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Sri Lanka has no alternative but to print money: minister
17 Dec, 2007 07:01:29
Dec 17, 2007 (LBO) – Sri Lanka has no alternative but to print money because the government cannot move into a framework of limiting expenditure, a senior minister has said.
Speaking to the British Broadcasting Service's Sinhala language Sandeshaya program, consumer affairs minister Bandula Gunewardene said it had become necessary to print money because the government had recruited 250,000 persons and defence expenditure was increasing.

Fiscal Problem

He said that between 2002 and 2003 total government service had been trimmed and vacancies of 120,000 had not been filled, but now expenses were higher.

BBC: Is the government trying to pay for all this expenditure by printing money?

Minister : Yes. There is no alternative.

BBC: The government has no alternative but to print money and inflation also goes up very fast?

Minister: Yes. In that event the government will have to stop state recruitments with immediate effect, stop the war, stop welfare expenditures, stop fertilizer subsidies, stop school mid-day meals. However, the government is not prepared to move into an expenditure limiting program because the government believes it is politically bad for the country.

The BBC was questioning the minister on its weekend program, after country-wide inflation measured by the Sri Lanka Consumer Price Index (SLCPI) hit 24.1 percent in October 2007.

Modern Index

This is the highest shown by the index which was started in 1999 to reflect modern spending patterns of Sri Lankan consumers.

The index is showing even higher inflation than the Colombo Consumer Price Index (CCPI) which authorities claimed was showing "wrong" inflation as it had a five decade old base year.

Embarrassingly however, the decade old Sri Lanka wide index is now showing higher inflation that the older CCPI. Compared to the modern SLCPI which showed a 24.1 percent increase, the much older CCPI, showed only 19.6 percent inflation in October.

Sri Lanka has since introduced another controversial index which authorities claim to show "true" but lower inflation.

Gunewardene was deputy finance minister in 2002 when the index showed 6.6 percent inflation in the 12-months to December and in 2003 when inflation was just 1 percent amidst tight fiscal discipline.

At the time, the then opposition egged on by the Marxist-nationalist Janatha Vimukthi Peramuna vilified the minister and pushed the country back into high budget deficits and money printing.

Inflation promptly started to rocket up.

The SLCPI's previous high was 18 percent recorded in January 2005, after 65 billion rupees was printed for fuel and fertilizer subsidies in 2004 amidst a massive reversal in fiscal discipline.

Minister Gunewardene said oil prices were high and inflation was a global problem as massive amounts of money was spent on oil imports, resulting in "imported inflation".

Oil Complication

But speaking to Sandeshaya minutes before, opposition United National Party parliamentarian Kabir Hashim said the government was giving various excuses such as oil prices and war for inflation.

Hashim charged that the government had printed 45 billion rupees from May to September and was borrowing vast amounts from the state banks, causing high inflation.

"The government says this increase in prices is because of oil price increases on one hand and on the other side an argument is built up that it is because of the war," he said

"This is a lie."

He charged that after printing vast amounts of money the government had borrowed money from foreign banks "mortgaging" future generations.

Hashim said all countries experienced high oil prices, even in the region, but they had low inflation, including India. India's most recent inflation was 3.75 percent.

Researchers at Sri Lanka's central bank have shown that inflation would be lower if oil prices were adjusted automatically.

Automatic

In August this year Sri Lanka froze oil prices again abandoning a short-lived automatic pricing formula. By July country-wide inflation had fallen to 14.7 percent from 17.7 percent in June despite numerous oil price hikes.

But the government then froze oil prices till December, overruling oil minister A H M Fowzie who wanted to raise prices, creating imbalances in the economy, making it more difficult for the Central Bank to conduct prudent monetary policy.

Both in 2002 and 2003 when Sri Lanka had very low inflation, the country had an automatic pricing formula for fuel.

Even oil producing countries with poor economic management have high inflation. Venezuela under populist president Hugo Chavez had 17.8 percent inflation in October.

Iran, another oil producing country reported 19.1 inflation in November. In August, the country's central bank governor, Ebrahim Sheibani, resigned over a forced interest rate to print more money.

Sri Lanka's politicians find it difficult to grasp that inflation and balance of payments problems are monetary phenomena that have little to do with oil prices.

Sri Lanka has suffered chronic high inflation and balance of payments troubles since the island scrapped a currency board regime and moved to a central banking regime with money printing powers.

Economic analysts have called for legislated inflation targeting or a return to a currency board regime to restore economic stability and low inflation.

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READER COMMENT(S)
13. lucky Dec 18
To Jos David
What right were denied to Tamils when took up armed . struggle against the Sinahlese in 1980s? Were they denied the
1. Right to live anywhere they want?
2. Right to speak the language?
3. Right to practice religion?
4. Right to buy land ?
5. Right to set up businesses?
6. Right to free educatiion?
7. Right to vote?
8. Right to elect members of parliment
9. Right to university education?
10. Right to freedom of movement/
Don't quote the present situation - there is a war going on and the situation is like in Israel.
12. lucky Dec 18
PP s comments are interesting but the use of the general term staff makes it difficult to evaluate. My experience is the opposite.

I questioned the controller of immigration about the validity of statement that Sri Lanka allowing dual nationality.

The controller( and everone else) is under the impression that Sri Lanka allows dual nationality- wrong.

If a Sri Lankan takes up British nationality he/she automatically loses Sri Lankan citizenship. Dual nationality means one can take up a another nationality without losing the nationality of origin.

Sri Lanka allows former Sri Lankan nationals to regain/obtain Sri Lankan nationality under a economic citizenship programme by paying the government Rs 250,000 or investing USD 50,000.

Most government servants are allergic to computers. 90% of the traffic police do not know traffic regulations. In developed countries, if a pedestrian is knocked down on the middle of a highway, the pedestrian is charged for crossing the road without due care and attention. In Sri Lanka they lock the driver up. The rule is pedestrians have no right of way on a main road. Most people are not aware of this rule - least the police.

My impression is that the level of knowledge most Sri Lankans are well below standards.

For instance none of the electricians I questioned knew why the British standard changed from Round pin electrical plugs to square pin or why live red wire was changed from red to brown.

Most of the doctors I questioned did not know the correct sequence of traffic light changes or kerb markings

In fact 99% percent of Sri Lankan drivers are not aware that sounding the car horn is illegal:
1. When the car is parked
2. Between 11pm and 7 am
3. Built up residential areas
4. to attract attention

Only legal use of the horn is to prevent accidents. All other instances are illegal.

11. pp Dec 18
Am actually talking from my own personal experience rather than by going by hearsay or assumptions.

I believe in what i see from my own eyes and experience in reality.

I have experienced a vast difference between between the "substance" of some private sector staff and govt sector staff. Basiclly i find some private sector staff do not have much wider knowledge and expericen to handle situations that demand "thinking" - but i have found many govt staff do have that.

Private sector people are not well trained in this country. They recruited fresh and given only basic training and often are not very competent as they appear to be.

Also, i have found many govt staff are highly knowledgeable and experienced and it is very sad that they are not utilized properly.

I might be wrong but am speaking from my own (but limited) experience.

10. SVE Dec 18
Peter, im gonna go with GD on this one, im really not sure which private banks u have been dealing with or which government ones for that matter but the bottom line is few govt. orgs even know the meanings of the words efficiency and productivity !

Lets face it Sri Lankans lack attention to detail I think we've all been guilty of it at some point, though I will not condone the poor working conditions at some govt. offices these ppl still get paid to do wat they do ! As do all of us who dont own a business !

Customer service is just a catch phrase for the private sector and something unheard of for the govt. sector !

9. Jos David Dec 17
The South had neither visionary nor pragmatic leadership at any time. There was always a "fooling leadership" making people gullible. The inflation we see is the result of 50 years of "fooling leadership", promising the masses the sun, moon and the like and fooling the people that federalism was separation.

They often said every thing which needed outside help as "an internal matter". They were never willing to receive advise or correction.

Financial problem is an "international problem" and so is the Tamil problem in the country. If both the Financial and Tamil problem are not International problems why are they talking with the leaders of other countries when the presdident and cabinet ministers visit foreign countries?

Inflation will soon catch up to be like Zimbabwe because the attitude of socilaist leaders and Sri lankan leaders are exactly the same.

The only way to stop the trend would be to stop the war, grant the legitimate right of Tamil people of North East and develop the island together as united islanders of the former paradise island.

8. Grateful Dead Dec 17
I'm yet to be to a single public sector office or avail a service (ID card, driving license, police station to get a police report, customs clearance on packages ordered from overseas, VAT refunds, Water Supply, CEB) from any of the above mentioned offices that have performed, on their BEST day, better than any impoverished private bank in this country.

And anyone who has tried to collect their EPF in one installment will also testify how difficult it is to do so.

I have to disagree with you peter. You DO get the backside-scratching mercantile executives. But in general, evidence suggests public sector far more bovine that private.

Also nobody is saying that govt. recruitment is the CAUSE for unemployment, but definitely plays a big part.

And i like LBO's articles. Their articles are backed with some form of analysis of real numbers, and regardless of whether opinionated or not, do far better than the swell of propaganda govt. influenced media.

7. paul Dec 17
Peter it seems a bit odd that you call the 'flashy private sector' if you are in it. Most private sector people think in terms of the lazy government sector people who knock of at 4.15.

You sound exactly like a government sector person. If you are big shot in government I guess you can get good service at a government bank.

6. peter Dec 17
All the articles published in this site are hilariously one sided!
If one argues Sri Lankan unemployment is low because of public sector that person must be someone like a frog trapped in a well.

Sri Lanka has a serious labour problem. Both skilled and unskilled labour is so short. An unskilled person get minimum Rs 500 per day.

A lot of factories in EPZ struggiling find staff.

Private sector is finding hard to catch up with the escalating salaries of executives.

These people who shout saying that public sector is not efficient are no better than village folks who talk hearsay.

I am from the private sector, and at least some of the govt institutions i have dealt with are sometimes far efficient than the flashy private sector (e.g., banking - just compare the crap service you get at foreign banks vs. govt banks - dont judge by what the staff is wearing or how by the staff's looks - just do a sensible analysis of the final service you get!

5. Punchihewa Dec 17
Whether PA or UNP, the same officials are running the show. So, how can there be any difference?

Money printing is a short term plaster. We have to consider the root causes and treat.

4. Grateful Dead Dec 17
Sam a couple of things to ponder:
a) Unemployment is not low because the economy is demanding them for productivity - a large factor is influenced by the bloated public sector and finding jobs for local graduates in the public service (they are not adding to productivity at all)
b) Sri Lanka is not the only poor country borrowing oil at high prices and other countries don't have sky rocketing inflation.
For an independent report, have a browse at the IMF article IV report - its a carefully worded statement that, amongst other concerns, draws attention to the relationship between fiscal indiscipline and money printing
3. fb Dec 17
Sam
Sri Lanka's highest inflation was seen in the early 1980's under the UNP, under fiscal indiscipline. There is no party bias to fiscal indiscipline and inflation.

Presumably at the time all 'independent analysts' were being apologists for the UNP and did not criticize government actions at the time.

Sri Lanka's best inflation control after independence was seen under
a) chandrika kumaratunga administration
b) ranil wickremesighe adminstration

That is a fact, not a political analysis. Fiscal indiscipline whether under the UNP or PA or UPFA will give us inflation. In the same way fiscal discipline under UNP, PA, and UPFA will give us low inflation.

At least Bandula Gunewardene is telling the truth. Hopefully people in places where decisions are made will listen.

2. Sarath Gunatunga Dec 17
The day, where all your earnings for a month be packed into a three wheeler, take it to the nearest boutique and unload it and pay for a cup of tea only, is not far.

There should be some one knowledgeable to handle the finances, not uneducated people as ministers

1. sam Dec 17
To whom it may concern,
I find this article to be incomplete and mis leading. You seem to promote the idea that the inflation is entirely caused by excessive priting of money and use reference period of 2004 when so called "fiscal displine" was practised.

However, you conveniently forget that in 2004 a barrel of oil was 50 something dollars and now it is around 90. A couple of months ago it almost reached 100 dollars. Even as recently as last month the US reported increased inflation which they determined as having caused by higher oil prices.

In additional I have recently read an article by some international organisation that claimed perhaps the Sri Lankan economy is operating at its maximium capacity. The unemployment is at an all time low. This is also contributing to the higher inflation.

I would really like to read a balanced opinion on why the inflation is skyroketing taking into account all the relevant factors, rather than indirectly hinting that the UNP government could managed inflation better. Perhaps your forum is a propaganda arm of the UNP. If that is the case I would rather see you express that directly than being confronted by biased analysis every month.

It is a pity that Sri Lankans lack independent analysts who are not influenced by party politics.

An irrirated reader,