To bridge trade deficit, Sri Lanka’s approach should be offensive
Thursday, 9 January 2014 00:00
After the presentation of the Government Budget for the year 2014 by the President, the Secretary to the Treasury in a public speech, responding to the criticisms of the Budget, stated that the economic policies of the Government were not defensive. The reason for this remark was the allegation that the Government was trying to take the country’s economic policies back to the 1970s by increasing tariffs on certain imported products in order to encourage domestic production of the same.
Sri Lanka had been experiencing a trade deficit for a long time. A trade deficit means the amount paid for the imports to the country exceeds the income generated by the export products. There are simple remedies for this. One is to increase the export income and the other is to decrease import expenses. In order to increase the income the approach should be offensive and in order to decrease the import expenses the approach should be defensive. It appears to be that the Government prefers to be on the defensive.
Whether it is in trade or in sports or in war or in politics, to be successful one has to be in offensive mode. It has to be implemented while preserving one’s own defence. Then from the beginning he is in the winning mode. He has to work to establish his success. If one is basically in defensive while in offensive wherever possible, then he is in the losing mode from the beginning. He has to work to convert his possible failure to a success. The war which was ended four-and-a-half-years back was won because the commanders and the Government adopted an offensive policy towards it.
Focus on State sector
The Government works with placing a higher weight to the State sector. The slogan that the private sector is the engine of growth which was adapted sometime back appears to be no longer valid. The State sector is being strengthened and there are more and more graduates employed by the Government.
Employment opportunities of the State sector are not preferred much by the young graduates and there is an ideology that their qualifications and the capabilities do not match the requirements of the private sector.
The Government acquired some of the privatised ventures. Using the Employees Provident Fund in the stock market, the Government acquired a considerable number of shares especially of commercial banks and influenced the management of those banks by appointing directors in proportion to its shareholdings.
Governments of Sri Lanka have been maintaining a budget deficit for a long time. As a result there is a tendency that domestic interest rates and rate of inflation would increase and thereby exporters would be affected since the cost of production would rise. Exporters in general used to set-off this adverse effect against the depreciation of rupee, which is inevitable due to the policy framework. Since the present Government manipulates the exchange rate artificially, exporters are severely affected.
Export enterprises continue to export raw materials without any value addition, with certain exceptions. For instance, cinnamon is largely exported in the same form we exported it in the Dutch period. There are a very few exporters with a broader vision
The Government keeps the income tax rate for exporters at a lower rate of 12%, which is commendable. Commercial banks do not offer any concessionary interest rates to exporters. Although the Government encouraged the commercial banks to give long-term loans to the business community, the banks wish to settle on short-term loans. The main criterion the banks consider when granting a loan is the collateral, especially to the small and medium scale entrepreneurs. Neither the strength of the project proposal nor the ability to repay the loan is considered as the primary criterion.
In a country if the banks are in the top slots of leading companies, the development of that country should be lopsided. That is what happened in Sri Lanka.
Government usually strengthens the State sector while promoting import substitutes. To promote exports the Government has to strengthen the private sector including the small and medium scale entrepreneurs.
The other major receipt of the country is the remittances from mainly the poor who go abroad for employment. These remittances are being increased but successive governments failed to do anything substantial for this group of people.
In comparison to the income from the tourist industry and the cost incurred by the Government in this sector, the foreign remittances the country receives from the persons in foreign employment and the cost incurred by the Government for the betterment of their conditions, the difference of treatment is evident abundantly. The reason is that this group is less affluent and unable to lobby the Government for favourable conditions.
The foreign exchange policy of the Government adversely affects this group of people although the whole country including the rich is depending on them for the lavish import expenses. The Government pays less attention continuously to improve the productivity of the local labour in foreign countries by using education.
Private sector has failed
The private sector of the country has failed to make a considerable influence on the Government. They keep praising the Government for the comparatively insignificant benefits they get. They have failed to analyse and criticise the overall economic policy of the Government. The private sector today comprises a bunch of people without straight talk and with submissive behaviour.
The table gives important economic data of a few Asian countries for 2012. It appears to be that the other countries also achieved much-talked-about economic gains of the country.
All the countries other than Pakistan have achieved an economic growth over 5%. Budget deficits of Indonesia, Thailand and Bangladesh are comparatively lower. Inflation is lower in Indonesia and Thailand and then in Sri Lanka. Once again in those two countries the prime commercial lending rate is low; thereafter it is low in India.
The lowest unemployment rate is in Thailand and then it is low in Vietnam. Contribution of exports to GDP is high in Vietnam and Thailand. In those two countries the gap between imports and exports is low and exports are more than the imports.
In Sri Lanka, public debt is alarmingly high. Across the globe Sri Lanka is among the countries whose debt to GDP ratio is very high. In order to develop the country there is no doubt that debt has to be obtained, but the issue is whether we get the best terms and whether the funds are utilised effectively.
Uneven income distribution
The higher Gini index reveals that the income distribution is uneven. Other than Thailand, this is higher in Sri Lanka. This is one reason for the political turmoil in Thailand. In Sri Lanka in the recent past the poor were taxed by the Budget proposals and certain concessions were given to the rich. Tax revenue of the country has reduced and the rumour that there would be a tax on wealth did not materialise.
A major portion of the tax revenue comes from the indirect taxes including VAT and the contribution of the direct taxes keeps on coming down. As a result the contribution of the poor to revenue is going up and the same of the rich is coming down. This bitter pill is sold to the people with the coating of Sinhala-Buddhism.
Among the above countries Sri Lanka provides the lowest percentage of GDP for education and Vietnam provides the highest percentage.
Staggering public debt
The economic benefits Sri Lanka has gained after the end of war which was a grand opportunity were not sufficient and we cannot be proud of the achievements. In fact we should be afraid of the staggering public debt.
For the long-term benefits of the country, it is mandatory to increase exports. The Government failed to have a considerable impact on this. In addition to that, the attitude of the private sector, the commercial banks and the Secretary to the Treasury towards this objective is not correct.
(The writer is a Chartered Accountant by profession and holds a Master of Business Administration degree awarded by the Postgraduate Institute of Management of University of Sri Jayewardenepura.)