ISSN: 1391 - 0531
Sunday April 20, 2008
Vol. 42 - No 47
Financial Times  

Economy – Up, down or flat?

In recent weeks, the debate over the state of the economy has been growing and in certain cases turned into a personal battle between sections of the Central Bank and some economists. The pros and cons of money printing, inflation and food prices have been discussed at unprecedented levels.

While economists generally have different schools of thought and in most cases no two economists will think alike, in this case inflation hitting the 20 percent and over level has seen many economists taking a common stand. On the money printing issue, the main debates have been between economist Harsha de Silva and the Central Bank while an economics teacher from the Colombo University, Sirimal Abeyratne seems to agree with both points of view based on different economic theory – that printing of money is essential but only when necessary.

Neverthless most of these arguments have been couched in a lot of economic jargon with foodflation (what does it mean to the man on the street?) also entering the lexicon of the economic debate based on rising food prices globally. (By the way … why can’t economists speak in a language that most people understand and explain in laypersons terms what inflation means or why money printing is necessary or for that matter why interest rates should be in line with inflation?)

In this midst however, the bigger picture of a looming world recession, a financial crisis in the US with excessive money printing adding to the economic woes there and what it means to Sri Lanka hasn’t still got our planners working overtime to explain to the public what is going to happen here.

The crisis is growing in the US. According to newspaper reports April 2008 began with one of the worst periods in United States aviation history, with no fewer than four airlines (Aloha Airlines, Champion Air, ATA Airlines and Skybus Airlines) all ceasing operations in a period of a week. A fifth airline, Oasis Hong Kong Airlines ceased operations after the price of oil hit $110 on April 9 causing concern that the small airline crisis in the United States may spread worldwide. A sixth airline, Frontier Airlines filed for bankruptcy on April 11. The reports said high and unsustainable jet fuel prices are to blame, caused by record oil prices and a declining supply of oil. “With regards to this and high food prices that are occurring, some are arguing that this is the first recession in history to be caused by environmental factors rather than economic despite the housing market downturn,” one report said.

Recently Sri Lanka’s own Dr Howard Nicholas, an eminent (some could however call him controversial) economist based in the Hague, during a visit to Sri Lanka and at some speaking engagements spoke widely on the crisis confronting the US and subsequently the world. In a TV interview he said that the recession and crisis is one not seen since the mid 1900s and the crisis in the US will have a gradual impact on the rest of the world.

Already rising food prices is showing in Sri Lanka. A request to import rice from India has been turned down as India has banned exports of some rice varieties because of a domestic crisis though latests reports indicate our neighbour may accede to a special appeal from President Mahinda Rajapaksa. With rising prices, the government has brought rice under price control but traders argue; who takes care of their losses when they have to sell at below cost prices? Food prices are rising globally partly due to shortages in milk (in Australia/New Zealand there has been a shortage in milk powder production) and wheat grain production and partly because grain is being grabbed by another consumer – the motor vehicle industry as bio-fuels.

Back to the Sri Lankan situation, here the debate between economists – government and outside – continues on money printing, inflation and now inflation targeting. The middle class/wage earner is the one getting squeezed all the time and the crisis is opening out new income classes – lower middle/upper middle – and it’s anybody’s guess as to which class the average middle class wage earner belongs or falls into as prices gallop into an uncertain future.

The question one needs to ask then is – while the experts debate and score their points in the tit-for-tat discourse, who will save the consumer from the rising cost of living and unbearable burden?

 

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