The axe falls

The signs have been ominous for the past several weeks and finally the axe has fallen. Plagued by both mismanagement and bad governance by the ruling Rajapaksas, aggravated by an ineffective opposition, the bad news is now very much here and the people have to face the harsh reality. Last week’s sharp devaluation of the rupee against the dollar, long resisted by the Central Bank and its Governor, has been forced upon the Sri Lanka economy and a population that moved from gas queues to milk powder queues and then to long lines to refuel their vehicles interspersed by blackouts and power outages countrywide will, hopefully, be spared such torment in the near term. But at a price and a very heavy price at that, that most people would not be able to afford. But for how long? We can only hope that a benevolent deity will smile down on this tormented land.

The economic indicators are grim. The foreign exchange liabilities of the Central Bank exceeded its reserve assets by Rs. 662 billion (USD 3.29 bn.) in January this year, up from Rs. 386 billion (USD 1.9 bn.) a month earlier. The situation today must necessarily be worse with the country struggling to repay debt and being compelled to utilize reserves to pay for vital imports. We have been printing money as though there is no tomorrow and this has been going on for a long time. Cash savings of people have been wiped out in value terms in a country that had long been advocating savings as a means of strengthening the economy. Those who held what funds they had in fixed income instruments like fixed deposits have taken a heavy blow while those who invested in real assets like land and property or even a vehicle have been relatively unscathed. However, it is still too early to say whether capital appreciation of real estate in the current scenario will continue as in the past.

Government leaders have been urging patience on a population that is running out of that, or more correctly, already run out of it. No less than the president assured that the power problem will be over by March 5. But that was not to be. Ministers Lokuge and Gammanpila kept making contradictory statement with the ground situation proving Gammanpila right. The Lanka Indian Oil Company (LIOC), the Indian player in Sri Lanka’s oil import and distribution market, raised prices four times since Dec. 21 last year. The Ceylon Petroleum Corporation (CPC) which controls the larger market share did not follow suit though both players have been stridently claiming that they are selling below procurement cost. The obvious result of LIOC fuel, both petrol and diesel, being much more expensive than CPC’s, consumers tanked-up at CPC filling stations unless they were forced to do otherwise. The net result is that already high CPC losses swelled further.

The grim reality is that CPC must raise its prices sooner than later. The government, obviously, is all too aware of the ramifications of a fuel price increase which is all encompassing. Public transport fares must go up; so also the price of produce that must be moved to markets. The implications are far and wide but the evil day will soon be with us. The CPC, initially, would hike prices to be on par with LIOC, and thereafter both companies needing to match their sale prices with the cost of procuring supplies will demand further price increases. These no doubt will be granted. There is a Tamil proverb that the man who is already wet does not feel the rain. People hit with price rises for all essentials, leave apart the few luxuries that makes life tolerant, may (hopefully from the rulers’ viewpoint) like the man who got wet in the rain not feel the effect of this one too badly. We need not labour the fact that the impact of the devaluation will be all pervading.

There have been indication that the hard line resistance towards going to the IMF for assistance is weakening. A structural adjustment facility (SAF) from the Fund in 1978 greatly assisted President J.R. Jayewardene’s big bold stroke of freeing the economy shackled for decades by state controls. There were conditions for that including a sharp depreciation of the rupee from then prevailing exchange rates. Older readers may remember that the National Savings Bank (NSB) at that time paid as much as 22% for one-year fixed deposits. There was a surge in imports and demand pent-up over several years was satisfied. So much so that Mr. Lalith Athulathmudali, then minister of trade and shipping, once declared that people may tolerate high prices up to a point, but never again scarcities. Fifty years later they have been forced to tolerate both.

The IMF has warned that the Central Bank may lose control of money and the economy could implode unless money printing was stopped. There are signs that this advice is now being taken, although late. It said in a statement that Sri Lanka’s public debt, including Central Bank liabilities, has risen to 119 percent of gross domestic product (GDP). The bank is yet carrying debts to the tune of USD 1.2 billion to the IMF from previous currency crises. The president will chair an All Party Conference, something it was hitherto reluctant to do, within the next few days. As SJB front-liner Harsha de Silva, a knowledgeable economist recently said, “We’re all in this together.” Now is not the time for the cheap politics that has long plagued this country. The right thing must be done. But do we have the leaders to do it? That is the question.