Indian pressure mounts as govt. faces economic tsunami

While Tamil Nadu continued to simmer over the ongoing military offensive in the Wanni which is increasing in intensity each passing day, the government weighed the pros and cons of a snap general election last week in the backdrop of an anticipated doomsday economic scenario.

That the government is finding it increasingly difficult to meet its day to day housekeeping commitments leave alone the loan repayments is an open secret in the market today and with the flight of capital also taking its toll, President Mahinda Rajapakse knows only too well the looming crisis can well bring his government down notwithstanding the war hype generated by sections of the media.

Expensive

The seriousness of the emerging crisis hit the President in the gut when he was told by the Central Bank that even the US$ 300 million which the government looked to raise was hard to come by due to the global credit crunch, and more so for a country having to fund an expensive and never-ending war.

Apart from the economic factors, the President was also alive to the ground realities on the war front including the high casualties and desertion rates, which meant the security forces would have to fight many more pitched battles before 'mission accomplished' can be claimed and that in turn meant a much greater financial commitment for the war effort.

So much so while TNA MPs in the parliamentary lobby claimed on Thursday, 700 soldiers were killed in Muhamalai that day, Minister Mahinda Yapa Abeywardena was to deny it to UNP MPs Ranjith Aluvihare and Sagala Ratnayaka, claiming the figure was more like 460.

The Minister was to also say that according to the Army Commander, Muhamalai cannot be taken without heavy losses and that to take Kilinochchi too, a high casualty rate will have to be suffered.

The President's case was not made any easier on the eastern front either with the LTTE once again infiltrating the region and destabilising it, further to the TMVP's internal battles aggravating an already tense situation.

Murder

This was made all the more evident by Chief Minister Chandrakanthan alias Pillayan broadly hinting that the murder of his Private Secretary cum TMVP Political Leader Ragu was an inside job and not a LTTE hit, contrary to claims made by Karuna.

Mind you, these developments came even as a Sinhala doctor was killed in Batticaloa and Karuna warning the government not to send any Sinhala doctors to rural areas in the east for security reasons, highlighting in the process, the so-called 'liberation' of the east was nothing more than a myth.

It is in this backdrop that the President thought it fit after consulting astrologers to dissolve parliament by December 9 and go for an early general election before the security situation free falls and the  economic tsunami hits Sri Lanka in all its ferocity by around March 2009 though not many in government were happy with an early poll.

The most concerned of course were the government's alliance partners, especially the UNP defectors who wanted a little more time to decide whether they will link up with the SLFP or go back to the grand old party, factors which were not lost on the President who wanted to take full advantage of the surprise factor.

Surprise

The thinking was that by springing a surprise the President will leave those undecided stranded, whilst at the same time giving the opposition very little time to get its act together, and this mood was reflected at a meeting Rajapakse had with confidants last Sunday.

There was however one factor niggling the President despite political prudence dictating a snap poll and that was advise tendered by one favoured astrologer, who said the upcoming period was extremely bad and that it would be ill advised to hold elections before end 2009.

The advise of this astrologer was that there can be setbacks on many a front from the date of dissolution to election day which will be devastating to both the government and the President given the planetary configurations and hence to err on the side of caution.

Top favourite

However, there were other astrologers, including top favourite Sumanadasa from Galle telling the President, the period commencing November 30, 2008 to November 30, 2009 is very bad for the UNP Leader Ranil Wickremesinghe and was therefore the opportune time for elections and it is in the face of this dilemma the President told Health Minister Nimal Siripala de Silva on Sunday to make a statement there will be no early elections, whilst of course keeping his options open on the issue till December 9. That is the day, given by Sumanadasa as a 'good day' for dissolution.

Indeed to cause confusion was the name of  the game with Sumanadasa allegedly telling UNP Badulla District MP Lakshman Seneviratne that the President's time was bad and was therefore advised not to go for early elections.

Good day

At the sametime, Sumanadasa was to tell UNP General Secretary Tissa Attanayake last week during a  wedding reception the President wanted a good day to dissolve parliament and that he recommended December 9 as the most opportune.

But the recurring nightmare for the President on the exact timing of dissolution was how soon the deteriorating economy will impact on the government politically with even the strategy of hedging on oil turning into a disaster, compelling the Central Bank to seriously consider passing the buck to the banking sector.

What such a course of action will do to the government internationally on raising loans apart from strengthening the UNP's case against HSBC over the earlier dollar loan which it has pledged not to honour were the least of President Rajapakse's concerns when the issue came up before Cabinet on Wednesday, November 19 given the precarious financial position the Treasury and the Central Bank found themselves in.

Commitment

With the Ceylon Petroleum Corporation having to come good on the payment due to the Standard Chartered Bank and other banks for the hedging operation last week, Petroleum Minister A.H.M. Fowzie put up a Cabinet Memorandum highlighting the seriousness of the issue where the ministers came to discuss how the state can renege on its commitment to the banks.

Before that of course there were preliminaries to be disposed of and that was the celebration of President Rajapakse's birthday, which fell the day before, November 17 and at hand were the Temple Trees staff with a large chocolate cake sprinkled with nuts.

And no sooner the cake was brought in amidst cheers, the Ministers started singing 'Happy Birthday Dear President' while a mildly amused Rajapakse invited 'the oldest member in the Cabinet,' Minister D.M. Jayaratne to join him in cutting the cake.

Having got that out of the way, the ministers settled for the business at hand and it was then that Fowzie took up his Cabinet Memorandum and started explaining the precarious position the CPC found itself in due to the oil hedging operation.

Agenda

Interestingly, Education Minister Susil Premajayanth who had earlier discussed the day's agenda with the President came fully prepared, newspaper cuttings et al, to not only take to task CPC Chairman Asantha De Mel but also the Standard Chartered Bank over the hedging operation and the precarious position the government has been placed in as a consequence.

Basically, what the government had committed to with the banks through the CPC and the Central Bank was that if the price of oil goes over, say, US$140 per barrel, then the corporation can continue to buy 100,000 barrels of oil per month at US$140 for three months with the banks providing the hedge taking the loss.

Loss

Therefore if a barrel of oil for example went up to $145, then the hedging bank would take a loss of $5 per barrel for 300,000 barrels.

At the same time, the government also committed to buy 200,000 barrels of oil per month at US $100 per barrel for one whole year if the price went below US$100. Therefore if the price of a barrel of oil drops to US$55, it still has to pay at US $100 per barrel for 200,000 barrels every month.

That necessarily means taking a loss of US$45 per barrel and with the commitment being for 200,000 barrels every month for a whole year, a loss of US$9 million every month.

That in rough terms was the government's commitment with the estimated loss expected to be around US$300 million.

In essence the government had negotiated a very bad deal with the banks and with payments due every month due to the price of a barrel of oil falling well below US$ 100, the state was well and truly up the creek without a paddle and that was the issue before Cabinet.

Crisis

A criminal lawyer by training, Premajayanth having thus listened to Fowzie on the crisis situation started on his brief by opening fire at the CPC Chairman over comments he had made to The Sunday Times financial section last week on the hedging operation.

With newspaper in hand, the Education Minister said De Mel in an interview had accused the ministers of not knowing anything about hedging and attempted to exculpate himself from all blame.

Said Premajayanth - "De Mel has also said the Cabinet had taken the decision to go for hedging and that it was thrust upon him. De Mel had also said if he had any say in the matter, he would never have taken that option. He had no business to say that. What he has done is point the finger at the entire Cabinet. Therefore he must be called upon to clarify his position."

Interjected Fowzie - "I too saw this article and took it up with the Chairman. He told me he did not say what was attributed to him."

Shot back Premajayanth - "Then he must send a clarification to the newspaper and clear the position."

Coming into support the Chairman at this point was President Rajapakse who saw in the Standard Chartered Bank the real culprit in the hedging disaster.

Responsibility

Said the President - "I was there when the Chairman and the Central Bank had a discussion on the issue. In my opinion the responsibility for the loss should be taken by Standard Chartered Bank and not anyone else. They should have advised us properly."

What the President did not say was the Central Bank, its Governor Nivard Cabraal and the CPC Chairman had failed to do their homework before hedging at the rates they did without looking at an option, costing the taxpayer hundreds of millions of dollars at a time of great financial crisis.

In fact, De Mel was questioned about not being protected on the downside at a time the price of oil was around US$80 and dropping by Harsha De Silva on his MTV talk show not too long ago but the CPC Chairman was defiant.

At that time De Mel was to say the Cabinet only wanted him to protect the upside but that he can protect the downside and buy an option by going to Cabinet and seeking approval, which he added he won't do because he did not wish to be a speculator.

Scapegoat

The upshot of it is the country having to pay the banks millions of dollars due to the collective bungling of the Cabinet, Central Bank and the CPC, with the banks looked at as a convenient scapegoat.

Be that as it may, with the President pinning the blame on the banks for raking in the big bucks over the deal, Ministers Rohitha Bogollagama and Premajayanth joined the chorus wanting the responsibility for the loss pinned on the banks.

They made a lot of money on the hedging, the Ministers said.

Not stopping at that, Minister Premjayanth who was armed with case law to boot referred to a judgment in the Orange County case given in the USA and said no bank should be allowed to make unconscionable profits.

Added Premajayanth - "What they have made is way beyond reasonable profits. The banks had responsibility to keep the customer informed of the risks involved. The banks neglected in that duty. We must send the contract to the Attorney General and see what we can do to get the banks to take the responsibility."

Having listened to the ministers, the President said Fowzie's Cabinet Paper can be considered again at next week's meeting and thereafter went on to pass on some advise to the CPC Chairman.

Said the President - "Asantha De Mel is a clever guy. He has come from the private sector. The problem is he has antagonised everyone at the CPC. He is very authoritative. It is good to have someone like that but when he is in trouble, no one comes to his rescue. Public relations is also important. He must understand that. Please tell him that."

Reserves

The bottomline however is that thanks to the cleverness of guys like De Mel and Cabraal the government will have to cough out the big bucks for bad judgement at a time its foreign exchange reserves are plummeting with little prospect of attracting further loans, a case bound to get worse if the state reneges on the hedging deal.

Realising of course the dangers of reneging on the payments due to the banks, by Thursday, the government was appealing to the banks for fresh terms backdated to November 1, stating, they will pay at US$75 per barrel as opposed to the US $ 100. With oil selling at less than US$50 per barrel, the government will still take a hit of US$25 per barrel.

And while the President was wrestling with the economic nightmares confronting the country, Tamil Nadu dialled up the heat over the ongoing military operations in the Wanni, calling for a harthal in the state on Tuesday, November 25.

More significant is the BJP, that is tipped to emerge as the single largest party at the next general election due in April, entering the fray with a promise to resolve the Sri Lankan issue within six months.

Given the closeness of the race anticipated in India, the Tamil Nadu seats become crucial at the general election and the BJP obviously was planning to make the Sri Lankan crisis an election issue compelling other parties including the Congress to do likewise and this was evident even at talks UNP Leader Ranil Wickremesinghe had in New Delhi last week.

Relief

A worried External Affairs Minister Pranab Mukherjee was to tell the UNP Leader, India was interested in not only ensuring a political settlement but also creating effective space for humanitarian relief urgently.

In fact, the Indian Prime Minister Manmohan Singh had at his meeting with President Rajapakse the previous week stressed the same issues and urged him to talk with at least the TNA and arrive at a political solution.

This Indian call was conveyed by the President on his return to both the JHU and Wimal Weerawansa prompting the latter to call for the immediate dissolution of parliament to oust the 'Tiger proxies' from the House.

That the government was running out of options on the Indian front became more evident with it having to concede distribution of food aid to Tamil civilians via  the ICRC, which also saw some embarrassing moments at Thursday's press conference after the Indian High Commissioner Alok Prasad, Foreign Secretary Palitha Kohona, Essential Services Commissioner S.B. Divaratne and ICRC Chief Paul Castella said cheese to the cameras.

Fireworks

The fireworks of course came at the time of the press conference with Divaratne attempting a bit of Goebbels by stating as a sovereign nation, the government cannot be bypassed in the distribution of aid, a statement Castella took issue with.

Mind, you, this issue had already come up in India with the External Affairs Ministry informing Tamil Nadu Chief Minister M. Karunanidhi that the food aid would be sent directly to the Indian High Commission in Colombo and the distribution done through the ICRC and the UN agencies.

It is with the stage thus set that Divaratne attempted  his little number at the press conference to save the government from an embarrassing situation albeit making a bad case worse.

Overlook

Said Divaratne - "Any food, relief material that goes to these two districts, the government agents are the agents of the government. So it will be  definitely, it will go to the displaced people through the GAs. They are part and parcel of the whole distribution. ICRC can't go directly distribute to the families without the involvement of the GAs. That is the government's stand and that is how we have agreed upon. Because the delivery mechanism. They are living in those areas. You can't overlook the GAs. It will be distributed with the support of the GAs."

Not accepting this position, the ICRC Chief Castella retorted:

"Let me correct these points. We are used to work in Sri Lanka, thanks to the cooperation of the authorities. But it is us who are distributing and that's why we have teams even in the north to identify needs that exist. It is in collaboration with the GAs. But it is us who select who gets what. Because we are responsible for the distribution as well. So this is a close collaboration but the operation is carried out from the beginning to the end by the ICRC."

One point

Not to be outdone, Divaratne fired back thus: "We have to be very clear of one point. This is Sri Lanka and Kilinochchi and Mulaithivu is not out of Sri Lanka. No foreign organisation can directly go and give any food to anybody living in those two areas. How can you bypass the government mechanism?"

Castella was to respond with equally tough words and said thus:

"This supply, this humanitarian supply will be distributed by the ICRC in the Wanni based on the needs we have identified by ourselves. Now of course we share this information with the government agents, with authorities because we want to  be transparent in the work we do here. But we think it is very important that humanitarian aid is guided by needs assessments and not by political principals. That's why we want to ensure that the correct people get the correct things."

On that note, all pretensions of the food aid being distributed by the government was laid to rest with the ground reality best captured in a telephone conversation DUA Provincial Council Member A.J.M. Muzammil had with Indian High Commissioner Alok Prasad.

Speaking to the High Commissioner who was at a dinner, Muzammil said, "Congratulations, you have done better than Dixit," a comment that saw the jovial Prasad chuckling.

Muzammil was of course saying that during Dixit's time, India had to forcibly airdrop parippu whereas under Prasad, New Delhi managed to do it in style by delivering the food aid directly to Colombo's Mission bypassing the government.

That just about summed up the plight of the Rajapakse government, with the only hope now being to militarily defeat the LTTE before the next election.

But that, going by the pitched battles in the Wanni appears to be a long shot, nay, a very long shot.