May 25, 2012 (LBO) - Sri Lanka's economy will expand around 7.0 percent in 2012, but a drought can hit agricultural output which may undermine growth, Treasury Secretary P B Jayasundera said.
"We think the economy will grow around 7.0 percent," Treasury secretary P B Jayasundera said.
"Nobody should under-estimate the prevailing drought conditions. That we have not calculated."
Sri Lanka's tea exports have already fallen with production falling in the first quarter amid price weaknesses. But an economic growth of 7.0 percent or even lower, would be much higher than what most countries are expecting this year.
Sri Lanka was originally expected to grow 8.3 percent in 2012 but large amounts of unproductive credit taken by state enterprises to manipulate energy prices put pressure on Sri Lanka's peg with the US dollar, pushing up interest rates and depreciating the currency.
The rupee has since fallen to around 130 to the US dollar from around 110 in the first quarter and energy prices have been raised.
Last year the central government budget deficit contracted to 6.9 percent of GDP in 2011 from 8.0 percent in 2010, but two energy utilities ran losses of 104 billion rupees or another 1.5 percent of gross domestic product.
State energy price deceptions, which have been a key vote buying tactic of Sri Lanka's rulers for decades are also one of the main threats to economic stability and well-being of the people, as they trigger frequent balance of payments crises.
Deceptive pricing were only abandoned for a brief period from 2001 to late 2003 through a price formula, following a balance of payments crisis in 1999/2000.
Deceptive energy pricing pushes up credit demand, which are then accommodated with Central Bank credit (printed money) causing high inflation or currency depreciation or both.
Deceptive pricing is eventually by non-energy taxes on citizens, which are then channeled to the energy enterprises, or by expanding the national debt which have to be repaid later, giving an impression to citizens that they are not actually paying for the energy.
In 2012, 17.0 billion rupees in tax payer money has been given to the Ceylon Electricity Board to cover its debt repayments, according to the annual report of the finance ministry.
In 2012, about 21.9 billion rupees in tax payer money would be needed to cover its debt service and a further 4.5 billion would be given via a government bond expanding the national debt. The enterprise ran an operating loss of 19.2 billion rupees in 2011.
The Ceylon Petroleum Corporation, which sold subsidized heavy fuel to the CEB has run losses of 85.1 billion rupees in 2011.
The Treasury had given a 60 billion rupee bond to cover dues from other government agencies transferring the cost to the central government budget in the following year and expanding the national debt.
Energy prices were finally raised in February 2012, after most of the damage was done.
Jayasundera said state officials managed the economy around a policy framework and there was debate about whether energy prices should be formula based or adjusted periodically to match actual costs.
"Economic performance depends on the policies that countries adopt," Jayasundera said. "
"Each country adopts different policies depending on the political realities that the ledership desires and leadership vision. There is no single economic model for the whole world. And the latest is such debate is what is happening in France.
"The new president is challenging his predecessor."
A high spending president has come to power in France.
Despite repeated and graphic examples of the effects of fiscal and monetary excess - including the current global downturn - except for a few countries like Germany, Austria and Switzerland - most rulers eventually convince the electorate to allow them to spend.
In the English speaking world in particular, deficit spending was adopted by rulers based on the work of British economist, John Maynard Keynes.
Long term deficit spending was made possible by currency depreciation that came from the gradual abandonment of the gold standard for money by major central banks.
Fiscalists such as Nobelist Paul Krugman from Princeton have backed the spenders, while others with a classical bent, such as Steve Hanke from John Hopkins have charged with him of peddling 'snake oil.'
In Europe, the single currency - which takes away the power of rulers to devalue their currency and destroy real debt taken from citizens - have pushed the most fiscally imprudent states into default.
"We need a central bank that prints money, euro bonds, and a system that transfers money from rich countries to poor countries," Euclid Tsakalotos, a Greek academic, has said.
Greece, Spain and Portugal are among the most troubled in Europe.
Sri Lanka's economic growth also zoomed as deficit spending fell in 2010 until the first half of 2011, when state energy manipulations increased.
In recent years Sri Lanka's finance ministry has also spent substantial parts of the budget on much needed infrastructure, which increases the growth potential of its citizens and the country.
In 2011, even if total state spending was counted as 23 percent of GDP adding the costs of only energy enterprises losses to the published budget number of 21.4 percent, about a quarter of the budget or 6.2 percent was spend on state investment.