The Economy: Can The Government Manage It In Time?

As the Sri Lankan stock market dipped dramatically, the government has begun regulating the market more restrictively while making a public show of tightening its own belt. The government is trying to improve its financial management, but the question is whether it can adapt in time to stabilize an already shaky economy.

The Colombo Stock Exchange (CSE) dropped 4% this morning (9 August) following a 1.41% drop on Friday and a 1.49% drop on Thursday.

The government responded by ordering that no stock can drop or rise more than 10%. This has alleviated huge drops but caused uncertainty in the market prompting economist and UNP MP Harsha De Silva to say the government was turning the CSE into a casino. While trying to stabilize the private sector, the government has also made moves to address salary irregularities and spending within the public sector as well.

ECONOMIC MANAGEMENT

Following the suspension of the European Union GSP+ trade concession, the government made better financial regulation a hallmark of its policy. In response, the Central Bank issued a release saying that they could offset the loss of the concession (affecting 30% of all apparel exports) by “stabilizing and improving almost all macro-economic fundamentals.”

Political Drive

This is part of a broader political drive for development headed by President Mahinda Rajapaksa and his brother Basil Rajapaksa as Minister of Economic Development. The President has assembled his MPs now in Beruwela for a two day workshop, exhorting them to uphold the public trust. He said “all should be united in brotherhood as a group that loves the country and carry forward the people friendly programme of the Government.” In specific terms, this workshop was billed as an exercise to educate MPs about the current economic situation in the country.

Improving The Civil Service

In addition to educating MPs, the government has also committed to set up a financial training academy to create a competent civil service to match the political development drive. “The academy is being set up taking into consideration the inadequacy of training facilities in public finance, accountancy and taxation which are acutely felt needs,” government spokesemen Keheliya Rambukwella told a press conference. ”A massive development drive is being planned and accounting is an area that has to be geared to meet these requirements, sophistication has to be brought in,” he said.

This follows reports that the government was unable to collect over Rs. 9,402 million in tax revenue last year. Rambukwella has positioned the new Academy of Financial Studies as a way to improve the services of the Inland Revenue Department as well as other departments under the ambit of the Ministry of Finance.

Treasury Secretary P.B. Jayasundera has reportedly told department heads to cut back on expenses and foreign travel to improve efficiency. ““We were told that the Treasury is facing a severe financial crisis and has found it difficult to implement the promises given to the masses during the elections,” one official told The Sunday Leader.

Other ministries like Posts and Telecommunications and Power and Energy have begun tightening their belts, the former looking into salary irregularities and the latter taking steps to crack down on electricity piracy and conduct electricity audits for state organizations.

THE ACTUAL ECONOMY

All of this re-gearing, however, is being done within a machine already rapidly at spin. The Colombo Stock Market is already the second highest performing bourse in the world, albeit from a small base. Speculative trading, however, has already destabilized the whole market, forcing the government to step in and impose a daily 10% price band.

Private Sector Speculation

Companies related to Environmental Resources Investments have been fluctuating heavily, affecting the whole market. Trading in their holdings like Dankotuwa Porcelain, Blue Diamonds and Touchwood Investments were suspended until the company explained itself. Then all stocks were forbidden from move up and down more than 10%, upon which ERI stocks promptly fell the maximum 10%, showing that they still threaten to drag down the economy.

Public Sector Protest

The government has to keep this economic engine running, but at the same time it faces growing pressure from public sector employees for salary increases, from students for more funding for education, and from citizens for better health and environmental services in the face of a deadly wave of dengue. This is the delicate balance the Rajapaksa government faces as it seeks to modernize its financial management for a ‘future path’ while the actual economy that needs better management right now.