Funding economics and Cost of Living crisis

By Darshana Abayasingha
Sri Lanka’s cost-of-living woes would take a dramatic turn for the worse this year, and end-2008 could well be a testing time for government and the people. Treasury officials toss and turn dreaming of ways to control inflation; the bugs that really bite are government expenditure, and debt-financing. Adding to that oil prices soared last week as investors put cash into oil and commodities like gold, to shelter from US dollar shocks and volatile stocks.

Oiling issues
The equation is pretty simple. Close to 60 per cent of power generation in Sri Lanka is done using auto diesel, which the Ceylon Petroleum Corporation (CPC) pumps to the Ceylon Electricity Board at cost. The CPC would be optimistic to recover at least 50 per cent of that spend from the CEB, whereby the Treasury must step in to subsidise the shortfall. The figure is not short of astronomical. It doesn’t end there. The state sector happens to be a large consumer of energy, plus, the biggest culprit in terms of non-payment of dues. Then again, the exchequer must come to the rescue. Treasury Secretary, Dr. P. B. Jayasundera, is not too worried about defence expenditure, but has expressed his anxiety at the state sector’s ignorance and indifference to the matter. Some serious revisions in the price of fuel and energy may well be on the cards, with severe repercussions at every level. In fact, some corporates and industrialists in the know are already budgeting for the setback, with increased attention to cutting costs. With money-printing no longer really an option, the state would have to rely on foreign borrowings. However, this is risky in the long-run with debt accumulating, and the government would hope to end the war in the short to medium-term to encourage investments.

Donating ironies
But how much of borrowings and grants could the government expect from the world community. Its dismal human rights record, governance issues and diplomacy blunders have resulted in Sri Lanka scoring less amongst donor nations and organisations. These days, The World Bank is holding consultations with a wide spectrum of people and organisation on its new Country Assistance Strategy (CAS) to Sri Lanka. A CAS seeks to ensure that the Bank’s priorities for development assistance are aligned with the needs of the people and the government’s priorities, and The World Bank has been doing that in Sri Lanka for over 50 years, with (perhaps) little success, possibly due to no real fault of theirs.

CAS consultations find The World Bank in discussion with various stakeholder groups, including government, trade unions, business community, media and civil society groups. What’s was interesting was how extreme left-wing trade unionists were seen asking The World Bank to pump economic sense into the government. The Bank’s biggest critics are now turning to it for salvation from the economic mess; a sign – perhaps – that people no longer ignore the fact on the pretext of the war.

Performance and potential review
The new World Bank CAS is being prepared at a time far different to environment of optimism and promise three years ago. That was a time of peace and potential, and today it’s of violence, conflict and macroeconomic crisis. Given its 50-plus year tenure in the country, and being a observer and stakeholder in the nation’s progress, it is only fair that they ask “why is Sri Lanka not reaching its full potential”? Then again, it is also only fair that some may, why hasn’t that institution been able to drive any incremental change/development in the country? The World Bank would come up with a diplomatic answer to that and it’s best we don’t spend time on it. However, the Bank maintains “if the rest of the country could emulate the Western Province’s performance, Sri Lanka would eliminate extreme poverty in a generation.” Thus, its primary strategic objective to expand economic opportunities in lagging regions. For that lending organisations or government through partnerships with the private sector must invest in infrastructure – but how could they do that with the corruption bill?

The Bank asked what they thought it could do to assist Sri Lanka overcome its constraints? What are the constraints impeding Sri Lanka’s ability to achieve strategic objectives? In addition, do they agree that the conflict and governance/anti-corruption issues are key cross-cutting stumbling blocks for economic and social developments in Sri Lanka? During its consultation with media, editors and journalists alike stressed the need for investments in education and human capacity development. It is the hope of many that a proper education would give life to an educated and empowered generation that could grasp right from wrong and throw away policies of despondency. The World Bank, they said, could assist with effective micro-finance and infrastructure development projects. But, to go to the people, The World Bank must build its credibility amongst the masses. Due to false propaganda, and perhaps politically incorrect statements made by the Bank itself, the common man’s perception of the lending agency is somewhat flawed. And if The World Bank wishes to change that opinion, and perhaps, effect that incremental change – it would have to take some serious steps in that regard. And as pointed out by the media, doing that through the media might be a best solution. It was pointed that some of its credible projects such as vocational training has not received adequate publicity whereby the public has little or no knowledge of the Bank’s contribution. Issues of governance were highlighted, and the question was raised whether The World Bank could effectively track fund lost to corruption. The media highlighted the point that Sri Lanka’s corporate community has become insensitive to the matter, and some are in fact part and parcel to the process.

People vs politics vs power
The World Bank CAS for Sri Lanka would come out in June, and it’s likely the institution would continue its (around) USD 200 million loan package to government. What concerns or conditions it may apply would be worthwhile to note. Given the current flow of things it’s all a big gamble for government, as it would be banking on an end to the conflict to address debt issues, plus, that of the public’s living standards. It is evident that people are becoming increasingly impatient, and unless the state delivers some respite their silence would be broken - and how bad and with what consequences we don’t know. It’s obviously all in prudent fiscal management. Authority claims that inflation is primarily supply-driven and is a result of a heavy bill on imports to Sri Lanka – including oil – is really far from the truth. The brawns in government must listen to its brains and concur on the far-reaching consequences of its rampant extravagance. It must give ear to development concerns and plans and direct Central Bank to target inflation – not create it (or perhaps push that institution into creating it)! Trimming the costs of an over-sized and corrupt public service is no means an easy task, but there must sit someone in there that could design a plan – then implement it! If they think they don’t, and then outsource it – and that doesn’t mean we have sold our national integrity. It’s either that or a public backlash… which is worse…. You decide!