Waning Economic Euphoria And The Impending Crisis Of Governance
By Muttukrishna Sarvananthan -
Muttukrishna Sarvananthan
Dr. Muttukrishna Sarvananthan
The immediate post-civil war years of 2010 and 2011 in Sri Lanka were trumpeted as record-breaking eight percent or greater annual real growth rate of the Gross Domestic Product (GDP) for two consecutive years including the highest ever economic growth rate of 8.3% recorded in 2011. However, the GDP growth rate in 2012 is unlikely to exceed six percent and the prospect for 2013 is even less. Besides, post-civil war economic growth rates all over the world are always in double-digit and therefore there is nothing to gloat about the high single-digit growth rate in Sri Lanka in 2010 and 2011.
The quarterly GDP growth plummeted to 4.8% during the third-quarter 2012; lowest quarterly growth rate since third-quarter 2009 (4.2%). The agriculture sector, in particular, recorded negative growth of (-) 0.5% during the third-quarter 2012 largely due to severe drought. The agriculture sector is expected to have declined even further during the fourth-quarter 2012 because of severe floods in the major agricultural districts throughout the country in the Eastern, Northern, North Central, and Southern Provinces causing extensive damage to the agricultural crops. The last and first quarters of a calendar year are the main agriculture season (Maha) in the country. More critically, the services sector growth rate of 4.6% during the third-quarter 2012 was the lowest quarterly growth of that sector for more than a decade. The deceleration of the services sector growth rate is critical because the services sector accounted for 58% of Sri Lanka’s GDP in 2011 whereas the agriculture sector’s contribution was only 12%.
The external sector of the economy is even more precarious because the trade deficit in the first eleven months of 2012 was (-) $8.6 billion and is likely to have reached at least (-) $9.5 billion by the end of 2012. While total exports (in terms of US$ value) declined by (-) 6.6%, total imports declined by (-) 4.5% during the first eleven months of 2012. About half of the trade deficit would be compensated by net income from services trade and net transfers (foreign remittances). That would still result in about (-) $4.5 billion deficit in the current account of the balance-of-payments in the external sector in 2012. The total income to the capital account of the balance-of-payments is unlikely to erase the huge deficit in the current account. Therefore, there is a serious likelihood of the overall balance-of-payments in red (deficit) by the end of 2012 for the second consecutive year; probably by a lesser amount than in the end of 2011. The overall balance-of-payments was in deficit by (-) $1.1 billion by the end of 2011.
The critical state of the overall balance-of-payments was indirectly admitted by the Secretary to the Ministry of Finance who has indicated of seeking $1 billion from the International Monetary Fund (IMF) in 2013 “if IMF is willing to provide loans for budgetary support and infrastructure development activities in the country”. (See Daily News, Business page 1, 07-01-2013) I am afraid it is not the mandate of the IMF to provide development financing to member countries; IMF’s sole function is to lend to countries experiencing shortfalls in foreign exchange reserves because of deficit in the (overall) balance-of-payments account or countries unable to service its external debt. It is a pity that the longest serving Finance Secretary is unaware of the division of labour between the two Bretton Woods institutions, viz. International Monetary Fund and The World Bank. The foregoing statement by the Finance Secretary is also an admission of the un-sustainability of the state-driven public infrastructure-led development strategy pursued since the end of the civil war in May 2009, which is yet another expression of the waning of economic euphoria.
The Fitch Ratings in a recent report highlighted the vulnerabilities of the financial sector in Sri Lanka dominated by the state-owned commercial and specialised banks and government interference in the private banks and financial institutions through the purchase of shares by the government and nomination of government appointees to the governing boards of those institutions. The financial sector in Sri Lanka is further destabilised by the unethical and illegal disclosure of bank account details of the Chief Justice thereby prompting relatively richer people including senior bureaucrats and politicians to stash their money overseas.
The point-to-point rate of inflation has been fluctuating between 8.9% and 9.8% since June 2012 narrowly avoiding hitting the market sensitive double-digit. The point-to-point rate of inflation was 9.2% in December 2012; the highest since January 2009. The annual average rate of inflation was 7.6% by the end of 2012 compared to 6.7% at the end of 2011. The annual average rate of inflation by the end of 2012 was the highest since the end of 2008. In terms of both measures, inflation at the end of 2012 was the highest in the past four years (2009-2012).
The domestic sector of the economy is expected to continue to deteriorate as the government will attempt to buy the support of the masses through new recruitment and pay rises to the public sector (middle-class) and extravagant subsidies and hand-outs to the rural population in order to contain the widespread discontentment caused by the arbitrary and illegal impeachment of the Chief Justice, which would result in soaring fiscal deficit. Moreover, the crisis of governance caused by the arbitrary and illegal impeachment of the Chief Justice will seriously undermine business confidence within the country and severely restrict the flow of Foreign Direct Investments (FDIs) to the country. No sane foreign investor would invest in a country where the Executive and the Legislature blatantly violates the Constitution of the country which they have taken oath to uphold. This is on top of the enacting of the “Act to provide for the vesting in the government identified underperforming enterprises and under-utilised assets” of 2011 (popularly known as the Expropriation Act).
There do not seem to be any prospects of the external sector of the economy bouncing back in 2013 because of the continuing crisis in the major markets for Sri Lanka’s exports (viz. the USA and UK), negative perceptions (in the USA and UK) caused by the serious assault on the rule-of-law in Sri Lanka, and because of the overvalued rupee due to arbitrary interventions by the Central Bank of Sri Lanka in the foreign exchange market. China, for example, undervalues its currency in order to boost its exports. Ironically, in Sri Lanka the rupee is overvalued in order to artificially keep inflation in single-digit (by lowering the costs of imports) and minimise the burden of external debt servicing.
The economic policies pursued in 2013 should ensure that it will not be a repeat of the year 2001 when the economy recorded negative growth rate for the first time since independence following 6% growth in the previous year 2000.
*Muttukrishna Sarvananthan Ph.D. (Wales), M.Sc. (Bristol), M.Sc. (Salford), B.A. (Hons) (Delhi) hails from Point Pedro, Northern Sri Lanka, and a Development Economist by profession and the Principal Researcher of the Point Pedro Institute of Development (PPID), Point Pedro, Northern Province. He has been an Endeavour Research Fellow at the Monash University (Melbourne, Australia) and Fulbright Visiting Research Scholar at the George Washington University (Washington D.C, USA.) as well. He can be contacted at sarvi@pointpedro.org
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whou chin - January 21, 2013
4:34 pm
Many Thanks for this analysis Dr. Muttukrishna.
The Chinese economic policy of under valuing the Yuan is to ensure that the REAL ECONOMY grows by expansion of production and manufacturing, whereas the overvaluation of the rupee (which is going to crash as it did last year) soon is to sustain a fake property/apartment market bubble, while killing the real economy – production and manufacturing.
This is fake growth and as we all know the Krish Sky scrapers are pure fiction – the higher the towers the nearer the massive crash and busting of a real estate property BUBBLE that will expose the fictitious nature of the growth figures manufactured by the Rajapakse rogues and their putrid “economic development policies” policies masterminded by the uneducated LA petrol pump attended Basil Rajapakse who knows nothing about economics or development and is looting the Lankan Tax payer.
Dinuk - January 22, 2013
2:12 am
This is a surprisingly weak outline compared to previous work by a committed research economist. It is especially disappointing, as the subject is a critical area for the regime as well as the masses.
While the writer dwells a great deal on some remarks by over the top political and arrogant TS dr. PBJ, (that apparently he got his wired crossed) and to surmise that it’s a further indication of the weak public finance situation, it doesn’t tell us much about the economic health through a sound analysis backed by data on public borrowings etc;.
What we would like to learn from the writer are the researched numbers and his analysis on what continue to weaken the economy ( in addition to growth rates). This is especially relevant here because he refers to the impeachment, the vital and central factors such as the determination by the SC (headed by legal CJ) on the appropriation bill and constitutional limits to public borrowings and the overall validity of the entire 2013 budget. In a context of all including the opposition hushing up this unconstitutional act which is central to good governance in its most basic sense, maintaining public trust on finance of the country, is it not reasonable to expect that in a piece that touches on macro economics and governance?
And with the continuous public borrowings for govt. led infrastructure and other ventures as determined by the regime what kind of pressures are exerted on the economy in the short and medium terms would be another critical area that we would like to learn from a researcher of this caliber writing on this topic.
I hope as a responsible research economist he will share clearer and to the point thoughts on this significant and timely aspect of the current crisis in governance, where the rhetoric and sloganeering by the regime and its various avatars will not be able to hide the stark economic realities much longer.
anaperera - January 21, 2013
6:10 pm
“Double Digit growth in post civil war economies”,says the writer
Can the writer please let us peasants know where these are?.
US Prez is begging the Congress to lift the borrowings in a less than 3% growth Economy.
Our EU friends can’t get it up even a couple of notches.
And our closest ally in the UK can’t get it up at all.
Our borrowings are pumped into building Roads, Rail,Airpots and Harbors.
These are appreciating assets with increasing returns.
Our Western mates’, Pension Funds will pay many multiples of the earnings for these Infrastructure, in not distant future.
Even our US Ambassador has been on an inspection tour in Hambantota,
She says she is doing her “simple bit” to get her Nationals to invest in Hambabtota,
K.A Sumanasekera - January 21, 2013
7:45 pm
K.A Sumanasekera
“US Prez is begging the Congress to lift the borrowings in a less than 3% growth Economy.”
Sri Lanka is doing very well on the economic front and US economy is doomed to fail according to your comments.
Please recommend MR to lend some dollars to USA out of clan’s fortunes. It would be greatly appreciated by the poor Americans.
“Even our US Ambassador has been on an inspection tour in Hambantota,”
Perhaps the ambassador would have had first hand knowledge of what to avoid if and when US decides to build a new habour. Definitely US will ensure that their habour building projects would not be handed to China.
Native Vedda - January 21, 2013
11:29 pm
Better you shut up on this subject. Shoe is too big to you
Kautilya - January 22, 2013
8:04 am
“It is a pity that the longest serving Finance Secretary is unaware of the division of labour between the two Bretton Woods institutions, viz. International Monetary Fund and The World Bank” Says Dr. Muthukrishna. Let us remember, if he was to observe the spirit of the law or tradition, the man should not be in Govt at all now. The Supreme Court ordered him to be sacked (and fined) – for inefficiency and matters unbecoming a senior official of his standing. But The Family, having none in the country to handle the Finance Ministry to suit their own personal fortunes – as opposed to that of the country – wanted a willing and super sycophant, good at the Greek type of economics. The man cannot show an instant where he ever set right any economic debacle through his expertise.
The tragedy is not that the country does not have the right economists but none of these men/women of honour will sell their souls for perks and a job risking professional and personal integrity. Comes to mind men of established economic expertise such as Dr. Nimal Sandaratne, former Governor/CBSL Jayawardena (CBKs tenure) who certainly can do a much better job to pull the country out of its downward slide.
Senguttuvan
Senguttuvan - January 21, 2013
11:27 pm
No doubt that the country will slide and continue to slide with the the bankrupt and anti-social policies of the govt. Developing a country is not a matter to be entrusted in the hands of thugs and rogues.
Safa - January 21, 2013
11:52 pm
AS I STATED IN AN EARLIER POST, THIS MARCH, WE WILL SEE THE UNITED NATIONS IN GENEVA, PUTTING SRI LANKA IN A POSITION THAT THEY CANNOT WRIGGLE OUT OF.
RECALLING OF ALL LOANS BY INTERNATIONAL MONETARY FUND AND WORLD BANK WILL FURTHER SCREW SRI LANKA.
WITHDRAWAL OF SCHOLARSHIPS, TRAINING AND OTHER EDUCATIONAL HELP GIVEN BY THE WEST, WILL PUT THE ISLAND INTO CHAOS.
TRADE AND ECONOMIC SANCTIONS BY THE WEST WILL TOTALLY CRIPPLE THE ISLAND.
WHEN THIS HAPPENS THE DEVIL DANCERS AND THEIR THUGS WILL HAVE TO RETURN TO THEIR MUD HUTS.
THEY WILL HAVE TO ATTEND NATIONAL VOCATIONAL QUALIFICATION TO REFRESH AND RETRAIN TO ACHIEVE A CERTIFICATE TO PERFORM THOIL DANCE IN RUHUNU.
THEIR PERFORMANCE IN THE CINE CITY OF HAMBANTHOTA WILL ATTRACT THE MILLION TOURISTS.
THE TREE CLIMBING PARLIAMENTARIANS COULD PERFORM THEIR DUTIES AND SHOW THE TOURISTS HOW THE TODDY IS TAPPED AND PRESERVED FOR CONSUMPTION.
THE THUGS IN THE PARLIAMENT COULD SHOW THE TOURISTS HOW THEY ASSAULT, RAPE, MURDER, MOLEST AND THIEVE.
THE ISLAND PARADISE WILL THEN HAVE A REAL GROWTH IN ECONOMY.
Oh Danny boy - January 22, 2013
6:46 am
The political solution in terms of the 13th amendment was implemented over 25 yrs ago and we have a provincial council system to take into account provincial power sharing. This is functioning well now for 25 years. So this is it no more political solutions are forthcoming. Sri Lanka is not going to hand over north east comprising over 28% of its land area and over 66% of it’s coastline to less than 12% of it’s population i.e. northern Sri Lankan tamils at the expense of 88% of the rest of the population. It is never,ever,ever,ever,ever,ever going to happen. The coastal resources are an integral part of any island nation and crucial to it’s existence. The coastal resources, the 200 nautical mile exclusive economic zone is absolutely critical for any island nation. Therefore over 66% of its coastal resources would not be handed over to less than 12% of it’s population at the expense of the rest of the 88% of the population. It would be unfair and unjust and unacceptable, idiotic and stupid to say the least.
If the Sri Lankan Tamils were the majority will they hand over over 28% land area and over 66% coastline to less than 12% Sinhalese? No of course not they won’t be that stupid I am sure and they will laugh at such absurd demands. Honestly will they do this? Of course not they will never do this. So why are the separatists demanding such an absurd demands like federal state and such nonsense without being just and fair to their fellow citizens who need a fair treatment by any means.
monkey - January 23, 2013
9:24 pm
Monkey will not deny the central focus of the 13th amendment was to
allow the North-East to enjoy its own local governance but, as later events proved, Colombo buckled the issue. The Sinhala extreme used a political CJ to undo a near sacrosanct protocol between two governments
on perfidious grounds. The very people to whom the PC system was designed to bring political justice remained denied of this for decades. Apportioning to the LTTE all blame in the failure of the arrangement does not hold water anymore. Why was this facility not extended to the Tamils at least from post 5/2009? If it comes by in 2013/14 it will not be because of good intentions of the regime but due to pressure from the IC.
Senguttuvan
Senguttuvan - January 24, 2013
11:21 pm