Rising costs: Perception or reality

Whether the government likes it or not – the perception and to many, the reality-, the economy is running downhill.

The President and his closest financial and economic advisors – Dr P.B. Jayasundera and Ajith Nivard Cabraal - may proclaim on any tree top that the situation is not as bad as it looks, but their pleas are bound to fall on deaf ears.

Talk to any middle class income wage earner and working class workers, as joint polls by the Business Times and research agency, the Research Consultancy Bureau (RCB) have repeatedly shown, the constant plea is for the cost of living to be tackled and reduced.

But how do you do this in a world where fuel prices are rising and Ministers like Bandula Gunawardene assert and go further as to debate claims that a family of three can live, even frugally, on Rs. 7,500 income?

The recent policy measures introduced by both the government and the Central Bank have led to a lot of concern and heartburn.

Increased taxes on motor vehicles and the withdrawal of intervention in the foreign exchange markets led to a lot of uncertainty, which the authorities are dismissing as a knee-jerk reaction.

The choice of owing a car is becoming a distant dream to middle and low income wage earners.

The increased taxes are impacting on the fastgrowing tourism sector, which the government is itself promoting. This makes today’s policy measures meaningless in terms of promoting sectors like tourism on one side, and on the other hand imposing high taxes that restricts growth.

Another area of concern is the credit squeeze and rising interest rates which is being felt mostly by the small and medium scale sector, responsible for the bulk of economic activity and stimulating local industry.

For, how does one then reconcile tightening credit which curbs small industry growth, with statements by none other than the President and his brother Basil on the need to reduce dependence on imports and be self sufficient, by increasing production and expanding local industry?

While a homespun economy is nice in words, it’s difficult in deed. The cost of production of any local product including tea is always higher than other economies due to dependency on foreign fuel, fertilizer and other inputs and thus uneconomical. Rice farming as a profitable crop has failed.

More than a decade ago, then Trade Minister Kingsley Wickremaratne allowed cheap imports of eggs from India for Christmas due to a shortage, at less than half the price of local eggs. Consumers relished the idea but local producers – a key vote base - objected and imports were stopped. Local producers are struggling against economies like India and China that have a huge advantage in terms of economies of scale.

It’s far more efficient and economically viable to import what Sri Lanka cannot produce cheaply and export high, value products and crops, based on sound, policy initiatives that are not changed in an adhoc way (example -the recent expropriation laws).

There must be a balance between looking after the interests of both the producer and the consumer. Ultimately it’s the yield (value) and not quantities that should matter in terms of exports, a lesson the government should learn in trying to target mass market tourists rather than aim for niche market, high-spenders.

This Avurudu is not going to be the best of years for most celebrants as costs rise. Finance companies say rising interest rates will hurt mostly those who have leased 3-wheelers and other vehicles to generate an income.

The plan to reduce the age of used vehicle imports to one year, a promise made last year, would affect the future of a million people employed in this industry. Eventually only new vehicle imports will be permitted.

Higher taxes will reduce revenue, a worry expressed by the Treasury which has reported lower than targeted revenue last year.

Further tax increases on other non-essentials are likely in coming months as the government grapples with a yawning trade deficit which was $1 billion in January alone, and $10 billion for the whole of 2011.

The Central Bank says the recent measures would help firm foreign exchange reserves with the reduction in intervention. Separately the Ministry of Industry and Commerce is quoting a businesswoman from China as saying that they plan to invest a gigantic total of $50 billion in a 10-5 year period to set up a trade port in Hambantota. Everything is happening in Chinese-led Hambantota and the Indians must be worried too.

Whether this huge inflow will materialize, almost the size of the country’s GDP and far more than the $500 million to an estimated $2 billion average from foreign investment inflows, is anybody’s guess.

Sri Lanka’s local industry, built on costly power and other, high costs, is struggling against cheap Chinese and Indian goods.

The country’s local industry was ruined under the inward policies of the Sirima Bandaranaike 1970-77 government when people were compelled to depend on local, poor quality goods. Because of the demand and foreign exchange constraints to secure good technology or know-how, the quality of local goods was shoddy.

In 1977 the free-market UNP government opened the floodgates to foreign goods, giving consumers a good deal and ending the shoddy-goods era but in the process killing the local industry. Despite many efforts over many years to lift the local industry, it is far from being the ideal on the lines that government leaders profess can lead to self -sufficiency.

In recent weeks, there has been a lot of loose talk by various government politicians and officials, contradictory statements and a peculiar response from government spokespersons: “They (ministers) are expressing their own views and not that of the government.” Using the same yardstick, is the President and his brother Basil also expressing their “own views and not that of the government”, in pursuing a less-import, dependent economy?

Given the plethora of statements, often contradictory by government ministers and key officials, state policy is increasingly becoming unclear and confusing to the people.