World recession will Hit Lanka, Ronnie warns Biz CommunityBy Winston de Valliere
Former Finance Minister Ronnie de Mel, now senior economic advisor to the President, warns that " the more disastrous consequences of the global recession will hit Sri Lanka any time from six months to a year from to date. The Sunday Island spoke at length with the former finance minister about his perceptions on how the global economic downturn will affect the Lankan economy. But first, a look at what the economy really portrays at the moment.
What does the economy really look like at the moment? Consider the hard facts.
Dwindling export revenue combined with higher import expenditure caused by global recession on the one hand and a depreciating rupee on the other paint a bleak picture in which appreciably lower tax revenue will logically compel government to resort to more foreign borrowings to fund development. The latter will cause a massive increase in external debt servicing on interest alone. Increased state borrowings from the banking system can leave us with a seriously cash-strapped private sector that will be compelled to resort to ad hoc short term borrowings from private sector commercial banks to merely stay afloat until the crisis is hopefully past.
Pressed for defence funding, the government will certainly be in no position to extend a lifeline to private banks to bankroll the private sector that will be compelled therefore to put development plans on hold. The broader picture would then suggest that one can forget all about planned budgetary development targets at which even the ADB has begun to look askance. An increasingly worried private sector, specially some listed companies, may not be declaring dividends at year’s end, 2009 or in other cases at end of March 2009. No matter what some brokers predict, the facts do not substantiate their optimism. The more forthright ones don’t want to be quoted. Inflationary trends show no signs of letting up despite some ministers claiming a drop in inflation citing lower commodity prices chiefly caused by greater agricultural output. They conveniently forget that this is done by footing a huge all round fertilizer subsidy, which would be politically suicidal to remove with several elections lined up for over the next two years. So much for sound fiscal policy!
With more internally displaced persons (an approximate 300,000) now ready for resettlement and rehabilitation in the north and east, and billions of dollars needed for rehabilitation and reconstruction of the east and those areas of the north which are ripe for such action, the pressures on the Treasury will right now be absolutely toe crunching. Add to that gloomy reality the dwindling external reserves in the context of a continuing drop in export revenue and what pops up is the picture of an economy under unrelenting siege teetering on the edge of a huge crisis.
This is the backdrop against which the Sunday Island had a frank chat with the former Finance Minister Ronnie De Mel, now the senior economic presidential advisor, on his perceptions of the direction in which the economy is headed.
Q: What’s your assessment of the impact of the current world economic downturn on the Sri Lankan economy?
De Mel: Businesses the world over have not fully understood the magnitude and inherent dangers in the current global economic crisis. I’ve observed and interpreted our private sector attitudes to this crisis as being similar to that of their global counterparts. Foreign businesses reacted too late to the crisis after it affected them and with negative consequences to the economies of their countries. This is obviously the case in Sri Lanka too. The recession has still not made deep inroads into our economy but it is my opinion that even our politicians, besides the business community, have been overlooking the potential threat to the stability of our economy that is inherent in the crisis, even to the extent of underestimating the adverse impact it could have on the country and the common man besides the business community."
Warning that the " recession is just beginning to affect us in a big way" de Mel feared that "its more disastrous consequences will be felt by Sri Lanka in about six months to one year’s time."
Q: What areas of the economy have already been hit by the global downturn?
De Mel: Tourism has been dragged deeper into the doldrums. I have never before in my political career seen the traditional tourist resort areas from Kalutara and Bentota down to Tangalla, Hambantota and Tissamaharama so totally bereft of tourists as in this last year. There are few low spending types but the big spenders are almost completely out. I have known these areas from the inception of tourism in 1965 having been an MP from this area for nearly 40 years. But this is the worst ever excepting the decline at the height of the JVP insurrection.
The tea and rubber sectors have also been seriously affected as foreign buying has dropped of very substantially. The smallholders who sustain the overall performance of these sectors produce between 65 to 70 percent of the country’s tea. Until the onset of the crisis, they received between Rs.50 to 75 for their green leaf. They now get between Rs.25 to Rs.35 a kilo and these are prices considerably below the cost of production. The rubber smallholder who used to get from between Rs.200 to Rs.300 a kilo of latex now gets a mere Rs.100 to Rs.120.The same is true of the spices range and our other minor export crops. Our exports have been hit all round. Though coconut has held up somewhat in comparative terms, there too prices are considerably lower.
Q: What about the apparel, textiles and industrial exports sectors?
De Mel: The entire industrial sector is just beginning to be affected with several smaller apparel factories having already wound up operations here while the bigger ones have started retrenching staff. One of our biggest solid tyre manufacturing factories which is ranked second largest in the world, recently retrenched 25 percent of its workforce of 8,000. There are others who are also retrenching while some others are not filling available vacancies.
Q: What are the concerns you have briefed the government about?
De Mel: I am deeply worried about our foreign employment and our foreign remittances which constitute one of the most vital forex earners for the country. The economic downturn has begun making inroads into the Dubai, Abu Dhabi and other Gulf and Middle-Eastern economies as well while the crisis has been exacerbated by the very serious downturn in Italy, France, Spain, UK, Malaysia, South Korea and even Japan. All this will result in the loss of jobs for Sri Lankan workers in those countries as the recession drags on resulting in a decline in remittances which will present a very serious problem to Sri Lanka before long.
Q: Which means our village economy that is sustained by these remittances will be badly hit….
De Mel: It will also very seriously affect our foreign exchange position and impact badly on our balance of payments.
Q: So if the global decline in demand for our products is not reversed soon, our industrial production will nosedive seriously?
De Mel: Yes because the crisis has very considerably hit almost all of the countries which are traditional importers of our products. At the moment, oil prices have dipped but there is no guarantee whatsoever that they will remain at today’s low levels of $38 to $ 40 a barrel for Brent or West Texas for long.
Q: Many countries have come out with economic revival packages. What’s your feeling about such an option for Sri Lanka?
De Mel: The first package from the US government helped a little bit in the sub-prime mortgage crisis in the US but it hardly touched even the fringe of the overall crisis there. A second package of $789 billion came out a week ago. We will have to wait and see what results it will produce. Other countries hit by the crisis have also come out with similar packages. President Rajapaksa also announced a series of economic relief measures despite being seriously handicapped by the enormous military expenditure. With an end to the war the government will come out with a broader relief package to help the country tide over the difficult times which are approaching.
Q: All our donor countries have been seriously hit by the downturn and have necessarily had to deal with this crisis in their economies. How will this impact on their usual aid and grants to Sri Lanka?
De Mel: President Rajapaksa has been able to get large amounts of aid from China, Iran and several other countries. And I don’t envisage any great reduction of aid or other forms of assistance from donor countries either. I recall that during a recession in UK and Europe in the late 1970’s when I was finance minister, it was possible to get more aid during the recession because aid often means large contracts for firms in aid giving countries which increase employment opportunities for their people. I got all the aid we needed at concessionary terms for the Victoria Dam and other major hydro power and other development projects. I told the British Premier James Callaghan that when they help us build our dams and power stations they will also create jobs for their own people manufacturing sophisticated machinery needed and for connected work here. I used the same rationale in Germany. France and Sweden for some of our large construction works because during that recession they were looking for new avenues of employment for their people. So these things work both ways if one knows how to present a sound brief for aid and assistance.
Q: Have foreign banks in Colombo whose head offices in recession hit countries have been affected by the crisis modified their credit to our private sector industry and trade?
De Mel: I have not checked this out but banks such as HSBC, ICICI, Deutsch, Standard Chartered and some others have immense resources despite the crisis. I am fairly confident they won’t have any change of stance on any of their operations in Colombo.
Q: Is there the possibility of an earlier than expected resurgence of the global economies which will save the day for Sri Lanka?
De Mel: The huge bail out programs would suggest otherwise and economists in those countries are not expecting a turn around for anything between 18 months to four or five years.
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