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Economic policy still a knee-jerk reaction

[Lakbima News, Saturday, 7 April 2012 19:47 No Comment]

Rajapaksa administrationWith the abyss of a collapsing external economy staring it in the face, the government finally stopped encouraging profligacy in vehicle imports and raised duties. Nothing, other than automobiles, seem to have been touched, hence though welcome for other reasons, the impact on the trade deficit will be limited; too little, too late, a knee-jerk reaction. The plunge in the exchange rate will do more than the new vehicle duties to check sinking external accounts. Raising export income is the only sustainable long term solution. In the meantime the Treasury has also not missed the opportunity to sneak in another blow at the working class, not to mention my friends and neighbours, by raising the tax on arrack by another Rs50.

Devaluation and higher vehicle duties are far from adequate to rescue Lanka’s external finances. Some steps that must be taken before I come to my main point are as follows. Terminate white elephant mega-projects and cancel those not yet started; practice transparency so that informed public opinion can influence economic decisions; and thirdly, defence spending must be curtailed. I will not touch on the Tamil issue, good governance, or political links to the narcotics mafia, allegedly from top to bottom, as I wish to keep within economic parametres.

The Hambantota airport, in my view, is an astronomical waste of resources, not even a bat will land there voluntarily; it should be scaled back to a modest domestic terminal. What a frittering away of funds, first in capital, then to maintain aviation facilities and air-traffic control at international standards, and then to run customs and immigration offices. International carriers won’t go there unless arms are twisted; some may then pull out of Lanka altogether!

Political power runs wild

I have been adamant that the Hambantota port should have been no more than a bunkering point to cash in a few quick bucks. Having blasted obstinate rocks and opened a large harbour, a customerless government is forcing the unwilling (automobile imports, which will soon dry up thanks to new duties) to shift and incur costs. This is typical when political power runs wild and cowardly officials dare not tell big shots that they are talking through their hats.

The proposed tower to top all towers on McCallum Road is insane, and the lotus shaped stadium opposite St. Bridgette’s Convent can find no thespians. The next generation will be saddled with repaying harbour, airport, heavenly tower and floral dancehall project debts. Factotums dare not tell the president his elephants are as white as snow? Proliferation of sycophants is a feature of authoritarianisms.

Some infrastructure projects are clearly in the public interest; for example much of the road and highway development is long overdue. I don’t know the truth of the mister-ten percent gossip, but highway and road improvements are essential and to my engineers naked eye the job is being done well. I will say the same for projects around Colombo to beautify the city.

Transparency

There is no transparency in commitments and terms in respect of a plethora of Chinese financed projects. Again for reasons of opacity, little was known of the petroleum no-brainer hedge till the s**t hit the ceiling. Let me give an example of the damage lack of transparency does. A website reported and e-traffic is going viral about wrongdoing in the award of the Norochcholi coal power plant. It is being alleged that the cost of the plant went up from $300 million to $450 million because powerful parties where on the take. It is also being alleged that a shady Chinese supplier was allowed to dump a substandard unit, rejected by another utility, on the CEB.

Let me say straightaway that the allegations may be entirely groundless, in which case nobody but those in authority are to blame for curtailing transparency and fertilizing the soil for seeds of doubt to germinate. Let me also say that I think, and have been saying for 15 years, that two or three coal fired power stations are essential till the feasibility of small nuclear or other options are better known; so I am not anti some coal power, at this stage of development. I promised not to talk of good governance today; what I am drawing attention to is the possible economic costs of a lack of transparency.

At the height of the war the armed forces, the police and security-related expenses added up to over Rs250 billion annually. The war is over and there is not a tiger in sight from here to Bengal’s Sundeban mangroves. So the Defence Ministry conjectures tigers behind every bush, more to justify repression than collect the bucks, but the bucks are big. Ok, granted, you can’t exploit 200 thousand young fellows to fight a war and then throw them out like chafe after they have served the ruler’s purpose. They will be pushed to crime unless found gainful employment. Yes, they are being used in construction projects; fine, then take away the guns, place them in labour brigades in other institutions, and snap the dangerous potential for a power grab that regimes with large armies cannot resist. Don’t forget, we live in volatile times.

The big question

This business of raising duties and floating the exchange rate is just pussyfooting with the main issue. Last week in this column I contrasted NM’s stewardship of the economy to generate savings and mobilize resources to lay the foundations for growth and development with domestic practicalities. OK, the world has changed in the last 40 years and more flexible exchange rates, greater international trade, and a bigger role for foreign investments are timely. Globalization has made the world more interconnected and foreign investment and foreign collaboration are more welcome than in the 1970s.

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