The budget was a neutral one with nothing of ANY substance. The most important point was fluffed. The 3% devaluation should have been between 6% and 10% as now when you have an inconsequential devaluation there is more likely to be flight of funds out, and less likely that funds will come in the light that there will be more to come in the future.
A 10% immediate devaluation would ensure Investors will believe the risk of further devaluation is minimized, and thus not repatriate funds. Those who held back waiting for devaluation will give an immediate spurt to the tourist industry reeling from the high cost for the visitor as compared with other options available.
Admittedly the down side would be the increase in cost of living from imports, but a suitable reduction in the taxes of imported items can always nullify this effect is so needed. Do not forget that imports of Sugar, flour, tinned fish, sprats, potato, B onions, dhal, green gram, corn etc are highly taxed and any increase in their costs have a double delight of increasing the price and thus support for local agriculture.
It is also noteworthy that the Central Bank DID NOT release the drop in reserves in September by nearly US$1B as it may have caused some panic out of the rupee and only disclosed it yesterday at the time the depreciation was announced and the drop in reserves for October and November was not that prominent. In my view this 3% devaluation is likely to increase the drop in reserves to an extent that Sri Lanka will not have any unborrowed reserves by the year end. It makes no sense to borrow US$1B from a foreign consortium and then include it in reserves as it is merely an accounting entry, meant to fool the unwary and not a real increase.
I know when one gets bogged down in budget preparations, these bureaucrats tend to lose the wood from the trees and forget the priorities that need to be addressed and the assumptions they make can be without any foundation, due to the inherent belief in their gut instincts and when proved wrong are quick to point to some world issue that has overtaken their closely planned structure.
All I would ask PBJ (as it certainly is not Mahinda Rajapakse’s budget) is to put himself in the shoes of both the foreign investor, the local exporter, the overseas worker who is remitting his hard earned money, what do they all want? A 10% devaluation would have instantly made all Sri Lankan shares 10% cheaper and helped dispel the current fears that the market is overvalued as compares with the stock markets of the other comparable emerging markets.
Is this the answer - how to combat CKDU?
4 months ago