Cash crisis

SRI LANKA is reeling from a new bout of stagflation - rising inflation and falling growth - say analysts warning of economic crisis ahead.

This year’s war budget has doubled to around Rs 46 billion ($920 million) and the UN’s Food and Agricultural Organisation (FAO) warns that drought and war will cut Sri Lanka’s rice crop in 1996 by 25%. The government was forced to raise bread and flour prices in late July, generating wide discontent.

Economists point to the increasing tempo of the war and the slow pace of privatisation compounded by continuing high interest rates which makes Sri Lankan business uncompetitive in an increasingly global market. Present lending rates in Singapore are 6.3% and in Sri Lanka 17.2%.

The government appears powerless to lower interest rates because of the high treasury bond rates floated to bridge previous budget deficits and the same short-sighted strategy is likely to prevail.

This year’s budget was expected to realise $400 million in privatising the management of the troubled plantation sector and its key export tea. Only $15 million has accrued and strikes and union opposition continue.

After a year of labour unrest President Kumaratunge has postponed a new Workers’ Charter fearing that it will deter foreign investment. But more radical surgery may be required. Colombo’s infant stock market is in free fall and tourism has slumped badly.

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