ISSN: 1391 - 0531
Sunday September 2, 2007
Vol. 42 - No 14
Financial Times  

Mucking up the economy

Rising cost of living, printing money, inflation, depreciating rupee, foreign loan saga, corruption … the economic muddle that Sri Lanka is in seems endless.

The United National Party is taking the government head-on in a clash over the US$500 million commercial loan threatening to stop repayments and not honour the loan commitments if and when it comes to power.

The government says it has the sovereign right to resort to commercial borrowings and any incoming administration has to fulfill these commitments, a view that is shared by some economists who say that stopping loan repayments – never done before -- would create a negative image globally if such threats are carried out. But the same economists are also appalled over the decision to borrow at such cost.

This week the US dollar hit the psychological Rs 113 barrier, apparently a sharp depreciation over a month, triggering alarm bells in various sectors. The Central Bank defended criticism that its economic fundamentals were responsible for the sharp gains in the US dollar saying export earnings have gained, worker remittances have increased and foreign inflows are comfortable.

But foreign exchange analysts argue that if that was the case, the Central Bank (CB) should have intervened in the market and pumped in dollars to stabilize the rupee given its sharp rise. “The only explanation for the surge in the US dollar is that the CB doesn’t have enough foreign cash to pump into the market. A costlier dollar means rising costs of food and fuel imports resulting in higher costs of living and inflation,” one analyst said.

Money dealers believe the rupee will depreciate to 115 in two months and Rs 120 by early next year unless the Central Bank takes corrective action.

Despite the controversy, the government via the Central Bank is determined to go ahead with the US$500 million bond issue and preparations are underway for the three lead managers including HSBC to organize road shows in Europe this month. The local branch of HSBC, the scene of a UNP demonstration on Wednesday, is going ahead with its plans.

In a rare move, UNP leader Ranil Wickremesinghe wrote to HSBC chiefs with copies to JP Morgan and Barclays, the other two lead managers of the bond issue, giving reasons why the UNP will not honour the loan when in power. Wickremesinghe’s move raises constitutional and political issues for a governing party.

For example, if the UNP goes ahead with its threat when in power, it sets a precedent which could be followed by any party in opposition.

While the government is desperately seeking costly commercial borrowings for doubtful reasons – either for infrastructure spending or financing the widening budget deficit – there have been occasions where it failed to access funds that was freely available at no costs.

Sri Lanka lost a golden opportunity to some US$500 million of grants (free cash) from the Millennium Challenge Account (MCC) of the US government this year having haggled over various projects. No decision has been made yet whether Sri Lanka will have access to these funds which some chambers were also hoping to get. However we have learnt that this funding is now off the table.

The MCC wanted home-grown projects and the government couldn’t come up with any. Thus a good opportunity was lost for free cash while the government is now discussing a costly loan that generations of Sri Lankans would have to pay.

Another missed opportunity for the economy is the increasing worker remittances that our hard-working migrant workers bring in annually, now the second highest foreign exchange earner after garments. But annual growth in remittances over 10 percent as against garments which is around five percent will soon see the migrant worker industry topping the list as the highest foreign exchange earner. But what is being done for these workers other than the disbursement of a few welfare benefits? What is the fate of the young Sri Lankan housemaid awaiting a death sentence in a Saudi jail? Sri Lanka’s economy has been and will always be a story of missed opportunities as the above examples show.


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Copyright 2007 Wijeya Newspapers Ltd.Colombo. Sri Lanka.