By Kumar David –
There was wide public support for President Gotabaya Rajapaksa’s onslaught on Prison’s Department. For decades our prisons are infested with drug king-pins, officers were corrupt from top to bottom, and prisons were no better than the hell-holes in Mexico and the Philippines. While the public at large and even this usually cautious of the big-stick columnist were pleased by the intervention there was something else we missed till Gota repeated it, letting loose a blitzkrieg on the country’s Central Bank (CB). Something different became apparent: Gota and his key advisors (PBJ, stooges from the military high-command and ambitious Viyathmaga upstarts) were panicking. The President is unable to cope with the strains of his office.
Yes, the Executive Branch of government is panicking. Poroppaya is going to win the elections, no doubt about that, the funk is about something else; the economic scenario stretching over the next 12 to 18 months. PBJ is a knave but no fool, there may be others around Gota too who can see what’s happening to foreign reserves, balance of payments, employment, debt and deficit. The writing is on the wall; it is frightening. It’s no fault of Gota but he will get lynched for it anyway. If Donald Trump is up shit-creek and America is facing recessions and a possible depression, what can little Gota and micro Sri Lanka do? Gota and his top aides are thrashing this way and that like fish out of the water.
The government has declared virtual bankruptcy and pulled out of the central expressway, Colombo light rail, the 220kV cable from Kerawalpitiya to Colombo and the Kelani Bridge to Athurugiriya elevated highway. Foreign financing is available for all, volumes of specifications and engineering studies have been completed, some projects are part done, but the government can go no further. It is broke. Alarm bells are sounding that public servants’ salaries will be pruned, indirectly at first by slashing overtime. Fees and charges will be raised, subsidies clipped. Import of non-essentials will have to be stopped but essentials like food and medicines will also come under pressure. The world economy is reeling and poor Lanka unfortunately is located on this planet. (Next Sunday 28/6 I will write about the Political Economy of Global Finance Capital).
Desperation drove him to lash out. It is true that the CB has not switched on the printing press and flooded the country with rupees in the way that the Fed flooded America and the world with dollars. The US can do it and get away for a while (I think the end of that game is near) because the green back is the world’s reserve currency, anyone will take it, it will buy oil and goods and repay debt. If Lakshman did that we will drown in galloping inflation Mugabe style. But has the CB been conservative? After Gota’s tirade it did reduce the statutory reserve ratio (the portion of deposits that banks must keep with the CB) from 2.2% to 2% leaving banks with an extra Rs 115 billion to lend. Previously the CB made Rs 150 billion available to banks at 1% interest rate provided they re-lent to desperate business at 4%. Gota squeezed Rs 265 billion out of the CB that it was previously unwilling to part with. Further squeezing monetary-policy will likely push this up to say Rs 500 billion. After that my dear friend Prof. Lakshman will lose his intellectual and professional credibility or have to say enough is enough and quit.
But the crux of the matter is this. If a huge amount of rupee liquidity is injected into the banking system will the economy revive? “Lanka’s current economic woes are fiscal, not monetary. There is sufficient and in fact excess liquidity in the market. Therefore, there is only a limited role for monetary policy in this crisis.” (Mangala Samaraweera). Sure, some companies will borrow to stay afloat and keep jobs alive, some will branch into new lines or markets and try to stay afloat in sinking external markets, and some brave souls will build apartments and tourist resorts. Yes some, but only a few brave souls. The bigger picture is that business confidence is gone; investors are afraid that there will be no demand for output or supply chains will be disrupted again. I chat with SME and MicroE people and the feedback is uniform “Minisu viyadang karana buyai; aye varathei kiyala bayai” (Folks are afraid to spend; they are afraid things will go wrong again). This is the big problem. Liquidity is not the problem; markets and business confidence are problems. Gota yelling at banks won’t overcome that. It is not the job of the banks to formulate, enunciate and implement economic policy. It’s the government’s job.