Central Bank Annual Report 2018
Central Bank Governor Dr. Indrajit Coomaraswamy presenting the Annual Report 2018 to Minister of Finance Mangala Samaraweera end April. State Minister of Finance Eran Wickramaratne, Ministry of Finance Secretary and Monetary Board ex-officio member Dr. R.H.S. Samaratunga, Senior Deputy Governor Dr. P. Nandalal Weerasinghe, Assistant Governor Swarna Gunaratne, Central Bank Acting Director Economic Research Dr. Chandranath Amarasekara and Additional Director of Economic Research Dr. P.K.G. Harischandra are also present
Converting hard labour to fruition
The Annual Report of the Central Bank for 2018 analysing in minute detail the state of the country’s economy today and outlining the prospects for the next five years has just been released (available at: https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/annual-reports/annual-report-2018).
It is a report of the Monetary Board, the legal body that manages the Central Bank, presented to the public through the Minister of Finance. But, it is crafted by a technical team working under the bank’s Director of Economic Research incorporating numerous inputs contributed by the other departments of the bank as well. It is customary for this technical team to work day and night, especially during the first three months of the year, to bring this report to fruition.
Use of graphical pictures to illustrate key points
Improving the presentation style significantly, this year’s Annual Report has liberally used graphic pictures to synthesise the main messages presented in different chapters of the report.
An eye-catching graphic presentation has been the snapshot of national output, expenditure and income 2018, appearing on page 48 of the report. Dissecting the national output by sources and causes, this graphic figure presents the whole story about the country’s total output by means of a single picture. Anyone desirous of understanding the structure of the economy and numerous interconnections involved should carefully study this single graphic presentation. Hence, the bank’s technical staff that has laboured to produce this report should deserve commendation by all.
Alarmingly declining growth rates
However, an important line graph which has been obscured by other colourful presentations has depicted the sad story of Sri Lanka’s economic performance during the last four-year period. Showing the annual real economic growth rate during the reign of the present Government, it has drawn a downward spiralling staircase with a growth of 5% in 2015 but falling continuously since then to reach the lowest stair of 3.2% in 2018.
On average, the annual growth during this period has been at 4% and when it is adjusted for an annual population growth of about 1%, the real income per person, known as the Per Capita Income or PCI, has increased only by 3%, a rate much below the planned growth rate of 8% needed to become a rich country within a generation.
Thus, as I have argued previously, it is four wasted years which cannot be recovered by Sri Lanka now (available at: http://www.ft.lk/columns/Sri-Lanka-s-deep-economic-crisis-Wasted-four-years-and-a-wasting-election-year/4-670265).
Need for quick recovery measures
Hence, what the Government, whether it is this government or any other government that would come to power in the future, should do is to plan for a quick economic recovery in the next few years and lay foundation for a firm and consistent high economic growth in the subsequent 20- to 30-year period.
The strategies for economic recovery during the next few years is essential since the Central Bank itself has painted a gloomy economic picture for the country in the years to come. According to its predictions, growth will slightly recover in 2019 to 4% and move upward sluggishly to about 5% during 2021 to 2023. This is a little higher than what the international agencies like the World Bank and the Asian Development Bank have predicted for Sri Lanka which is on average below 4% per annum.
Even that higher prediction of the Central Bank is, still on average, below 5%, a growth rate woefully inadequate to deliver prosperity to Sri Lankans. This is a warning signal that cannot be ignored by the Government.
What the Government, whether it is this government or any other government that would come to power in the future, should do is to plan for a quick economic recovery in the next few years and lay foundation for a firm and consistent high economic growth in the subsequent 20- to 30-year period. The strategies for economic recovery during the next few years is essential since the Central Bank itself has painted a gloomy economic picture for the country in the years to come. According to its predictions, growth will slightly recover in 2019 to 4% and move upward sluggishly to about 5% during 2021 to 2023. This is a little higher than what the international agencies like the World Bank and the Asian Development Bank have predicted for Sri Lanka which is on average below 4% per annum. Even that higher prediction of the Central Bank is, still on average, below 5%, a growth rate woefully inadequate to deliver prosperity to Sri Lankans. This is a warning signal that cannot be ignored by the Government
Synthesis presented in Chapter 1
Chapter 1 of the bank’s Annual Report is a prerogative of its Director of Economic Research, the officer historically known as the brain of the bank. Synthesising the detailed analysis made in the rest of the report, the Director usually presents a summary of the behaviour of the key sectors in the economy.
On top of this, he or she presents a prediction of its performance in the next five-year period in the light of the expected developments in the global economy which has serious bearing on Sri Lanka. This is then followed by an outline of the policy to be followed by the Government if it is desirous of supporting economic recovery on a sustainable basis.
Gloomy forecast and essential economic reforms
Since the predictions made for the next five years are gloomy, this year’s Annual Report has come up with a set of essential economic reforms that have to be implemented by the Government on a priority basis.
In my view, the policy package in the present Annual Report highlighting ‘what the Government should do’ and ‘what it should not to do’ is a comprehensive set dealing with the policy reforms needed in all the areas. If any political party contesting the next election is interested in mapping out its economic strategy for sustained high growth, this section surely provides the base for it.
Economic reforms to address the low-growth conundrum
Economic growth in the last four years has been low by any standard but the Central Bank, apparently not willing to embarrass the Government, has chosen to call it a ‘moderate growth’. According to the bank, the reasons for this so-called moderate growth have been the postponement of the structural economic reforms which the country should have undertaken many years ago.
These reforms had been recommended by international lending organisations such as the International Monetary Fund, World Bank and the Asian Development Bank for some time. At the same time, the domestic private sector chambers too had advocated for them. Yet, all the successive governments, demonstrating their inability to manage economic policy programmes properly, had either abandoned them midway after embarking on them or not tried out at all for fear of antagonising certain quarters in society.
Ignoring the needed reforms in the past
To the top policymakers in the previous Mahinda Rajapaksa Government, ‘reforms’ had been an anathema. The present Government started its career after the general elections in August 2015 with many promises of economic reforms as pronounced by Prime Minister Ranil Wickremesinghe in the first economic policy statement delivered in Parliament in November 2015.
There were promises about tax reforms, making the Central Bank independent, integrating Sri Lanka seamlessly to global trade, trade facilitating bilateral agreements with almost all the countries in the world and converting Sri Lanka’s low-tech production base to a high-tech base. To plan out these reforms, an Economic Summit was held in Colombo in January 2016 with the support from the George Soros Foundation and Harvard University’s Centre for International Development. Yet, the achievements on economic reforms during the four-year period have been less than expected.
It is ironic that now the Central Bank has to remind the Government of the need for moving into action on the country’s reform agenda if the country is to accelerate its economic growth to required levels.
Key reforms needed
The bank has identified in its Annual Report for 2018 the key areas of failure by the Government on this count. Incidentally, they had all been promised in the Government’s first economic policy statement. According to the Central Bank, these failures have been in the areas such as measures for export promotion, attraction of Foreign Direct Investments or FDIs, reduction of budget deficits and debt levels, reform of factor markets to make them more conducive for growth, strengthening of the Government’s administrative machinery, and observation of the rule of law.
The failure to undertake these structural reforms has not only contributed to the country’s low economic growth, but also made it a laggard among its peer countries. This is observable when one compares Sri Lanka with Bangladesh. While Sri Lanka’s average economic growth during 2014-18 has been at around 4%, Bangladesh had managed to maintain on average a growth rate of about 6.5% during this period despite many natural calamities, political disputes and terrorist attacks.
An important line graph which has been obscured by other colourful presentations has depicted the sad story of Sri Lanka’s economic performance during the last four-year period. Showing the annual real economic growth rate during the reign of the present Government, it has drawn a downward spiralling staircase with a growth of 5% in 2015 but falling continuously since then to reach the lowest stair of 3.2% in 2018
No more cheap labour
The bank has also noted that Sri Lanka no longer has cheap labour and a young labour force. According to estimates made by the World Bank in its Sri Lanka Development Update 2019, the country’s working age population has peaked in 2005 and begun to decline since then.
Thus, the country can no longer enjoy the luxury of moving toward labour intensive industries such as apparel industry. Hence, improvements in productivity and efficiency are a must for the country to move up from a middle income country to a rich country – a feat known as beating the middle income trap. The failure will result in trapping the country in the middle-income category forever.
Enhance value addition of exportable raw-materials via advanced technology
Sri Lanka has been exporting natural resources in raw material form and the bank in its recommendations has advocated for enhancing their value added so that the country could get not only better prices for same but also increase the overall export earnings. But, this requires the adoption of high technology to process these raw materials into value added products. High technology in the very short run had to be acquired from countries that have developed it.
Though the bank has not spelt it out, one way to acquire high technology immediately has been the attraction of global companies to the country either as joint ventures or FDIs. When the country does so, it has to choose products which have huge market potential in the future. In an era where electrical vehicles are being promoted across the globe, better and more efficient batteries will be demanded by users. If Sri Lanka goes into partnership with an international company like Tesla or Panasonic, it is possible for the country to tap this market easily.
In the medium to long run, technology can be developed within the country by engaging its universities and research institutions. In this connection, Sri Lanka can learn a lesson or two from Thailand which is presently on a move to increase its high-tech production base. To support this move, its universities are competitively getting connected to high-tech firms in China, Taiwan, Japan and South Korea, in addition to providing support services to local high-tech companies.
Wide reforms to promote trade competitiveness
The increase in the earnings from the export of merchandise goods and services will enable the country, according to the Central Bank, to meet foreign exchange liabilities more confidently in the future. For that purpose, the bank has recommended that barriers to trade have to be removed.
In this respect, the new trade policy announced by the Government has called for wide reforms in the trade sector to promote the country’s competitiveness. This includes bringing the country to a uniform tariff regime by eliminating numerous tariff measures in force and para-tariff that has been enforced. A single simple tariff system will always help exporters to sell their goods and services to foreigners.
FDIs to bring in new technology
The bank has also recommended that FDIs should be routed to more productive sectors in the economy. Sri Lanka or for that matter any emerging economy in the world cannot have the luxury of attracting every type of FDIs today.
This was the policy adopted by Sri Lanka in the initial phase of opening its economy to foreign investors. It helped Sri Lanka to establish a world class apparel industry that provided an imitation effect to local entrepreneurs. Over the years, it therefore contributed to the transmission of the export structure from predominantly agriculture-based exports to manufacturing based exports.
Now apparels are ‘on-shored’ or ‘near-shored’
However, today, it faces several challenges due to loss of cheap labour, on the one hand, and the presence of new competitor countries such as Bangladesh and Myanmar, on the other. The worst scenario has arisen due to new production systems adopted by apparel consuming Western nations. Taking advantage of robotisation and automation, both North America and Western Europe have begun to establish apparel factories on their own lands, a system known as on-shoring or re-shoring as against off-shoring that had ruled the world a few decades ago.
This has been strengthened by the need for having garments within a short delivery time like three to four days. In this context, garments produced by Sri Lanka will take about 30 days to be delivered to the market.
But the factories located close to the market in countries – now known as near-shoring – such as Turkey, Morocco in Europe and Mexico and Honduras in North America will deliver them to the markets within a short time span. Thus, Sri Lanka has no choice but to change from the present low-tech production system to high tech production systems. This has been cogently recommended by the Central Bank in its Annual Report for 2018.
Tear-free understanding of CB reports
One of the weaknesses in the Central Bank Annual Reports has been that they are presented in technical language not easily comprehensible by ordinary readers. Hence, it is necessary to write commentaries on the Annual Report to facilitate tear-free understanding.
Despite these weaknesses, they contain a wealth of information. Hence, it will not be a waste of time if the top leaders of the Government spend some time in perusing and understanding the messages that have been delivered in the report for 2018.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)