Budget deficit the root cause for Lanka’s economic woes: CB Chief

By Devin Jayasundera

Central Bank Governor Dr. Indrajit Coomaraswamy reflecting on Sri Lanka’s fiscal policy environment stressed that the ongoing economic woes are a direct result of the deepening budget deficit which has thrust the country’s macroeconomic stability into a continuous state of flux. 

“What has happened in the last 30 odd years is that the budget pumps excess demand into the system. This creates a large fiscal deficit due to a combination of populist politics and entitlement culture. The budget has never been controlled or difficulties in control,” said Coomaraswamy addressing the gathering of the annual general meeting of the Sri Lanka Ceramic & Glass Council. 

Last week former Deputy Central Bank Governor W.A Wijewardane also commented on the danger in adapting Keynesian expansionary policies a common infatuation of all elected governments from 1978 onwards. Stimulus led economies create outsized public deficits which generates excess demand resulting in high inflation, high interest rates and over-valued exchange rate. “That’s a 180 degree difference from the characteristics of the successful economies of Asia,” he said. 

Referring to the Government’s fiscal consolidation efforts, Coomaraswamy said that in the recently-presented Budget, the deficit target has been bought down to 4.6% GDP for 2017 and it would reach 3% by 2020.

In numerous post-budget forums the business community has been requesting the Government to ensure consistent policies. According to Coomaraswamy, the root cause of policy inconsistency is also attributed to budget deficit due to the low cash flow in the budget and in the current account of the balance of payments.

“If you fix the budget and fiscal cash flow problem and also improve the cash flow problem of the balance of payments, a lot of these policy volatility experiences will also go away. It is an absolutely necessary condition to get the fiscal situation in order. So the Central Bank can deliver low nominal interest rate and a competitive and a stable exchange rate,” said Coomaraswamy. 

The country is to finalise the proposed Free Trade Agreements (FTAs) with many of the major regional powers in the next six months.  Among theses the controversial Economic and Technology Cooperative Agreement with India and the FTAs with China and Singapore are to take the main stage. If the agreements succeed Sri Lanka will have preferential access to India, the fastest-growing economy in the world and also a key investment hub for Chinese maritime silk route. 

The CB Chief believes that global cooperation would provide a golden opportunity to expand its market which would inevitably entice the foreign investor community. “In about seven months’ time it is possible and hopefully probable that Sri Lanka will have preferential access for about three billion people. This is our unique selling proposition,” he said. 

Sri Lanka has been enjoying healthy relationships with capital surplus countries like China, Japan and Korea. Coomaraswamy opined that the country should leverage these excellent inter-governmental relations to expedite the process of global cooperation. “But first we have to do our part to create the right environment, if they need land we need to clear land quickly. Make the Customs and logistics work well. We can’t just sit back. There is real opportunity to be grasped,” said Coomaraswamy.

The Government is in talks with China to finalise the deal of the Mattala Airport and the Hambantota Port. The Chinese have partially agreed to take on 80% of the port and also expressed interest for 15,000 acres for an industrial park. “They have said they can bring 2,000-2,500 companies if we are ready to absorb it. This is because their costs are going high in South China. We are one of the countries that they are willing to look at to base,” he said. In the Eastern Province, a Singapore-led investment project is also in the works. “All these plans, by the time they materialise it is going to take three to four years before you really see a big impact. In those next 24 months it is the domestic private sector that has to drive growth and create jobs,” asserted Coomaraswamy.

“There’s enormous promise. But unless we are really focused on things like productivity, competitiveness and delivery, we won’t be able to gain the full benefits of what is potentially extremely promising conjuncture for the country,” he added. 

        Pix by Ruwan Walpola