Three-and-a-half years have elapsed since the Government has taken control of the management of the country’s economy. Except on the inflation front where inflation has largely been subdued, there has not been any significant improvement in any other area in the macroeconomy – Pic by Shehan Gunasekara
Release of GDP data
Sri Lanka’s official statistics bureau, Department of Census and Statistics or DCS, has released the country’s 2018 first quarter provisional economic growth data in its website (available at: http://www.statistics.gov.lk/national_accounts/dcsna_r2/reports/2018.06.18/Q1_2018_(2018_06_18).pdf).
These numbers may change later when DCS refines its data set. For instance, in the current release, DCS has firmed up its estimation of total output in the first quarter of 2017 by reducing its value from the previously released numbers. Had that previous high number been used, the growth rate in the first quarter 2018 would have been much lower than what has been announced in the current release.
A declining growth rate
But, whatever the number used, the results have been contrary to the expectations of authorities. The expectations were that the economy would bounce back to high growth in 2018 from the declining growth trend it has experienced from 2013. Thus, if the total economy could be equated to a cake, the size of the cake, measured as the real gross domestic product or real GDP based on the prices that had prevailed in 2010, has been enlarged by 3.2% in the first quarter 2018. The real GDP growth had amounted to 5% in 2015, to 4.5% in 2016 and to 3.1% in 2017.
The Central Bank had expected the growth to move up to 5% in 2018. But, the first quarter results show that the country’s real GDP in 2018 will be more in line with the prediction made by IMF in April 2018 than the Bank’s expectation. IMF in its prediction had put the growth possibility for this year at 3.8%. Even to reach this level, the real GDP growth has to accelerate on average to 4% in the three remaining quarters of the year. To reach the Central Bank’s expectations, the average growth rate in the next three quarters should be as high as 5.6%, a challenging feat for Sri Lanka’s economy, indeed.
Crisis started from around 2013
The fact that Sri Lanka’s economy has been in a crisis is not a new revelation. The crisis has been manifested from around 2013 when the economy had begun to slow down its growth from the high growth it had recorded temporarily in the immediate post-war years. By the time when the present Government came to power in January 2015, all the available macroeconomic indicators had shown signs of distress.
Rupee under pressure for depreciation
The exchange rate was under pressure for a massive depreciation because the previous Government had kept the value of the rupee artificially at high levels by supplying dollars to the market from the country’s scanty foreign exchange reserves. When the reserve levels which had been built by borrowing and not by earning had fallen to a critically low level, the country could no longer continue to feed the market’s voracious demand for dollars. Exports, a means of earning reserves, had been declining both in dollar terms and as a share of the total GDP.
Shortage of foreign exchange in the market
Meanwhile, imports had been ballooning creating a high trade deficit in the region of $ 9-10 billion annually. This was cushioned partially by the remittances sent to the country by Sri Lankans working abroad; but that also became saturated at around $ 7 billion in the recent past compelling Sri Lanka to borrow abroad to fill the gap.
The country’s freely available foreign exchange reserves, the money immediately available for meeting future foreign debt repayments and making payments for imports and other services, had amounted to $ 6 billion, a little higher than the identified future obligations. The Government budget was in a precarious situation with its revenue falling relative to the country’s GDP, generating stubbornly high overall budget deficits and making it necessary to borrow more to repay maturing debt stocks.
Rising foreign debt stock
The last outcome had augmented the Government’s debt stock year after year. The economic patient was, thus, in the intensive care unit and the new Government was expected, as a matter of urgency, to administer it lifesaving medications to get it out of hospital and back on the job. The mainstream economists as well as economic think-tanks like the Institute of Policy Studies or IPS and newly-established Advocata Institute had warned the Government that it was deep in crisis and running out of time.
An unheeded warning
For instance, IPS releasing its State of the Economy Report for 2015 warned the Government in October about this sad eventuality. A review of the report highlighting this waring was made by this writer in a previous article in this series (available at: http://www.ft.lk/columns/ipss-soe-2015-has-delivered-a-strong-message-to-govt-which-it-cannot-ignore-reform-or-perish/4-487845). This writer who reviewed the report at its launch drew the attention of the Deputy Economic Enterprise Reform Minister Eran Wickramaratna to the gravity of the crisis in the economy (available at; https://youtu.be/igsAaLP2wBY).
When the Government postponed the needed economic reforms and the then Finance Minister Ravi Karunanayake sought to resolve the burning foreign exchange crisis by getting an imaginary Belgian investor to bring in $ 1 billion, its fallacy was pointed out in another article in this series (available at: http://www.ft.lk/columns/the-illusive-rescue-of-the-rupee-by-an-elusive-belgian-investor-is-the-yahapalana-government-on-the-/4-519497).
In January, 2016, the Government hosted the first ever Sri Lanka Economic Forum in Colombo with support from economists from Harvard University’s Center for International Development or CID. A video record of the proceedings of the Forum could be accessed at https://youtu.be/kMF6nRc7E-o. At this Summit too, the main focus was how to get out of the economic crisis and place Sri Lanka on a long term economic growth path. But still no action was taken and it appeared that the Government would have expected the crisis to disappear on its own.
Then, in July 2016, the Ceylon Chamber of Commerce or CCC hosted the Sri Lanka Economic Summit in Colombo. This Summit had advised the Government to ‘focus, act, and deliver’ to place Sri Lanka back on a fast development path. The strategy for achieving this goal has been, as the Summit had thematised, to change from ‘issues to solutions, potential to performance and rhetoric to action’. That was a fine piece of wisdom given to the top leaders of the Government by the country’s leading business chamber. The subsequent actions of the top Government leaders showed that that wisdom had been transmitted to deaf ears.
Sitting on the crisis without taking needed action
Now, three-and-a-half years have elapsed since the Government has taken control of the management of the country’s economy. Except on the inflation front where inflation has largely been subdued, there has not been any significant improvement in any other area in the macroeconomy. The Government was expected to consolidate the budget by expanding the revenue base, curtailing the expenditure programmes, narrowing the budget deficit and slowing the growth of public debt.
However, the achievement has been only with respect to a marginal improvement in the revenue base and the enactment of a new revenue legislation. Since new loans had to be raised in order to pay interest and repay the maturing loans, the debt stock too continued to increase unabated. As a result, the debt to GDP ratio which had been declining marginally in the recent few years took a reverse turn in 2017. Though the Central Bank had purchased some $ 2 billion from the market to build the country’s foreign exchange reserves in the last one-and-a-half-year period, a part of that had to be sold in the market to prevent the rupee from further falling in recent times.
When the deficit is massive, using the country’s reserves to hold up the rupee will be an abortive exercise. Hence, as Sri Lanka had already experienced it in 2000 and 2012, sooner or later, the Central Bank will have to give up its hold on the exchange rate. If this happens, no amount of IMF support will be able to prop up the rate.
Immediate action needed
Sri Lanka therefore needs to take immediate measures to arrest the current declining trend and place the economy on a long term economic growth path. It calls upon the Government to introduce an economy-wide economic reform programme. All economic reforms are painful since they require at least some section of the population to make sacrifices.
In the current political environment, these are difficult and challenging tasks. But, they are not impossible to accomplish if the political leadership has the will, dedication and commitment to take the country through the needed reform programme.
Above all, what is needed is the capacity and ability to manage the reform programme. An essential part of the management capacity is getting the public support for reforms.
Flawed economic management
Since coming to power in January 2015, the management of the country’s economy had been placed under a Cabinet sub-committee titled Cabinet Committee on Economic Management or CCEM that functioned under the chairmanship of the Prime Minister. Instead of coming up with an effective macroeconomic development plan and a strategy, CCEM devoted its time and energy to sort out day to day micro issues in the economy. Now, CCEM has been dismantled and its powers have been assigned to another high-powered body titled National Economic Council or NEC. While all the members of CCEM are also members of NEC, it functions under the chairmanship of the President supported by a special secretariat.
In April 2018, NEC announced that it had formulated an economic plan for the country. However, it has not been released to the public domain and therefore, members of public have not been able to assess its adequacy, suitability or efficacy. Meanwhile, NEC has continued to address day to day micro issues like its predecessor, CCEM.
Some of the issues it had handled, according to reports, have been whether fertiliser should be issued to farmers in the form of a cash subsidy or a quantity subsidy, whether the tea sector should be permitted to use the banned pesticide ‘glyphosate’ or whether medical consultations should be exempted from VAT or not. These are micro issues that should have been resolved by the respective ministries. Surely, they are not the functions of a national economic council.
NEC should address macro issues
Then, what should NEC do in order to take Sri Lanka out of the current economic crisis? It can take cue from the Economic Planning Board or EPB setup by President Park Chung-hee in South Korea in early 1960s. EPB, staffed by technocrats rather than military personnel, took a macro view of the Korean economy and formulated its policies accordingly.
It came up with a series of five-year plans that concentrated on promoting exports, developing science and technology, reforming the university system to support industrial growth, increasing national savings for investment in industry and commerce and supporting the establishment of heavy industries like steel, ship-building and chemical industries.
These strategies were converted to plans and plans to projects. They were then implemented with close supervision by the President himself. The results were impressive and South Korea began its journey from a very poor third world country to a developed nation within a single generation. Poverty in Korea was reduced from about a half of the population in early 1960s to less than 5% by 1990s. The secret was nothing but the effective management of economic policies.
Political leadership should set an example
Hence, NEC in Sri Lanka should change its focus from micro to macro now. The economic plan which it says it has formulated should be released to public domain immediately in order to win the support of the people. This is because without public cooperation, no plan could be implemented successfully.
Winning public cooperation is another art and it is necessary that all the top political leaders of the Government master that art. An important requirement today is to prepare the people for the hard times they are to face in the coming years. To get their support, it is necessary that top leaders in the Government should set an example by going for a voluntary cut of their perks.
Malaysia’s new Prime Minister Mahathir Mohammad set a fitting example by cutting the salaries of ministers by 10%. This is not much but it has a tremendous mass appeal by generating a highly productive communication effect. The argument made out was that in order to gain capacity to repay the mounting foreign loans of the Malaysian Government amounting to some $ 170 billion, the country needs to make sacrifices and the political leadership is in the forefront in making those sacrifices.
Politics should not prevail on economics
A general political wisdom, as the left-wing politician Colvin R. de Silva had once remarked, has been that good politics does not go along with good economics. What he meant by good politics was the political mastery to win elections.
That may be true in normal times. But when a country has been engulfed in a deep economic crisis, practicing bad economics to win elections would send the economy further down the drain. Along with the economy, the political party too will go down in the drain. Hence, given the intensity of the current crisis, politics should not be allowed to prevail on economics.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at firstname.lastname@example.org.)