Absolute urgency for an immediate devaluation before its really too late

I was absolutely appalled to see a respected economist in the form or Dr Saman Kelegama who heads the Institute of Policy Studies, defending the Government’s stance on keeping the rupee at this unreasonably high level despite all evidence to the contrary.

I have stated time and again that the traditional reasons for not devaluing, namely of the inflationary impact does not apply now as we are in a situation of a substantial (50%) drop in commodity prices and so will be able to prevent any net inflationary impact. Furthermore, as the Indian rupee has depreciated against the US$, we can suffer an equivalent depreciation without affecting our food imports and for that matter other imports from India. The oil import bill which should (but for the disastrous hedging contracts) fall by over US$2B if the price of US$50 a barrel stays throughout 2009 will effectively leave the country in a Balance of Payments surplus situation on the current account even taking into account the reduction in value of Tea and Garment exports.

One possible area where he did make some sense was in the issue of repayment of international debt and credibility with international investors. I don’t believe there will be any grain left in that truth now the world is in recession and they have lost more money on their other investments than in their investment in SL treasuries which as we speak still yield in excess of 20% on a stable exchange rate. The other fallacies of not being able to carry out the government’s infrastructural development plans is totally predicated on inflation, which I have proved is not an issue.

A famed economist should realize if he has ever been in business, which sadly many of our intellectuals have not, that it is the businessmen who are importing who are amassing fortunes both in foreign bank accounts and on local profits, by not passing the substantial price reductions from commodity prices to their consumers. The fortunes amassed overseas from over invoicing exceed the total foreign reserves of the country.

So please I beg of you the reader to alert the state to the reliance on outdated economic theory that does not hold water at present in Sri Lanka, and the hardworking population overseas have kept the economy functioning through their remittances. They who have saved this country deserve more from the extra money pumped in from devaluation too. Just do it!

The leaders are engaged in an orgy, while the rest of us are struggling

Sri Lanka is in a pathetic situation. Nero is enjoying in Rome, oblivious to the cries at home. The finance minister who happens to be President does not understand Finance, the Governor who is the policy maker does not understand Banking and the Global Calamity. The country is being held to ransom, with no coherent stand by the opposition to address the issues and notify the people of the crisis at hand. This all because the country is being held to ransom on the pretext of being on hold to win the war at all costs.

This is the background today, and the purpose of my essay is to alert the reader to take a stand in some way to notify people in power and try to take action to minimize the effects of what is in store.

The captains of industry are busy shoring up their diminishing portfolios by taking full advantage of the substantial drop in commodity prices to maintain and enhance their profit margins, without upsetting the apple cart. No wonder the importers are not agitating for devaluation, as they are taking full advantage of the price falls to make large profits, despite a fall in demand for their products. There is therefore no agitation from them who are also helping the politicians to keep the status quo while the rest of the country which really does not have a say is suffering under this heavy burden.

This conspiracy of silence is being carried out because there is little competition in Sri Lanka, and the large businesses that are oligopolists are able to act in concert for their mutual benefit. In other words, the industrialists in Sri Lanka collectively seeing the demand for their products falling, due to lack of money with the consumer, is not passing the cost reductions arising from halving of commodity prices. Instead they are increasing their profit margins to maintain the cumulative profit. This process is being carried out both by the multinationals such as Unilever, the milk powder and flour producers as well as paint manufacturers and even the animal feed importers, just to quote a few industries. I have not noticed Arpico reduce the price of any rubber product, despite the drop in rubber sheet prices from Rs325 two months ago to Rs70 today.

The government is complicit in this scam, and instead of defending the rights of the people who have elected them are either in cahoots or ignorant of what is happening around them. Not even the Newspapers have competent staff to be even aware of this state of betrayal.

Economic consequences of the halt to most apartment construction

One just has to look at the halted construction projects on the Colombo skyline to wonder if a major crisis in the housing and hence in the banking sector is about to erupt. The Dawson Grand has ceased any further building work, and it looks like the Emperor has done the same. Ceylinco Celestial seems to be going that way, and Premier Pacific has declared insolvency. Just as there was a meteoric rise in the value of apartments, there is now a meteoric fall in the same.

In the past the builders took stage payments from the apartment buyers in order to finance the construction. That helped them construct with little bank borrowing by preselling the whole project. Premier being unable to sell all its apartments found itself unable to continue as they were unable to obtain bank borrowings at an acceptable rate of interest to make the project viable. So those who put in stage payments are faced with a dilemma and a part completed building. Of course an investor who can see a good profit may wish to buy the shell and promise existing purchases completion if they are willing to pay more than originally committed but that is another story.

What all this means is that the apartment and condo building boom in Colombo is over for the foreseeable future. Those buildings that have been completed all have issues that have dissatisfied the buyers. Therefore this is not a harbinger for the health of apartment living in Sri Lanka. Banks are either unwilling to lend or extend already stretched credit lines as this does not seem to be a good investment after all.

Many of those who bought apartments for speculative purposes have lost their money and are trying to cash in their investment at any cost as some have borrowed heavily to purchase them. The world economic crisis has resulted in rich Sri Lankan expats overseas not wanting to invest in an apartment in Colombo and some who have want to cash out as they need the funds. Many high net worth individuals who purchased apartments as part of their diversified portfolio have seen their wealth drop in many of their investment vehicles, that include stocks here and overseas, property and businesses, Only those who hold cash have weathered the storm but are unwilling to buy property now as it no longer seems a good investment as rental returns do not seem a possibility either with no demand. Banks who have lent on the valuation of property have seen their security drop in value by 50% but worse have realized that they are all illiquid at this time.

Interest rate and risk

Kalpanakaranna! Why is it so obvious to me and so oblivious to the Central Bank, that there is something extremely serious going on. There is month on month deflation in Sri Lanka today that is if one takes, October vs November and November vs December. The current interest rate on 5 year T Bill rates is 20%, which is an effective real interest rate of 20%. Is it no wonder that there is a huge credit squeeze on the lines of the international crisis and no one seems to be doing anything about it?

What is so obvious is that when the risk free rate one can earn is 20% on one’s cash, why would one want to lend at anything less than 35% in an environment where there is such a huge degree of uncertainty. For a business to borrow at that rate and make a profit is almost impossible. So we are about to see companies crash. It is so simple to understand but why is it that no one seems to do anything about it?

Added to this dynamic, there are many wealthy people, including the pettah traders who hold cumulatively, more US$ both in cash and in accounts overseas, than the Sri Lanka Central Bank. I am sure the Central Bank does not realize that. I can transfer US$100M tomorrow to any account overseas I specify, if I have the SL currency to give today at the black market wire transfer rate of Rs118=US$1. This is one reason that the SL rupee has to tanked nor has the pressure on the rupee yet been high to devalue. That does not mean the pressure will not come shortly if other circumstances like a banking crisis suddenly takes hold when all hell will brake loose.

In previous blog articles I have proposed urgent solutions, none of which have yet been implemented and therefore the impending gloom will be more severe when it actually transpires. I do not think it is too late but time is running out and the signs of a disaster are now obvious. Firstly the fall in commodity prices, has not been fully reflected in local prices, as importers are over invoicing and stashing their cash in US$ overseas. We have screwed up in oil hedging not passing the full benefit to the country, and if the deals are nullified by the Supreme Court will never be able to hedge or borrow from overseas banks again. With the collapse of Tea, Rubber and Coconut, there are many people out of work or are earning much less than a few months previously, which directly affects their pocket books which then directly affect consumption, and therefore impact on local industry. I see this first hand as I have a village shop in my farm and have noticed this.
When there is less money in the consumer pockets, in a simplistic form these are the ramifications. People who have leased vehicles or white goods cannot make payments. They are then reposed by the lessor. Just look at the lease returns available for sale with no takers as there appears to be no one with money to buy these cheap. Then with less money from income they are dipping into savings. People are now cashing in their CD’s so Finance Companies are finding it harder to keep deposits. They cannot offer ever increasing rates, as the real interest rate is already high and they cannot lend at higher rates. Additionally as these companies are lending long, by way of cash stream over the period of a lease of say 4 years and depositors usually hold a maximum of one year CDs that some are not renewing on maturity, finance companies are strapped for cash and will imminently face a liquidity crisis.

The Liquidity crisis is exacerbated because the banks invest surplus cash in Treasury Bills which are risk free, and are reluctant to lend to finance companies as they are now considered very high risk, because of what I have shown above. The imminence of a run on Finance Company deposits cannot be more convincing, the rollover effect to a run on the banks is just the next step, and there is no guarantee by the Central Bank of a bailout of the Banks or Finance Companies if this happens. The guarantee MUST be given now before a crisis happens, as it will be too late after as the cost will be much greater and the resulting loss of confidence in the banking sector more devastating.

I have earlier recommended a Central Bank guarantee of about Rs1M per name per Bank of Finance Company to forestall a run on these institutions. The various institutions are led by novices and the professionals in their midst are biting their nails and preparing their exit strategies in case the house of cards crumbles. Those affected will no doubt be all the innocent citizenry of this country who will see their life savings devastated and the resulting lack of funds for consumption will immediately reduce demand, output, layoffs, and a depression with stagflation with no one able to do anything about it.

Then the rupee will depreciate by 100% in a flash and the only people who will benefit are those holding US$ realizable assets who can pounce in and buy every asset in Sri Lanka at fire sale prices, due to the desperation of people for cash as there is no availability of ready of ready cash to conduct economic activity. This is the law of the jungle capitalism at its worst!

It’s a good life after all – Sri Lanka still remains truly a paradise Isle

Kalpanakaranna, I say this time and time again and then you will really be able to see the wood from the trees and analyze your strengths and weaknesses. If we in Sri Lanka spend half as much time, as we spend of cutting this country down, in looking at how fortunate we are, I am sure in time we will learn to be more positive about the prospects, have courage to remove the unsavory people in positions of power, and take control of our destiny and maximize the Island’s potential.

The GNP per capita is now at Rs170,000 for every man woman and child. Granted that half of GNP is just in the Western Province and the uneven distribution means the rest of the country still suffers from a substantially lower figure. In terms of purchasing power parity this is equivalent to US6,000, which is a very respectable figure, as there are many things we do not need for basic living like warm clothing, heat and insulated homes.

Due to the nature and graciousness of our society no one really starves, and there are many who at least offer to share there last meal even if they don’t know when or from where the next meal will come. I have been both the recipient of such assistance and the provider of such assistance and can at first hand state that there are hardly any people who are actually starving.

We must therefore get away from the siege insecurity and get above this beggar mentality to look at ourselves as one of the most fortunate nations on earth in most respects. It is only the humans who live in this land who have made life difficult, and not acts of God or lack of fertility for growing anything we care to imagine.

People are very spoilt in believing that three square meals a day is their right and not a privilege and live gratefully that they get to eat at all while much of the world even the western world, where more calories are required just to stay alive, go hungry and more so due to the lay offs and lack of health care.

With no unemployment, no hunger, is it no wonder that most people prefer not to work if they have a choice. We are therefore swimming in the senses of satisfaction, contentment, and adequacy to want to do anything about it except complain for the sake of it. I am no heartless wretch for saying all this, as if you really know me and see how I live, you may wonder how I survive on so little, but remain positive in being able to overcome the void.

The Carbon Credits Gold Rush as it pertains to Sri Lanka

Currently there are nearly 500 projects in the planning stage to make use of carbon credits available for planting of vegetation, which will suck carbon dioxide from the atmosphere and clean the air polluted by smoke billowing industries. This is a latter day gold-rush where the pitfalls are unpredictable.

Needless to say once the availability of these credits became known that potential investors pounced on the idea of its merits to make money!

Sri Lanka’s recent history is replete with projects of one sort or another to take advantage of the current craze or trend, but none of the projects appear to have succeeded either for its initial purpose or subsequently in any way for the country’s development. Just to quote an example, the 500 acres each leased to private companies in the Anuradhapura District in the 1960s to grow food crops for local and export in a large scale using the latest methods failed. All that happened were that all the forests were cleared, the trees cut and bare land remained, only to be abandoned once the first crop failed and losses were incurred in the agricultural project. Some of this land is still available for use after all these years.

The place most of the current projects are looking at due to the availability of large tracts of land is the Moneragala District. Both the state and temples own extents of land and there are about 100,000 acres that can be potentially used for these projects. At this stage not one body has been allocated land.

In the end there are various hurdles, most importantly cabinet approval and subsequent inter ministerial approval before any land is identified and allocated. It is a complex process made more difficult by a government that does not appear too keen to be seen to lease state land to private organizations for fear of political backlash, even though this land is currently lying fallow with no prospect of being developed. Most of this land is also a relic of the past attempts at planting, where forests were cleared and abandoned, by well meaning but foolish private interests who have no knowledge of the realities of agriculture, and the hazards that are faced.

In the present context basic rules have to be adopted such as elephant corridors to be protected, pockets of forest land with trees to be left as is, as well as water sources preserved and sometimes restored before permission will be granted for the balance to be leased for the project in question.
There are additional problems, as the trees are owned by the forest department, which is part of the Environment Ministry, the land is part of the Ministry of Lands or various temples. The Buddhasasana Ministry has the final say on how the temple lands can be leased. The project itself needs to show that there would be some direct benefit to the local community in terms of employment and rural upliftment. Finally in order to pass muster, it may have to be leased via another ministry to whom the annual lease payment per hectare should be made in line with the objectives of that ministry. This makes it very difficult for an initial project to be passed without amendments to take account of a multitude of interests and they are all an added cost to the project, compromising its initial viability.

In my opinion, the government should set aside a division under the purview of the President to look at all the project proposals along with the land that they have identified as being suitable for their particular projects. Then a fair assessment on the same criteria can be made for these carbon credit projects.

All the land available can thus be allocated with some upper limit per project, as it is most impractical for any organization to cultivate more than 2000 hectares each with all the will in the world. Most of these people not being farmers do not understand how long it takes just to plant 10 acres in Sri Lanka with the available labor and technology as well as climate and planting conditions. The lease terms should also be fair and enforced tightly with a longer term than the proposed 35year leases being contemplated.

In my opinion, the feasibility of the project without carbon credits should be assessed and only treat carbon credits as icing on the cake, because it is not a certain thing that these credits will be available as assumed as sometimes the tough conditions applying to the credits may not be met and the project abandoned in mid stream, which will be inevitable for at least half the projects that finally obtain approval.

For example, if one plants Rubber, then due to the vagaries of the prices this alone may or may not be profitable. Instead if the trees are spaced a little more, and Gliricidia is also interplanted in the same property, this can be used, for animal feed and the wood for a Dendro Power plant that could supply power to the National Grid. Therefore a mono crop or single product such as Jetropha may not be sufficient. Bear in mind the crops that the state permits, as Teak cultivation for wood may not get approval because elephants could ravage the crop, while also being non native and destructive.

The Village is dead long live the place to call home

I am an outsider with no family ties, living in two villages. One village is peopled with third generation colonists who still refer to the village where the initial ancestor came from as their village. The younger generation have married neighbors, some to conserve property, others to stay close to family, but familiarity certainly appears to breed contempt as all my neighbors living next door to blood relatives seem to be at war with one another. The second village is peopled by the original inhabitants, and they marry from outside the village as a rule, usually the female leaving to live in the husband’s village, and the property being divided amongst the remaining males usually in equal proportion, with the youngest son inheriting the family home, where the parents live till they both pass on.

In both instances, the villages are unable to support all the people, and so the aim of all adults is to leave the village in search of employment. The females work in factories in Colombo, being boarded in rooming houses under very cramped conditions, or go in search of jobs in the Middle East, sending money home to the parents and to save for their ultimate wedding. The males also follow a similar path, and many are in the security forces including the police force, and come home on leave and a marriage is ultimately arranged for them by their parents, if they have not found their life partner nearer where they work. Increasingly with fewer children, the woman also has property, and in some circumstances, the man may go and live in the woman’s village. In that case if the man does not sell his property, his other siblings will effectively take it over. Therefore, the man or woman will want to sell their property so they can develop the remaining property, and often this land is sold to newcomers, like myself, looking to either settle in this place or because the village is now suburbia, where I have a secure long term job in town, and need a place to live, the town being too pricy.

It is therefore important that laws are enacted so that property is more easily disposed of as it is inevitably a reason for a better quality of life, and the old idea of some unscrupulous money-lender wanting the land to increase his land holdings does not hold water. We should therefore not protect the village, but give flexibility to every inhabitant to do with the property as he thinks fit, so that land consolidations can take place for meaningful agriculture and land not suitable for agriculture can be broken up to make small housing units for the suburban homeowner. We can then encourage homeownership, not land ownership, which is an anachronism for growth.

The Sri Lankan village a concept that is fast disappearing in substance

One thing unique in Sri Lankan culture, is the concept of Gama or village. Wherever one meets a fellow countrymen be it in the Island or overseas, the second question is which village are you from. Everyone is supposed to have a village, and most people by implication are living away from the village.

It is where the parents live, in the Mahagedera, and where one returns at Sinhala avurudhu time to bring in the new-year with our cultural traditions. One is expected to own some property which one day will lead one to build one’s home in the village, and once this home is built one’s spouse will be living there while one is away, either in a city or country, earning a living sending money home for its upkeep and generally being homesick for the day one can return to one’s village. This all sounds idyllic and very romantic.

The flaw in this is very simple. It exacerbates the separation of family, with a bread winner being away to ensure the home in the village can be maintained. The village is also by implication, a place, which cannot support itself, as its complete survival depends on its inhabitants leaving it to provide for it, as the village itself will never be able to be self-supporting.

The Mahinda Chinthanaya concept is flawed from the start, as it is village based, and conceptually trying to resurrect a dead species, by pumping more to maintain a cemetery and not a living thing is a regressive step.

I propose we concentrate instead on family. First by ensuring we don’t run after ancestral property and rights, but by helping to build a nuclear family and holding it together, so the family unit can live and grow up together, and when a member leaves the unit, by marrying or immigrating, they are pushed to make a life of their own and not come hankering back to a dead place where they seem to have some property and relatives, all of whom have squatted or encroached while the owner has been away, unable to control one’s own property.

I live in a village, but am not from that village. I am long separated from my village, but I am now able to see those who succeed are those who leave the village with no ties, except family, who are able to dispose of their assets and start anew at a place of their choosing, not having two places to keep. I will elaborate further on some other reasons for the argument.

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?

The USA is a socialist country and Sri Lanka a capitalist one!

One caveat to this is the provision of FREE Universal Health Care, which Sri Lanka provides and the USA does not and is a significant reason as to why I live in Sri Lanka. It is the one undeniable blemish of the USA.

The recent bailout of the US Banks is an indication that the government intervenes to save organizations when they make a mess of things in the USA and are in talks to bailout the large auto makers and sundry other large corporations in trouble. In Sri Lanka there is not even a government guarantee of the deposits in the Banks to say nothing of finance companies, while in the US a sum of up to US$250K is insured for each account in each of the banks.

Generous unemployment benefits, free education through high school and free school bus service, along with high federal and state taxes taxing the people to pay the large amount of government benefits are socialist practices. All agriculture is given heavy subsidies to produce mountains of food some of which the government purchases to give as US aid to other countries. The huge subsidies to oil companies for various purposes and tax credits for employment in certain fields are all indications of socialist practices. The enormous budget deficit created to pay for a war is itself a very irresponsible course of action that socialist countries take, while capitalist countries are far more fiscally conservative. The USA is the furthest from being capitalist. The looming crisis, which calls for more government intervention points to more socialist practices in the future.

Sri Lanka on the other hand with very low taxation, and no capital gains, wealth tax and death duties unlike in the US is a veritable tax haven when compared to the US. Unemployment assistance is negligible and so are a raft of opportunities for entrepreneurs to make a buck in Sri Lanka, all of which will be regulated by a whole host of laws and rules in the US.

Corruption is rife in Sri Lanka, a sure indication of capitalism. The rule of law is that of the underworld another capitalistic characteristic. There is less competition in Sri Lanka and businesses are making oligopolistic profits none of which would be permitted in the USA. It is easier to charge usurious rates of interest in Sri Lanka, which would be considered illegal in the US. All this is so convincing to verify the assumption made above. It is quite amusing that people are convinced otherwise.

Health Care Reform in the United States

When I quit my job in the United States in 1999, I immediately lost my medical insurance. I could have I believe continued with the previous company’s insurance plan for a period of twelve months, to give me some grace to get insurance from a new employer which only kicks in after three months of employment or buy my own health insurance for myself. At that time the monthly premium I would have to reimburse my ex-employer to remain on their plan was US$350, and I suspect it would be nearer US$700 a month now. If I had a family it would be nearer $2000 a month now.

Is it any wonder using my example, why there are over 40 million uninsured Americans, that is those with no medical insurance at all, and in the case of catastrophic illness, one would have had to exhaust all one’s personal wealth before some sort of minimum medical care is offered by the state. It is again almost always the case, where people have become destitute by having to pay medical bills, that are either not covered by insurance or by having none.

There are many types of insurance plans in existence, and the costs of these plans are a big detriment to the hire of new employees even in a period of recession such as the case now. More than the loss of ones job these days, the loss of the medical cover is the most stressful as one fears getting sick or even being involved in an accident, through no fault of ones own. Many of the large corporations and US government both in the state and federal sector have good insurance plans.

The small business sector, which is usually the engine of growth in any economy, is the one that is hard-pressed to provide insurance owing to the high costs. It is also generally true that the larger the number of insured in the pool, the lower the cost per family or person, and vice versa. In that sense small businesses are penalized paying higher rates.

I will not go into the intricacies of the high cost of health care and the reasons for it, as that is a separate debate altogether, except to say that policies that provide choice of doctor and hospital cost a lot more than policies that restrict choice, as they usually are managed care organizations that pay the doctors salaries, rather than on the number of patients seen etc. This massive variance in the quality of health care even for those who are insured, results in many who are dissatisfied with the care they receive. How therefore can this existing system be upgraded to universal care for all?
Hilary Clinton was appointed by her husband to head the health care reform task force in the Clinton Administration. She simply failed to gain consensus due to the very strong positions taken by the vested interests, who have a lot at stake in a revamp of this. A single national health service such as in the UK is not an option in the US and one has to realize not to go that route, so how does one get comprehensive health care for all while existing plans to remain in much the same form as now.

I believe the answer to this lies in keeping the NEW plan simple and including all those not in a plan into this plan and allow others who already have insurance to join this plan. The larger the number in the plan, the lower the average cost. Another significant aspect is that this is a basic plan and not the Rolls Royce of plans, which the US Congress receives. Due to this significant difference, there will not be a rush of people who have insurance moving to it but will allow small businesses and uninsured to join this plan as the cost is expected to be significantly lower than competing plans.

One significant point however is that like every insurance plan those with high risk, will skew the costs upwards, and therefore provision must be made to ensure that other plans do not kick out people with high risk into this plan, allowing them to profit and the plan to possibly incur greater losses due to the poor health of the pool that is covered by the plan.

It is fair to say that like the Medicare plan that covers retirees and is extremely costly and subsidized by the government to a great extent, this plan will probably cover numbers even exceeding Medicare. The only way forward is to force people not on any other plan to join this plan and buy into it by paying the requisite premiums. Small businesses will also be required to enroll their employees into this plan but give some kind of tax relief in the first few years to ease the transition and the cost of providing care.

A point to note is that all people currently in plans should be given the option of including all their immediate family members up to the age of 18 for children. This will reduce the number enrolled in the new health plan.

In conclusion, the cost of this plan to the state will not be more than the cost of currently having to provide care for the uninsured. It is essential that a simplified plan such as this is enacted rather than provide a series of choices. This is merely the alternative plan for those who have no insurance and not one to replace existing health care plans covering the majority of Americans.

The First Hundred days of the Barrack Obama Presidency

Barrack Obama will be sworn in as the 44th President of the USA on January 20th 2009. He now has 77 days to prepare his team, and his plans, so he can begin his term running on all cylinders to face the issues of the day, which are many and urgent.

The Bush US$700B bailout has singularly failed, in that the banks have not loosened credit, making it impossible for businesses to borrow for working capital, even if investment in plant is deferred. In accounting terms, it has only strengthened the balance sheets, so the banks do not look insolvent, but it has not helped the economy at all. An immediate 90 moratorium on foreclosures should be put in place without delay, so homeowners can negotiate terms. In reality in this crisis, it is better to keep a person in a home, than put them on the street, and lock the doors behind them. The bank will not be able to sell the house, so it is better to revalue the home downwards and structure a 100% loan on the new value at a slight premium in rates. This would prevent a glut of empty homes overhanging the market.

To jump start the dead construction industry, federal subsidies or tax credits, should be given to homes installing solar and wind energy, along with funds for research in developing new and more cost effective alternative energy systems for homes. This will form part of the green jobs package that has been promised. The same should also be done for electric cars.

The promised tax cuts cannot be financed at this stage, so it should only be limited to a tax credit for all before the rates themselves are dropped. A flat credit is more equitable than one depending on your income. This credit the same for all, say $1000 can be given to those not paying tax right through to the billionaire. Here there is relief for everyone, not just 95% of the returnees.

The proposals on Universal Health Care for all, should be laid out without delay allowing time for those controversial aspects to be discussed and consensus formed on how to practically get to the desired goal; namely of every person living in the USA being covered under one or other of the plans proposed. The environmental issues also need to be addressed with incentives to reduce the garbage piles put in place in this period, to start the ball rolling as it were. More research into recyclable materials should also be funded, to achieve the objectives.
The Foreign Policy agenda will be tricky. It is not easy, and it has nothing to do with Obama’s lack of experience. Of course each country will have a specific policy plan and engagement plan to suit their unique needs. One war will have to have a finite term, with Iraq footing at least 50% of the cost of troop commitments from January 2010. This will force them to get their forces ready to defend their country against agitators and insurgents.

The Afghan war however will have to be intensified and the Pakistan government engaged in the seriousness of their restless Northwest Frontier Province not taking the terrorist threat as anything more than an irritant. The increasing poppy fields that finance the insurgency in Afghanistan, have to be eradicated along with provision of alternative employment and income generation activities for the populace. This is a gigantic task not to be taken lightly as these people just cannot be tamed, so an accommodation, that delivers all hardcore, Taliban and Al Qaeda to the US forces, while respecting the territorial integrity of the country has to be negotiated.

Different courses of action are required to deal with the specific agendas of both Russia which is trying to exert pressure by regaining some lost power and prestige, while China is trying to prevent the closure of its factories due to the economic upheavals, by keeping its currency unusually low are issues that require diplomatic resolution by experienced officials.

The sore that is the Israeli question can be resolved by Obama, where all other previous presidents failed. He can command the respect of the Arabs, forcing them to agree on reigning in terrorism, in return for the insistence of Israel returning to its 1967 borders. There is no other way to resolve this issue and no matter what anyone says, that is the only way the state of Israel can exist in peace, and the century of Jewish resettlement be resolved once and for all. It is a once in a lifetime chance and I hope Obama realizes this and is up to the challenge especially taking the Israel lobby head on forcing them into a position of accommodating a fully fledged Palestinian State on an equal footing with Israel and aid to restore the country to one of respect and integrity with their own airports and power supply as well as the repatriation and employment of all their displaced people from camps in neighboring counties.

A much closer relationship with the worlds largest democracy, namely India is long overdue and I hope the Obama legacy will include a very close trade relationship with India that will be the engine that runs a future USA.

The Obama Era day one

Much like people remember where they were when they heard JFK was shot, or avidly listening to the radio when Neil Armstrong set foot on the moon, mankind will remember their twenty first century defining moment when Barrack Obama was elected to the Presidency of the USA. I was at my farm in Godagama, Meegoda this 5th November 2008 morning watching CNN when it was called, and the loud cheers and roars around the world could be felt in my body.

The tears streaming in my eyes, watching the faces of African Americans truly rejoicing, meant it certainly was a defining moment in my life. I having lived in the US for 14 years, felt that great country had finally cast off the last vestiges of prejudice and entered the truly modern era. I hope I will also live to see the day when a non-Sinhala Buddhist person, would rise to the Presidency of Sri Lanka, and only then will this country also claim the same moral status amongst the truly liberated nations on earth.

For a man with a Harvard Law degree but little experience in the art of governance, this meteoric rise in the past six years, from being nobody, to be the most recognized face on Earth is truly astounding, and must have had some kind of divine intervention to make happen, if one believes in God. Using the skills of a community organizer in Chicago, to galvanize the youth, and minorities, and use the internet to attract donations in small increments of $5 was a unique method of attracting grass roots, and young previously disenfranchised people and empowering them to form the back bone of his campaign is an example to us of the art of the possible, and I am sure a treatise on how it was achieved would be in print before too long.

The eloquence of his speeches, the inspiration of his persona and charisma that he exuded in all the sold out events both before and after receiving the Democratic Party’s nomination, gave rise to the optimism, that America had at last found a leader they can have hope in after 8 years of the most lackluster and extremely flawed leadership of the George W presidency. The delivery on this hope will be the next challenge, and I don’t envy BHO in meeting the expectations of the world. It is hard enough to be a leader, but to be the leader of ‘the free world’ is even harder as his every step will be watched and analyzed with many only looking for the missteps to point to. I am confident that he is up to the task at hand and I send him my best wishes.
Now comes the true art of delivery on the promises. For a man who did not stoop to character assassination of his opponents, he must keep that integrity in the presence of foreign leaders, testing his abilities with provocations just to pick a fight. He can hold on to the moral high ground if he acts calmly and without a hair out of place. McCain on the other hand is prone to unexpected outbursts that detract from his otherwise impeccable credentials, but would not bode well with the threats posed from outside, quite contrary to the common view of him being stronger on foreign policy.

Obama’s choice of Joe Biden as his VP was also inspiring in that he chose experience to fill that void in his background, but also moreover, chose the person who is the least wealthy Senator in the United States Senate, whose total declared net worth is less than $200,000, including the equity of his home, which is less than any cabinet minister in Sri Lanka. So we have two individuals from very humble backgrounds, another reinforcement of the American Dream.

One significant reason for my even greater enthusiasm for BHO is that he is truly a citizen of the world. His father was from Kenya, where he still has half brothers. He lived in Indonesia when his mother married an Indonesian, so his sister, his mother’s only other child is half Indonesian. His mother a Midwestern American, from I guess, Irish or English roots, gave birth to him in Hawaii a state with an indigenous people. Having a middle name of Hussein with a father of the Muslim faith in this decade where Saddam Hussein of Iraq was the villain of the peace. Is this poetic justice?

One could not have imagined a script for this story, while all this is historic fact. This nigh impossible outcome, was made possible, by a series of calculated and unplanned chances, all coming together when it all mattered. Hence my belief in, a higher-being responsible in giving hope, when things seem hopeless. Let this be a lesson to us all to never lose faith in the impossible. BHO is only human and can only do so much. We must work together to build a better world, embracing the ideals of inclusion and the possible, in the face of tragedy and adversity. So it is not him who has to perform, but us all to follow and do the same, all BHO did was show us the way, and inspired us to aspire to do what is good, what is right and persevere in the face of adversity, which many of us face in our daily lives. The world so lacks leaders of character and stature let this be a new beginning in the road to tame the unprecedented upheavals in the world today, not only the economic and financial crisis but that of poverty and terrorism as well.

the tea smallhoder is in shits creek due to the credit crisis

I am writing this at Paradise Farm in Kitulgala, which is an organic plantation, that grows the World’s best Green Tea. All the people who live around the farm are Tea Smallholders who grow tea on their little plots and sell their leaf to the local factories. 60% of Sri Lanka’s tea is grown by them, and have seen a significant price and production increase over the past few years owing to the increase in the demand for low grown teas that go to the Russian, Ukrainian, Middle Eastern and Iranian markets, which have seen an increase in their purchasing power.

As I noted in an earlier article written a week earlier, but published on Oct 27th the international buyers of tea have stayed away from the Sri Lankan auctions, due to their inability to obtain bank financing to purchase. The unsold tea has resulted in a substantial reduction in the price of this tea.

These people who I just saw waiting anxiously with their bags of cut tea leaf for the van to pick them up, have seen a drop of over 50% in price. The faces clearly show the fact that the van may not accept their tea if the quality is substandard. When prices were high rejections were low, now factory owners are demanding better quality of leaf, to make better grades of OP teas that still have a market. So the double whammy of price and quantity reduction, have reduced some of them small holders to penury, as the local factory have delayed payment for the leaf by over a month, citing that they have yet to receive payment, with no assurance when payment may arrive.

I know some of these small holders, a few work on the farm and one is a retiree from the farm, who now grows and sells his tea this way. They have never been faced with this kind of sudden price reduction, so sudden and then a refusal to buy tea plucked. They are in a real quandary. It is not like losing a job with some kind of relief albeit in temporarily. Here there is no relief, especially if this is their only source of income. Additionally in agriculture one invests for the long term, as it takes three years for a tea bush to mature to the stage of plucking. So money borrowed to plant and maintain, as well as the very high cost of fertilizer, has left many people with debts they are unable to service and in some cases, of repossessions of motorcycles, tractors, and vans by the leasing companies. One local person had all five of his vans used to pick up leaf and take to factories, repossessed for non payment of his lease, as he did not receive the funds owed to him for tea from the factories who have either defaulted or deferred payment.
It is interesting to note, that the President called a meeting to discuss this issue and no small holder was there to present the subsistence farmer’s plight. He instead made an asinine comment like, if he had known about this problem he would have called his buddy Ahmadinejad(President) of Iran and ask him to increase the purchases of tea, just like he did the other day to ask him to extend credit on Sri Lanka’s oil purchases. He said he will call his friend the largest tea buyers in Sri Lanka(I presume Akbarally) and ask him to increase the amount of tea he buys as a special favor!

This problem is temporary, but for the small guy, all it takes is one missed payment for his small tractor to be repossessed. The factory owner can close the factory and so not buy any more tea, till demand picks up. He can reschedule debt as banks don’t want to own non-producing factories. Those such as brokers who have lent on the strength of the consignment at auction, can recover their money when the Tea Board buys the unsold 1Million KG.

I repeat, the Smallholder bears both the brunt of the lower prices and also the non-payment for tea sold to the factory and also even worse the prospect of his tea remaining unsold, which he can do nothing else with. The direct help for this person was what my earlier article was about, and this is the one area the government has not been able to give relief. The Rs5000/- per bag of Urea is beyond anyone and this lack of sales means there will be little fertilizer being used, so the future crop will also reduce accordingly.

We here at Paradise Farm are trying to give temporary relief for the next two months to buy the tea from those in our village only, namely Ganepalla, Thaligama. We will use this tea to make Green Tea. The problem lies with the procedures and bureaucratic red tape to enable us to do this. Tea leaf purchases are tightly controlled by red tape, so I can’t buy your green leaf which no one else will buy from you! If this clearance takes time, the whole objective of the exercise, to help those in need, will be worthless.

I say don’t waste money getting the Tea Board to buy our teas as bargain hunters will buy it at a lower price. Those who really need help are the Smallholders, and due to their circumstances differing from person to person and the numbers needing help, so large, the government is impotent in not knowing how to help so many. I say give an immediate once only subsidy based on volume to each who can show how much tea was sold by him in August, before the crisis erupted, with a cap on the extent of the total subsidy at say Rs50K.

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.

The current crisis in the Tea Industry

Yesterday the representatives of the Tea Smallholders (those having tea extents of less than 5 hectares each), the backbone of the tea industry in Sri Lanka, were in crisis talks with the Tea Board over the need to address and resolve the problem, which for them is one of halving the price received by them for their leaf, within a matter of a month, after a prolonged period where they received in the region of Rs50/- per kg for their plucked leaf sold to the factories. Many are losing money at this price.

The reason for this is that there are many consignments of tea at the auction (which is the primary method of bulk tea sales in Sri Lanka), not fetching even the reserve price. This is because overseas buyers have lately been absent from the market, and which has also resulted in most varieties of tea fetching substantially lower prices than in the recent past.

We do not know for how long these buyers will stay away, but looking into why they are absent, it is logical to assume that as many buyers are traders, they have not been able to raise the necessary finance to make these purchases owing to the international credit crisis.

It is very unlikely that the world demand for tea will fall sharply owing to the recession, so it is a timing problem, so that when credit lines are made available, the market will return to normalcy.

The government is in a quandary over what to do. If they provide money to the local buyers such as MJF or Akbar, to purchase this tea, then it is just helping them to stockpile at a lower price to off load when prices rise. Actually these entities are better able to finance stocks anyway, are most likely waiting for prices to drop further so they can snap up bargains, as the prices they will purchase at will be much less than the cost of production.

If they help the factory owners with finance, to buy tea from the Tea Smallholders, to keep the factories operating then they have an unfair advantage, where they will continue to offer lower prices to the Smallholder, while keeping the future profits to themselves, when they eventually sell the tea they manufacture. We then come to the Smallholders who can be loaned money to tide them over, but the government will be unable to collect on these loans, as they will not have any collateral to enforce collection.

One other matter that needs to be mentioned to appreciate one of the practical problems is that due to the demand for tea and the need for factories to run at capacity, to ensure lowest cost of production, there has been a lot of competition to collect as much leaf as possible. Due to this competition, the Smallholder sells the tea to the factory that offers the best terms, not just in price, but also if the factory offers free pickup, and then only deducts a nominal 2% for moisture content of wet leaf, and also being lax on the quality of the leaf itself, as it is likely that with so many smallholders, the strict adherence to leaf standard could be compromised, resulting in a quality reduction.

Factory owners thus complain that some of these factories with low leaf quality have unsold tea at auction, resulting in their closure temporarily, affecting the smallholder who sold to them, now trying to find a buyer. They may have to find a factory further away, that charges a transport fee, and a higher moisture retention as well as a lower price, which in turn reduces the smallholders revenue by a substantial amount in the current trading environment.

How does one resolve the catch 22 situation, as the tea must be plucked. Once plucked the tea has to be manufactured, as one cannot leave leaf for more than a few hours. Once manufactured, tea stock that remains unsold can create a glut and a drag on prices once the demand increases. Tea can be kept in stock for a period if it is well sealed and stored in dry warehouses.

When the free market creates a temporary problem such as this, government intervention must also be very temporary, just for the duration of the problem, but one that will not create either an unfair advantage to the buyer or factory owner both of whom are usually at a much higher income bracket, at the expense of the sector most affected, namely the small tea farmer, who is suffering the most at this stage.

I can only think of one way where there is a Rs10 per kg subsidy given to the Smallholder who sells at a lower price to the factory that is operating and when it works its way through the system is a subsidy to the factory owner that is operating despite the lower orders so he can contemplate holding stock taking an element of risk himself until such time as the prices stabilize and the orders resume. This scheme should be strictly temporary for a stipulated period and the subsidy given a month in arrears once the tea has been sold to the factory from where the data is obtained to pay the subsidy

The essential difference between Obama and McCain

If one were to ask the average US voter what the difference between the two candidates on domestic policy was, other than say one would tax the rich while the other would reduce taxes on large corporations and wealthy, they would not be able to say anymore.

In Obama’s case he is proposing two main platforms that will impact on the voter, which should form the basic premise of his platform. The first is a tax cut for those earning less than $250,000 per annum, and the second is the insistence of employers providing health insurance for their employees, along with tax credits to them for so doing.

Taking the first matter, one must appreciate some of the basics of US taxes. While 40% of workers in the US do not pay federal income tax as they earn very little, one must appreciate that payroll taxes, such as social security is deducted from the first dollar they earn, and amount is also contributed by the employer. These 40% will be entitled to a non-refundable tax credit of a $1000, which is effectively a subsidy from the government.

The effective result of this is to permit a consumption increase as the poor spend all their income on living, equivalent to the tax cuts. In a recession, a consumption led growth is more likely than investment led growth and is likely to counter the fall in consumption seen lately with people losing jobs and tightening their previous extravagances.

Taking the second area, namely that of health insurance, it is cheaper to obtain collective policies, in preferences to individual policies that McCain favors. How many employers who are suffering in the downturn can afford health insurance for their workers is a question that has not been adequately addressed. Unless some tax credits are given to smaller employers to provide health insurance the pool of insured will not rise.

While the cost of health insurance is a tax-deductible expense on a company it is not so to an individual. There are 40million Americans without health insurance, and the number will rise when more people lose their jobs. Today’s insurance cost per insured is higher as a result. So the greater the number who are insured, will reduce the average cost, which is the premise on which the Obama plan rests its case. Lets see the percentage of uninsured at the end of Obama’s first term to comment on its effectiveness.
On McCain’s side he complains that Obama is about to make the tax more progressive, which he deems taxing the rich, and rather foolish Palin calls socialism. In an ideal world, one would not need to tax the rich, but in order to reign in the Bush deficit, some revenue has to be generated and the wealthy will pay a greater percentage of their incomes in taxes under Obama. One must bear in mind that payroll taxes stop, for the employee at about $80K so the rate of taxes that the wealthy pay taking this into account is not that much higher. On a flat tax rate, under McCain they will pay a lower proportion of their income in taxes than those earning at that threshold of $80K.

McCain’s other main plan is to provide a $5000 tax credit to the employee to purchase their health insurance privately to encourage the increase of the pool of the insured. One must however realize that because health care is private and run for profit, purchasing individual policies, rather than collective ones pooling a whole group is much more expensive, which is both a cost to the employee and the government that is subsidizing this policy which will go as profit to the health insurer. Remember that health insurance for a family of 4 if one were to purchase amounts to about $20,000 per annum which is a huge chunk of ones income if one is middle class, and not affordable if one is poor, so this $5000 credit amounts to nothing more than a hill of beans!

It is easier to understand the election in this context on how it affects the average American rather than look at other policies, as I believe there is little practical differences over any of the other policies, domestic or foreign between the two candidates though the rhetoric is there to distinguish them.

While no candidate dare talk about reforming the unwieldy tax code, I believe in mid term, serious thought should go into simplifying this when the economy improves, so as to reduce the amount of inefficiencies in the smooth functioning of the economy, which the current code encourages.

Of course none of all this is important if one does not bring in the intangibles, namely that of hope that a bi-racial President will create history and inspire confidence in a new generation of Americans for whom race matters little, and an international audience watching eagerly to see if the US can re-gain the moral high ground in its dealings with the rest of the world, which has hitherto taken a beating during the Bush Presidency. Sadly the festering sore, that is the blind support for Israel will be a permanent crutch.

The impact of the Global recession on Sri Lanka

I have noted earlier what the Central bank should do immediately to minimize the impact of the recession, and take advantage of it to profit from it. However there does not appear to be anyone who has heeded my advice.

Drastic scenarios now seem to come at breakneck speed and the authority’s smugness itself will create more problems as we are definitely being affected by events beyond our control. Now the flight of capital will continue, as the overseas investor has already discounted a rupee devaluation, which we should have done immediately there was any indication of trouble.

We could face a run on the banks, and finance companies when investors realize that some of the assets the banks have lent money for are worthless, such as exposure to apartment complexes, which are bound to be the first casualties of the drop in Colombo real estate prices. There is already a softening in the used car market, which will translate into the new car market, and with the current rates of interest, businesses are hampered in making a profit and a significant drop in stock values are imminent.

The central bank must give confidence to the banks by at least guaranteeing deposits so that there will be no panic run on the banks due to rumor or just a drop in confidence, which is all that is needed for an unforeseen event.

The extremely silly pronouncements by the Governor of the Bank, saying we are cushioned from the crisis is most irresponsible. We just have to be ahead of the game in our predictions and take steps to cover the eventualities rather than just say we have enough reserves to cover a run on the rupee!

If a 25% devaluation is not done immediately we may have to contemplate a 100% devaluation later when things have got out of control. The main thing is to be in control of the situation and not let external forces overtake ones ability to inspire confidence. The wealthy in Sri Lanka are about to see a halving in their wealth including Colombo property, and traditional havens such as gold are also falling, so like the herd they will try to hold dollars using the black-market and a run on the rupee will ensue with the black market determining what the rupee should be devalued to.

It is not too late to act now and stave off the crisis by putting a lid on the value of the rupee by devaluing.

The Global Economic Summit G20 in Washington DC November 15th 2008

It is a total sham to hold such a meeting in the midst of this economic crisis, which has been created primarily by the US Federal Reserve not regulating the totally irresponsible lending practices of the quasi mortgage lenders like Fannie Mae and Fredddie Mac and Banks under its purview. It is akin to holding a meeting of the foxes in the hen house!

All regulatory bodies must share the blame, as this problem was obvious even to the amateur. It is interesting to note that there has not been any mention of the culpability of the accounting firms, who I believe must share in the blame, but if it is highlighted, they would all be out of business and so they are keeping mum about it lest blame is apportioned to them.

There is no point partaking, as we all agree, in the blame game, and we should go towards reducing the impact of this recession and to the best of our abilities reduce the likelihood of it occurring at this level of severity.

The reaction of the stock market is just a reflection of confidence and not the problem itself, which resulted in lending drying up, businesses unable to borrow, and so on. It is so apparent that confidence is fickle and any Bank can go under if there is a run on the bank. The IMF was set up to help short term confidence issues of countries, and similarly each country must set up a contingency fund for the very same thing happening to their banks, but with a tough regulatory framework within which to operate.

It is easy, as we have seen for these rules to be flouted as incomprehensive mortgage instruments are invented daily, and few understood what they meant, in order to be able to opine on their value and recoverability. More novel ways will be found in the future to do the same thing, and until the authorities are able to get wind of them when they are structured rather than wait for a problem to occur, we will have this crisis again.

The severity of the crisis depends on the confidence of the public, which in turn depends on the way it is handled by the respective governments, and I say it again, that the stock market is just a barometer of this and not the cause. This meeting does not foretell of a combined international effort to combat bad practices of private institutions by ensuring strict adherence. The internationalization of the larger Financial Institutions including Insurance companies means that common rules must cross frontiers, as otherwise some of the problems can flow out of the borders of one into the other. The problem is that exchange rate fluctuations may also have to be managed, as even these result in banks going bust. How does one effectively control the prima donnas in banks that are always taking risks on behalf of the banks and making bets that could bring the bank crashing. There is a limit to the amount of regulation that can prevent rash action that if proved correct can make a huge profit for the bank and hence a huge bonus to the departmental head. Often the person does not lose his job if the bank suffers a loss.

The most important point to note is that with the advent of the internet and cross border banking made easy at the click of a button on a laptop, people are able to move funds daily with very low transactions cost. So a global approach is needed as countries and currencies can be affected just on whims and rumors that are baseless. Greed and profit are part and parcel of the western world, but now even more so in China, India and Brazil, therefore concerted action is required when there are signs of trouble, rather than waiting for the problem to balloon outside anyone’s control.

The level of uncertainty as well as the reward for placing the correct bet is so great that despite the best will in the world small fluctuations in exchange rates can result in massive losses or gains, that may force companies and banks to go bust, and no amount of regulation that kicks in later will help them. So regulation has to be real time, and hourly, with computer programs highlighting the contingent liabilities on an hourly basis. The regulators also need to be aware of this at this speed as well, but as secrecy is also part of the ability to profit, it will be difficult to agree internationally on how such immediate issues can be identified and tackled.

I am not confident that the real issues will be tackled. It will be an attempt at a smokescreen to reduce uncertainty, and bring back the confidence that has disappeared. It may have a short term benefit, but the structural international issues will not be even addressed, unless an institution is set up to oversee and report on this problem with a timeline on recommendations that are binding on countries. Few countries will allow international regulators. So it is unlikely that the real issues will be solved. The free market will be free to carry on in the same vein and then again go for government bailouts when things get difficult and the troublemakers get off scot-free yet again while the innocent will suffer the pain and consequences yet again. It is sadly the way capitalism works, but is a better alternative to socialism, where the government interferes in one’s life on a daily basis akin to a nanny state.

Why has the US$ strengthened against all currencies?

People are surprised that despite the global economic crisis that was precipitated by the collapse of some US Investment Banks that had held on to worthless mortgage debt, the US dollar has continued to rise against all other currencies. If one had forecast this to happen, few of the pundits would have agreed. Furthermore when US treasury securities are yielding 1% one would expect money to flow out to countries offering higher rates and thus make the dollar depreciate more.

Well it is all to do with confidence. The whole world has confidence that whatever happens the US government will not default on its debt and therefore every country would prefer to hold assets in US dollars in preference to any other country’s security. So the Japanese and Chinese have not pulled out any money from the US and the market value of their securities have strengthened both in dollar terms and in the currency of the lending country, reinforcing the decision to hold on to these securities.

With this confidence and the dramatic fall in the prices of commodities, especially crude oil, the US is able to withstand the trade deficit it runs with the rest of the world, counterbalanced by the surplus in invisible earnings. There is no other country or currency or for that matter any asset, not even gold that can match the US treasury bonds and so while the currency remains strong, and there is no run of funds out of the US, I believe the US is the best placed to get out of the recession, faster than other countries due to its flexible labor laws, that permit quick firing in the event of company’s requiring urgent action to stem losses, so it can just as quickly take advantage of an uptick as soon as it occurs where employers are not afraid to hire because they can just as easily fire unlike in most other places.

This flexibility in the economy will hold the country in good shape, for a more speedy recovery than the rest of the world, that depend a lot on international trade. With a fall in orders for Chinese goods, some of their companies are folding, as is the case with Indian companies that depend on overseas orders including those in the computer field.

It is anyone’s guess as to what price the exchange rate will settle at, and it is all the more miserable for Sri Lankan companies that export, unless a substantial depreciation is carried out on a sickeningly overvalued currency the Sri Lankan rupee.
It is therefore important to bring back confidence, for funds to move out to more lucrative areas. A lot depends on the deflation that is taking place, and the level at which it will eventually settle at. This massive drop in international wealth as a result of the valuation in stock markets worldwide as well as the drop in value of homes, which is a greater figure to the average homeowner, has made people very cautious about spending their way out of a recession, which will therefore not happen. The downside of that is that the recession will last longer, until people are willing to invest again.

The unavailability of funds rather than the rate of interest has stopped many a company it its tracks, and this situation will not change much as people and companies have got risk averse and are reluctant to take a gamble, which they would have taken if this crisis had not erupted.

It is also worthy of note that contrary to the doctrine, the Bush administration has been deficit spending to such an extent that it will reduce the ability of a future administration to cut its budget. Keynesian economics teaches one to spend one’s way out of a recession, usually by larger increases in public spending, but I do not believe that it is the way to go, because the perception of fiscal responsibility will erode into areas not earlier considered and a run on the dollar could result. The Friedmanite way of controlling Monetary policy will also not arise due to deflation and printing more money will only mean they search for even more safe haven’s to park their funds instead of spending which will increase the amount on deposit reducing the likelihood of them being able to spend their way out of a recession as it will not work.

Massive public works programs to keep people employed while also improving the infrastructure is what has been bandied about as the only way to show some relief in the country.

While gold used to be a safe haven, it is no longer the case as investors realize its true value will only emerge in jewelery and is neither an inflation beater nor a safe investment. Cash in the form of dollars are held all over the world, cushioning the dollar further, which is still the defacto reserve currency of the world. Therefore in closing, this state of affairs will continue and those forecasters who predicted the demise of the dollar will just have to eat humble pie, now realizing the importance of this currency far further than would have been anticipated earlier.

Letter to the Governor of the Central Bank of Sri Lanka

Dear Sir,

If I would be presumptuous enough to propose urgent action, in light of current world economic conditions, for Sri Lanka to take maximum advantage of the situation. We can show the world we are able to maximize the benefit of the crisis to our advantage. The reason I appeal to you is I still have some faith that you may be able to see the wood from the trees and be bold enough to take action, which could be a recipe for the rest of the world to follow at some stage in the future. There is no downside to you.

I believe Sri Lanka should take maximum advantage of the current conditions instead of being concerned about its effect on the SL economy, thereby taking defensive actions. We must instead go on the offensive.

With the expected free fall in the price of oil, which is poised to drop below $50, I expect you to be able to keep the price at the pumps unchanged and instead tax the difference. This additional US$500 million, which you will have from tax should be set aside to pay off your very high interest loan you negotiated recently as interest rates have dropped to zero in US treasuries. If you still need the cash you can renegotiate this as a new loan at an interest rate of 2% as the country risk rating would improve by repaying a loan early, saving the country untold billions.

Please ensure that the Central Bank watches carefully the prices of our imports as steel and other commodities have dropped by more than 50% and should be reflected in the invoices. If they have not some of the importers may be over-invoicing to stash money overseas and they can easily be brought to task. As you may be aware, the case in Sri Lanka is there are limited number of importers who work in concert, who will not pass the price reduction to the consumer, and together with the wholesaler and retailer keep the shop price the same for all these items while making the profits themselves.

A price drop is actually deflation, which means we must drop to zero inflation immediately as there is no reason for any inflation in a period when prices are falling. This is exactly the situation for you to devalue the rupee to 130 to the dollar without seeing an increase in the import price of products in rupees. A unique situation to find oneself in. This depreciation will help the exporters who are hurting and who are putting the jobs of their workers especially in the garment sector at risk. If you do this I believe we can keep the dollar earnings of exports unchanged as the price of tea will most likely remain unchanged and the fall in garment earning will be more than offset by increasing remittances from the our workers overseas. Again you are in a lucky situation to see your export and invisible earnings rise while at the same time seeing a significant reduction in the import bill giving you a balance of payments surplus in the short term and hence foreign reserves.

Remember in a period of deflation, cash is king so all the foreign currency reserves you hold will help you in the long run to stabilize your currency reduce the country risk therefore be able to borrow at extremely favorable rates should the need arise.

Don’t wait to take reactive steps, take proactive steps and you will be proved right and at worst you can make a name for your self outside these shores which counts more than to be known within as the latter is only for ones failings and not ones achievements.

These simple actions can reduce money supply growth just enough to keep inflation at zero, something you never thought would happen in your lifetime. That is because you are embedded in the past and not in the future to a changed world that happens once in anyone’s lifetime and that is now.

The deficit spending you have resorted so far will not be necessary if proper action is taken to ensure that a few politicians and industrialists don’t benefit from the drop in prices, and instead ensure that the government in the form of taxes or tariffs raise revenue, without affecting inflation much in the way the oil price fall is used only for the government’s benefit.

Identify the best people to help you. 80% who work in the Central Bank are just time servers, who have to be cautioned or reassigned and not just to hog desks and have a subsidized buffet lunch that encourages a siesta. I recommend as a step in restructuring the Bank, you offer a buffet breakfast between 7and 8 am, and make sure they all work till 3.30 with a cup of tea and sandwich served at noon. On their way home when they exit the bank give a small snack to eat on their way home to give them the energy to get home. Trust me the productivity you get from them will double.

Yours truly, A subsistence farmer who spends less than Rs100 a month.

lets face it we have a problem with the assumptions

Just think, and look around you in Sri Lanka. We have the highest concentration of foundation stones being laid for projects, highest concentration of partially built and abandoned projects, highest concentration of government buildings, and largest number of government departments all as per capita in the world. This is a fact.

How can we be a poor country with these, institutions? It is because it is bureaucratic and not efficient. No one is performing to expectation and the importance of maintenance is set aside out of egos too inflated to need their names on foundation stones, over well maintained structures.

Until we realize we should not waste anymore money in construction of new projects; make more efficient the existing arms of the government by making them accountable for their performance; to be judged on how well their budget allocations are spent and evaluated; and energize public servants with performance incentives and drop age based seniority and age based promotions; we cannot proceed effectively.

All this comes down to good management from above where objectives and goals are laid down and everyone works on the same page. Then progress can be made. Our bureaucracy at some levels are made up of zombies, this frustrates the energetic dynamic individuals, as they are not allowed to shine and are constantly put down by their lazy and cushioned elders.

There is political interference when it comes to transfers of government servants, as well as promotions, which demotivate good staff. Each one of the 400+ government departments must have a set of objectives and criteria for performance measurement, so that they are working after their lunch break and not literally sleeping on the job as is commonly encountered. Thanks to President Premadasa, we have Wednesdays as public days where the officials are obliged to be at their seats. The instances, when, even this rule has been violated by government servants, are too numerous to mention.

Lets bring a sense of discipline into the public sector, and make them accountable and efficient, only then will the private sector be able to take up the mantle of performing without hindrance and corruption. They are up to the task if only the government sector is doing their bit. So please re-evaluate the assumptions and energize the personnel to perform.

the good suffer with the bad

After the fall out of the present crisis, where genuine hardworking, profitable businesses are shut out from obtaining working capital as a result of the actions and excesses of others, it is hard to tell them that they have to suffer along with the rest through no fault of their own.

That in a nutshell is what is wrong with the system. These small entrepreneurs are the backbone of the economy. They are the most productive who manage and run small businesses. The excesses of the banks’ poor lending practices are hitting these innocents. They see the government helping the worst offenders, and not them who are just asking for an extension of a line of credit to keep their businesses from going under.

Often these businesses prefer to operate on short term borrowings rather than lock into long term loans, so they become the most vulnerable when credit lines are not extended as the banks are reluctant to lend, because they cant even borrow from each other. The resulting effect is these small businesses have to close or lay off and the economic repercussions multiply.

Bankers reading this please take note that knee jerk reaction to mistakes on your part will affect productive hardworking businesses more than you would realize and in a way the banking system is one that is more than just a business, it is one that should have obligations to give people a chance, when they are not to blame for a tightening of credit, which affects good and bad.

It is important to realize the knock on affect of credit tightening because the small engines to economic growth are also affected by adherence to strict new rules of lending. This issue does not appear to be addressed and needs to be if the downturn is to be minimized and sound businesses permitted to function. Working capital is an essential tool for a small company, as without it they are often not able to meet their day to day obligations, and payroll is the first to fall prey, and then the payables to suppliers.

Governments are quick to apportion blame, but it is no time to blame when honest people are unwittingly caught up in the trap. It is the duty of the state to protect or at least help those, much like in a natural disaster to get back on ones feet, as the problems are often someone else’s creation. It is vital that a proper understanding of the problem be made a quick solution found, so that those businesses that can be salvaged are in fact prevented from folding.

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

Will they ever learn? An accident waiting to happen- the 2008 recession

This crisis that is upon us now was predicted, the severity is something that depends on human factors such as confidence, and wise state intervention that cannot be predicted, but the inevitability was as night follows day.

The US economy that is the largest in the world, also grew rapidly, not out of productivity growth, but out of consumption led growth where lending institutions relaxed lending amounts and rates. This made it easier for people who are not financially savvy to rack up huge credit card debt, and release equity from increasing home prices to borrow to finance consumption. Hitherto positive savings rates thus became negative.

China was eagerly supplying the US consumer with cheaper products, thereby increasing consumption of such items like flat screen TVs and electronic items. The dollars the Chinese received went back to purchase US treasury debt. There is a limit to how far one can go, when one is unable to pay one’s debts. The unscrupulous lenders who were remunerated more based on the increase in the amounts lent, devised more schemes, such as secondary loans with teaser interest rates to get people to commit to borrow. Like a ponzi or pyramid scheme, when the rate of increase began to fall as there were no more takers, and the teaser rates ended, people who had signed up unwittingly and foolishly, were unable to pay their loans. The loans had been sold off in the secondary markets with Fannie Mae and Freddie Mac guarantees, and so were off the books of the regulated financial institutions.

The incompetent accountants(the largest firms in the world) failed to realize that any fraudulent information on the loan documents, hold the originator responsible, and the originators were the first to go bust when fraud was discovered, when they were unable to meet their obligations. The banks thought they would have recourse but were left holding worthless paper and insurance companies, who guaranteed these without fully understanding the risk profile, began defaulting.

Not to be outdone, international banks and insurance companies joined the bandwagon not wanting to be left out of this jamboree with tiny banks in Iceland joining the fray through internet banking crossing borders seamlessly, wanting a piece of the pie. Now even they have to be rescued by their governments making it a global phenomenon.