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Quest Means Business

US Inflation Reaches New Multi-Decade High Of 9.1 Percent; Twitter Sues Musk For Trying To Terminate $44 Billion Buyout; The Deadly Job Of Farming In Ukraine's Wheat Fields; Sri Lanka Declares State Of Emergency As President Flees; Dash To The Bell. Aired 3-4p ET

Aired July 13, 2022 - 15:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

[15:00:23]

PAULA NEWTON, CNN INTERNATIONAL HOST: US stocks are attempting a comeback after some early session losses, you see it there. The Dow all call it

flat, it is up from where it had been given the inflation numbers which we will get to. Those are the markets and these are the main events.

No relief in sight for US consumers after June's eye-popping inflation numbers.

Sri Lanka's government is trying to restore order after its President fled the country.

And Twitter shares they're surging as investors bet the social media giant can beat out Elon Musk in its legal battle.

Live from New York, it is Wednesday, June 13th, I'm Paula Newton, in for Richard Quest and this of course, is QUEST MEANS BUSINESS.

Tonight, we can tell you that US inflation has surged to a new 40-year high raising the chance of more aggressive measures from the Fed. Now, the

Consumer Price Index rose last month to 9.1 percent year-over-year and that's well above the 8.6 percent posted in May, and a much bigger jump

than many economists had expected.

Now the cost of basic necessities, I don't have to tell anyone in the United States, they have soared over the past year. Gas prices up last

month more than 60 percent, food prices 10 percent, and shelter costs are five and a half percent higher.

President Biden called the latest inflation numbers unacceptably high. Investors initially seem to agree. The Dow opened 300 points lower shortly

after the new reading came out. But how to look at that. I mean, look, it's still having losses, not at the lows of the day though and get this the

NASDAQ and the S&P right now are actually in positive territory. If you see the NASDAQ, they're up by about a third of a percent.

Now investors are digesting how this rising inflation might actually affect the Fed's next moves. Rahel Solomon is one of those people who's on this

and no one has to guess as to you know, what is going on in this economy.

Inflation is at historic levels, like I just said, consumers know that. They see it every day. Question for you, Rahel, I'm like those children in

the backseat right now. Has it peaked? Are we there yet?

RAHEL SOLOMON, CNN BUSINESS CORRESPONDENT: Are we there yet? Well, I'm like the parent in the front seat, simmer down. You know, we're not there

just yet. So yes, unfortunately, we wish we were, Paula. We certainly wish we were.

But it is hard to find good news in this report. You would have to look long and hard to find it. I talked to Mark Zandi, the Chief Economist at

Moody's a short time ago, he has been, Paula, one of the more optimistic economists in terms of whether we avoid a recession. So I called him to try

to get a silver lining and get a sense of what glimmers of hope.

He is saying, he pointed to core CPI starting to peak. That said, if you look at the yearly numbers starting to peak that said, Paula, in this

report, we are still seeing monthly increases for core CPI. Core, of course, being inflation that strips away more volatile categories like food

and energy.

The Federal Reserve and Chairman Powell have been very clear about the fact that they would like to see declines in monthly core inflation as a sign

that inflation has peaked, as a sign that inflation is starting to abate and we are not seeing that yet. Quite simply, it was an ugly report, just

really not a great picture.

NEWTON: And when we talk about the implications for the Fed all eyes on them to see what they make of this.

SOLOMON: Yes, I mean, look, when we got this number today, as you pointed out, it was eye popping, and quite simply, it makes the job of the Fed even

harder.

It was a tough job to begin with. It made even tougher by this report showing that inflation is so broad base. It is proving to be quite sticky.

And also, by the way, impacting categories that have some economists quite concerned about affordability in this country in terms of shelter costs, in

terms of accommodation costs, essentially the cost to put a roof over your head.

So now we're hearing that perhaps we might see a hundred basis points or four percentage point of a rate hike when the Fed meets in two weeks. This

report Paula means that the Fed will have to do more rather than less to tame inflation because the medicine of monetary policy is not working yet.

And we do know that there is a lag, but it is not working yet. So the Fed is going to have to do more. And of course, that raises the risk, the

possibility of the Fed overdoing it, of overshooting it, of crushing demand so much that we trigger -- that they trigger a recession.

So that is the concern and the jitteriness that we have seen in the markets earlier today, although as you have pointed out, we have sort of come off

of those lows for sure.

Perhaps investors feeling a bit more competent that a more aggressive Fed gets a handle on inflation, rather than the concerns of a recession.

But it is not what the Fed wanted to see. Certainly, not what consumers wanted to see. Although, it is a confirmation of what we already know that

inflation is painfully high right now.

[15:05:21]

NEWTON: Yes, and maybe from that point of view, you know, the Fed policy will follow.

Rahel, thanks so much for breaking it down for us appreciate it.

Now, a global rise in the cost of living is of course stoking fears that we're headed as Rahel was just saying, for an economic slowdown, not just

in the US, but globally.

Bank of America is now predicting a mild recession in the United States this year, as prices go up and consumer spending slows. But this is key,

the IMF Managing Director Kristalina Georgieva warned in a blog post that funds forecasts for global growth are set to fall. She cited the war in

Ukraine, as well as inflation.

Maurice Obstfeld. He was in fact, the Chief Economist at the IMF. He's now a Professor at UC Berkeley, and he joins me from California.

It is really good to see you again on a day when certainly the market moves are confusing when they see an inflation report like this. When you looked

at it, what did you see? Did you see inflation that could have peaked or is at least peaking?

MAURICE OBSTFELD, FORMER CHIEF ECONOMIST AT THE INTERNATIONAL MONETARY FUND: We don't really know. You know, core inflation on a month to month

basis, rose a little bit. On a year to year basis, it has been steady around six percent and the headline inflation number is truly scary.

Month to month, inflation was 1.3 percent, which is even higher than in March, the month after the war started, and that translates to a 16.8

percent annual rate of price level increase.

So, I think the Fed is very worried about this and 75 basis points for this month is a done deal. Maybe even a hundred is on the table.

You know, if you look around the world, the Bank of Canada just today did a hundred basis point increase. The Reserve Bank of Australia just did two

50-basis point back to back increases and those are both countries where inflation is substantially lower than it is in this latest print.

NEWTON: It is in fact, and the data that they're seeing must not be comforting, which is why as you said it was a surprise for the Bank of

Canada to go a hundred basis points.

I want to ask you, though, you know that 16 -- that over 16 percent, when you annualize that monthly figure is, as you said, scary, it's startling.

The other thing that I saw was rent only up let's say five and a half percent. But to me, that seems like it still has to settle through the

system, meaning that inflationary indicator could yet go higher.

And more to the point as well, what we're seeing with wages, do you think then, that there could be more trouble for inflation down the road? Because

when it comes to rents, the cost of housing or wages, it is very difficult to pull those downward, isn't it?

OBSTFELD: No, the rental numbers are indeed very significant, and they are one of the big drivers of this number along with food and especially

gasoline.

The thing about rent is it is part of part of core inflation. It's a huge fraction of a lot of people's spending, and so it bulks very large in the

CPI, and there is a lot of momentum there.

So this is hurting a lot of people. It is hurting their ability to spend on other goods and all in all, these price increases, even though the Fed will

have to tighten to counteract them, but tighten even more to counteract them, themselves give a deflationary effect to spending on other goods in

the economy.

So that is very worrisome as this tightening cycle proceeds.

NEWTON: And I do want to get to the other side of the picture here. When we look at commodities, people have already started to talk about, you

know, demand destruction and that they're coming down, but are those sustained?

And I do point to some things, we still have the war going on between Ukraine and Russia, but if you couple that with the strong jobs report that

we just had, plus COVID still apparently a huge issue in China, do you worry that naturally we could be in for darker days ahead, not the slow

shallow recession around the world that some people are predicting?

OBSTFELD: Well, I think there is a worry that you know, Central Banks having been wrong footed by and large to greater or lesser extents, maybe a

little bit in panic mode, and they go a little bit too far.

Like if you if you look at the joint global effect of all these rate increases, it could be very contractionary and we saw something similar to

this in the early 1980s. Recession in fact, you know as far as China goes, they seem to be rolling out a pretty substantial stimulus.

[15:10:13]

I mean, they in common with a number of East Asian countries, haven't seen quite the inflation pressures that that we've seen in the West. So that

could have something of a mitigating effect on the global response.

But moving forward, I think the picture is really grim and so, it's not surprising that the IMF's Managing Director made the prediction she did.

NEWTON: Yes, as you said, a grim picture and unfortunately, with the forces at work, we have no idea what to predict and Fed clearly has got to

be worried about the inflation numbers they can predict ongoing.

Thanks so much for joining us and weighing in once again, appreciate it.

OBSTFELD: My pleasure.

NEWTON: Twitter shares are surging after news the company is suing Elon Musk in a battle worth billions. The stock -- here is what's happening with

that it was up better than nine percent, now up eight percent today.

Social media giant wants the court to force Musk to carry through with his takeover of the company worth $44 billion. Twitter stock price initially

surged, this was way back when, when Musk made his offer in April, but it nosedive, of course once the billionaire began hinting at a U-turn.

Bill Cohan is a former M&A investment banker. He's now a founding partner at the news outlet "Puck," and he joins us live from Nantucket,

Massachusetts. What a front row seat to this brawl. You know, I read your newsletter on Friday, the minute it came out, your bottom line is that

Twitter would actually be better off without Musk anyway.

But now, what's your prediction here? Do you think that this is just a matter of Elon Musk has to pay more to get out of this deal more than the

billion dollars? Or do you see a scenario where this is a long, protracted legal deal and that he does have to buy it?

BILL COHAN, FOUNDING PARTNER, "PUCK": I see compromise is what I see. I see a lot of legal saber rattling. We've had now the Twitter lawsuit

against Musk, which is just a splendid narrative about how egregious Elon Musk's behavior has been, since he signed the merger agreement with Twitter

on April 25th, but since April 25th, his behavior has been absolutely egregious, if you believe the complaint that was filed yesterday by

Twitter.

You know, Elon Musk, and his lawyers are going to have a chance to respond to this, but -- and I'm sure that'll be a compelling story too, you know,

Elon, his version of events. You know, it seems to me though, that this is really just a pretext to a compromise, because neither side here really

wants a prolonged battle, which of course, both have enough resources to make it a prolonged legal battle.

Elon Musk does not want a judgment against him, forcing him to buy the company, which would be kind of unprecedented given the size here. I mean,

forcing somebody who doesn't want to buy a company to buy a company that doesn't want to be sold for $44 billion, seems like something that's going

to -- would go down in the legendary M&A textbooks.

And of course, Twitter doesn't want a prolonged fight with the world's richest man.

NEWTON: No. They need to turn around their company right now and they're trying to find other sources of revenue. They have a lot of people fleeing

for the exits. It's a tough company to run right now, especially in this environment.

But this is also a story about Elon Musk. He is someone who wields enormous power in the economy. You know, Twitter has been the collateral damage this

time. Do you think there is a point here for regulators on his behavior?

I mean, he may walk away with this. So big deal, he is the world's richest man, instead of paying a billion what -- you think the compromise might be

four or five, those are hardly consequences that are going to provide, you know, make sure he doesn't behave this way the next time.

COHAN: This is actually the third M&A misadventure he's had. You know, he sort of forced his company, Tesla, to buy Solar City, which really,

frankly, had nothing to do with Tesla. But he did it because his relatives needed to get bailed out of that investment, and he made it happen. And he

actually won in Chancery Court in Delaware, where he now is.

He then of course, famously in 2018, declared on Twitter that he was going to take Tesla private for $420.00 a share, and he had the funding

"secured," which of course was not true. He paid a fine, $20 million-plus, it was supposed to --

NEWTON: It was a slap on the wrist. It was a total slap on the wrist.

COHAN: Of course. Both instances have been a total slap on the wrist. This too, as you say, whether it's a billion or $5 billion, those are slaps on

the wrist for somebody worth $230 billion.

[15:15:14]

He could be forced to pay the difference between the $44 billion that he agreed, and, you know, whatever the market cap is of Twitter, you know,

take $25 billion, another $20 billion. You know, the difference of what's lost for Twitter shareholders, if this deal doesn't go through, I really

don't think the Court is going to force him to buy a company he doesn't want to buy and that doesn't want to be sold.

I stand by my comments from the other day, which is Twitter will be much better off without Elon Musk anywhere near Twitter.

So the sooner they get rid of him and resolve this, the better for everybody.

NEWTON: Yes, and we will say that they do want to speed this up in terms of it should go through the Courts in Delaware, very quickly. We'll see if

it ends up in other Courts in other States and how long it lasts.

In the meantime, thanks so much. It's good to have your perspective on this. Appreciate it.

Now in Ukraine, there's new hope that grain exports could resume on the Black Sea. We'll show you the life-threatening work now taking place in the

fields, right? This isn't on the battlefield, it's in the fields to complete this year's wheat harvest. That's next.

(COMMERCIAL BREAK)

NEWTON: Ukraine's Foreign Minister says there is nothing to discuss with Russia when it comes to peace talks. Ukrainian authorities now say a

Russian rocket strike killed at least 47 people in the City of Chasiv Yar.

Now the Ukrainian military says other cities in the Donetsk region are also facing intense shelling and airstrikes. The UN Secretary-General says talks

are to resume about getting those grain shipments on the Black Sea moving again and they are those talks taking a crucial step forward.

Turkey met today with negotiators from Ukraine and Russia and the U.S. A Russian blockade is preventing grain as we've been saying from leaving

Ukrainian ports.

Now back in the fields, Ukrainian farmers face other challenges.

CNN's Ivan Watson has a report.

(BEGIN VIDEOTAPE)

IVAN WATSON, CNN SENIOR INTERNATIONAL CORRESPONDENT: This is the farmers deadly crop, part of it this summer. Rockets -- Russian rockets and nose

cones that he has collected from his farm fields in the last couple of weeks, and that's the reality of life in this part of Ukraine.

There is incredible, rich farmland here. This is one of the biggest grain exporting countries in the world, we're just in the kind of parking lot

amid the tractors and combines of this farm.

[15:20:07]

But right now, everywhere in Southern Ukraine, you'll see people harvesting wheat and grain and they're doing it amid artillery and frontline combat

that is very close by. We've been hearing the explosions of artillery coming to the south of here. And actually, we were driving through farm

fields next to burned out tanks and armored personnel carriers.

And the farmers are still working, even with the threat of Russian artillery that could land here. It's remarkable, the bravery of these

people.

Part of the problem though, is even though there's a crop of wheat out in these fields that needs to be harvested, the Ukrainians can't export it

right now. There is a Russian naval blockade of Ukraine's ports, so the food can't get out and that is having an immediate impact being felt around

the world with the inflation of global food prices.

So the Ukrainian government, the farmers here, the World Food Programme, the UN, they're all asking for corridors so that the wheat that is

harvested here can be exported, so that you're not going to see starvation and social unrest in some of the poorer countries around the world.

But it's tough. There are barns here, storage facilities that are full of grain from this farmer's last year's crop that he cannot take to market

right now and this is just one example of the consequences of this terrible war where the Ukrainian government is accusing Russia of fighting hunger

games, driving up food prices, and shortages of food around the world.

(END VIDEOTAPE)

NEWTON: Again, that's our Ivan Watson on the ground there in Ukraine.

Now, actual gas prices have been climbing in Europe after production cuts in Norway. Natural gas prices rose as much as 7.9 percent and the supply

squeeze comes as Europe is rushing to fill storage sites and that is before winter, right? They don't have much time.

The EU regulation says facilities must be at least 80 percent full and you see where they're at right now by November. Few countries have yet to reach

that benchmark. As you can see, Germany, France and Italy among those falling short, the largest economies in Europe.

Bart Jan Hoevers is President of the ENTSOG, an association that includes some of Europe's top operators of natural gas networks. And he joins me now

from the Netherlands. And I'm sure you have been warning there is a little time and little margin for error here, if Europe, you know, has to make do

with less natural gas from Russia.

Where do you see the slack coming from what's in place now? And how worried are you when you show those storage supplies, the benchmarks that we just

saw on our screen, which shows as we were just saying, European countries far behind on where they should be?

BART JAN HOEVERS, PRESIDENT, ENTSOG: Yes, I think it's quite logical that they are still far behind on target, because we are only just halfway, so

much there to say, and it is the normal behavior in European gas market to start storage fillings in January, and continue up till the end of October

with the filling.

So with the current level of fillings, we see a little over 60 percent, I think we are quite on the five-year average level of fillings we see. But

of course, the worries that we have is that we might have to deal with less or even no rush in gas coming in from later this year.

So I think we are still on top of it, sad to say to reach the filling level. If the gas flows continue at the current level, we will quite easily

reach over 80 percent over on European average.

NEWTON: But will that cut it -- depending on the flow from Russia. Sorry to interrupt.

HOEVERS: Nope. No, no problem. I think that's a bit what we what we see. There is still some slack, but if the Russian flows will come to a total

stop, we will finish on our estimates below the 80 percent filling level. So we will barely reach it, but also, I think barely not reach success.

NEWTON: Understood and that could lead to even some rationing, right throughout Europe?

HOEVERS: Yes, I think we already see that due to the price developments. We are looking, for example, in some countries have at prices that are five

to 10 times as high as the average we saw in the last five years. So also those high prices are really doing something to the amount of market demand

in Europe.

There are countries that are having a reduction in market demand of up to 20 percent.

NEWTON: So we could, we still don't know where this is going to go, and of course, it depends what kind of winter they actually have in Europe and I

know that this analogy is not perfect, but we all remember that during the pandemic, Europe and the UK did not exactly pull together. It was every man

for himself when it came to procuring vaccines, it really was like the Hunger Games.

Could we see the same thing with gas supplies coming this winter? And what is your advice to European nations and the UK because as I said, if you

just look at the example of the pandemic, none of them are really bathed themselves in glory in terms of helping neighbors.

[15:25:33]

HOEVERS: Yes, I think it's a worrying example. And, therefore also, so to say, reach out to the European politicians to align on the story there, and

I think, in the gas market, we have a good habit of working well together, also on European level, and we know that we are very dependent.

And I think the difference, of course, with vaccines is that we have an infrastructure so to say, so for example, if I look at the Netherlands, we

know we have a lot of storage facilities, and the UK has less. So at the current times, the UK is supplying large amounts of gas to the Netherlands,

and they rely on us in a colder winter circumstances.

So it's very important not only for the whole of Europe together, but also for countries to bilaterally agree on what volumes they would exchange in

case of a full Russian disruption.

And I think it's the scenario we can already start to work on, because we definitely know what it means, and also my organization is really helping

the individual countries, but also the European Commission to have a good understanding how the flow could be divided in the best way all over

Europe.

NEWTON: I don't have a lot of time left. If there is a full, you know, takedown of the Russian energy source, do you believe Europe can get

through the winter if they cooperate and work together?

HOEVERS: I think that, yes, I think if Europe works together, it's going to be difficult, but it's possible to realize it because I think at the

moment, we see that we are dependent between 15 and 20 percent on Russian gas.

So that is still a level of saving on gas and rationing that we should be able to allow ourselves, but we also should work well together to sort the

say spread the pain amongst the members of the European Union.

NEWTON: Okay, we will leave it there for now. I'm sure we will try and check back in with you just to see how this develops in the months to come.

I really appreciate your insights. Thanks so much.

Now, economic hardship is one of the main issues driving mass protests in Sri Lanka. The policies that pushed the economy and its people to the

brink, when we come back.

(COMMERCIAL BREAK)

[15:30:00]

(MUSIC PLAYING)

NEWTON: A curfew is in place at this hour in Sri Lanka as authorities try to bring to an end today's serious unrest. The order comes from the former

prime minister, who stepped into the role of acting president on Wednesday.

His office was stormed by protesters just hours after he took that position. Tensions are continuing to rise. ITN's Peter Smith has more in

his report.

(BEGIN VIDEOTAPE)

PETER SMITH, ITN CORRESPONDENT (voice-over): Having removed their president, the people of Sri Lanka now turn their attention to the prime

minister. But the atmosphere on the streets of Colombo changed today, when the unarmed crowd tried to get to the prime minister's office. Heavily

armed military police stood in their way.

"We will cut through you," came the chants. One military commander came out to assure the crowd there would be no violence here today.

UNIDENTIFIED MALE: Whatever they protest in peace, that's all.

QUESTION: Will you fire tear gas?

UNIDENTIFIED MALE: No, no, we will not fire (INAUDIBLE).

SMITH (voice-over): Words that proved ominous because, no sooner than the first attempt was made to scale these gates, round after round was fired

into the crowd.

SMITH: The military guarding the prime minister's office has just fired tear gas on the crowd. They have the weapons but the people have the

numbers. And they are going back in.

SMITH (voice-over): The tear gas kept coming, attacking the lungs and burning the eyes and scaring the people. It was an attempt to force this

crowd to go home. It failed.

UNIDENTIFIED FEMALE: They say the prime minister is (INAUDIBLE) though he's not here (ph).

UNIDENTIFIED MALE: It's not enough that the president is gone?

UNIDENTIFIED FEMALE: No.

UNIDENTIFIED MALE: We are fighting to get our freedom.

SMITH (voice-over): At last, the gate holding these people back gave way and the soldiers gave up trying to stop them.

SMITH: The protesters are now inside. There is no resistance anymore. Sri Lanka's people are now in control of the prime minister's office.

SMITH (voice-over): The military are still in here, forced to just stand and watch. But there is no sign of the prime minister, because he is now in

hiding. The president has already fled the country.

This, though, is the man who will take control in Sri Lanka, Sajid Premadasa, educated in London, is the country's opposition leader. And he

has a message for the protesters.

SAJID PREMADASA, SRI LANKAN OPPOSITION LEADER: They made their point. And I hope the prime minister has taken that point and that he resigns

immediately in the wish and will of the people.

SMITH: Who is in control in Sri Lanka?

PREMADASA: Absolutely no one. There is total and absolute anarchy.

SMITH (voice-over): But the leaders of the people's protest won't change.

SMITH: So what change are you going to bring?

DANISH ALI, PROTEST CO-LEADER: Everything, from top to bottom, bottom to top.

SMITH: You're talking about revolution here?

ALI: You call it revolution, we call it a system change. And we are Sri Lankans. And we will save this country.

SMITH (voice-over): Sri Lanka now has a revolution without weapons and, so far, the people are winning.

(END VIDEOTAPE)

NEWTON: Our thanks for that package.

Experts say the economic crisis that has triggered such remarkable protests in Sri Lanka has been years in the making. The foundation was laid by a

decade of vast government borrowing in 2019.

The president slashed taxes to try to stimulate the economy. Months after that, the COVID-19 pandemic struck. Tourism came to a screeching halt soon

after that. Sri Lanka's credit ratings were cut and, without access to global credit markets, the government consumed more than two-thirds of the

country's foreign exchange reserves.

[15:35:00]

Now inflation is soaring well above 50 percent per year, headed toward 70 percent. That is according to figures released by the central bank.

Shantayanan Devarajan is a professor of the practice of international development at Georgetown University. But this is key, he is also a member

of Sri Lanka's presidential advisory group on debt sustainability.

I thank you for joining us now. As part of this advisory group, you already had a heck of a job on your hands, trying to convince the IMF and others

that Sri Lanka could come out of this, could restructure its debt.

Now where are we now?

You just heard the opposition leader there in that report. The opposition leader says, look, no one is in charge of Sri Lanka now.

How do you get this back on the rails?

SHANTAYANAN DEVARAJAN, GEORGETOWN UNIVERSITY: Well, we have been negotiating with the IMF and with our creditors for the last three months

now, since April, for a program of adjustment that would then lead to an IMF program that could bring in much needed foreign exchange into the

country.

And those discussions are continuing because they're at the technical level at this point. And so the central bank governor and the secretary of the

treasury are negotiating with the IMF staff as we speak.

The fact that there is no leader as such at the moment is neither here nor there because these technical discussions can go on. What is important is

that in about three months' time, when we hope this program will be approved by the IMF board, that is when you need a leader to be able to

sign off on the program.

And so I think the main point is that they should come to some agreement over the next day or two as to who is the president or the interim

president of Sri Lanka, who will then appoint a prime minister and, importantly, a finance minister.

But I should say that regardless of who is in charge three months from now, I am quite confident that they will approve of the program, even though it

was negotiated by a different government because we have been in consultation with the leaders of the opposition, including Sajid Premadasa,

whom you interviewed just now.

Informing them about the program and getting their feedback. And the feedback we have gotten is that they are basically on board with the kinds

of policy reforms we are proposing.

So I'm reasonably confident that, whoever is in charge will approve of the program, even if they weren't the ones who negotiated it.

NEWTON: And I understand that. From a technical perspective, perhaps people should be relieved. Having said that, that is still a few months in

the making. People are in dire need right now, whether it's for fuel or cooking oil, basic medicine.

You know as well as I do, the allegation against this president and his family, about the endemic corruption and the kinds of abuses in office that

they have been accused of, are you certain that, whether or not you get buy-in from the opposition leader or not, that the people of Sri Lanka have

patience to endure this?

Because some of these financial conditions do come with austerity.

And guess what?

They come back with putting income taxes back in place as well.

DEVARAJAN: This is different from your typical IMF-style austerity program because the Sri Lankans are going through austerity right now, before the

program. Right now, there are shortages of food and fuel and pharmaceuticals.

There has been zero foreign exchange reserves essentially. So they are actually experiencing what normally people experience when you introduce an

IMF program. The difference is that, when you have the IMF program, that will relieve some of these foreign exchange constraints.

(CROSSTALK)

NEWTON: But what demands can be made of reform in the country?

Right now, we still have someone who is closely affiliated with the past president, basically insisting that the military now has to take over and

restore law and order.

DEVARAJAN: I can only answer the question about the demands on economic policy. Those policies are essentially the reverse of the policies that got

Sri Lanka into trouble. As you said in your introduction, the tax cuts of November 2019 were what led to Sri Lanka being excluded from capital

markets and having to use reserves to borrow.

So you have to restore those tax cuts. You have to restore taxes if Sri Lanka is to have a credible macroeconomic program. Likewise, Sri Lanka has

a whole series of subsidies that are essentially subsidizing the rich. They are going to the rich but they are draining the coffers of the treasury.

[15:40:00]

We have to cut those subsidies and protect the poor by expanding the cash transfers that are targeted to the poor. So those are the elements of the

program. This is not a draconian program at all. Indeed, it is a program that will relieve the foreign exchange constraints.

NEWTON: I know and I am just thinking that, perhaps for people who are on the streets right now, they would have a hard time thinking that, in two or

three months, this will be a panacea and improve things. I know you're not calling it that.

It's important to get your perspective here and you've given us a lot of technical detail about what's going on. That's important. I appreciate you

coming on and I hope to have you on in the weeks to come. Thanks so much, I appreciate it.

And that is QUEST MEANS BUSINESS. I will be back at the top of the hour as we make that dash to the closing bell. But for now, it's "MARKETPLACE

ASIA."

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NEWTON: Hello, I'm Paula Newton and it is the dash to the closing bell. We are just two minutes from the closing bell.

U.S. inflation last month came in higher than expected, raising new concerns with the direction of the economy. You see the big board there,

it's bouncing all over. It was down more than that when the CPI came out.

But this is the issue here. The market is not knowing where to go. It's recovered some of its losses, it's now back down. Remember that the CPI

report showed the worst inflation in nearly 41 years.

And if we look at how the S&P is doing right now and the Nasdaq, the Nasdaq had been up by about a third of a percent, as you can see now all three

indices are back in the red. The market is trying to decipher what is going on with that CPI report and, clearly, what the Fed is going to do now.

That's it for your dash to the bell.

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