Small changes for hope

Tough times call for careful measures. As the government struggles with multiple challenges to keep the fuel prices from increasing the common man watches with trepidation his wallet. The drastic weather that has displaced 900, 000 people, destroyed vast tracts of agriculture, increasing international food prices and escalating cost of living has made many wary of the remainder of the year.

Lanka IOC has already bowed to pressure and increased prices and the government is clearly going to have to face the inevitable and follow suit at some time. This will obviously have a spillover effect that will cause the price of almost every item in the average man’s consumer basket to increase. At a time when inflation must be kept under double digits to spur the long awaited economic growth, this state of affairs is hardly comforting.

The International Monetary Fund (IMF) has already cautioned the government to watch out for secondary level inflation when the high cost of goods will result in demand for higher salaries. This will in turn motivate higher production prices and the possibility that exports will lose their competitiveness in the global market. The chain of events is very obvious but the solution obscure in contrast. What can the government do under these circumstances to ensure that inflation does not get out of hand?

For a multi-pronged problem there must be multi-pronged solutions. Import duty cuts are just one method of dealing with the situation in the short term. Lanka IOC has reportedly had to fork out Rs.230 million in taxes for the last consignment of fuel imported, which left them with little choice but to increase prices to recoup at least part of their losses. This makes the private player lose competitiveness against its government contender but considering the larger picture one cannot expect this to be a significant long-term boon to the common man.

Commodity prices, electricity, water and transport prices will be where the hit will be hardest. Inflation rising will cause many people to moan over their day to day expenses and savings will reduce. As it is Sri Lanka has one of the lowest saving rates in Asia and needs to bolster its record if it is to keep the economic growth from flagging. Moreover tax cuts will mean that the government will lose out on much needed income resulting in development programmes being delayed or cancelled and fiscal deficit widening. The latter of course will result in a chain reaction that can be detrimental to overall economic growth.

Cost of living increases are mainly due to supply shocks and while they are a headache to solve, the government needs to find income from other sources to do so. The present calls out even more loudly for strong governance so that corruption and wastage is minimised and the revenue that is lost by tax cuts is gained in such a way as not to hurt the macro economy. State owned enterprises, showy tamashas – especially when 900, 000 people have been displaced by floods, unsustainable development programmes and other acts that drain public expenditure need to be minimised. Granted these are comparatively small amounts but at this point every little bit counts.

Minor as these changes might seem at first glance they will also send a clear message to the people of what the government’s intentions are and emphasise the fact that they really care. It will also act as a beacon for the people to follow.

Government will, must change to mirror the future of the people.