Columns - Political Column

Lanka's economy heads for disaster

  • Expert group says situation like "an accident waiting to happen"
  • Politics an extension of war, President and Ranil to meet Indian PM next week
By Our Political Editor

Thursday's budget overshadowed other events to become the focal point of attention for Sri Lankans in all lifestyles. This is notwithstanding the remarkable victory of Barack Hussein Obama at US presidential elections on Tuesday. The Democratic Party president-elect has won the hearts of millions in not only the US but also the world over.

For the Government that is marketing its virtues, the budget proposals are encapsulated in a one-liner - substituting imports, saving foreign exchange and giving pride of place to local industry. The opposition's counter, interesting enough, is also a one-liner. One of them said the left hand has taken away what the right has given to the public.

In the past two days, the good and the bad of the budget have been disseminated in the media. More views on how it benefits or affects the Sri Lankan public appear elsewhere in The Sunday Times. Whatever the merits or the demerits are, it is abundantly clear that the Finance Minister, who is President Mahinda Rajapaksa, did not present an "election budget," one that offered all the goodies to help the ruling party win votes and return to power. There indeed was an anti-climax to it.

Ranil Wickremesinghe Manmohan Singh

The reasons are significant. Most important is the global economic meltdown. The government has recognized the warning signs of what it means to Sri Lanka. It was only a week earlier that the rupee was de-linked from the dollar and allowed to float. Tea exports, one of the largest revenue earners, have been badly hit with half of the country's production lying in warehouses. The regular buyers were shying away.
Another important reason is the ongoing military campaign. It is no secret that the re-capture of Kilinochchi, once the political epicentre of Tiger guerrillas, would pave the way, if not for dissolution of Parliament and subsequent general elections, at least more provincial council elections. Such a move, it was argued, would see the return of the ruling party with an overwhelming majority, either at national level or at provincial level. Such an argument is not without justification.

Yet, for the past two months or more, going, going but not going to Kilinochchi has been a great damper on the government's timetable. Making it worse was the October 28 twin air raids by the guerrillas on the Army's Area Headquarters for Mannar and the Kelanitissa power station in Colombo. That it embarrassed government leaders is no secret. The matter figured at top-level security conferences. More so, since senior officials and security top brass had repeatedly asserted the invincibility of the skies, particularly over the City of Colombo and the immediate suburbs.

This is with the installation of modern air defence systems and the ability to intercept and shoot down guerrilla aircraft. That a ramshackle aerobatic trainer, described by Media Minister, Anura Priyadarshana Yapa as a "crop duster" (aeroplanes used for spraying farms to rid them of pests) could even force the closure of the Colombo airport for some hours did not augur well. Last year, it had forced the total closure of the airport at nights for four long months.

In the wake of the global economic meltdown, a market commentary by Citigroup Global Markets Asia describes Sri Lanka as "an accident waiting to happen." Here are some excerpts:

"Sri Lanka's FX (foreign exchange) reserves have fallen to an accelerated pace in the last month (October), with CBSL (Central Bank of Sri Lanka) Governor recently saying FX reserves are now down to US $ 2.6 billion in late October from $ 3.1 billion in September and $ 3.4 billion in August. We think Sri Lanka is vulnerable to sudden stop of capital flows and the Sri Lankan rupee (LKR) is unlikely to hold at current levels.

"Two major factors that are driving the decline in FX reserves -

1. Foreigners exiting Sri Lanka T-bill and bond market - it is estimated that foreign holdings fell from $670 million in early October (we were told foreign holdings were $150 million in T-bills and $520 million in bonds in our early October trip) to now around $380 million in bonds and bills combined;

2. CBSL has been intervening in the market to keep LKR stable with CBSL estimated to have sold about US $600mn to the market in the last two months.

"How externally vulnerable is Sri Lanka? We think they are very vulnerable though how close is a bit unclear. We have repeatedly argued that Sri Lanka is the most extremely vulnerable country in the region, as highlighted in our recent report….

"If we look at IMF's figures of short-term external debt by remaining maturity, the figure is about $3.5 billion for 2008, while Fitch's figures, which we are told is only "original maturity: is at $ 2.9 billion in 2008F and $3.1 billion in 2009F. Current FX reserves can't cover these drains and will need refinancing in an environment where capital markets are seriously impaired. Their recent announcement (October 7) seeking proposals for a $ 300m syndicated loan looks very difficult under the current environment.

"The CBSL argues that IMF's figures are overstated as they include dollar denominated Sri Lanka Development Bonds (SLDBs), outstanding amount is at $1.4 billion, which because of capital controls, does not represent capital flight if local banks do not rollover. However, it is not entirely clear how that would tally with Fitch's figures. According to CBSL, the projected debt payments over the next 12 months are only about $ 1.2bn - US$ 900 million for the government and $300 million for corporate, but we think these figures look too low when public external amortizations alone was $1 billion in 2008 and we expect that figure to be rising each year given the chronically high budget deficit.

"We also expect the FX reserves to continue to come under pressure - we think there is still more near-term pressure of foreigners liquidating their LKR bonds and bills, especially if LKR is at increased risk, thus, presenting possibly another $380m possible outflow (assuming foreign holdings could go to zero). We also think the $100 million NEXI-guaranteed loan due in December may not be rolled over.

"There is also a lot of ambiguity about the payment terms of the $700 million Iran oil facility, which we think could start in 2009F but is not yet being factored into the government's external debt repayment projections. Moreover, even the US $150mn 3-year loan to Sri Lanka in March (from Standard Chartered) has annual puts which could be exercised next year.

"Lastly, Sri Lanka's current account is now projected to hit a deficit of 7% of GDP ($2.1 billion) in 2008F and our economist expects it to remain very high in 2009F (at 3.1 billion deficit) on the back of an unexpected slump in export growth. With capital markets unlikely to revert to normality in 2009F and Sri Lanka remains highly reliant on debt-related capital inflows (plus over $ 1 billion in official flows), we think BOP (Balance of Payments) will likely remain under pressure in 2009F."

To a non-professional these excerpts would be Greek. They will not be able to understand or discern their implications. It is reported the same way it is highlighted in the market commentary so that those who are able to discern will see the gravity of the situation. In other words, the report paints a very gloomy picture of Sri Lanka's foreign exchange reserves and warns of the disastrous consequences that lay ahead. The description that Sri Lanka is "an accident waiting to happen" thus describes the situation aptly.

In the light of this, some of the terms used by the government to describe the budget are in reality sugar coatings of a very bitter pill. These relate to substituting imports, conserving foreign exchange and promoting local industries. The Citigroup Global Markets Asia market commentary clearly sets out the backdrop in which President Rajapaksa's budget proposals as Finance Minister were presented.

Behind-the-scenes, the impending economic gloom has also prompted a number of other measures by the government. Some of these measures, like import curbs, came before the budget. Now, Toursim Minister Milinda Moragoda has become the government's proverbial kokatath thailaiya (or oil for all ills). He left for Iran on Tuesday for talks with leaders there concerning the $700 million oil facility and related issues. Much to the chagrin of his two cabinet colleagues, Rohita Bogollagama (Foreign Affairs) and G.L. Peiris (Export Development and International Trade), Moragoda has taken upon himself the task of lobbying for the GSP plus facility. This is a real slap on the face of Peiris, who elbowed Bogollagama in the first place by telling Rajapaksa that he could swing it round with the EU, and kept travelling to Europe to meet this Trade Commissioner and that Ambassador, all it appears, to no avail.

Now, Moragoda has said he could turn it around in Sri Lanka's favour by persuading the European Union to extend the concessionary arrangement for Sri Lanka's apparel exports. An uphill task indeed particularly after the government has declared that an investigation by the EU to determine conformity for such an extension amounts to an "infringement of Sri Lanka's sovereignty."

In the light of these developments, the main Opposition United National Party (UNP) demonstrated once again through its actions that it was running out of ideas on how best to confront this Government. This is after Kotte parliamentarian Ravi Karunanayake introduced what was termed as the Opposition's 'alternative budget proposals'. Firstly, even UNP General Secretary Tissa Attanayake was unaware his party was introducing such proposals. Secondly, it was not Karunanayake's act itself but the proposals he made demonstrated that the Opposition was orbiting a galaxy away from reality.

The Opposition 'alternative budget proposals' included a Rs 7,500 pay rise for State sector employees (with the private sector expected to follow suit), Rs 40,000 pay for soldiers and Rs 32,000 for policemen. The good intentions of an Opposition, when they are out of power, will no doubt be soothing to them though the public at large often view such promises with a bag full of salt. The voters have come so distant from the promise of 'rice from the moon' era, and if one must hoodwink the public, one must do it convincingly.

In the backdrop of an impending economic gloom, should they not have highlighted instances of the gigantically colossal waste of public funds, mounting corruption and misdeeds by the government? What about the colossal waste of foreign exchange for overseas junkets by Ministers and others? To say the least, their 'non budget' proposals will not be believed by their own ranks. They know it is ballyhoo. It also raises the all important question - whether the Opposition is keeping a close track on the threatening economic crisis in Sri Lanka. That is on behalf of the public it represents. If indeed it is, at least the ongoing budget debate will reveal whether any studied contributions would be forthcoming.

The main opposition's key speakers are going to be Ravi Karunanayake, John Amaratunga, Joseph Michael Perera, Lakshman Kiriella and Kabeer Hashim. Given the depleted numbers in their ranks within Parliament, it might be wiser for the UNP to concentrate its efforts outside Parliament, with the public, but it also is a pointer to the depths to which parliamentary debate has fallen in recent years.

Several UNP MPs' voices are never heard within Parliament. Among them, veterans like Gamini Jayawickrama Perera, and youngsters like Sajith Premadasa, who is no doubt aspiring for greater heights. Political analysts recall the years 1970-77 when the UNP sat in Opposition with just 15 MPs, led by J.R. Jayewardene, and how each played his part and formed themselves into a formidable Opposition to the steam-roller majority on the other side of the benches in the House.

Despite a worsening economy, the Government is committed to continue with its war effort until the Tiger guerrillas are militarily defeated. On Tuesday, former Foreign Minister and now the only MP in the SLFP (M), Mangala Samaraweera, launched what he called a 'Defence Watch', at a news conference to disseminate information on matters relating to the ongoing separatist war. He was critical of those in the defence and security establishment. He complained that correct statistics of casualties were not being officially reported.

The day after the news conference, Samaraweera complained, he had received a series of obscene telephone calls on his mobile phone. In a letter to Speaker W.J.M. Lokubandara, Samaraweera says:
The day after his news conference, he says, "I started receiving highly abusive and threatening telephone calls, and I was told in no uncertain terms that my life will be in jeopardy if I continue with 'Defence Watch' and I was specifically asked not to criticise the Defence Secretary or the Army Commander.

He adds, "I attempted several times to speak to the IGP without much success. Then I informed the Director of the MSD (Ministerial Security Division) who in turn requested me to get in touch with SSP Panadura. He promised to send a Police team yesterday (Thursday) to record my statement along with the telephone numbers of calls in question; so far no one from the police has come. This may not be the fault of the Police as I have reliable inside information that they are being pressurised by a leading official in the Defence Ministry, not to record my statement."

This week, in the light of the availability of food stocks in the Wanni, the Commissioner General of Essential Services temporarily halted vehicle convoys. The World Food Programme, however, continued to send further stocks.

It has now become clear food stocks to be sent by India for civilians in the Wanni will be handled by the Indian High Commission. They will deliver the supplies to the International Committee of the Red Cross (ICRC) for distribution. This is contrary to claims made by the official Indian High Commission spokesman in Colombo last week that the stocks will be given to the Government of Sri Lanka.

More talks on this subject and related issues are expected when President Rajapaksa leaves for New Delhi tomorrow (Monday). He is taking part in the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC) meeting. This is an international organisation involving a group of countries in South Asia and South East Asia. The member countries are: Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal.

Ahead of this visit, Opposition UNP leader, Ranil Wickremesinghe is also slated to visit New Delhi, though the dates are yet to be finalised.. He is to take two days' time off from the ongoing budget debate for this purpose. Meetings with Indian Prime Minister Manmohan Singh, Congress Party leader Sonia Gandhi, Foreign Minister Pranab Mukherjee and National Security Advisor M.K. Narayanan are on the cards, according to sources close to him. Whether all this could be accomplished in just two days, remains to be seen.

Talking to friends last week, Wickremesinghe added his own line to the saying by Carl Von Clausewitz, the military strategist who declared that war is an extension of politics. Wickremesinghe remarked that now politics has become an extension of war in Sri Lanka. He was alluding to the ongoing military campaign and the recent concerns expressed by India. Now that the issue has extended to Wickremesinghe and his party, what transpires in New Delhi would be of great interest. More so with Rajapaksa scheduled to follow suit.

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