Wednesday, February 29, 2012

The souring of the economy

Indi has written an interesting post on the bubbly nature of things.

It is quite astonishing to see how rapidly the mood has changed. One month ago a lot of people were happy with things, many accepting the view that we were growing well, even if we were not exactly the wonder of Asia. The falling currency and rising prices have suddenly soured the mood. Were things as good as they seemed and can things go so bad, so quickly?

Just to turn the clock back back to 2009, just after the war tourism picked up but not a lot else happened. Things remained slow for some months until the following happened:

1. Taxes on household goods (electrical appliances) were cut.
2. Interest rates were forced down.
3. Income tax was cut in the budget.
4. Vehicle duties were cut.

This sparked demand. Low interest rates enabled people to borrow. Finance companies sold household goods on hire-purchase and cars on leases. Banks lent to the finance companies and leasing companies.

Corporate profits in general improved because of low interest rates and lower taxes. Some investment activity began to take place, repairs, reconstruction, refurbishing. All this was positive and people did feel the benefits, at one level or another.

The problem was with sustainability. Five or six years of bottled up demand for cars was suddenly released. A similar tale with electrical appliances. Once the pent up demand is satisfied, things will slow naturally. There is nothing wrong with this, it just happens.

With the end of the war tourism will naturally pick up, but growth is dependent on the state of the world economy, how cost competitive the country is and how well it is marketed. Rapid increases in prices coupled with regulations on minimum prices caused things to slow down a little after April last year.

In order to build sustainable growth we need investment, that will create jobs and boost incomes. In order to do that we need to cut regulations, taxes and generally have a friendly investor climate. A functioning legal system, low corruption, low taxes and consistent policy are all things that will help.

An over-large state that is actively involved in every sector of the economy impedes investment, because it displaces the private sector. Further to run these extensive operations they need to tax and this takes money out of the consumers pocket.

The factors that drove growth in 2010/2011 were lower taxes and interest rates. In order to keep these cuts in place the government needs to cut expenditure, which is not happening. Now that the taxes have gone up everything slows. The moment the Government increases its local borrowings, interest rates will rise.

The great saving grace of Sri Lanka has been its ability to export its unemployed. Whenever things get difficult, more people go abroad. They then send money back that sustains their families-and the local economy. If it were not for the workers in the middle east many families could not survive. Almost every family has someone abroad and the remittances they send pay the bills. As long as this option remains open, we will stumble along in some fashion. If that closes, we will be in real trouble.

Tuesday, February 28, 2012

The Road to Serfdom

The economist Friedrich von Hayek is best known for his work on the business cycle but his book on the dangers of centralised planning, The Road to Serfdom has particular relevance today.

It was written at a time when the Nazis were rising to power in Germany, hence the references to war. There is a simple version, in cartoon form here.

Praised by Orwell and Keynes, it tells a tale of how citizens can end up as serfs, if they allow themselves to fall under the spell of mesmeric leaders.

Saturday, February 25, 2012

The lure of the harpsichord

Like a lot of other people, I have tended to regard the harpsichord as an inferior instrument to the piano. The piano has a great deal of power and expressiveness that I thought was lacking in the harpsichord. I had never really listened to the instrument properly, I had heard the odd bit here and there and heard it mostly as the continuo in early opera and oratorio, where, to be honest it was more irritating than anything else. Looking back, that was probably the worst possible introduction to the instrument: accompanying long tracts of dialogue, without the benefit of seeing the actors or the drama; and all in a foreign language to boot!

One of the great advantages of the internet revolution is that there is a great variety of music readily accessible. I listened to some Bach and Handel played on the harpsichord and found it to be very agreeable. There seem to be a variety of instruments around with varying degrees of depth and tone, but on the whole, nice.

Listen to Keith Jarrett play Bach's F minor Prelude and Fugue here or Sophie Yates playing Handel's suite HWV 437.

I don't listen to much music now and what little I do listen to is frequently on Youtube, but you can bet that the harpsichord will feature a little more regularly.

Governance and growth: a lesson from Rwanda

Growth does not depend on resources, it depends on policy and governance. Many countries rich in natural resources from Nigeria, to the Congo to Angola remain poor because of bad governance.

The African continent seems to teem with ill-governed countries so it may come as surprise to learn that a country that seemed a basket case in 1994 is now progressing reasonably well, thanks to better governance. When Rwanda emerged from a genocide in 1994 prospects looked very bleak. Now things are much better, as this article explains.

They have cut red tape (Rwanda ranks 45 in the World Bank's ease of doing business report, in contrast to Sri Lanka's 89th position) and reduced corruption. Transparency International ranks Rwanda at 49 (out of a 182 countries and just below Macau, Brunei and Bahrain). Sri Lanka ranks 86, just below Jamaica, Panama and Serbia.

Although Sri Lanka is far, far ahead of Rwanda, I still think there are some useful lessons to be drawn. Hopefully the next time G.L Peiris takes wing it will be to Rwanda.

Some further reading here and here.

Monday, February 13, 2012

How much does the Ceylon Petroleum Corporation raise through the price hike?

Fuel prices were hiked last week, not unexpected given the need to maintain the budget deficit at targeted levels (so that further borrowings can be made). What was shocking was the size of the increase; kerosene by Rs.35 (up by 49%) and diesel by Rs.31 (up by 37%).

According to the Central Bank Annual report (see page 63), the country's fuel consumption in 2010 was as follows:

Metric Tonnes
Petrol 90 octane 595,000
Petrol 95 octane 22,000
Auto diesel 1,699,000
Super diesel 12,000
Kerosene 165,000

Converting this into litres (at approximate specific densities of 0.74 for petrol, 0.95 for diesel and 0.82 for kerosene) and multiplying the results by the amount of the price increase the CPC will raise Rs.72bn, assuming that fuel consumption remains at the above level.

This is a lot of money, by any standard. The Government revenue (excluding grants) in 2011 was Rs.963bn. The 2011 revenue deficit was about Rs.95bn, this was to be reduced to virtually zero (just Rs.1.8bn) in 2012. The price increase in fuel (72bn) will plug most of the gap, provided of course that expenditure is in line with budget.(Have a look at this link for a few more details on 2011 and 2012 figures).

Could the Government have plugged the gap in some other way?

If expenditure were cut, then there would be no need to raise prices. Where there is waste, inefficiency and corruption it should be relatively easy to cut costs, with no loss of services. Close down or sell off loss-making enterprises and improve the efficiency of others. The COPE reports highlights enough problems with public enterprises, its time to start dealing with them, or face the prospect of still higher taxes, to pay for more waste.

Saturday, February 11, 2012

Some scenery of Hatton and Dickoya

Travelled to Dickoya early this week. Here are a few pictures (click on the picture to get the high quality image).

The entry to Hatton

Late morning sun

Christ Church, Warleigh. The little stone churches in the hill country make such pretty pictures

Castlereigh Reservoir

The Castlereigh reservior, from further up the hill

Misty mountain

Mist, mountain and road

Tree clad hills..

...and winding roads

This is a picture of Queen Victoria's statue, at the back of the Colombo Museum. Took it last year and meant to write something suitably Victorian. Found it in my phone with the others so uploaded it anyway.

Thursday, February 09, 2012

Rupee slides, IMF loan more likely, expect taxes to rise

The Central Bank did its best to defend the rupee but squeezed by all sides they have given up the fight and seemingly allowed the rupee to float. The markets have not really digested the news so it is difficult to say where the rupee will end up but current quotes are around 115.10-115.50. It may move up a rupee or two in the short term.

This should come as no surprise to careful observers, the Central Banks started defending the rupee in the second half of 2011 and they have been fighting a losing battle since then. The reason they have allowed it to slide is to obtain the remaining facility of US$800m from the IMF. It is rumoured that the Government was shopping around in the Middle East for funds but had been quoted rates of 6-7%, so even at 3% the IMF loan is far cheaper.

We are basically back to where we were in 2008, which is when the last currency crisis occurred. In that instance the rupee dropped to about 115 (it may have touched 120 briefly, I have forgotten the exact dip) and interest rates spiked. I still carry a legacy of that era in the form of five year fixed deposit that is at 24%. In 2009, with the end of the war there was a positive story that the government could sell so they were able to tap the bond markets and rebalance the foreign debt. This time, having screwed three international banks and having alienated many foreign governments, that task will be a lot more difficult.

The IMF demands that the Government sets its macroeconomic house in order - or least embarks on a plan to set in order before it lends. One point is that the budget deficit needs to be brought down. This is excellent advice that the Government can follow by either cutting costs or raising taxes. The pattern that we have seen in the last six years has been no restrictions in Government expenditure, which means ever more taxes on the population. When one discovers that a great deal of this expenditure is spent on white elephant projects (eg Mihin Air, Lankaputhra Bank), or servicing high interest commercial borrowings the people need to start asking why they should fund the lavish lifestyles of so many cronies. (Read some comments on the COPE report for more on this subject here).

Until some means is found to get expenditure cut one must be resign oneself to the payment of higher indirect taxes. These are mostly imposed on essential foodstuffs (Dhal, onions, potatoes and canned fish are particular favourites). We saw this last month and once or twice last year. This is of course in addition to increases in fuel, gas, alcohol and a host of other items that took place in the month before and the months after the budget. Very little new taxes are actually announced in the budget, everything takes place the month before or a few months after. This little subterfuge really works, even I find it a little difficult to recall what exactly went up and when.

Due to the huge losses at the CEB, we can expect a (long overdue) increase in electricity rates as well. The non-operational coal power plant, built with expensive Chinese debt, no doubt contributes to this loss. The interest needs to be paid, even if no power is generated, and the consumer or taxpayer ultimately foots the bill, while those who build the plant walk away with their profits intact.

The exchange rate is linked to the interest rates so we need to wait and see where things end up. In anticipation of the depreciation interest rates were edging up, we need to see where they end up. Businesses which were making good profits on the back of low interest rates will find that borrowing costs go up, banks will find margins squeezed (as deposit rates rise) and overall increases in indirect taxes will bring about wage pressure. Company earnings will therefore be adversely affected but the biggest blow will fall on consumers.

When the average consumer is left poorer, does a the GDP growth number have much meaning?

Racing in Yala

I visited a friend in hospital last night, he was nursing a rather nasty gash that he had received while on holiday in Yala.

He had been in the park with some friends in a hired jeep. The driver was going very fast and the jeep hit a rut, he was thrown up, hit his head on the iron cross bar of the jeep and was left with a pretty nasty cut. After visits to the Tissamaharama and Hambantota hospitals he has now been transferred to Colombo.

The park had been packed last weekend with large queues waiting to get in. Traffic jams within the park are a frequent occurrence and judging from the descriptions people give me it seems that the parks contain more people than animals on busy long weekends.

The jeep drivers, eager to earn money are hell bent on trying to show their clients as many animals as possible, so as soon as word it received of a sighting everyone races to the spot. Quite apart from the dangers to passengers, the roar of engines must surely be disturbing the wildlife, not to mention wildlife being run over by vehicles .

My concept of visiting a sanctuary is to spend some time in quiet contemplation of nature. It seems that the jeep drivers work on the basis of trying to show as many animals in as short a period of time as possible. Regrettably some visitors seems to encourage this, a trip being rated on the basis of numbers seen rather than an overall experience.

Tourism is a good industry, it creates a lot of employment but it must be managed in such a way as to bring in long term benefits. Thoughtless, short term exploitation can ruin the product.

There is a need to regulate the number of visitors and vehicles in the park. A park that resembles the Bambalapitya junction, crawling with vehicles and people is not a park. People will be put off. Some people already asking if the experience is worth it. A visitor on the Lonely Planet website commented:

"In general, I find the Sri Lankan national parks to be over priced and where there are animals to be seen, I find them over crowded.

In Yala , before the Yala East section was opened up, I was very surprised that even when we came across an elephant, the driver or " tracker " would phone all his jeep driver mates to tell them exactly where the animal was and in a few minutes there would be so many jeeps competing for position that the animals were scared off anyway."

In the interests off all concerned, not least the animals, I hope the Wildlife and Nature Protection Society will a take a lead in regulating visitor numbers.

For some ideas on this check the link below:

Tools for visitor management

See also this appeal to photographers.

Tuesday, February 07, 2012

A new growth industry- Poaching

A friend of mine was involved in the building of a hotel on the East coast, Passikudah to be exact.

He was telling that there is a shop that sells game; venison, wild boar sambhur and various other meats. I have no objection to eating wild boar, it is not protected and for the most part regarded as a pest because of the damage that it causes to crops. I do however draw the line at that, I do not consume protected species.

This shop apparently has a booming business - supplying to construction workers. My friend estimates that there are about 5,000 workers building hotels in the area. As soon as a fresh supply of game is obtained the word goes out and within hours every scrap is sold out. The main demand seems to be from these workers, not the people who live in the area.

The best part of the story is that the shop is supposed to be owned or run by a policeman so no action is likely to be taken to shut it down. Since demand seems strong poachers are probably putting in extra hours to supply the need with consequent damage to wildlife stocks.

Could the people involved in construction in the area take note and attempt to educate their workers not to buy meat from poachers? It is, after all, in their own interest to do so.

Wildlife is a tourist attraction. If a lot of deer are killed there will be fewer to see. Moreover, if all the herbivores are destroyed, it will lead to leopards turning to lifting cattle or dogs which will bring them into conflict with herdsmen who may resort to trap guns or poison. Even if leopards simply move away to other areas in search of game, it will be a loss, so take the initiative and act.

Wednesday, February 01, 2012

On teachers and teaching

Cerebral Ramblings post on bad teachers got me thinking. I have suffered at the hands of bad teachers. I used to hate school and although the passage of time has dimmed this emotion I can't really empathise with those who profess great love for one's school.

Education, especially at primary and secondary school has become commoditised with a focus on large classes and rote learning, which breeds (and rewards) only poor or mediocre teachers. Shaw's adage that people who can do; and those who cannot teach, is unfortunately true.

Teaching is in fact a noble profession, one of those that I describe as a 'calling'. To my mind teaching, preaching and healing are all callings: if one does not hear an inner voice that calls one to it and if one is not prepared to devote ones life to it, better not go. If you are only looking for a career or a means to make money, don't follow the callings, spend your time on something else.

In a perfect world, teaching is about a student at one end of a log and a teacher at another. Human beings are naturally curious all that a great teacher need do is to stimulate and guide that curiosity. In order to learn it is often more important to ask the right question than to find the right answer. Frame a good question, pose a knotty but interesting problem and let nature take its course in the mind of the pupil. On the way, equip the pupil with the tools to tackle larger questions, initially to read, write and perform basic arithmetic but later to the basics of science and logic.

Fear plays no part in learning. Discipline is necessary in life but the process of learning should never be coloured with fear. Patience is essential, civility necessary and kindness prized among the characteristics of good teachers.

This is what great teachers are about. I should know, my grandfather was one.

Of bird flu and suicide vests

Two little articles in today's Daily News caught my attention. One was that a large number of chickens had died in a farm in Bingiriya, Kurunegala. The dead poultry had the symptoms of bird flu but, according to the report they may not have died from it.

This is a fairly serious matter. We have had many fears of a bird flu outbreak before but this is the first time that there seems to be a confirmed case. Adequate precautions need to be taken because if the virus is of a type that spreads to people many can die. China has attempted to cover of outbreaks of SARS, swine flu and bird flu before, resulting in the disease spreading further and claiming more victims. The 'China model' is worshiped in many quarters, lets hope that it will not be followed, in this instance at least.

The other story was that a suicide vest discovered in Kataragama was five years old. When the Emergency Regulations were in place, there was a 'discovery' of a stock of arms on a monthly basis, usually in the week preceding the date when parliament would need to extend the Emergency Regulations. Now that all of the Emergency Regulations (plus a few more) have been permanently enshrined within the PTA there has been no need to extend these regulations and the 'finds' of weapons have also halted. Therefore it is quite likely that this is indeed a genuine find. The question is who put it there and for what purpose? Information is never easy to come by but lets see if any further news develops. Eight people have been arrested, according to the Island, which gave the story more prominence. No arrests were made, according to the Daily News.