Monday Dec 16, 2024
Monday Dec 16, 2024
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If Sri Lankans aspire to live in a more equitable and democratic society, they must fight for a political system that will control the economic and political interests of State-created monopolies through the licensing system. Although small and petty corruption contributes to inefficiencies, it is the larger structural and political systems that are fundamentally corrupt and highly damaging to the nation – Pic by Shehan Gunasekara
Sri Lanka’s ongoing economic crisis is exacerbated by the imperfections and inherent unfairness of global economic and financial systems and its own lack of adequate economic and monetary sovereignty to navigate towards a better future.
Internally, the failures in the country’s existing political system assists a few stakeholders possessing high levels of economic and political capital to negatively impact the long-term wellbeing of the country as a whole, through influencing policy choices that protect their State-enabled monopolies within the economy.
Sri Lanka can free itself from its current external debt trap by pivoting away from some of its existing industrial strategies and utilising the fiscal space available to the Government towards programs that can improve its current account deficit. Its citizens have a key role to play in using the democratic process to fight for essential political and economic reforms.
As a sovereign nation, public policies for advancing the wellbeing of all citizens and environment must be at the heart of any economic strategy of a Sri Lankan democracy. Monetary sovereignty will allow Sri Lanka to have a degree of economic independence and self-determination in crafting and implementing robust public policies that work for the country.
A country that fulfils the following four criteria has complete monetary sovereignty:
Sri Lanka fails to meet some of these criteria. The country’s monetary sovereignty is compromised by its level of external debt and its need to strengthen the local currency against the US dollar. The Government often has to sacrifice public wellbeing by cutting programs such as health, education or housing because of Sri Lanka’s dependency on whether the economy can absorb uncertainties arising from a major external event or an exchange rate depreciation.
External debt crisis is a problem
One of the primary drivers that weakens Sri Lanka’s ability to gain monetary sovereignty is external debt.
The root cause of Sri Lanka’s external debt crisis has many components. Examples include the lack of energy sovereignty, high-levels of non-essential imports and deficiencies in the industrial structures that drives Sri Lanka to export low value-added content and import high value-added content.
This leads to constant pressure in the form of trade deficits that in the end materialises eventually in the depreciation of the SL rupee relative to the US dollar. That depreciation if left unchecked will immediately hurt Sri Lankan consumers. Energy imports and imports of basic necessities such as medicines will become more expensive for domestic consumers. This means there would be ‘imported’ inflation which at times leads to social unrest and uprisings.
To avoid imported inflation the Central Bank intervenes to artificially fix the exchange rate by borrowing US dollars. This constant trap of trade deficits pressures the Central Bank to borrow even more in US dollars. In order to pay off this external debt Sri Lanka’s economic strategy is redirected to earn as many dollars as possible through tourism, worker remittances, Foreign Direct Investment, State asset sales, attracting foreign investors and accelerating exports.
Aspects of these strategies are often a debt trap. Sri Lanka’s economic strategy disproportionately focuses on prioritising the needs of tourists, foreigners and multi-national corporations, in order to raise the US dollar revenue rather than meet the core needs of local people and environment.
Earning sufficient foreign exchange that benefits people is challenging
Tourism does bring in US dollar revenue, but there is also a financial and environmental cost the country has to bear. Many imports are required to support the tourist industry such as food, transport, equipment and luxury items. The damage to the environment can be significant with depletion of local natural resources as well as overuse of water, pollution and waste. Tourism also puts enormous stress on local land use.
The net benefit to Sri Lanka from tourism is limited if lost opportunity cost from people and resources being redirected towards the industry are also taken into account. On balance, a strategy to position Sri Lanka as a lower-volume, higher-value destination may be more beneficial for a majority of local people.
By chasing Foreign Direct Investment (FDI), Sri Lanka can end up in a race to the bottom by lowering standards for health, environment and labour to attract the multi-national corporations who are essentially coming in to take advantage of the assembly line status of the country.
Most industries import high-value components to produce low value-added content, and the profits from these industries are often repatriated rather than reinvested in Sri Lanka. FDI should be encouraged when it aligns with national priorities and provides sustainable long-term benefits to the country.
Exports are necessary for acquiring much-needed foreign currency to purchase essential products and services that domestic industries are unable to supply. The need to move away from low value-added content is important as most export industries often rely on imported technology, capital equipment and intermediate goods. But in the process of encouraging exports, Sri Lanka should reclaim more of its economic sovereignty as it often subsidises electrical bills and labour costs.
Export industries must improve wellbeing of people and safeguard the environment as this does not always happen. For example, the tea industry struggles to meet this challenge as a significant portion of additional value to the commodity is created overseas. As a result the quality of life of over 200,000 tea plantation workers (earning less than $ 5 per day) has not enhanced significantly even after 70 years of independence.
Privatising State-Owned Enterprises or selling-off State assets is only a band aid solution to pay off some of the external debts. Once privatised and money is spent, Sri Lanka is back to square one. This is not a sustainable long-term strategy.
To attract foreign investors to the local financial market and away from mature global stock markets, Sri Lanka should refrain from manipulating interest rates, monetary policy, tax policy or eliminating capital controls. These strategies unfortunately attract mostly financial speculators rather than serious long-term investors who do not like economies that manipulate interest rates and exchange rates for short-term economic boost. Sri Lanka would then end up with a financial crisis as soon these speculators leave the economy.
Remittances from migrant workers are a significant contributor to foreign debt reduction. However, encouraging large numbers of young and able citizens (mainly women) to work in countries with poor employment standards to face incredible hardships in exploitative industries should not be a key pillar of Sri Lanka’s economic strategy.
Sri Lanka needs an economic development strategy that pivots away from previous strategies that have been tried for decades and left the country with massive external debts as well as high levels of inequality.
Increased economic and monetary sovereignty is a solution
Key to achieving monetary sovereignty is Sri Lanka addressing issues of energy sovereignty, non-essential imports and low value-added content of industrial production.
Firstly, Sri Lanka has to invest in renewable energy production domestically, in order acquire a level of energy sovereignty.
Secondly, Sri Lanka will need to identify and control the level of non-essential imports such as luxury vehicles, single-use plastics and food items that have domestic substitutes.
Thirdly, it will be critical for Sri Lanka to invest in its population so that they may increase their knowledge and skills in the ‘value-added’ sector of the industrial system through education, language (English), technical and vocational training.
Developing an industrial strategy built on and designed to move industrial production capacity from low-value added content to high value added content is fundamental. This must ideally be done in partnership with universities and with a commitment to fund research and development in strategic areas to acquire a stronger degree of economic resilience to external shocks.
Additionally, it is necessary to invest in mobilising domestic resources into sustainable agriculture to reach a level of self-sufficiency adopting agricultural practices that protects the environment.
Sri Lanka can set national priorities and stop the importing of inflation with strategic Government spending. The full capacity of the Government to spend, namely its fiscal policy space, is much larger than the conventional prescription of taxing and borrowing revenues. In reality, as a currency issuing sovereign government, its spending capacity in SL rupees is limited only by the risk of inflation.
Risk of inflation can be managed
The risk of inflation is determined by two key factors. Firstly, it is the availability of productive capacity in the economy. It is the upward pressure on prices caused by a shortage of equipment, skilled labour and materials an economy could have otherwise absorbed. However, with a sound industrial strategy, adequate industrial planning to deliver it, and investment in strategic areas to increase availability of productive capacity this risk can be controlled.
The second source of inflation is an uncontrolled abuse of market power. Key players with corporate interests in crucial areas of the economy (healthcare, transport, energy, real estate, food) increase their prices just because they can. Government regulators allow them to get away with raising prices and abusing their market power in the economy. This type of inflation cannot be eliminated by lessening Government spending or implementing austerity policies.
The only way to tackle these abuses of the system is through taxing and regulating their market power out of existence and by making these markets more competitive. It is necessary to reclaim the democratic process where elected officials who are the regulators use the power of the State to regulate market conditions to increase the fiscal capacity of the Government.
There are many reasons for taxation but none of them are to fund public spending. For example, Sri Lanka can tax fossil fuel companies to decarbonise the economy; can tax tobacco companies to achieve behavioural change; can tax financial institutions to reduce their power and influence in the economy and can tax citizens to reduce destabilising levels inequality.
Taxation can also be used to remove the excess money supply in the economy that is inflationary.
Political and economic reforms are a pre-requisite
The Government invests in national priorities to improve capacity to produce and in strategic areas such as health, education infrastructure and in areas of food security and renewable energy and so on. The Government also incentivises the private sector and supports entrepreneurship to deliver products and services that are in line with national priorities defined through the democratic process.
This is only possible if Sri Lanka elects public officials who are ready to take on the challenge of regulating, including potentially, people who contribute to their campaigns and political parties.
Situations such as when the Government gives exclusive import licenses to individuals to bring in strategic resources, for example, medical equipment, technologies or key food items, reduces the effectiveness of a government’s ability to set it policies for the benefit of the country. This practice allows for the accumulation of large political capital and economic capital that enables these parties to block any domestic industry that challenges their economic interests, by using their political leverage.
Similarly, there are exporter license owners who enjoy exclusive privileges. They also develop economic and political weight and acquire many benefits such as having offshore bank accounts and foreign currency back accounts for bringing in US dollars into the economy.
Certain sectors are extractive industries that need to be tamed if they block the development of domestic production systems required to help the country acquire larger productive capacity for internal economic development.
If Sri Lankans aspire to live in a more equitable and democratic society, they must fight for a political system that will control the economic and political interests of State-created monopolies through the licensing system. Although small and petty corruption contributes to inefficiencies, it is the larger structural and political systems that are fundamentally corrupt and highly damaging to the nation.
The grotesque levels of inequality and poverty that can be witnessed, even in cities such as London or New York, should provide the motivation as to why Sri Lanka must strive for more economic and monetary sovereignty to buffer itself against unchecked abuses in the global economic and financial system whilst selectively engaging with international partners in implementing sustainable development programs.
A successful transition to a stable economic system in Sri Lanka is possible with a reformed political system and a clear strategy to achieve more economic and monetary sovereignty.
(The writer is an elected local councillor in London, UK representing the Labour Party.)
