Editorial

IT'S THE ECONOMY STUPID 

The government has finally woken up to the impending crisis facing the economy. Last week, none other than President Mahinda Rajapakse himself, warned the nation that the country is facing serious economic issues.

With the country's media, especially the electronic media enthralling the people with military victories and election campaigns, the economic gloom engulfing the world was rarely if ever highlighted.

Not to be outdone, there was the Governor of the Central Bank, Nivard Cabraal confidently announcing that the worldwide economic downturn would not have a negative effect on Sri Lanka, thanks to the 'Mahinda Chinthanaya' policies.

Any economist who disagreed, and there were more who did than agree with the 'Cabraal doctrine' were dismissed as alarmists or speaking on behalf of the opposition. For months, the international rating agencies (though their credibility is questioned and had also been held partially responsible for the economic meltdown), the Asian Development Bank and the IMF have been warning of a full-scale foreign exchange crisis. But the Central Bank instead of taking pre-emptive corrective measures chose the path of crying out "wolf." For Nivard Cabraal it was an international conspiracy to undermine confidence in the Sri Lankan economy.

The shortsighted policy of defending the rupee ata highly over-valued exchange rate only resulted in the depletion of foreign reserves even further. Additionally the unrealistic exchange rate had an adverse effect on exports. The direct result has been the loss of around 50,000 jobs, to date. No amount of fixing of data by the Central Bank will get us out of this mess.

The appointment of Nivard Cabraal to the key position ofGovernor, Central Bank was always questioned. He is a run of the mill accountant with no great achievements to show in his curriculum vitae. If he had the ability to learn on the job, three and a half years is more than sufficient. The country hopes that the supporting professional staff at the Central Bank can minimise the damage done by the Governor. The Governor for his part should at least learn to keep his mouth firmly shut.

The foolhardy optimism of the Central Bank Governor has now been shattered by none other than the architect of the 'Mahinda Chinthanaya' himself. In two successive speeches last week, the President mapped out in general terms the looming crisis. It appears he is preparing the people for tough times ahead. As if on cue state television which has all but ignored the worldwide economic crisis began covering the issue extensively.

This government has shown little progress in most areas over the last four years but has masked this through a top class team handling propaganda. The multi-faceted propaganda campaign to sell the "all out war' to the people of this country was nothing short of brilliant.

Now it seems the same team is launching a similar campaign to prepare the people for another war - economic war. No doubt, instead of taking responsibility for poor economic management by the government, the blame will be laid firmly on the rest of the world. In this instance at least there is some justification for that. The world is paying for the unbridled and unregulated 'greed' in the financial sector in the Westand Sri Lanka is not going to escape the repercussions of that down turn.

For decades Sri Lanka survived on foreign remittances from tens of thousands of low-skilled workers mostly in the Middle East. It also eased the pressure on unemployment back home. Unfortunately that revenue stream is also heading towards the negative. Construction work in the Middle East, a major source of employment, has come almost to a stand still.

The Central Bank has finally acknowledged that the foreign exchange crisis is real and immediate. With the worldwide credit squeeze, raising funds from international commercial banksis no longer an option. Even if loans were available, the country would have to pay high interest rates. So, the inevitable is here. After vilifying the International Monitory Fund (IMF),the Governor is now in the process of negotiating a standby facility of almost two billion dollars. Here again the country is fortunate. The IMF no slouch, imposes harsh conditions in exchange for bailing out countries. However, the IMF cash infusion should get us out of the foreign exchange crisis in the short term.

On the positive side, low oil prices and the 'peace dividend' will help to cushion the economy somewhat. If handled astutely, the country would get tens of millions of dollars to resettle the IDPs in the north and to reconstruct the region. With relative peace, tourism would pick-up creating thousands of new jobs and increasing the income of tens of thousands of people who are employed in that sector. Foreign investors would start looking at Sri Lanka again.

Another plus factor is the banking sector. Unlike in most Western countries Sri Lanka's banking sector has weathered the storm better. This is due to the very conservative lending policies of this sector. However, the same cannot be said of the finance companies. The collapse of the Golden Key Credit Card Company has undermined confidence in this sector. Well-run finance companies are under pressure with investors pulling out deposits to reinvest in banks despite lower rates of interest. The Central Bank's announcement of a stimulus package for this sector to be operational next month, we hope would stabilise the finance companies and confidence re-established.

It is clear that life in Sri Lanka is going to get much worse in the months ahead. It isthe responsibility of the government to handle this crisis prudently and smartly. The government we hope has woken up to that reality. It is as the saying goes"better late than never."