Monday, October 13, 2008

Sri Lanka can ride out the Global Recession with relatively little impact

By whatever criteria it is viewed, the world will be in for a period of economic slowdown. The depth and length is still a matter of conjecture, but it is not a precise science, the severity will depend only on how it is managed. In the case of Sri Lanka it can be managed with minimal impact if the following recommendations are followed.

a) When the oil price falls to $50, just lock in the rate by forward purchase agreements for as long as one can afford, even though the expected drop may be greater. The government should keep the price at the pump unchanged from present levels, by taxing the difference so even IOC can still profit. I expect the government tax per annum on this price locked in to be at least $500M, which effectively negates the need for borrowing this amount from overseas, something they would otherwise be forced into.
b) In light of this drop, one needs to make sure no agreements are made to purchase fertilizer as the government has estimated it to cost Rs66Billion. Due to the price decline in oil it will drop to Rs22Billion, if no one makes decisions on personal profit.
c) A modest devaluation taking the dollar pegged SL rupee to Rs125 to US$1 should be done, and stabilized at that rate as it is essential to help exporters who are desperate for some relief due to their increasing costs and falling revenue
d) Due to the devaluation of the Indian rupee against the dollar, all our food imports and vehicle imports from India that account for 30% of vehicles will not cost more and we can be cushioned to some extent on imported prices. Commodities such as steel have almost halved in value. In short we should not see a depreciation led inflation increase. With the 35% depreciation of the Australian dollar against the US dollar we should not see an increase in Dhal price, and in fact see a decline.
e) We should not see a decline in remittances from the Middle East, and this revenue will at worst hold steady, so I believe our total foreign exchange earnings will remain stable, as even the decline in Rubber prices, will not affect it as we export manufactured rubber in the form of tires, which are unlikely to fall in either demand or value.
f) With the war won, the soldiers should be put to infrastructure work on highways in the north so more output from the North can come to the markets in the South and overseas, increasing National Output. They will therefore be in productive employment.
g) Stock market falls will not affect the economy as the Banks appear to be relatively immune and a correction in the Colombo property market which is overdue will not create a crisis, and instead release labor from construction projects in Colombo, to development projects in recently liberated areas.
h) I am not counting on a large inflow of foreign investment as a result of the peace as the appetite for investments from overseas will dry up and local entrepreneurs will take up any perceived benefit from peace, which is actually a better alternative.

Following these very simple rules and advice, we can in fact grow through this recession, at rates higher than otherwise. We can at the same time reduce inflation, from double back to single digits, and the government will not require large deficit financing to carry out their projects, as I expect our balance of payments to be in surplus (trade and invisibles).

I just hope our leaders have the courage to take the all important step of not passing lower oil prices to the consumer, as transport costs of people and goods is unlikely to come down, and the private sector can increase profitability from reducing commodity prices, despite the modest devaluation recommended to help the export sector from massive layoffs and closure. Dollar price reduction in imported goods is expected.

The inherent point to note is that our import bill will fall substantially, so we can afford a devaluation, and our export and foreign currency earnings will barely fall, giving us a much better balance of payments picture and the government a far better borrowing picture from both domestic and foreign sources.

The one thing that can stop us in this endeavor will be the greed of the government to benefit from this without passing it to the people in the form of less corruption. As I reiterate we are not in an employment crisis, just an efficiency crisis, and anything we do to improve productivity at this stage will be rewarded many fold. More productive and remunerative employment is only a byproduct of the efficiency drive. This is a chance that only comes once in a lifetime, and if we do not take advantage of the situation now we will not get another chance for another 100 years!!! So please wake up to the opportunity and don’t blow it

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