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 Economy  

Relief: Who's giving whom?


Mahinda Rajapakse, Bandula Gunawardena
and Ravi Karunanayake

By Mandana Ismail Abeywickrema

The so called economic stimulus package presented by the government last week as a New Year gift for the people has come under fire from many sectors claiming it to be insufficient to revive the country's flagging economy.

Following a closer look at the relief package economic analysts are now calling it eyewash presented to mislead the public, especially given the downward trend in the world fuel and food prices. Analysts say that the reduction in local fuel and other commodity prices do not in any way reflect the huge decline in global prices.

Exporters and many industrialists meanwhile lamented that the relief offered was too little too late and insufficient, given the massive downfall experienced in many export related industries due to the government's delay in addressing their issues.

The economic stimulus package for consumers, industrialists, exporters and the plantation sector, worth a total of Rs. 16 billion, was announced last week after a special cabinet meeting was summoned by President Mahinda Rajapakse on December 30, 2008.

Relief measures

Soon after the cabinet meeting a press briefing was called at 8 p.m. to inform the media of the relief measures approved by cabinet for various sectors as well as the people.

The government announced many relief measures for the export sector as well as a minute reduction in fuel prices. The decision to reduce a litre of petrol by Rs. 2 and diesel, kerosene and furnace oil by Rs. 10 raised many an eyebrow given the Supreme Court directive to reduce the price of a litre of petrol to Rs. 100 per litre.

According to the main opposition UNP, given the decline in global fuel prices, a litre of diesel could be sold at Rs. 32, petrol at Rs. 55 a litre and kerosene at Rs. 26 a litre. 

UNP Parliamentarian Ravi Karunanayake told the media last month that under the current global oil prices where a barrel is trading around US$ 36, petrol should cost only Rs.24 a litre while the government sold it at Rs.122 a litre, ignoring the SC directive.

However, presenting the economic stimulus package, the government said that apart from providing relief, its aim was to target a 6% growth rate for 2009.

Analysts have however questioned the viability of this endeavour.

Not sustainable

Economist, Dr. Harsha de Silva said the proposals in the package were not sustainable and would not fuel long-term growth.

He says that the only way the government could stimulate the economy was to cut down taxes and bring down  interest rates.

"Unless you bring down the interest rates, it is not possible to sustain growth," he said.

According to Dr. de Silva, most of the economic growth recorded was driven by the state sector.

He said that given the decline in global commodity prices, it seemed as if the government was scooping out huge profits.

Citing an example, Dr. de Silva said that the government's decision last month to reduce milk powder prices by Rs. 15 was a move to mislead the people. He explained that milk powder that was priced at US$ 3,000 a metric tonne at the beginning of 2007 saw a drastic increase in the global market by mid 2007 as it reached US$ 4,500 a metric tonne.

 Global prices

During this period the price of a 400 gram pack of milk powder in the local market increased from Rs. 195 to Rs. 285, which was a 150% increase given the 50% increase in global prices.

Although various ministers made statements that the era of cheap food was over, the global milk food prices once again reduced to US$ 3,000 per metric tonne. However, local prices have not been adjusted accordingly.

Dr. de Silva said that when the global milk powder prices reduced to US$ 2,000 per metric tonne last December, the government announced a reduction of Rs. 15 in local prices.

It is indeed interesting that a pack of milk powder that was priced at Rs. 195 when a metric tonne of milk powder was US$ 3,000 was increased to Rs. 285 when the prices increased and has now been subjected to a reduction of only Rs. 15 when the global prices have plummeted to US$ 2,000 per metric tonne.

Should be reduced

Dr. de Silva says that the prices of fuel and other essential items should be reduced in keeping with the global prices.

It must also be noted that the government that announced an economic stimulus package just before the dawn of the New Year had slapped a plethora of taxes that would have a direct impact on the average Sri Lankan this year.

Although the 15% VAT component was reduced to 12% through the 2009 budget, economists have pointed out that the reduction has not affected the government's tax collection due to the imposition of a range of new taxes as well as the increase of several existing taxes and cess.

According to calculations an additional Rs. 30 billion burden would be placed on the shoulders of the people in the form of tax payments for 2009. (Rs. 1,500 in additional taxes to be paid by each person.)

In the 2009 budget, there have been increases in cess on imported items, notably consumer goods, food items and even animal feed.

The package

According to the Cabinet Memorandum of the economic stimulus package, the President in his capacity as the Finance Minister has called for the continuance of a number of cess imposed on imported items and has even proposed to increase it where some commodities are concerned.

However, it has also been stated that given the decline in global prices, the continuance of the cess or an increase in it would not result in a price increase in the local market. Whether this would actually be the case in reality is another question.

Given past experience, it would not be surprising to see an increase in the prices of several imported products due to the increase in import cess.

According to analysts, any tax burden is ultimately passed on to the consumer who is  always at the receiving end.

High commodity prices

The masses who have been burdened with high commodity prices and an intensifying battle for survival amidst a soaring cost of living for the most part of last year, were hoping for some relief in 2009 with the declining global fuel prices.

All they have so far been offered is just a meager reduction in prices that would not have a massive impact where personal finances and saving are concerned.

Meanwhile, the consumers would be faced with another shortage of rice in the market very soon. According to rice wholesale dealers, the government's failure to increase the price of samba rice and the mill owners' failure to supply samba at Rs.65 to the wholesale market has led to a shortage of samba rice in the market.

It has been reported that the rice mill owners who had initially agreed to supply a kilo of samba rice at Rs. 65 have now gone back on their word.

Rice wholesalers

President, Old Moor Street Importers' Association (OMSIA), K. Palaniyandi, who is also a rice wholesale dealer, said that due to the mill owners' failure to provide samba rice at Rs.65 and the government's failure to allow a price increase, there was a rice shortage in the market.

"There are two options to tide over the situation.  The government should either be flexible and allow the rice traders to sell samba around Rs.75 - Rs.80, or should take the rice mill owners to task for increasing their prices from Rs.65 to Rs.70. Earlier when we were supplied samba for Rs.65 we sold the stock to the retail traders for Rs.67 and they in turn sold it to the consumers at Rs.70.

"But with the sudden price increase by mill owners we are unable purchase rice for Rs.70 and sell it at the controlled price. That was why we requested the government to intervene and to allow us to increase the selling price of samba but to no avail," Palaniyandi had told The Sunday Leader's sister paper The Morning Leader last week.

He had also said that due to the current rice shortage, the wholesale rice market has been badly affected over the past few weeks and many wholesale shops were on the verge of closure.

 


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