Crisis of credibility

THE global food crisis and its rampaging effect on inflation are knocking at leaders of all nations. This twin crisis is threatening to dent economic growth in 2011. As reported on Page 15 of today’s Daily FT, a Reuters poll says Asia’s rapid economic growth will moderate slightly in 2011 even as policymakers combat rising prices with higher interest rates and try to keep local currencies from appreciating too sharply.

Most of the 13 Asia-Pacific economies covered in a Reuters survey are expected to see growth cool in 2011 from 2010 as economic recoveries in the United States and Europe remain uneven and China steps up its efforts to fight inflation and asset bubbles.

At the same time, higher prices for food to fuel mean governments and central banks in the region will have to tighten monetary policy further or take other measures even if it risks curbing growth, economists were quoted as saying by Reuters.

Whether we like it or not, it is crisis time and Sri Lanka, like several other Asian countries, has been facing severe pressure on food supplies, their prices and overall inflation for several months. However, there appears to be signs of downplaying of this within sections of the Government amidst warnings fired by others.

This was well articulated by UNP MP and Consultant Economist Dr. Harsha De Silva at a news conference last week. “The President (Mahinda Rajapaksa) has said it is going to be worse than what we experienced recently and that we should brace ourselves for a food crisis,” Dr. De Silva told journalists. He also said according to the Government’s numbers, “which are fairly scary,” 400,000 acres of paddy had been destroyed due to the recent floods. Noting that the five Districts of Anuradhapura, Polonnaruwa, Trincomalee, Batticaloa and Ampara produced exactly half of Sri Lanka’s entire harvest of paddy, he said that widespread destruction of paddy fields in those five districts would lead to a major impact.

However, Dr. De Silva’s key salvo was that whilst the Government was calling on the people to prepare for a crisis on the one hand, Central Bank Governor Nivard Cabraal was presenting an entirely different scenario on the other. “Cabraal has said, as reported in the press over the last couple of days, that there will be no significant impact on prices due to the floods. He (Governor) says there is an ample buffer stock of paddy and that the stocks will be released to the market and that there is absolutely no need for a monetary response with regard to the supply shock,” Dr. De Silva opined.

These contradictory viewpoints – one from President Mahinda Rajapaksa and another from the Governor of the Central Bank, a key function of which is ensuring price stability – require a more responsible assessment of the true short and medium term challenge of Sri Lanka in terms of the food crisis and inflation. If not, the Government in general runs the risk of what the UNP MP alleged: “We see absolute confusion as to the understanding of the problem that the Government is facing.”

Irrespective of politics from both sides, the issue is a more realistic assessment. A fortnight ago the President chaired a special cabinet subcommittee on food and a formal communication of its progress and findings is important. If Sri Lanka is set to face an acute crisis, then make the public aware so that the country at large can start taking a host of measures to better manage the unfolding situation.

Sri Lanka is preparing for Sinhala and Tamil New Year in a few months’ time and pressure on food demand will rise. Before the crisis gets out of control, we still have time to act, be it through austerity measures or cutting back on consumption.

Sri Lanka’s import bill has been averaging over $ 1 billion per month and the trade deficit continues to balloon. The figure as at November 2010 was $ 4.7 billion, up by 72% from $ 2.7 billion a year earlier.

The Central Bank maintains the position that strong foreign reserves are encouraging, hence there is no need for panic. By end December, gross official reserves were equivalent to six months of imports. This level is said to be highest in recent years. Despite growing upward pressure on overall levels of prices, the Central Bank also remains confident about inflation being a single digit in 2011.

Whilst reserves and forecasts may be comforting today, the country can certainly do better in terms of avoiding excessive consumption or wastages. This will also help improve productivity and efficiency in the country and more importantly, enable it to be dynamic enough to withstand multiple crises.