indi.ca

A parody of Mahinda Money, from the ongoing Colombo Art Biennale

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I was talking to a trishaw driver today. He was a sales guy, then worked in the Middle East for 10 years, came back, 10 lakh surgery, wife died, now he’s driving a trishaw to make ends meet. He said he had to tell his daughter not to go to tuition class this week cause he didn’t have enough dough. That hurts.

Right now basically everybody in Sri Lanka is pissed at the government (for raising petrol prices). As long as daily living is OK and you can put the kids in school people tolerate government waste and abuse, but when the tide is out, you can see who’s swimming naked. I heard the trishaw driver saying the government is looting, which is something I haven’t heard in a while.

I understand that prices have gone up but not entirely why. For that I asked Jack Point. What follows are his comments, interspersed with mine.

Using The Peoples Credit

The depreciation of the currency itself is not too much of an issue and if it settles at around the levels above people will soon forget about it. The big problem is in Government spending and its impact will be felt over some time.

Have a read through the chapter on Government finances here.

Here’s a summary

Rs. bn	2009	2010	2011
Current spend	879	937	1017
Tax revenue	618	725	861
Non Tax revenue	80	82	101
Deficit	181	130	55

The spending is on recurring costs, mostly interest, salaries, pensions and general administrative costs. The tax revenues are mostly indirect (VAT, excise duty, import duty etc). As is evident above the government does not even cover current expenditure with its revenues. The shortfall is borrowed, which means even further interest payments.

This is the equivalent of a household borrowing to meet daily consumption needs.

I know what that’s like, borrowing on the credit card to pay for daily expenses. It’s retarded.

Debt Coming Due

There is apparently US1bn of foreign debt that needs to be repaid this year (US$500m of the first HSBC loan and the rest is supposed to be Chinese loans). They is why they were defending the rupee from Aug last year. Every time the rupee drops a rupee they need to find an extra billion to repay the foreign debt.

Anyway, if they cut waste, corruption this can pave the way to cuts in taxes and reductions in consumer prices (eg world market price for canned fish is about 60 US cents a can, its retails for around Rs.220 locally, most of the difference is tax).

The biggest elephant in the room is defence, which eats up a fifth of all Government revenue. Interest payments absorb another third, so between the two half of all state revenue is gone.

Since they borrow to bridge the primary deficit, the interest bill keeps climbing higher every time, so we are in a vicious cycle of ever increasing debt, ever increasing interest cost, which leads to still further borrowing.

This was the basic problem that Greece had, although it was much worse. When repayment is due the government raises taxes and cuts services but there is a limit that people can pay. When the economy contracts tax revenues fall even further and the problem keeps getting bigger.

We had the same problem in 2000 and it was recession of 2000-2001 that brought the UNP to power. They cut expenses and started reforms that pulled us out of the hole. These guys need to start on reforms but it goes against the grain.

I’ve heard the complaint that the war is over, they should have money now. Mahinda is very public about big projects, and they’ve seemed to be free for a while, but now everybody in the country is feeling the bill. Most of the pressure is on getting exemptions (ie, screw everyone but not me), but that can only go on for so long. I think the govt recently vetoed a cost of living increase for public servants and Basil is (logically) saying that if we give exemptions for everyone it defeats the purpose.

The real pressure should be on reducing waste and corruption within the government, but most of the 2000 UNP brains are in the SLFP now and there isn’t a viable opposition to push for the necessary cuts. We’ll see.

For ongoing economic coverage Jack Point’s comments and blog are always worth a read.