Inflation is theft; state takes away ‘our’ money

Out of the total amount of goods and services traded within Sri Lanka in 2006, 25% of the Rs.2.8 billion, known as the GDP, was taken away from the people, said economist R.M.B. Senanayake this week addressing a Certified Management Accountant’s (CMA) seminar on interest and exchange rates and its impact on the economy."This also means that 25% of your income is taken away from you by the government. This the government does by stealth lest the people protest."

Senanayake said that with treasury bills, the same money does not buy the same amount of goods as the original amount lent to the government. "They have stolen a part of your money. The objective is that the longer that you leave your money in savings, the less it will be worth." He outlined the mechanism by which this 'trick' works.

First, the government borrows about 10% of the GDP (budget deficit) which was Rs.235.8 billion last year. It borrowed Rs.164 billion from domestic sources according to the Central Bank Annual Report as opposed to 'the bogus figure of Rs.123 billion which was announced in the budget speech.' It also borrowed Rs.72 billion net from foreign sources compared with the original target of Rs.124.2 billion. Senanayake said this proves how fictitious the figures announced in the budget speech really are.

He described the Central Bank as a 'fully owned subsidiary of the government, on whose Board sits the Treasury Secretary who proceeds to hand over to the government as and when it runs short of money its newly created money either as temporary advances or as subscriptions to the treasury securities.' Senanayake said that these sums of money will be multiplied by five to six times and will end up pushing the Aggregate Money Supply by the end of the year by 19% to 20%. "The result is that, all things being equal, the general level of prices throughout the economy rose by about 13.7% last year." This amounts to every rupee being worth nearly 14% less at the end of the year than it was at the beginning. "You can, at the end of the year, purchase 14% less rice or bread or booze with your rupee than you could at the beginning of the year. That is nothing but theft."

At the same seminar, Executive Director of the Institute of Policy Studies, Saman Kelegama painted a more positive picture of the economy. "Sri Lanka will experience a budget deficit of 7.8% GDP and not 9.2% GDP as estimated earlier due to capital expenditure reduction and improvement of revenue," Kelegama said. "Due to the reduced budget deficit, pressure on the interest rate will gradually reduce. In my view, interest rates should not come down until the first or second quarter of 2008." He added that the exchange rate will depreciate. "The depreciation can be decelerated in the next four months because of a reduced budget deficit and inflow of new external capital." However, all this is dependent on cutting government expenditure.

The borrowing of US$500 million should not be used to delay macro-economic adjustments required and to artificially bring down interest rates. Kelegama expects a minimum growth rate of 6.5% this year and feels that by early 2008, Sri Lanka will be able to reduce the pressure on both the interest and exchange rates by bringing inflation under control.

Currency speculation

According to Nihal Jinasena, Chairman and Managing Director of the Jinasena Group of Companies, both interest rates and exchange rates have a devastatingly high impact on industry and exports. "Extremely high interest rates which are being charged now by the banks tend to deter investors and also affects the quality of investment because investors would look to short gestation projects in such a scenario," he said. Foreign exchange also has an enormous effect on industry and exports.

"We are in the business of manufacturing and exporting," Jinasena said. "We are not in the business of currency speculation. But that is precisely what we end up doing because we are forced into it. Hedging, forward booking, forward sales of currency, derivatives and all other financial instruments become our daily parlance, not productivity, quality and output." He added that sometimes, there is more money to be made by picking the correct derivative rather than by merely manufacturing and exporting the product.