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Political ideology vs. economic reality


Comments / {{hitsCtrl.values.hits}} Views / Friday, 1 July 2016 00:10


sffVery soon it will be tennis at Wimbledon. We will be watching the scintillating long rallies. The ball whizzing back and forth from one side to the other. Whilst ruminating about watching some good tennis, an interesting thought crossed my mind. The political scenario was now becoming like a long-drawn-out tennis rally between economic reality on one side of the net and political ideology on the other side.

Who is winning?

It looked like economic reality was winning. It is thumping a wide variety of shots at political ideology. The revenue deficit, the difficulty in increasing revenue, and reducing expenditure. The parlous state of foreign reserves. Current reserves (most of it composed of loan funds) is adequate for only three-and-a-half-months of imports. The difficulty in finding new loans, to pay interest, and to repay loans.

Have been compelled to go to the IMF for a loan. IMF loans come with conditions. Had to accept the six overall conditions – lower budget deficits, monetary policy reforms, higher Government revenue, reform of State enterprises, stronger public financial management, and supporting higher trade and investment

The response

Political ideology on the other side of the net plays its traditional game very much in line with the DNA of their political ideology. The DNA of the UNP has always been a pro-business, pro-private sector orientation. These are the engines they have always believed in to deliver growth. It has perceived the Government’s role as a facilitator to the private sector. So low taxation, availability of credit, no encroachment of the public sector on activities of the private sector

This is an old record. Not strong enough to meet the onslaught of economic reality.

New tactics

In the context of the sustained attack from economic reality, the coaches in the political ideology balcony have proposed new tactics. A combination of spin, lobs and drop shots to confuse the opposition. So political ideology has changed a gear and is hitting back strongly with this new strategy. It says it is focusing on regaining GSP. Signing the Economic and Technology Cooperation Agreement with India. A Free Trade Agreement with China. An Economic Trade Agreement with Japan. A FTA with Singapore. Making the Port City a financial city with financial, trade and legal services. Developing Hambantota harbour and an industrial zone.

As the DNA of the UNP has always skewed to the open economy concept, political ideology is convinced that the time is right to formulate these outward-looking trade and investment policies which can revitalise Sri Lanka’s export competitiveness and integrate the country more closely with the region and the world.

When?

Motherhood and breast milk is good. This is accepted by everyone. These strategies are like motherhood and breast milk. Everyone will say it is good. It is an idea, but it is also a dream. The question is, when will the dream become reality? Not today. It will be tomorrow. But tomorrow is always late in coming. Whilst waiting for tomorrow, is there a risk of going down the tube like Greece?

An editorial in a leading newspaper summed it up as follows: “The worrisome prospect of the economy taking a turn for the worse cannot be wished away. But the Government carries on regardless bellowing rhetoric and pooh-poohing warnings.”

The grand riposte

In the context of the growing concerns being expressed about foreign reserves, political ideology responded with a grand riposte. Pooh-poohing all concerns (as the editorial said) the Government manifested no concerns about foreign reserves. To prove that there are no problems, exchange control is to be removed! There will be free movement of currency like in all the top countries of the world.

The Governor of the Central Bank said that countries in the region like Singapore and Malaysia do not have exchange control. He said: “As a measure to increase Government foreign reserves, abolishing exchange control is a need of the hour.”

We are in the big boys club is the message. So open the bubbly.

Umpire called

Political reality called foul and claimed the shot was not in the court and was way out.

If the people are to attach any credibility to the statements of the Governor, there is a need to explain many things. Are our reserves adequate to pursue this high-risk strategy of removing controls? Sri Lanka reserves are $ 6 billion, India $ 363 billion, Singapore $ 244 billion, Malaysia $ 95 billion, Indonesia $ 107 billion, UAR $ 78 billion.

Of our comparatively measly reserves of six billion, a part is borrowed money.

The Government must set out its view of the cash flow of foreign reserves, for the next five years.

  • The current position of foreign reserves
  • The annual loan repayments
  • The annual interest payments 
  • The annual inflow of foreign exchange from exports.
  • The annual outflow due to imports
  • The inflows the Governor says will come in when exchange control is removed (and please, from where and when)

Sri Lankans abroad

Now non-resident Sri Lankans can bring funds in and invest in shares or Government securities through a SIA account and take the money out without any problem. They could also have bank fixed deposits, in a SFIDA account and take their money out at any time. It is difficult to see why removing exchange control will increase significantly the inflow of funds from Sri Lankans. As for Foreign Direct Investment, having no exchange control will not be a feature unique to Sri Lanka. Many other countries have no exchange control. There is no logical reason to believe that this alone will bring in FDI.

So we will hold our breath until the Governor explains in detail from where great inflows will come. If they do not come in and if resident Sri Lankans start moving their assets abroad, we will indeed be in a dire crisis.

The match?

Stopped for rain, before the umpire could rule on the validity of the grand riposte.

(The writer has done this, that and the other including the AMP from Harvard Business School, USA.)


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