A senior economist warned that Sri Lanka s economy could face a catastrophe as the global financial crisis unfolds, compounding problems already caused by macroeconomic conditions.
Not wanting to be named, he said the only option out was for the government to implement and fast-track development projects, develop the country s human resources and manage the devaluation of the rupee in consultation with the people.
`The government must take a decisive step and implement certain policies because we are facing a crisis and if it goes out of hand, by next April things will really look bad,` he told the Island Financial Review.
He sighted the depletion of the foreign reserves as the main cause for concern as it would be difficult to meet payments on the import bill.
Inflation, high interest rates and high utility costs had made exporters worry but now, sagging demand from export markets due to the financial crisis have made matters worse.
`There is no option but to depreciate the rupee,` he said.
Depreciating the rupee
`Depreciating the rupee is not as easy as it sounds. Prices are bound to increase because consumers depend on imported items, but the economic ramifications for not allowing the rupee to reflect the trade balance could prove disastrous in the long run.
`This is why the government should engage the people, tell them exactly what is happening and why it would be necessary to depreciate the rupee,` he said.
`Now is the best time to do this because inflation is on the decline and world commodity prices are low.`
`This is what the government tried to do with the fuel prices but it seems they could not convince the Supreme Court. Buy allowing domestic prices to stay above world market prices, the excess could have been channeled to pay off debts which will ultimately hurt the people when they accumulate,` he said.
Total official reserves rose from about $3.5 billion at end 2007 to $4.2 billion at end August 2008. However, reserves eroded to about US$ 2.6 billion in October this year.
Standard and Poor s rating agency said last week that 30 percent of the country s foreign exchange reserve had been used by the Central Bank to intervene in the foreign exchange market and keep the rupee stable.
The Central Bank said foreign exchange reserves declined in October and November 2008 due to the supply of foreign exchange to the market mainly to meet higher oil bill payments and to allow the outflows of Treasury bonds and bills.
It said the exchange rate was stabilizing after a major part of short-term capital flows by way of Treasury bills and bonds have already flowed out of the country and the large stock of oil bills for imports at high petroleum prices have already been settled.
`What is going to happen when oil prices increase? OPEC is not going to allow prices to remain this low forever, they may soon begin to cut productions. So we need to build our reserves to be able to handle this situation,` the senior economist said.
Raising commercial borrowings could be difficult in light of the global financial crisis, so building and managing reserves will be critical.
Reforming the public sector
`There are two things that need to be immediately set in motion of the economy is to survive next year.
`Firstly, the public sector should better coordinated economic activity as to minimize wastage, overlaps and gaps between ministries and departments.
`Secondly, development projects that have already been allocated with funds must be implemented because raising new funds is going to be difficult so we must work with what we have and get it right,` he said.
He said that time bound targets must be set for monitoring purposes and that impact assessments need to be carried out before implementation, not only to gauge the monitory aspect of the projects but how they will meaningfully benefit the public.
`There should be a high level committee with members derived from the Treasury, Central Bank and the private sector to look at ways in which the export sector can be facilitated,` he suggests.
`But the private sector must keep in mind to think of the entire sector and not focus on the problems faced by a few, if not, they will not be successful. We see this happen even in the business chambers where only the interests of the bigger members are addressed,` he said.
He said if the government was serious about boosting domestic industries and the export sector there should be a mechanism in place where the business community can easily approach government with their concerns, where dialogue is encouraged and not hindered or made cumbersome.