With economy in crisis the ‘feel good party’ is over, claims Harsha

• Peradeniya Uni's Dr. Perera says exchange volatility is temporary and acceptable

• IMF's Mathai says no crisis but stability measures taken

By Cheranka Mendis

UNP MP Dr. Harsha de Silva yesterday made a compelling case that the ‘feel good’ party that the President Mahinda Rajapaksa Government tried to propagate among the people post-war was over, warning that the economy was in crisis.

Speaking at the Transparency International Sri Lanka (TISL) public seminar titled ‘Rupee Crisis’ at the OPA Auditorium yesterday, he said that following the end of the war the Government was keen to make people feel the dividends of peace.

He opined that instead of building a strong national economy and a dynamic exports and domestic industrial sector and thereby a stronger currency, what ensued was a credit-based and import-driven consumption boom. Interest rates were kept low whilst the exchange rate wasn’t adjusted to reflect the true value whilst the Government’s expectations of higher foreign inflows didn’t materialise either.

Dr. De Silva argued that these and a combination of other factors including politicisation of the Monetary Board was the cause for the current crisis in the economy with the rupee’s value falling from Rs. 110 to over Rs. 133 within months and interest rates rising and these together sending costs higher to people and the private sector while also lowering growth this year.

The UNP MP, who is also a Consultant Economist, said that the Government was trying to artificially control both the exchange and the interest rate instead of allowing periodic or market-driven adjustments. The delay, he alleged, resulted in triggering a major crisis. “The Government couldn’t sustain this artificial feel-good factor and the worst is yet to come,” opined Dr. De Silva.

Quoting from the IMF staff’s recent report, the UNP MP said that even the Central Bank had admitted difficulties in improving reserves by the June deadline to qualify for the next and final tranche of over $ 400 million.

Another speaker, Peradeniya University’s Senior Lecturer Dr. Prasanna Perera, opined that the volatility in the exchange rate wasn’t a crisis as it would be temporary. He told the TISL discussion  moderated by Daily FT Editor Nisthar Cassim that the short-term aberration was understandable, but with measures in motion along with IMF and Chinese support, the short-term difficulties could be lessened leading to stability. However, Dr. Perera warned that how the Government and the Central Bank manages its policies, avoiding populist decisions from now onwards, would be critical.

Senior economist R.M.B. Senanayake said that the Central Bank had to boost reserves after the country saw its levels crashing and that foreign investments into Government bonds as part of enhancing inflows was necessary. However, he said that the authorities, who were pursuing an infrastructure-led development thrust, should have changed course when it was necessary, thereby avoiding a major crisis.

Senanayake noted that a gamut of macro matters such as the high budget deficit, low revenue and correction in the balance of payments along with an increase in savings were equally important to resolve the exchange rate crisis.

There was consensus among the three speakers that Sri Lanka, the Government and the people were living beyond their means whilst real productive growth hadn’t gathered enough momentum. Whilst Dr. De Silva and Dr. Perera hinted further hikes in interest rates would have to be made to curb the credit boom and consumption, Senanayake warned the move would cause a further blow to businesses.

IMF Resident Representative Dr. Koshy Mathai who was in the audience joined the discussion, saying that whilst there were issues before the Government, it had taken several measures to stabilise the economy with required adjustments, thereby avoiding a major crisis.  He also welcomed the degree of flexibility on the part of the Government to face the new challenges.