Challenges for Budget 2009

Ravi Ladduwahetty

The date was November 12, 1997. The event was the inaugural South Asian Forex (Foreign Exchange) Dealers Conference. The venue was the ballroom of the then Colombo Plaza, now Cinnamon Grand.

Minister of Export Development and International Trade Prof. G.L. Peiris who then held the Cabinet portfolios of Justice, Constitutional Affairs, Ethnic Affairs and National Integration and Deputy Minister of Finance in the first Chandrika Bandaranaike Kumaratunga Presidency, addressing the event as the Chief Guest, made the most telling comment on inflation.

He said: “Some people say that a little inflation is all right. How much is too much ? Inflation is like pregnancy. Either you have it or you don’t.

Inflation is the single largest impediment to the national economy and the 2009 budget billed to be presented by President Mahinda Rajapaksa in his capacity as Finance Minister in Parliament next month.

There was earlier an instance where inflation reached record levels of over 20 per cent in the early and mid eighties due to the foreign aid and capital inflows due to his implementation of the Accelerated Mahaweli programme.

Inflation

However, the inflation of 2008 and 2007 cannot be attributed to massive capital expenditure, but the Central Bank has attributed the inflation to massive global oil prices and food which also recorded sharp price increases with wheat flour, sugar, milk foods and other essentials peaking in price increases.

The military expenditure has not been spoken of much. The Government in its Appropriation Bill has asked for a record Rs. 177 billion as Defence expenditure. There has also been an apparent boom in the recruitment in the public sector and these are some of the reasons which have been attributed for high inflation.

Of military expenditure and food imports, which is bigger is currently debatable and with the increase of the public sector these are the issues which have impacted the economy for the first six months of the current year.

The addition of non-productive jobs to the public sector does not add to productivity either. From that point of view, with soaring inflation life becomes more difficult.

Goods are gradually becoming more expensive. On the other hand, there are the implications for the productive sectors of the economy as well.

Business houses which cater to the domestic market have seen production costs galloping with escalating electricity tariffs, fuel and wages and they are unable to sell more with markets and margins getting squeezed.

The challenges for exporters are of a different nature. In the past, there has been a depreciation of the Rupee with inflation against the United States dollar and there have been increases in profits due to the increase in the Rupee incomes due to the depreciated Rupee.

However, the exchange rate has also stabilised in the last twelve months and export houses too have been stressed, again with falling margins.

Positive

On the positive side are the premium prices that the tea exports are currently fetching with high global prices.

Another positive feature is that domestic agricultural production has seen an increase. However, the increase in the agricultural production cannot compensate for the dip in industrial exports and services.

The International Monetary Fund which has country reports on Sri Lanka has revised the economic growth rate downwards for 2008 at 6% and 5.8%-5.9% for 2009 in the light of the 6% and 7% we have seen previously.

The single biggest challenge for the Government is to reduce inflation which will also reduce the Cost of Living where business also can operate and grow.

A further important link in the equation is the war which is at a decisive stage and it is expected to trail off in 2009.

There can be reduction in military expenditure but not drastically as salaries have to be paid.

There is also the other link of fuel prices which peaked at $ 147.50 in April, hovered around $ 100 and is now at US$ 70. What implications it will have at the end of this year with the European winter is unknown.

In this context, it is also moot to note how the Government will manage its non productive expenditure. The largest issue may be the transfer of pensions which is astronomical as that too is non contributory. It may be prudent to at least get the new entrants to pay for them to get paid.

Diesel

Subsidies also have to be targeted better. Governments say that diesel prices are subsidised to accommodate public transport which is a rational and plausible explanation.

But on the contrary, what about the large number of middle class and upper middle class citizens who are not so poor who are using diesel vehicles. It is also paradoxical for the Central Bank to say that the poverty is at 15 per cent but the Samurdhi allocation is for 50 per cent of the population.

Terrorism, which has plagued and crippled this nation for the past two decades, has to be uprooted at all costs.

It is also important that a political solution to the ethnic issue also be found which will see the fruition of a sustainable, durable and lasting peace which this nation richly deserves now.