by K. Mylvaganam, September 20, 2004
sangam.org/articles/view2/554.html
There is no doubt that the economic situation of the Government of Sri Lanka (GOSL) has never been as low as it is now. To add fuel to the fire, the soaring of petroleum prices is affecting the Sri Lankan economy very hard. The price of crude oil reached an all time high of £47.50 yesterday (21.08.04).
There are two main reasons for the rise in price. One is the increase in consumption of fuel by India and China, both of which contain almost 50% of the world population. According to the statistics available by both these governments China has increased its refining of crude oil by 40% and India by 17.23% during the last twelve months. The other reason for the price hike is the unwanted and uncalled for war in Iraq. The bursting of the oil supply pipes by the rebels and the threat to blow up more pipes have been conducive largely to this end. America also is now compelled to restrict its import crude oil for its consumption and the American economy is growing. There is a proposal for it to pump more oil from Alaska. It may be interesting for the reader to note for comparative reasons that America, which constitutes 4% of the world population consumes 25% of the world production of fuel.
America being a very rich country can afford to bear this increase in price, but the question is can Sri Lanka take up this burden without dire consequences. It is already suffering the effects of the war that has been going on for over two decades. It had only around 11,000 military personal when the war started in the early seventies. Now the figure has shot over 125,000, not including the reserve brigades. The heavy losses incurred when it lost the Mullaitivu, Mankulam and the Elephant Pass camps and the enormous cost of the planes destroyed at the Katunayake airport have already depleted its economy drastically. The mushrooming general elections have had their toll as well.
The peace agreement did throw some hope to build back its economy. But since the latest election that took place in April this year things have turned to the worst. Foreign investment is down, as investors are reluctant to bring their capital into the country fearing the possibility of the eruption of the war. Some of the foreign investors have started to pull out. The newly elected government does not have an absolute majority to conduct its business in parliament. It is prepared to tie a knot even with the devil to get the magical “operation 113” on its side in parliament. The Ceylon Workers Congress (CWC) was sitting on the fence and flashing both red and green lights to the government and has now joined the government “unconditionally,” but with 14 demands according to minister Sivalingam.. The Jathika Hela Urumaya is sending conditional signals and openly condemning the peace proposals. This fluid state of an unstable government does not give confidence to foreign investors. This is not at all favourable for the stock market, which has started to plunge downwards. The chamber of commerce and the industrialists are bringing pressure on the government to commence the peace talks.
The distrust existing between the government and the Liberation Tigers of Tamil Eelam (LTTE) has prevented them from coming together at the negotiating table. The proposals put forward by the LTTE for an Interim Self Governing Authority (ISGA,) though accepted totally by the UNP and by the SLFP to some extent, are totally rejected by the Jathika Vimukthy Peramuna (JVP), which is a constituent party in the present government. The JVP stalwarts have declared openly both in parliament and on several platforms that they would withdraw their support if the government were to commence talks with the LTTE on the basis of the ISGA.. Hence, the whole world knows that the peace talks are not going to take off under these present circumstances. Representatives from the European governments and European Union have met both the government, the opposition and the LTTE to try to persuade them to come to some agreement soon and commence talks early. I understand that they have hinted at a collaboration of the government with the opposition to make the peace talks a reality. This will sideline the JVP. Lots of lobbying is going on to achieve this end.
It is alleged that the JVP is secretly or indirectly involved in sabotage actions in the country. One rumor has it that it was the JVP who instigated the strike among the employees of the petroleum corporation. This caused havoc and panic all over the country resulting in the petrol stations having long queues and running short of stocks.
The donor countries have stated categorically that the promised $4.5 million would be released only if there were to be steady progress and positive signals in the peace talks. The GOSL is hoping to bridge the deficit in its proposed budget from the above said aid. Since this aid is not forthcoming, the GOSL is making attempts to get India to grant a loan in advance against the said sum. India seems to have agreed to this to some extent, but on the condition that the loan will be utilised to settle the dues outstanding by the GOSL to the Indian oil company operating in Sri Lanka.
The rupee is losing its value against the U.S. dollar and UK sterling, which are fetching now over Rs.104.00 and Rs.186.00 respectively. The rupee even shot up to Rs.192.00 a few weeks back. During the first half of 2004 the rupee depreciated vis-à-vis the US Dollar by 5.4%. The rupee continued to depreciate against other major currencies: 7% against UK Sterling, 2% against the Euro and 5% against the Indian rupee. The rate of inflation rose from 3.9% in June to 4.3%in July. By the end of the year inflation is expected to be around 6-7%.
The devaluation in the currency and the increase in oil prices are sky rocketing the prices of goods, including essential items. Petrol is sold now at Rs.62.00 per litre in Colombo and it is expected go up by another Rs.4.00 in the very near future. The private bus operators are demanding to increase their minimum rate by Re.1.00, i.e. from Rs.3.00 to 4.00. They have given the government an ultimatum to respond and have issued notice for an island-wide strike if their demand is not met. Several other general strikes are also round the corner.
It is reported that there was a drop in the income for the government by 11.41% during the first two months this year. This amounts to Rs.45.8 billion. Expenditure during the same period has gone up by 3.1%, which amounts to Rs.78.6 billion. The 75% salary increase that was promised to government servants will cost the government Rs.90 billion.
The World Bank and the International Monetary Fund (IMF) have warned about a big budget deficit. The budget is to be presented to the parliament in November. It is expected that the deficit may exceed 7.3% of the Gross National Product (GNP). The local representative of the World Bank, Mr.Peter Harold, has already warned the sad state of affairs in the Sri Lankan economy. It is feared the increase in the expenditure is going to force an increase in interest rates sooner or later. The president of the group of representatives from the IMF, Mr.Jahankeer Azeez, has warned that the IMF may freeze the lending if proper remedial measures are not taken soon.
Sri Lanka’s finance minister, Mr Sarath Amunugama, has accepted at a press conference that the government is facing a financial crisis. The foreign minister, Mr Kathirgamar, flew recently to Japan to plead with the Japanese government to make an advance payment on the proposed $4.5 billion aid pending the commencement of the peace talks. A similar request was made to the Indian government as well.
The severe drought experienced all over the island recently has compelled the government to import rice among other goods. The Iranamadu tank in Kilinochchi, for example, is almost dry and those who were late in sowing will be compelled to plough their crops under. The tea plantations are also affected by this drought and the workers are offered only three days work in a week. Hence a drop in the production of tea is anticipated.
The only way out for President Chandrika is to form some sort of alliance with the opposition and commence talks with the LTTE. This is why she has been wooing Mr.Ranil Wickremasinghe so vehemently in the recent past. Even though she is provoking the LTTE to shed their patience, yet she can ill afford to finance a war. Despite these provocations, the LTTE is still holding on to the peace agreement. How long will it last is the million dollar question that is floating in the air.