The heat is indeed unbearable, but the suffering multitude will know that, at least by Vesak next month, the weather will be kinder. Whether the people will be able to look with similar anticipation on the economic front is doubtful. Many know, with the ending of the Avurudu season, hard times are ahead. The Finance [...]


The economic heat is on


The heat is indeed unbearable, but the suffering multitude will know that, at least by Vesak next month, the weather will be kinder. Whether the people will be able to look with similar anticipation on the economic front is doubtful. Many know, with the ending of the Avurudu season, hard times are ahead.

The Finance Minister had no time to observe the ‘Nonagathe’ period when one is supposed to do nothing as it is an inauspicious time during planetary changes. National duty is no respecter of time and he had to head for Washington DC together with the Governor of the Central Bank, begging bowl in hand, to seek a massive loan from the International Monetary Fund (IMF). If one were to call it a virtual ‘bail-out’ exercise, it would not be an exaggeration. Sri Lanka needs US$ 3 billion from the IMF to help get out of the ‘debt trap’ it has fallen into. From all accounts, the IMF has pledged half the amount and the balance only if we behave well by implementing some tough economic decisions prescribed by the IMF, starting from an increase of the indirect tax of VAT. The Fund will test the political will of the present Government before doling out the loan.

The IMF has long been accused of insensitivity to domestic compulsions and hard-nosed when instilling financial discipline. On the other hand, left to themselves, local politicians with the aim of getting re-elected want populist measures whether the country can afford them or not. Take the current economic imbroglio the country faces. The former Administration ran amok with commercial borrowings to cover budgetary shortfalls and also finance extravagant often ‘unsolicited’ projects on non-concessionary terms. The way the Chinese developers threw money to lobby support for the Port City project after it was suspended by the new Government, was a glimpse of how they would have oiled the palms of those in the previous Government too.

The Prime Minister went on record recently to say that he knew how bad the economy was in 2014 and predicted an election in 2015 because the Mahinda Rajapaksa Government could not sustain the pressure of having to service the loans it had taken. Why then, did this Government once elected in 2015 go on a populist, irresponsible spending spree, doling out huge pay increases to public servants and handouts to others? Clearly, the same year’s General Election and voter appeal was the aim. So, the aggregate of the two Administrations, past and present, together with the IMF’s own expansionary fiscal policies and a 6% budget deficit in 2015 is what the country – and its people, are being called upon to pay for today.

The external financing crisis is primarily due to this. Government Ministers are running around like headless chickens, so to say, in a scramble to find money. They want time for a ‘soft landing’ for the people to tide over the impending difficulties. The Central Bank accommodates the Finance Ministry through money printing and not adjusting bench mark interest rates earlier. The end result is going to be a ‘hard landing’.

Prospects for downward economic momentum as a consequence of steep exchange rate depreciation and higher interest rates, inflation now at 6% shrinking the purchasing power of low and middle class consumers and very soon, small and medium enterprises having to cope with the pinch of higher interest rates are the likely scenario. Then, at the same time, the President beefs up his Cabinet and deputies to a phenomenal 92. Perks are dished out to MPs while the people are to be asked to pay for all of this with increased VAT and other taxes for this reckless governance. There’s nothing so infuriating to the people than to be asked to pay for their soap and lentils to upkeep an obese Government. They ask the legitimate question of why Government, starting from the top, cannot be made leaner rather than keep turning to the people for the cash all the time.

State ventures are on the brink of collapse seeking regular Treasury cheques. ‘Sweet deals’ are in the making with commercial loans as in the past as is the case with the 65,000 houses project in the North and East. These are all ingredients for an explosive cocktail of discontent. The IMF facility now under discussion in the US capital at this late stage of the looming economic crisis in Sri Lanka is unavoidable and the in-built ‘stabilisation’ measures recommended can lead to further contraction of the economy this year and in 2017. The higher VAT to be implemented in every likelihood as early as in a fortnight’s time (May 2), will impose additional hardships.

The IMF has fired a broad salvo on the eve of its joint Spring sessions with the World Bank in Washington saying the picture for the world economy is gloomy as well. Blaming the adverse economic environment abroad for our economic mismanagement is, however, an old excuse. All countries are facing a global economic downturn, but many are coping better than others. The capacity factor to deal with pressing issues locally vis-a-vis the Ministry of Finance and the Central Bank is doubtful and to understand the critical issues on the external debt problem and thereby advising the Government on appropriate remedial measures is the question.

No wonder the Government is finding all the excuses under the scorching sun to postpone Local Government elections. Unless this capacity problem is addressed urgently, the country will limp along and possibly confront another crisis very soon — when Parliamentary elections need to be held (2020). By then new issues would have arisen. Amortisation payment for the 65,000 houses project would be US$ 100 million per year beginning 2018 if the project starts now, oil prices could rise and West Asian remittances that are barely holding up the economy currently, could fall.
What excuses can the Government trot out then?

New world order: LKIIRSS must play its role

This week’s announcement that US warships and aircraft will in future be permitted to refuel and restock supplies at Indian bases, and vice-versa, without case-by-case applications, came after decades of negotiations. It is a significant development in the geopolitcs playing out in and around Sri Lanka.

What is not commonly known is that Sri Lanka also permitted ‘somewhat similar’ facilities to the US in 2007, lo and behold, during the Mahinda Rajapaksa Administration under an Acquisition and Cross-Servicing Agreement with the US. The fact that the Defence Ministers of the US and India have hailed their latest agreement must mean a lot to both countries. Though the other key player in the region, China, may accept the US-India pact as a fait accompli, it is clear that the move is aimed at countermanding China’s growing military and economic influence in the Indian Ocean waters.

Nearly thirty years ago, fearing the closeness of the then Sri Lankan Government with the US, India through the controversial Indo-Lanka Agreement made clear its concerns of such affinity with the US. It was a time when India had its own Defence Treaty with the former Soviet Union. The irony is that India wants Sri Lanka to continue its commitment to this 1987 pact while offering carte blanche facilities to the US Navy and Air Force.

How times have changed. Is Sri Lanka keeping abreast of and adapting to these changes? The Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKIIRSS) was established to keep the Government fully aware of such changing scenarios. But the Institute is still bogged down in mundane workshops, seminars and lectures, producing little by way of research that would assist Government policy makers take informed, long-term decisions on the New World Order. It is time the LKIIRSS made a quantum leap to reach the heights expected of it by those who conceived such a think tank.

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