By Mandana Ismail Abeywickrema

Instead of finding real solutions to the prevalent economic crises the Central Bank has resorted to creating distractions in the form of new indexes. The bank's intention, it seems, is to show that everything is hunky dory by showing various new indexes.

Since last December, the Central Bank has been preoccupied with scrapping and introducing new indexes to convince the public suffering under the cost of living burden that all's well in the country's economic front although Sri Lanka still holds the record for the highest inflation rate in the region.

The latest addition to the list of indexes is the Sri Lanka Prosperity Index (SLPI) that was introduced last week.

According to the Central Bank, the index goes beyond traditional measures like economic growth to find out what makes people feel happy and prosperous. The new index has reportedly found that most prosperous conditions are found in the Western Province followed by the Central and Southern Provinces while the Northern Province lagged behind.

The 'yardstick'

Central Bank Deputy Governor W. A. Wijewardena has been reported as saying researchers turned to philosophers to find out what made people feel happy. "If he smiles from ear to ear we can see whether he is happy or not," Wijewardena had said.

"This cannot be measured by economic growth or a similar indictor. Because of this, countries searched for the causes of this smile and measured prosperity in that way," he had opined.

The country's economic hub - the Western Province dominated the Prosperity Index with 66.1 points in 2007, up 2.9 points from the previous year. The Central Province increased its points in 2007 by 2.4 points to 52.9 points, while the Southern Province gained 2.8 points in 2007 to end at 51.6 points.

The war ravaged Northern Province scored 43.6 points up 0.3 points from 2006 while the Eastern Province fared better at 44.2 points, up 2.3 points from 2006, but well below Sri Lanka's average of 52.7 index points.

Economist, Dr. Harsha de Silva, who developed the Business Confidence Index 12 years ago, says there is a need for a holistic way to look at people's poverty or prosperity. Therefore, he says the Central Bank's decision to introduce SLPI is good. However, he said there are several issues that needed to be addressed by the Central Bank.

Transparency vital

Dr. de Silva notes the need for transparency in measuring the index. "Before announcing the decision to introduce the index, it should be done with transparency," he said.

It has been reported that economic issues account for 30% of SLPI while social issues and infrastructure accounts for 45% and 25%, respectively.

According to Dr. de Silva, there needs to be clarity and transparency when measuring the index. "People need to know the sub components and how they are allocated," he said adding that there are various other aspects that need to be clarified as well.

Citing an example, Dr. de Silva said that there was a question on how the people in the Northern Province were happier in 2007 than the previous one. "If this is the case, I would go back to my drawing board and see if the measurements are right," he said.

He added it was also important when developing an index to pay attention to ensuring that there would be no need to make alternations every now and then.

"We need to see how happy the people are given the high inflation rate and also if issues like good governance, rule of law and civil rights have been incorporated in the index," Dr. de Silva said. He pointed out that the fundamental issue with regard to the SLPI was the lack of transparency. "These issues should be addressed," he said. The success of the SLPI therefore would only be known with time as well as the transparency in which the whole process is conducted.

The government has already scrapped two long established indexes, the Colombo Consumer's Price Index (CCPI) and the Sri Lanka Consumer's Price Index (SLCPI).

CCPI-N short-lived

Last December, in a bid to mask the galloping level of inflation, the government decided to introduce a new consumer price index through the Census and Statistics Department called the New Colombo Consumer Price Index (CCPI-N). CCPI(N) replaced CCPI, which existed since the early 1950s as the barometer of the cost of living.

According to analysts, the sustained rise in the level of inflation caused much concern both locally and internationally and the formulation of the new index was widely believed to reflect a lower inflation figure by reconstituting the 'Market Basket.' The rising inflation has been widely attributed to serious macroeconomic mismanagement by the government and the Central Bank.

The government, after running out of every possible excuse - from the war to the rising world oil prices - to hoodwink the masses on the reasons behind the rising cost of living and inflation, turned to the CCPI itself for salvation. In was not lost on the public that the new 'improved' consumer price index was hastily introduced at a time when the CCPI was continuously recording significant increases.

Addressing a forum of financial professionals, Treasury Secretary, Dr. P.B. Jayasundera last year found fault with the former CCPI, saying that the index never produced annual average inflation below 10% for the last 30 years. The Treasury Secretary however overlooked that fact during the brief reign of the UNP - from 2001 to 2004 inflation was down to as low as 4% as per the very same index he was condemning and is recorded for posterity in the Central Bank reports.

IMF opines

Dr. Jayasundera had said that the galloping index numbers were due to the fault of the index overlooking the poor macro-economic management based on weak policies.

Meanwhile, IMF directors noted in the statement issued also last year following the Article IV consultations between IMF and Sri Lanka that the country's growth has been underpinned in part by expansionary fiscal and monetary policies, leading to an increase in macroeconomic and external sector vulnerabilities.

They said in particular, that inflation has accelerated, the external current account deficit remains large, and gross official reserves are relatively low. The directors urged the authorities to tighten macroeconomic policies, while acknowledging that a return to political stability will also be crucial in underpinning sustained economic progress going forward.

Happiness measured by votes

A presidential advisor, who is also a legislator, was last week reported to have said politicians measured how happy people were by the number of votes they got. However,  SLPI would now have to show the happiness and prosperity of the people given the present economic conditions. How long the index would prosper and whether it too would be subjected to the same fate as the CCPI and SLCPI, only time would tell..