Wednesday, November 26, 2008

The Sri Lanka 2009 Budget presented on November 6th 2008

I am speechless, both to describe the level of amateurism on the Government’s part in presenting a nihilistic budget and on the part of the opposition for presenting an alternative budget, which even the amateur will say is foolish and silly and not workable. So it begs the question; what level of incompetents have we in parliament and why do we continue to elect them?

The Nation is now crying out for a charismatic leader, one who is not adulterated by parliamentary politics, and therefore is not now in parliament. Will this country get such a human being in our lifetime that can give Sri Lanka the same level of hope and expectation for the future that Barrack Obama has brought to the USA and the World?

It seems to be quite apparent that the technocrats that advise the leaders are incompetent too, or are afraid of challenging their bosses on the absurdity of the ideas they are proposing. Tweaking the numbers to satisfy the politicians is not a practical or workable solution. Our bumbling leaders seem to be of the smug opinion that if the brilliant minds of the West have made such a pigs breakfast of the world economy, then an ignorant person is unlikely to be any worse. The problem is that they do not grasp the seriousness of the task at hand, and therefore are unable to meet the challenges head on with the correct responses.

Fist the budget has to have a vision and objective, which it does not. Secondly it has to be practical and in keeping with the Nation’s short and long term goals, which it does not, and finally it should encourage the people for whom this budget is prepared to follow the vision that has been enabled by the provisions of a visionary budget, which it certainly fails to do.

In light of the current Global Economic Crisis, let us face some stark truths so we can prepare for harsh and difficult times. Total world demand for a series of products will fall when countries go into recession. We need to know how this will affect the items we export. In light of this recession, interest rates must fall, as a remedy to encourage businesses to prevent layoffs, and encourage hiring by reducing the cost of doing business. Most countries have substantially reduced these rates. We cannot afford to buck this trend as no one will invest, however the government uses tariffs.

In Economics, it is now accepted that people do not make decisions about whether or not to invest depending on the rate of tax per se, unless it is so high that no one wants to make a profit. Secondly, the increase in duty on imports will certainly not automatically encourage local companies into import substitution, as that requires the business climate overall to be good.

In light of these simple principals, the budget should have been prepared with reduction in the adverse impact of recession in mind and not in defending local producers. One must take into account the principles of comparative advantage, however old fashioned it may sound in areas where we cannot hope to be self-sufficient. For example, increasing the tax on imported sugar will not reduce the demand for sugar, nor will you encourage local producers, as both have been tried and dismally failed. We have to ensure we are able to persuade farmers to grow sugar cane close to Sugar Factories providing the infrastructure, which is not merely a price mechanism. Increasing the price will only increase inflation in areas where no substitution can take place. Sri Lanka only produces 10% of its sugar production and that can only double at most in 20 years. We must understand these facts about the results of proposed changes.

In summary after reducing wastage, and abandoning airlines and airports, how do you protect the economy from being affected by external factors, while at the same time benefiting from the drop in commodity prices in ensuring the infrastructure investment plans continue, in a country which is still committing a huge outlay to eradicating terrorism.

I have and continue to maintain, that the drop in the price of oil, should be seen merely as an opportunity for the government to reduce its deficit, possibly US$1B by not passing on the price decrease, but imposing a tax for the difference. The reason is that the fall in prices are only token, like bus fares and transport costs. This fact has already been proved. The second is a long overdue depreciation of the rupee to at least 135/- to the dollar, should have been done, before the foreign funds began repatriating in light of an expected devaluation. It is not too late.

A fall in commodity prices of over 50% in US$ terms arising from the recession, means we can suffer a depreciation of this size without increasing the rupee cost of imports. Importers will be forced to ask their suppliers to immediately reduce their prices if they are to continue to import. Our export sector will benefit enormously from this, and the higher spend by foreign remittances in rupee terms will boost the local economy, with more money in circulation, preventing a fall in demand for construction etc. The most important aspect of my suggestion is the ability with no government deficit, to be able to reduce the interest rates, to under 10%, which will be made possible by the immediate reduction in inflation and the money supply available in the banking sector. This will encourage business investment, and then achieve all the growth objectives we are looking for.

In summary a budget with no changes would have been the perfect budget. We are so used to changes that we seem to expect a change, but a wise person will be above the fray and make no changes and be rewarded in less than 6 months for such a bold move of doing nothing!

As a peasant farmer struggling to survive and make a living from food production, it is an insult to my intelligence that this budget even claimed to be farmer friendly. Who are they kidding? It just shows how out of touch the lawmakers in Colombo are of the ground realities of the farmer.

By doing nothing, the price of fertilizer, will come down as the world market price of Urea is now a third of its peak. All pesticides and chemicals that are oil based will fall despite the proposed depreciation of the rupee. My plan will lead to a 8% growth rate while the government plan is to revise it to 6%, which under the powder keg that is about to ignite will fall much further.

I don’t have access to an army of data to show how it will all fall into place. The government once it plugs in my raw data to the economic reality will come out with the answer I have just given. Why are we in an inflationary environment when there is world deflation and why are we bound by high interest rates if we do not need to run anything more than a non-inflationary budget deficit, once exchange rate risk is factored out under my plan. The answers to these questions are key to unlocking the genie from the bottle.

The actions of the government are criminal, when a path so simple out of the mess is so clearly seen. The reason they are not adopted can only be for self interest, and playing politics, where helping the country does not appear to be part. There is no one with the backbone, either in opposition or professional analysts to challenge the truth that is so self-evident due to ignorance or lack of courage to take a stance, due to temporary loss of popularity. Acts of omission are more sinful than acts of commission in my opinion, especially when the nations future is at hand.
A postscript to the above

Prior to my being able to post this to my blog the government was comfortably able to get the budget passed in parliament. I was not surprised, but very disappointed that many of the professional organizations like the chambers of commerce either backed it, supported it or at the very least did not forcefully state the obvious, that none of the budgetary positions will in itself achieve any of the objectives like import substitution.

I have written off the opposition in its stance on the budget, which was not at all constructive, especially as there are so many avenues where they have the moral high ground to state a cast iron case on the futility of all the assumptions made in the budget. It is an indictment on the level of knowledge of all manner of experts to be able to comment truthfully on the real result of the budget on revenue and expenditure, the total unreliability of the basis of the assumptions made in making calculations and estimates, using recent history as clear examples. We are therefore left with a public that is none the wiser and a country that should be performing better, being held back by a budget that is actually regressing the country rather than progressing.

The wholesale sale of the century has just taken place in a period where the exchequer could have legitimately raised a lot more funds, and reduced the budget deficit, creating an atmosphere of confidence, and therefore the needed significant interest rate reduction before any economic activity can increase in this economy. Instead the budget has laid the foundation for a complete collapse of the economy, partly due to external factors, which I have shown in prior writings as being ripe for Sri Lanka to benefit from.

The prices of almost everything Sri Lanka imports, including Motor vehicles have fallen considerably. The Sri Lanka rupee could have depreciated by over 25% percent against the US$ with no noticeable shift in the rupee cost of imports. Now the rich, the importers, and the multinational companies are taking the whole benefit of the price reduction without transferring it to the consumer. The cess on certain imports is more an administrative headache and shift from one form of indirect taxation to another. The budget therefore has been a complete waste of effort to fool the foolish and keep the intelligent dumb for fear of reprisal while the crooks have a field day. Why have I not seen or heard from even one source calling a spade a spade and reporting what is so obvious. Is it that we don’t have any people with brains?

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