Financial Times

Economic woes mount as war winds down


Government troops are closing in on the last remnants of Tamil Tiger resistance in northern Sri Lanka as an upsurge of more than two years of fighting winds down but the country's economic woes aren't over yet as revenues and a shortage of cash continue to plague the government.

The other day, a business leader (in jest) said maybe the government needs another 'PB Jayasundera' to overcome the economic crisis. The reference to the former Treasury Chief was in the context that the government's once top official was always smart in coming up with temporary solutions to long-term crises, even though they were not the best at the time.

For the past two years, the government has got away with high war spending based on the premise that eliminating the terrorist threat completely was better than piece-meal successes as seen in the past. And it worked until now - when the war is coming to an end and the economic crisis emerges as a major issue on top of the global crisis that is gradually eating into the Sri Lankan economic and political landscape.

Revenue is falling sharply and this is a warning from the Central Bank itself which has also sounded a note of caution on a shortage of funds to undertake the country's major development projects like the - Hambantota port development and various power projects.

On the Hambantota project and northeast development however, the government says Libya has agreed to provide a $500 million financial package but no details were given as to whether it is a grant or loan and at what kind of interest rates.

Chief Economist and the Director of Economic Research at the Central Bank, Dr Nandalal Weerasinghe has said that government revenue growth has reduced from almost 25% in the beginning of 2008 to less than 5% by the fourth quarter 2008 and added that, "Any further deceleration in economic activities during the year would adversely affect the expected revenue collection in 2009. So new revenue measures are being implemented."

Even a planned 1.9 billion dollar bailout package from the IMF may not ease the economic stresses. National growth could fall to 2-3 percent from 6 percent in 2008 due to the world economic crisis, and many major development projects may be suspended temporarily or delayed due to lack of funds.
Adding to the government's woes is a campaign by rights groups opposing IMF intervention without the 'people's consent.' Sarath Fernando, a veteran Sri Lankan campaigner of peasants and farmers' rights, last week launched a new campaign, saying, "We strongly insist that no loan agreements should be signed without a wide and participatory process of discussion on all relevant aspects not only of the loans but also of the process of development."

Fernando, coordinator for MONLAR, which represents people's organisations in fisheries and plantations, says they are alarmed that the government is going back to IMF loans under possibly "destructive conditions."

"The country is facing serious problems of foreign reserves and of debt. The government is so bankrupt that the foreign reserves currently available would be sufficient only for one month's imports and the IMF bailout package will materialize only if the government fulfils a set of conditions, one of which is to devalue the rupee which would result in the cost of living going up further by 50 percent," Fernando said.
Sri Lankan industry is plodding along wondering whether to close 'shop' - in the case of small units - or downsize labour while living in hope that there is a silver lining somewhere on the horizon.

Last week, agreement was reached between trade unions, businesses and the government, to manage worker lay-offs arising out of the global recession in a move that would cause a lot of pain to many families.

According to a report in The Sunday Times FT, the administrative arrangement includes fast-tracking the process of temporary lay-offs where companies will be allowed to lay-off workers up to three months.
However unions and other worker groups are raising a pertinent question: Why should only workers take the hit in the crisis? What about CEOs, chairmen and other top management?

Indeed if there is a semblance of good governance, fairplay and equality, CEOs of companies must make the first move in trimming their salaries and perks. Take a cue from the troubled finance companies supervised by the Central Bank where directors have been forced to take a severe paycut until the crisis is over. In the US, pressure is mounting on CEOs in troubled companies to take a paycut - even before it applies to other workers.

If workers are forced to be laid-off temporarily due to mounting losses, then the 'big corporate guys' must set an example - again in the name of good governance that many companies profess to follow and publish long press releases of how much good is done (by them) to society and their stakeholders. All employees, including the CEO, must be subject to any downsizing, paycuts, reduction in perks and any move that could cut costs in a company.

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