Mahoshada

The Port Strike
The negative consequences of the government’s approach to managing the economy are becoming increasingly apparent. As this is written, the port strike is continuing into its second week, as workers there seek increases in their wages in an attempt to cope with the rapidly increasing cost of living.

Port workers, like everyone else in Sri Lanka are finding their real incomes, what they can buy with the money they earn, shrinking as the rate of inflation accelerates. Since March of this year, the rate of inflation as measured by the Colombo Consumer Price Index (CCPI) has been increasing sharply: In March average prices were 6.4 percent higher than a year ago. In April, prices were 9.2 percent higher; in May 13.2 percent higher; and in June prices were 17.7 percent higher than a year ago – a three and one-half year high.

If the cost of living continues to increase at this rate, virtually all workers will be seeking relief through higher wages just to be able maintain their standard of living. And this will of course lead to further price increases and additional upward pressures on wages. When this sort of wage-price spiral gets going, it often becomes very difficult to stop. It can only be brought to an end if the government reverses its current course and begins to impose significantly greater fiscal discipline by reducing its budget deficits and its reliance on printing money to pay its bills.

The port strike is already having substantial impacts on the country’s main export activities – tea and garment manufacturing. It has been reported that tea stocks are accumulating in the port as dealers are facing difficulties in shipping their products. And because exporters are usually able to get payment only when the tea has been loaded onboard a ship, tea dealers are already beginning to face severe cash flow problems. A result has been less demand at the Colombo tea auctions, which will have knock on impacts for producers, including the large numbers of small producers.

The country exports $2.5 billion in garments annually and this is an industry that must meet tight deadlines in getting their products to their customers overseas if they are to compete effectively. Producers must also rely on substantial imports of their raw materials that come through the port. According to an industry association, on average about $10 million of garments are shipped daily while about $5 million of raw materials are imported every day. It has been reported that as a result of the port strike, shipments of raw materials for the garment industry have been offloaded in Dubai and Singapore while some producers have been incurring the much higher costs of sending their garments to their customers by air.

Sri Lanka already faces a substantial competitive challenge due to the relatively long shipping times to reach the US and European markets. In contrast, China, now the world’s largest garment manufacturer, is able to ship its products more quickly, especially to the US market. Garment producers in Sri Lanka were already facing severe competitive pressures with the end of the quota system that virtually guaranteed them market access. This industry is a major source of employment, creating the prospect of large numbers of job losses if the port strike is not quickly resolved.

The underlying cause of the port strike is the government’s strategy of increased spending and running unsustainably high budget deficits while financing their large revenue shortfall in ways that have been leading to high rates of inflation. It is hard to blame the port workers for taking action to address the problems that they face with the rapidly rising cost of living. If the government chooses to meet the workers’ demands, it is then likely that we will see similar actions by other unions.

Twisted Logic of New Banking Law
This last week the government sought unsuccessfully to pass in Parliament a number of bills relating to the banking and financial sector. According to the Deputy Minister of Finance, one of these new laws, the Banking Recovery Act, would provide a “safeguard” for the people who had obtained loans of less the Rs 5 million. Currently, a bank’s directors have the power to seize the collateral offered by a borrower when that borrower defaults. The government is seeking to exempt borrowers that default on loans of less than Rs 5 million from the possibility of losing their collateral.

The government’s logic is based on the fact that most people with small bank loans pay them back without default. The deputy Minister also noted that 50 percent of the bad debts with the state banks were for amounts greater than Rs 5 million, accounting for 78 percent of total bad debts held by these banks.

This justification ignores the likelihood that borrowers that face the prospect of losing their collateral if they default are much less likely to fail to pay back their loans. That is the principal reason why banks usually require some form of collateral when they make a loan. If borrowers did not face such a penalty for failing to repay their loans, it is a virtual certainty that the numbers defaulting on loans would increase substantially.

If such a provision were to be introduced, it would have at least two consequences. First, banks would be far less likely to make small loans without the protection of having recourse to seizing a defaulter’s collateral. Rather than being a safeguard for small borrowers, this would likely end up being a significant disadvantage. Second, in the unlikely event that banks were to continue to lend to small borrowers without collateral, the resulting increases in bad debts would only weaken the country’s banking sector. Recall that it was only several years ago that it was reported that Peoples Bank was facing the prospect of financial difficulties due to the excessive level of bad debts on their books.

“Protecting” the Domestic Film and TV Industry
The government has recently introduced a series of high taxes to be levied on foreign films and television programmes as well as foreign produced television advertisements. These taxes, which went into effect this week, are to be applied to stations airing Hollywood and Bollywood movies, serials and dramas. These new taxes will cost Rs 75,000 for each 30 minutes of a foreign television programme broadcast in a foreign language. Programmes that are dubbed in Sinhala or Tamil will face a tax of Rs 90,000 for every half hour segment. Foreign advertisements will be subject to an annual tax of Rs 1 million. The government has said that the receipts from these new taxes are to be used to develop the local film industry.

Not surprisingly, the stations that broadcast foreign films and programmes are arguing that these taxes will be prohibitive, making their businesses financially unviable. While nobody welcomes new taxes, the local television market for foreign programming is relatively small and competitive, which suggests that the stations arguments may well be valid.

These taxes are nothing more than another attempt to protect a local industry from competition. And as is usually the case when governments seek to protect industries, it is the consumers that end up as the losers. To the extent that these taxes result in fewer television stations broadcasting or the range of programmes being offered is greatly reduced, those who would watch foreign films and programmes will have fewer options and will be worse off for that.

There will also be job losses. For example, it has been reported that MTV which includes three stations and broadcasts foreign programmes, employs 1,500 people. In addition, there are as many as 1,000 people employed in the business of dubbing programmes. While there may be an increase in employment in the domestic industry, it is reasonably likely that that these taxes will lead to more jobs lost than jobs created.

These taxes have been set at prohibitive levels, with the result that much foreign programming will likely disappear from local televisions. This will mean that any revenues derived from these taxes will be very low or nonexistent and be of no benefit to the local film industry. (The only beneficiaries are likely to be the dealers in videos.)

When governments pursue economic policies, such as these taxes and the proposed new banking law, which ignore the realities of the market place, the economy inevitably suffers. Governments’ priorities ought to be to ensure a sound, competitive economic environment with stable prices.

“But part of the job of economics is weeding out errors. That is much harder than making them, but also more fun.” Robert Solow, Nobel Prize winning economist.