Ismail
Abeywickrema
The country's level of inflation is still
continuing its upward trend with the
Consumers' Price Index of the Colombo City (CCPI)
recording a 24% rate of inflation for
February. The CCPI for January was recorded
at 21.6%.
The CCPI for the month of February was
posted at 6345.4 index points, which is an
increase of 42.9 index points or 0.7% from
January 2008. CCPI for January was posted at
6302.5 index points.
According to the Census and Statistics
Department, it is an increase of Rs. 86.67
in the expenditure value of the market
basket when compared to January 2008.
The Central Bank of
Sri Lanka
has predicted high inflation for the first
half of this year - saying inflation would
be between 16 and 20%.
Doubts over target
The latest Central Bank prediction has cast
serious doubts over the bank's ability to
achieve the initially set inflation target
for 2008 of 10 to 11%. The Central Bank in
a statement issued on inflation attributed
the upward movement in inflation since mid
2007, to the removal of the fuel subsidy and
the increase in prices of imported food
items. However, it was also said that the
pass-through of international price
increases would have a favourable impact on
containing inflation on the long term.
The government has always blamed the high
oil prices for the country's record high
inflation level and has said it was a global
problem as huge amounts of money were being
spent on oil imports, resulting in 'imported
inflation.'
However, economists have argued that
although global oil prices do have an impact
on inflation, it was not as much as the
government has made it out to be and have
blamed bad financial management and the
printing of money to meet rising government
expenditure as key factors contributing to
the rising inflation.
They say that global prices do not have an
impact on the level of inflation to the
extent the government makes it out to be.
Other countries in the South Asian region,
which are also affected by the same high
global prices, have managed to maintain
single digit levels of inflation.
Low inflation elsewhere
Sri Lanka's
closest neighbour India has recorded 3%
inflation with many other countries in the
Asian region reflecting a similar rate. Sri
Lanka has the dubious distinction of
recording one of the highest inflation rates
in Asia.
Consumer Affairs Minister Bandula
Gunewardena has said that other countries in
the region have recorded low levels of
inflation as they were not involved in
spending heavily on social welfare measures,
fighting a war, and paying salaries of an
'excessive public sector.'
All these have resulted in the constant
widening of the budget deficit pushing the
government to borrow money, he asserted.
According to economists, until the
government stops printing money, the country
would continue to record high inflation.
Analysts have pointed out that the
government had printed Rs. 45 billion from
May to September last year and was borrowing
vast amounts from the state banks to fund
its survival, leading to high inflation.
Central Bank Governor Ajith Nivard Cabraal
outlining the bank's road map for this year
in January said that the conduct of a
successful monetary policy, while facing a
high budget deficit was a challenging task.
He said that borrowings by the government
from the banking system to finance the
budget deficit made it difficult for the
Central Bank to maintain monetary expansion
along a pre-determined path.
Optimistic target
However, he also said that in the medium to
long term, the Central Bank would conduct
monetary policy action with a goal to reduce
inflation to a level of around 5%, a figure
scoffed at by economists.
The government, which has run 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, in a desperate move even
resorted to scrap the offending consumer
price indices itself.
Unable to counter the rising level of
inflation, the government decided to
'reconstitute' consumer price indexes that
recorded high figures.
The Sri Lanka Consumer Price Index (SLCPI)
recorded a staggering 26.2% rate of
inflation for November 2007, which is the
highest to be recorded since the inception
of the index.
According to the Census and Statistics
Department, having 'too many indexes was a
problem' as 'people have now begun to
compare statistics.'
"This has all become political. The indexes
are now being used for political purposes.
We are not involved in politics," an
official at the department told The Sunday
Leader. With this excuse the department has
now decided not to release the SLCPI.
Interestingly, the decision to stop
releasing the SLCPI came at a time it
recorded the highest ever rate of inflation.
The department has justified the move by
saying that the SLCPI was a 'trial index'
initially brought about to replace the CCPI.
The department is also in the process of
scrapping the CCPI with the introduction of
a new index - CCPI (N). According to the
department, the CCPI(N) depicted inflation
more accurately than the existing index, the
CCPI.
Be that as it may, the country's economic
woes keep further compounding with the
government showing no interest in addressing
the core issues other than resorting to
cosmetic surgery to pacify a burdened
people.
It is in this light, that economists have
called on the government to overhaul its
monetary framework in order to combat the
rising level of inflation among other
economic issues.
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Country loses 7% of GDP due to war and
trade union action
The government last week stated that
trade union action has led to a loss of
4% of the country's GDP.
Addressing the media last week Public
Administration and Home Affairs Minister
Karu Jayasuriya had said that obtaining
this lost GDP would be beneficial to the
country as well as the ongoing conflict
as a considerable amount is allocated on
defence expenditure.
However, trade unions have now warned of
severe action if the government failed
to address their demands.
Of late the JVP led trade unions have
been the most vociferous critics of the
government and have warned of trade
union action. Although, the JVP led
trade unions have been threatening to
resort to union action it has not
resorted to any such activity as yet.
Analysts meanwhile have pointed out that
the war costs the country 3% GDP.
Therefore, the real threat to the
economy is the high defence expenditure
the country now has to incur, they point
out.
The 2008 budget saw the highest
allocation made for defence in the
country's history, and analysts have
already warned that the actual defence
expenditure for next year would be far
greater than that printed in black and
white.
With the government's decision to
withdraw from the CFA paving the way for
a full-blown war, it is only likely that
defence expenditure would skyrocket even
further. It has also been stated by
senior government ministers that in the
event the government was unable to meet
its expenses, the only option would be
to print money - a move that would push
inflation over the roof.
Analysts say that with the addition of
other indirect costs, defence
expenditure for next year would
definitely be far greater than that
presented by President Mahinda Rajapakse
in the 2008 budget. It has been
predicted that defence expenditure could
rise up to Rs. 200 billion in 2008.
Since 2006, there has been a difference
amounting to billions with regard to the
funds allocated for defence and actual
expenditure.
In 2006, the government estimated to
spend a sum of Rs. 96 billion on defence
when the actual amount spent amounted to
Rs.111 billion.
In 2007, the initial estimate of Rs.
139 billion for defence funding
increased to Rs. 156 billion by end
November.
In 2008, the government expects to spend
a sum of Rs. 166 billion, which is Rs.
456 million (US$ 4 million) per day on
defence and public security - a huge
amount for a lower middle-income
country.
However, going by earlier defence
spending since 2006, the government
estimation of Rs. 166 billion for next
year would see an increase of many more
billions of rupees.
According to analysts, if the additional
costs such as pensions and disability
expenditure and instalment payments for
military procurements are also taken
into consideration, defence expenditure
for 2008 will exceed Rs. 200 billion.
The figure of Rs. 456 million
expenditure for defence per day would
under such a scenario be an economical
figure, as most military procurements
are made on a 'pay later' basis and
therefore the payments are spread over a
number of years into the future and
with accrued interest.
Economists say the compounded cost of
defence expenditure would therefore be
significantly greater than that shown in
the annual budget outlays, which applies
to other public expenditure as well. |
