sewage system nationally, and $65 billion will be needed to develop 64,000 km of national roadways.

Given these needs and estimates, why would anyone in their right mind think of building a trade port in Hambantota for $50 billion? The way things are going, Hambantota will be chockablock with infrastructure of little use, while other places will be chockablock with people without facilities. Even those at Kandiah’s grocery store will know that this is not the way to run an economy.

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