Finance Minister and the forex challenge

Finance Minister Basil Rajapaksa

What is the difference between a poor family in economic hardship selling its children to pimps and human traffickers to earn money and a Finance Minister planning to export 300,000 citizens to Japan, Korea, Rumania and UK to receive $ 8 billion remittance to replenish the depleting stock of foreign exchange, to pay for imports and settle national debt?

Why should one condemn the first as inhuman and morally indefensible while tolerating (if not praising) the second as rational economic policy? When a country goes economically bankrupt moral bankruptcy follows. Moral bankruptcy is the handmaiden of economic bankruptcy. Leaving the first for a later discussion, what concerns here is the extent to which the Government has failed in economic management and resorting to desperate and palliative measures live by the day. 

Assuming that the Minister could succeed exporting the said number of citizens, there is no guarantee that the expected $ 8 billion remittance would materialise, with a Central Bank that has created a black market for foreign currency. Why should those who toil abroad under conditions of virtual slavery remit their hard-earned dollars through legal channels when they could get a better rate from black market? Self-interest rules economic behaviour. 

However, and on a positive note, the Finance Minister should be congratulated for being honest about the seriousness of the present crisis. With only $ 1.2 billion in foreign reserves, which would dwindle rapidly before the end of the year unless some miracle happens, and with national debt reaching more than the total GDP, he has warned people of more belt tightening measures. 

But with what confidence the Minister promised that his Government would hand over a debt-free nation to the Opposition when it decides to leaves is a mystery. Does he, his President or their Central Bank Chief have a magic wand? Even if they decide to seek help from IMF after dillydallying for so long, conditions attached to that help would be so severe people would be forced to endure hardship until the economy achieves some stability in the short run. 

The only meaningful way to make the nation debt free and prevent the danger of immiserisation is to earn sustained surpluses in balance of payments and corresponding surpluses in domestic budget. If BOP surplus is huge enough, governments may be able to afford the luxury of domestic deficit. Currently, negative imbalance on both fronts have become so unbridgeable debt default is an imminent possibility. As corollary to increasing exports is the need for massive foreign investment. 

Among all Asian countries Sri Lanka has become the least attractive for foreign investors. According to one source, even during the pandemic years from 2019 to 2021 while all other countries increased their foreign exchange reserves only Sri Lanka experienced a decline.  

Over the years professional economists and policy makers had consistently stressed the need to diversify exports, attract foreign direct investment, modernise the technological base of the country’s production sector, and develop tourism – all as part of a package to narrow the deficit gap. Still, the result remains disappointingly inadequate. Why?

Being a small and open economy Sri Lanka does not enjoy the luxury of being a price setter in any of its exports or imports. It is a price taker. Therefore, as Prime Minister Lee Kwan Yew once said about Singapore, Sri Lanka is also like a cyclist pedalling uphill to reach the summit. 

It is an arduous race involving total dedication. However, while the cyclist pedals relentlessly the road should be free of unwanted traffic and other unnecessary obstacles. 

It is time for policymakers to look for remedial measures outside the economic box and into the non-economic obstacles. Unless those obstacles are removed indebtedness would persist and immiserisation would be unavoidable. In the economist’s jargon, these obstacles, which are mostly socio-political in nature, lie within that convenient phrase ceteris paribus.

Without enumerating and elaborating each of them, it is worth reiterating a point made in a previous piece, where it was stated that there is at present at least a third of the country’s population, predominantly from the two minority communities, who feel victimised, discriminated and dejected because of a political regime that endorses and promote the ideology of majoritarian rule.

It is strange that none of the so-called economic experts and even the Opposition parties for that matter are prepared to discuss dispassionately the impact that this political foundation has on the economy. It appears that every economic policy or plan drafted and implemented is designed to target only the other two third in mind. Even if that two third were to maximise its contribution full economic recovery and steady growth would not materialise. In short, even if a solution to the current crisis could be worked out in the short run and under IMF tutelage, without internal peace and unity, long-term economic prosperity is impossible. 

If the Minister of Finance is so desperate to accumulate dollars by any means, the Foreign Minister has become hypocritical to achieve the same objective. 

In his recent meeting with the Heads of Missions from Muslim countries, with the view to solicit their respective countries’ economic and financial benevolence, he was assuring them that there would be no change in the “rich and varied” personal laws of the Muslim community while concealing the fact, which they know already, that a controversial Buddhist monk has been appointed by the President to Head the Task Force to suggest measures to translate the so-called ‘One Country, One Law’ into reality. 

This again is a sign of utter desperation by a Minister, who is also a scholar in legal studies, to find a way out of an economic catastrophe.

The socio-political foundation of the country has cracked and no economic structure built on it could survive long.  

(The writer is attached to the School of Business and Governance, Murdoch University, Western Australia.)