Tuesday 8 April 2008

Sri Lanka Economy

EW08-1An armoured vehicle from the recently launched Mechanised Infantry Division of the Sri Lanka Army participates in a demonstration in Nakarkovil in Jaffna
peninsula, about 396 km (246 miles) north of Colombo, April 6, 2008. Sri Lanka air force jets bombed rebel positions in the far north on Monday while troops killed
49 Tamil Tiger rebels in fresh fighting, the military said. Picture taken April 6, 2008.REUTERS/Buddhika Weerasinghe (SRI LANKA)

Inflation hits a record 28%
By Mandana Ismail Abeywickrema
The Census and Statistics Department has stated that the Colombo Consumer Price Index (N) hit 23.8% in March, while the previous CCPI index recorded a
28.1% rate of inflation.
The Cost of Living Index for March was posted at 6441.7 points, which is an increase of 96.3 index points from February. The index was posted at 6345.4 points in
February. This is an increase of Rs. 194.74 in the expenditure value of the market basket when compared to the previous month.
The CCPI-N, which has dropped an entire expenditure group, yet showed a price increase of 1.7% in March.
The CCPI-N has increased to 23.8% in March compared to 21.6% in February, which is also the highest level to be recorded by the new index.
Ironically, the former CCPI has shown a lower increase in consumer prices in March. The CCPI has seen a 1.5% increase in March recording a 28.1% rate of
inflation from 24% in February.
Meanwhile, Fitch Ratings when downgrading Sri Lanka's rating outlook last week has said that high and volatile inflation increases the risk of macroeconomic
instability and discourages investment.
The government however has palmed the blame of the high inflation level squarely on high global oil prices and food prices.
A special study paper prepared by the IMF titled Pass-through Of External Shocks To Inflation In Sri Lanka, states that most of the country's inflation was not
'imported' or caused by oil.
According to the study, "Since late 2006, Sri Lanka's inflation has increased sharply relative to other economies in the region," and "the sharp increase in inflation
compared to other countries in Asia points out that increases in oil prices in the recent past (a common shock to most economies in the region) cannot explain most of
the increase in inflation in Sri Lanka."
The study has shown that oil prices explained only 6% of the inflation in 2006 and 2007 when measured by the CCPI(N). "With external shocks not playing a major
role in influencing domestic inflation, domestic policies can be very important in containing inflation," the study paper has further stated.
"External shocks appear to explain about 25 percent of the variation in consumer prices and about 32 percent of the variation in core inflation, suggesting that other
shocks that are likely to be more domestic in nature explain most of the variation in inflation in Sri Lanka."
To add to the economic woes of the country, the Central Bank has predicted high inflation for the first half of this year, saying inflation would be between 16 and
20%.
The Central Bank prediction in February has cast serious doubts over the bank's ability to achieve the initially set inflation target for 2008 of 10 to 11%.
Economy: another blow with rating downgrade
Nivard Cabraal and Anura Kumara By Mandana Ismail Abeywickrema
The country's economy is in peril due to the lack of direction and economic mismanagement by the government.
Amidst a soaring level of inflation that has threatened the sustainability of the economy, the country's credit rating (which was anyway on junk bond status) was
downgraded by Fitch Ratings last week. The downgrading comes at a time when the government is in the process of the securing a second foreign commercial loan of
US$ 300 million.
Fitch Ratings when downgrading Sri Lanka's rating outlook has said that high and volatile inflation increases the risk of macroeconomic instability and discourages
investment, with negative medium-term growth implications and has stressed that the realisation of a 'peace dividend' would be credit positive.
Greater borrowing
Fitch has also said that increases in inflation and domestic interest rates have led to greater foreign-currency borrowing by the government, along with reductions in
the duration of domestic-currency borrowing as investors seek to protect the real value of their investments.
"The rating downgrade of Sri Lanka reflects the increased vulnerability of sovereign creditworthiness to adverse shocks associated with rising inflation, persistently
large fiscal deficits and worsened terms of trade due to soaring oil prices in the context of greater government recourse to commercial and market-based financing,"
Head of Asia Sovereign Ratings, James McCormack has said.
According to Fitch, the country's ratings remain underpinned by its impeccable debt service record, a business environment that compares favourably to regional and
rating peers and a moderate external debt service burden. These strong credit fundamentals provide policy makers ample time and opportunity to implement structural
and fiscal reforms that could materially strengthen public finances, and support a 'stable outlook' on Sri Lanka's rating.
Food and oil price shocks have contributed to a sharp acceleration in consumer price inflation - to 24% year-on-year in February 2008.
Repayments
Repayments of foreign-currency public debt will amount to US$ 1.5 billion in 2008, US$ 600 million of which is domestic debt, equivalent to about 23% of domestic
amortisation payments. Despite the tightening of monetary policy, Fitch expects inflation to remain relatively high, and the agency believes it will prove challenging to
reduce inflation significantly without inducing a sharp slowdown in economic growth that would expose weaknesses in public finances.
Nonetheless, Fitch has stated that a lasting and secure settlement of the conflict is unlikely to be realised in the near term, and the risk of disruptive terrorist attacks,
despite the military gains made against the LTTE, cannot be wholly discounted. "Moreover, with the management of the conflict being the overriding priority of the
President and government, fiscal reforms and other economic policy issues are accorded less attention," the statement said.
The Central Bank in response to the Fitch downgrading issued a statement last Friday saying the downward revision of the rating is based on the agency's pessimistic
views on the security situation, inflation and foreign currency borrowings. The Central Bank authorities believe a downgrade in the rating is not in line with the recent
improvements in the country's macroeconomic fundamentals and its future outlook.
However, Fitch Rating's emphasis on the macroeconomic risks faced by the country due to the high level of inflation comes at a time when the country's consumer
prices have hit an all time high.
Cost of living
According to the Census and Statistics Department, the Colombo Consumer Price Index (N) hit 23.8% in March, while the previous CCPI index recorded a 28.1%
rate of inflation.
The Cost of Living Index for March was posted at 6441.7 index points, which is an increase of 96.3 index points from the February figure. The index was posted at
6345.4 points in February. This is an increase of Rs. 194.74 in the expenditure value of the market basket when compared to the previous month.
The CCPI-N, which has dropped an entire expenditure group, yet showed a price increase of 1.7% in March.
The CCPI-N has increased to 23.8% in March compared to 21.6% in February, which is also the highest level to be recorded by the new index.
Ironically, the former CCPI has shown a lower increase in consumer prices in March. The CCPI has seen a 1.5% increase in March recording a 28.1% level of
inflation from 24% in February.
The government however has palmed the blame of the high inflation rate squarely on the high global oil prices and food prices.
A special study paper prepared by the IMF titled Pass-Through Of External Shocks To Inflation In Sri Lanka, states that most of the country's inflation was not
'imported' or caused by oil.
Sharp increase
According to the study, "Since late 2006, Sri Lanka's inflation has increased sharply relative to other economies in the region," and "the sharp increase in inflation
compared to other countries in Asia points out that increases in oil prices in the recent past (a common shock to most economies in the region) cannot explain most of
the increase in inflation in Sri Lanka."
The study has shown that oil prices explained only 6% of the inflation in 2006 and 2007 when measured by the CCPI (N).
"With external shocks not playing a major role in influencing domestic inflation, domestic policies can be very important in containing inflation," the study paper has
further stated.
"External shocks appear to explain about 25 percent of the variation in consumer prices and about 32 percent of the variation in core inflation, suggesting that other
shocks that are likely more domestic in nature explain most of the variation in inflation in Sri Lanka."
To add to the economic woes of the government, the Central Bank has predicted high inflation for the first half of this year - saying inflation would be between 16 and
20%.
The Central Bank's prediction in February 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 has 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 future
inflation.
Likely to remain
"This one time increase will be gradually dissipated over the next few months. Hence, until it is fully dissipated, inflation is likely to remain around 16 to 20 per cent
during the first half of 2008," the Central Bank said.
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.
Be that as it may, the opposition has now taken to the streets against the rising cost of living and the mismanagement of the economy on the whole.
Coalition partner of the UPFA, the JVP, which helped the government pass the budget last December has now done a u-turn and is highly critical of the government
and its handling of the economy.
The Marxists have said that the annual report of the Census and Statistics Department has revealed the economic crisis confronted by the country.
Disparities
JVP Politburo Member, Parliamentarian Anura Kumara Dissanayake was quoted in a news website stating, "Though it doesn't reflect the true nature of the crisis,
even when statistical gimmicks have been used to conceal facts the statistics presented by the report indicate that the social, economic and health sectors were
heading towards a catastrophe and there are blatant disparities in distribution of revenue and income."
Dissanayake had also pointed out that the ratio of those who live below the poverty line in Colombo and adjacent areas was 4% while in other districts such as
Nuwara Eliya it has increased to 33%. "This ratio, which was 21% at Nuwara Eliya in 2002, has risen by 11% in five years. Hence, 11% of the population has fallen
below the poverty line within years," he has said.
According to Dissanayake, the reason for the country's economic crisis was the wrong economic strategies followed by successive governments..
Special request for Indian rice
The rice shortage faced by the country is expected to take a turn for the worse with the Indian government deciding last Monday night to stop all rice exports.
Sri Lanka had already forwarded a request to the Indian government to import 100,000mt tonnes of rice to the island.
The Sri Lankan government extended the request to import rice from India in order to address the present rice shortage in the market as well as to control rice prices,
which had increased to over Rs. 80 per kilo.
Trade and Consumer Affairs Minister Bandula Gunewardena said the only countries Sri Lanka could import rice from were India, Pakistan and Burma as most other
countries in the region had stopped rice exports due to the existing global food shortage.
He said that with India deciding to stop all rice exports, the government will now have to make a special request from the Indian government to give special
consideration to the request made by Sri Lanka.
"The Sri Lanka government will have to speak on a government to government level now. We will also have to hold such discussions with other countries to import
rice stocks to Sri Lanka," he said.
Gunewardena said that the rice imports were aimed at controlling the rice prices in the local market and added that there was no fear of a rice shortage in the
immediate future.
He said that the government had already taken steps to plant seed paddy that would bear a crop within two months.
"Seed paddy that would bear a crop in two months have been cultivated in Yapahuva. We will have that harvest and also, the rest of the Maha harvest that was not
destroyed by the floods would also reach the market, so there would not be a rice shortage," he said.
However, Gunawardena said that even though rice kept flowing into the local market, he could not predict a price for rice in the market, as it was driven by demand.
"No one can predict the price of rice in the market," he said.

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