Monday, October 27, 2008

Urgent action needed in Sri Lanka to avert a crisis

It is very unfortunate to note that Sri Lanka’s foreign reserves have fallen by over US$600M just in the month of September to US$2500M. This is before the world was thrown into turmoil, and so the October figure is expected with trepidation.

In the midst of all this the Governor of the Central Bank, the only person who seems to be able to influence monetary policy in this country, issued smug pronouncements about the state of the country’s finances. First one should never be smug, lest he has egg all over when proved wrong; secondly some degree of caution along with an instant devaluation to prevent any flight of capital would have been the prudent course. In hindsight the a billion dollar flight of capital has taken place, and the country could have saved a fortune if the devaluation took place before. It is not too late.

While confidence is the bedrock of an economy, doing nothing in the midst of a recession is downright irresponsible. Neither the President who is the Minister of Finance or any other member in government understands what all this means, it is solely the responsibility of the Governor to fill the void, as the whole country is most likely to suffer severe setback due to the inaction so far. I have earlier noted why we should take action now, as doing so once confidence in the economy drops will lead to drastic steps like 100% devaluation and 50% inflation, both of which must be avoided.

I am aware of the thinking of the Bank that if we devalue the extra 25% in rupees that the kith and kin of overseas workers spend in the economy will be inflationary. It will also lead to a worse balance of payments deficit by them buying imported goods like TV and refrigerators. I believe the fillip to the exporters reduction in capital flight will more than offset this threat, and confidence that the overvalued rupee has been tamed will help the market.

Please don’t be complacent or think we are immune from international events, and realize the true extent of what is about to happen. Our interest rates do not permit investment, and hence there is zero growth in productive capacity, the high costs of production will not generate job growth. The unexpected rains three weeks early has created a literal quagmire on the battle front that may last till next year, by which time it will be too late for the President who will be toast thanks to the financial advisers who caused it walking away scot-free at the expense of the citizenry. Act today decisively.

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