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Inflation undermines tsunami recovery

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One year after the tsunami, a majority of the half-million people whose homes were swept away in Sri Lanka by ocean waves are living in temporary shelter because new houses are being built too slowly.

Out of the 95,000 houses that were destroyed, only 2,500 have been rebuilt so far; another 46,000 are under construction. According to the World Bank, some 22,000 displaced families don’t know where their new homes will be located.

Could the government in Colombo have done better? While the bureaucracy could no doubt have worked more expeditiously, even the current speed of construction may be unsustainable because of the pressure it’s putting on wages and material costs.

Rising prices in the Indian Ocean island-nation have eroded the purchasing power of the paltry 250,000 Sri Lankan rupee ($2,450) grant given by the government - in four installments - to rebuild a destroyed house.

When aid organizations and donors build the houses, they are spending more money on fewer dwellings.

Cost escalation is a challenge in Galle, a former Dutch- Portuguese colony in southwestern Sri Lanka. The tsunami claimed two thousand lives in the district of about a million people. Television viewers worldwide were shocked by the harrowing images of the vacation train that was lifted off the track by the tidal waves and swept out into the sea, killing most of the 1,500 people on board. That happened near Galle.

A year later, construction workers are in demand in Galle. A mason now charges 600 rupees to 750 rupees a day; before the tsunami the rate hovered between 400 rupees and 450 rupees.

Sand and timber prices have risen, too. A discount on cement is insufficient and requires too much paperwork, says Ariff Ismail Mohamed, mayor of Galle. He estimates that aid groups and donors have rebuilt about 1,200 of the 8,000 houses damaged. The affected families have constructed another 1,000 houses.

Researchers Sisira Jayasuriya, Paul Steele and Dushni Weerakoon said in a study last month that Sri Lanka’s post- tsunami “cost blowouts,” or price increases of 30 percent to 40 percent, will “most certainly create funding gaps, make reconstruction tasks difficult and impose further strains on government fiscal expenditures.”

The International Monetary Fund’s Anne Krueger had anticipated just this. When the fund’s first deputy managing director visited Sri Lanka in January, officials were talking about constructing 80,000 houses in 2005, a 16-fold jump from the 5,000 dwellings that get built in the country annually.

“A chunk of the money set aside for” reconstruction, Krueger said in an October speech in San Antonio, “would go not in more houses built - or roads repaired, or whatever it is we’re looking at - but in rising costs as wages and raw materials prices.”

No one denies that Sri Lanka needed to act quickly to rebuild the two-thirds of its coastline raked by the tsunami.

At least 35,322 people were killed, and assets valued at $900 million were wiped out. In the affected areas, nine out 10 working men and women lost their sources of livelihood; three quarters of Sri Lanka’s fishing fleet was smashed up; 53 large hotels were damaged, many of them irreparably.

Amid the urgency, it was important for the Sri Lankan government to realize that the tsunami victims needed price and exchange rate stability as much as they needed timely aid. That’s where the authorities could have done more.

Between Dec. 26, 2004, when the tsunami struck, and Jan. 7, 2005, expectations of foreign-aid inflows into Sri Lanka caused the local rupee to rise 5.3 percent against the U.S. dollar, the strongest appreciation in that period for any Asian currency.

The sudden rise in the Sri Lankan rupee reduced the local purchasing power of dollar-denominated foreign aid. Sri Lanka’s central bank shouldn’t have allowed the currency to rise in the post-tsunami period. It should instead have used the inflows of foreign money to shore up its reserves.

Simultaneously, the government should have liberally imported labor and materials from neighboring India for the reconstruction effort. That would have helped keep local costs in check and eased upward pressure on the currency.

Rising costs are only one part of the story. The age-old ethnic tension between the Sinhalese and Tamil communities has also played a role in delaying reconstruction. The rivalry cast its shadow on aid distribution in the island’s north where the Tamil guerillas are in control.

The government’s reluctance to allow construction by the seaside, too, has slowed things down. The buffer-zone restrictions are unpopular because they’re pushing people farther from the sea than they want to go.

“Fishermen don’t want to live miles away from the source of their livelihood,” says Mohamed, Galle’s mayor.

As for masons demanding higher wages, the mayor says they would go hungry if they didn’t seek protection from inflation, which is currently hovering at more than 12 percent.

Small economies coping with disasters need to focus on macroeconomic stability, including firm inflation control.

Donors too have a responsibility. “However much we want to help in the wake of disasters, we need to bear in mind that there are capacity constraints,” IMF’s Krueger said. “There’s only so much that can be done in a short time.”

Andy Mukherjee is a columnist for Bloomberg News. The opinions expressed are his own.

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