By Mandana Ismail
Abeywickrema
With economic mismanagement
being the order of the day, the country’s
economy is far from showing any signs of
recovery from the crisis it is in.
The government however
continues to palm the blame for the
rocketing inflation on high global food and
fuel prices.
Central Bank Governor Nivard
Cabraal had reportedly said last week that
the high global food and oil prices were
more damaging to the country’s economy than
the ongoing war.
However, economic analysts
have argued that although high global prices
have played a role in the country’s high
inflation level, it was not the key reason
for the present crisis.
They have said that it is
weak monetary policy that drives inflation.
The example posed is the over 20% inflation
recorded by oil producing countries like
Iran and Venezuela.
Economist Dr. Harsha de
Silva says that although every country is
facing supply side issues, most countries in
the region have managed to hold inflation
between 5-10%.
Highest level of inflation
He noted that some Asian
countries have recorded low inflation levels
like 2.5%.
"Even the IMF has spoken of
the impact of one time price increases.
However, it is not as large as the
government has blown it out to be," he says.
At an inflation rate of 28%
Sri Lanka is twice as high as the next
highest level recorded by an Asian country,
which is Pakistan at 14%.
Dr. de Silva says that
global food and fuel prices are not the only
reasons that have caused such a high level
of inflation, and blamed the Central Bank’s
accommodatory policy towards the government
as being the key cause behind the
skyrocketing inflation level.
"Although the Central Bank
has managed to follow a tight monetary
policy this year and not print any money,
which is commendable, the country is facing
the repercussions of the money printed last
year," de Silva said.
According to him, at a time
when the country was facing supply side
issues, the Central Bank should have been
more prudent in its decision making process.
The bank should have looked at investing in
prudent and profitable investments, he said.
Debt repayment
"If ever there was a time to
cut down losses, this is the time. If there
was a time to make decisions on shutting
down non profitable state institutions, now
is the time," Dr. de Silva emphasised.
The argument that the
Central Bank needs to assert its role in
building the country’s economy and not work
towards the survival of the government in
power has become more vocal with the
sustained increase recorded in the country’s
inflation level.
The irresponsibility of
governance has to be changed and reforms
need to be brought in is the call that is
gaining momentum.
The government for 2008 has
projected a revenue of Rs. 750 billion.
However, Rs. 600 billion has to be utilised
for debt repayment alone, which leaves only
Rs. 150 billion for all other expenses.
After allocating funds to
fight the war and pay debt, the state
coffers will be left empty.
"The government in such a
situation has to borrow money to pay even
the salaries of the state sector employees,"
Dr. de Silva pointed out.
These issues further
compound the economic woes of the country
and the failure by the Central Bank to make
firm policy decisions would only push the
economy into a further abyss.
Meanwhile, the government,
which is still trying hard to find excuses
for the rising level of inflation, has
stated that the high inflation level was a
result of the country’s economic growth.
Decline in growth rate
Deputy Finance Minister
Ranjith Siyambalapitiya was quoted in the
newspapers last week stating that high
inflation was inevitable due to the large
scale development programmes undertaken by
the government as well as the sustained
growth in the country’s economy.
He has also said that other
countries in the region were not involved in
a war against terrorism and hence were in a
position to maintain low inflation.
Interestingly, India, which
is growing much faster than Sri Lanka has
recorded 7% inflation while recording a 10%
growth rate.
However, Sri Lanka, as
pointed out by Dr. de Silva, has recorded a
7% growth rate and an inflation rate of 28%.
Central Bank to blame
"Also, there has been a
decline in the growth recorded from last
year. Hence if the government’s argument is
true, then the level of inflation too should
have seen a decline with it," he said.
Dr. de Silva believes that
the present economic crisis is the result of
the Central Bank ignoring its primary
responsibility of fighting inflation and
ensuring price stability.
"It is obvious that the
Central Bank has messed up its primary
objective," he said.
He blamed the heavy
politicisation of the Central Bank as the
main reason for its failure to act on its
primary objective.
In 2002, the Monetary Law
Act was amended to ensure the independence
of the Monetary Board of the Central Bank.
The independence was to give the bank the
strength to say "No" to the government of
the day in order to stand by its primary
objective of containing inflation.
"Governance issues have
hampered the independent functions of the
bank. Three members of the five member
Monetary Board of the Central Bank were to
be appointed by the Constitutional Council,
which is now defunct," Dr. de Silva
observed.
