16 May, 2022

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Advice To Presidential Advisory Committee Of Three Economic Experts!

By Hema Senanayake

Hema Senanayake

On April 07th President has appointed three experts, namely Dr. Indrajit Coomaraswamy (former Governor of the Central Bank), Dr. Shanta Devarajan (former acting Chief Economist of the World Bank and Sharmini Coorey (former Director of the IMF’s Institute of Capacity Development), to help with the IMF program.

Looking at their credentials, one might think, who the hell is this writer to advise them. Yet, if my advice is sensible take it or if not just throw it away.

Sri Lanka is in a dire economic crisis. It needs a quick and short-term solution. But this is a situation where no short-term solution is possible without designing a long-term macroeconomic strategy. Already, IMF has conveyed that message to Sri Lanka. In its recent report IMF’s Executive Board recommends “… the urgency of implementing a credible and coherent strategy to restore macroeconomic stability and debt sustainability…” So, it is clear that the country needs to devise a long-term strategy and coherent plan to ensure macroeconomic stability and for economic recovery. Then only we will be able to discuss the short-term plan for quick financial assistance. Long-term strategy for macroeconomic stability is what is priority. But there is a problem. No long-term strategy and plan for macroeconomic stability is possible unless the said strategy cannot unify the country behind that strategy even though the country is divided politically. Period.

What does this mean? Former Prime Minister Ranil Wickeremesinghe answered this question when he had an argument with Basil Rajapaksa at the recent all-party conference. He said that the IMF’s report must be submitted to the parliament. It is true. You cannot unify the country if the government deals with IMF secretly. IMF doesn’t like secrecy. Similarly, our long-term strategy and coherent plan for economic recovery which is to be submitted to the IMF must be submitted to the parliament. Let it be discussed and debated openly in financial centers, in business circles, in universities and even by trade unions. That is how a country can be unified to support your long-term strategy for macroeconomic stability. This point is clear. Perhaps what is not clear might be the designing of the strategy itself or the philosophical underpinning of it. I would suggest, begin with macroeconomic fundamentals.

Economy is a system. It is a wonderful system put in place by human imagination to achieve the goal of optimum wellbeing for all the members of the society or all global citizens. This system works in a unique way. Understanding it properly, provides an opportunity for policy makers to maneuver certain macroeconomic variables to change the country’s destination towards sustainable and robust economic growth. IMF wants to know whether the country knows this. IMF knows that it doesn’t know everything in every country. That is why IMF tolerates (allows) certain home-grown economic policy approaches even though such experiments could crash within a few years. One notable example is the implementation of the Argentinian Currency Convertibility Act in early 1990s, which was highly admired by Noble laureate Robert Mundell as an example to other Latin American countries. After a short-lived economic boom period that system crashed causing enormous economic meltdown in the year 2000. But at the beginning IMF tolerated the Currency Convertibility Act designed to peg its domestic currency to U.S. dollar. The point is that this example shows that IMF allows certain domestic policies, if they can be well justified on theoretical basis. But IMF is certain that if a country’s macroeconomic stability fails, the country’s economy might crash sooner than later. That is what is happening in Sri Lanka right now.

Having said that our fundamentals should begin by understanding that there are no various methods of developing the country. This means, if we forget about the corruption (corruption can be eliminated by a country’s legal structure), there is no separate economic plan for SLPP or SJB or JVP or even FSP. Why am I saying this?

One fundamental economic principle is that a country will grow economically only if it could increase the capital formation and consumption allocation on continuous basis. Again, from the consumption allocation part will be deducted as tax for the government to produce “common interests” of the society. As such no ad-hoc tax policies should be devised. So are profit reserves which contributes to capital formation, and it should be invested because it is the society which allows for capital formation. These are fundamental macroeconomic principles. No political party can change these fundamental principles which means the whole country will be unified to accept them. Good! Now, the next obvious question is, how the capital formation and consumption allocation could be increased. This can be understood if we know the origination of both allocations. Both are originated from one source, that is the total national proceeds or total sellable output (not GDP). This makes our problem easy. Then what should we do to increase the total proceeds? We have to expand the entrepreneurial base, if the entrepreneurial base expands in a way that contributes positively to the national current account, it is much better. So, far the whole country is unified on these economic principles

Then, what is the criteria that affects to the expansion of entrepreneurial base? It is the business confidence. Let me reiterate, it is the business confidence that matter most for the expansion of entrepreneurial base so as to increase the total national proceeds. But amazingly government promises do not help in ensuring business confidence. Instead, business confidence is fully depended upon the stability of the domestic currency. Stable domestic currency determined by the market forces shows the macroeconomic stability of economy, including trouble free balance of payment situation. IMF wants to know whether the country and the cabinet knows this, and the IMF knows that the present government does not understand it. Irrational government expenditure and illogical monetary policy including the printing of money enormously show the bankruptcy of the economic wisdom of the present government.

The above said macroeconomic fundamentals could unify the country for a pragmatic and theoretically sound long-term macroeconomic strategy. It helps to devise a long-term economic recovery plan. Once we have that strategy and plan, obtaining quick financial assistance from IMF and other multilateral and bi-lateral donor agencies, would be feasible. Also, then, it would be feasible to rollover foreign currency denominated loans because lenders are sure that their loans will be paid back as our macroeconomic strategy is sound and is backed by whole country. This is one aspect.

The other aspect is to rally lenders behind Sri Lanka strongly. Bottom line is that until we are able to rollover foreign debt in the short-term while ensuring long-term debt sustainability we will not be out of the crisis. Therefore, we can rally the lenders to support the country, if they have a high confidence in the government. To ensure this, it requires highly professional unifying characters in the cabinet and in the presidency. The committee of economic advisors should convey this message to the legislature and the executive branch. Political will can change it positively.

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Latest comments

  • 0
    8

    The President should keep the Finance portfolio so that he can get firsthand information about the country’s economy directly from finance economists. On the other hand, the newly appointed Secretary/Finance and the Governor/Central Bank will have the necessary freedom to work.
    The President’s decision to appoint an advisory Committee to engage with the IMF is a mistake. The new Secretary, Ministry of Foreign Affairs, the new Governor, Central Bank and their officials can deal with the IMF and directly report to the President.

    • 0
      3

      Champa,
      Good morning.
      “The President should keep the Finance portfolio so that he can get firsthand information about the country’s economy directly from finance economists”
      Historically, the finance ministry, ticking away as best as it could, since the time of Ronnie De Mel, started faltering and spluttering like a ‘worn engine’, after the Finance Ministry was taken over by the President under his fold.
      CMB and MR regimes.
      President is the head of government and head of State and not have time to focus on micro managing, fiscal and economic policy!
      We have the current predicament because of tha specific lapse!!
      Recount, to me who was the FM for majority of last 2.5 years, before Basil’s appointment (which was a Square Peg in a Round Hole!)?? MR!!
      And the suggestion is to recommit the same mistake? What progress?
      Typical Sri Lankan Solution!!!
      No wonder Sl is in this mire now, because we can’t remember at all what we did wrong in the past?!
      This was the mistake from 2007 to 2015 of a FM who was not focussed on the job, where the Messiah, borrowed and borrowed from Chinese and capital markets, beyond our means!!!

      • 0
        3

        Mahila
        You say, “President is the head of government and head of State and not have time to focus on micro managing, fiscal and economic policy!”
        Who says the Minister of Finance has to do all that? Formulating sound fiscal and economic policies is a routine job handled by competent officials in the Central Bank and the Ministry of Finance. Can you suggest a name of an MP in the government or opposition who is capable of doing that? There is none. If the President takes over the finance portfolio, the newly appointed officials will be able to work independently.
        You say, “Historically, the finance ministry, ticking away as best as it could, since the time of Ronnie De Mel,…..”
        Really? Ronnie de Mel was known to be the ‘pioneer of the innovative begging bowl’ to Sri Lanka. Since then, every government followed his footsteps as it is easier to sit and beg than work hard to be self-sustained.

    • 3
      1

      Ali Sabry claims that he is still the Finance Minister. How could he forget his own resignation letter? In his resignation letter, he even suggested the President step down. This is what he said, “ fresh and proactive and unconventional steps were needed to solve the country’s problems.”

  • 4
    2

    Political instability and economic instability are closely associated. Unless both parameters are restructured to minimise the instability, it is impossible to reach a satisfactory outcome. Even though we talk about the impact of Covid in our economy we knowingly or unknowingly exclude the impact of political instability ( eg. Ethnic war, Easter Bombing) which impacted far more than Covid.

  • 2
    4

    Sri Lanka should buy oil from Russia. “Unfriendly countries” that imposed sanctions against Russia buy oil/gas/coal/metal, etc from them. “Oil-for-Rubles” is perfect for our depleting foreign exchange reserves crisis.
    On a separate matter, given Sri Lanka’s own experience with UNHRC’s double standards, one-sided decisions and unsubstantiated allegations, instead of abstaining, we should have directly voted against the US’s Draft Resolution to remove Russia from the UNHRC. Anyway, the US failed to muster the required two-thirds majority votes to suspend Russia. Out of 175 countries voted, only 93 countries were in favour. Nevertheless, Russia decided to quit the Council. It is so sad, now, with the approval of 93 countries, the Ukrainian Army is killing people in the Eastern Ukraine also, to ‘make a case against Russia’. The Donbass region was subjected to systematic killings & slavery at the hands of the Ukrainian Army and the Azov battalion for the past 8 years. Anyway, President Zelenskyy is a ‘war president’. He allows the Ukrainian Army to kill his own people to please the West. When the Ukrainians come to know the truth, they will reject him. Maybe he is not aware, there’s already a ‘peace president’ for Ukraine.

    • 0
      1

      Oh – “wartime” president and “peacetime” president.

      • 3
        2

        Problem in Srilanka in layman term is trying to live above ones means, which has nothing to do with economics or politics. Inflated ego, frog in the well attitude and megalomaniac ideas has caused it. If there was no regime change in 1977, this would happened then. British favored Srilanka spending money earned from other colonies, to develop it as a model colony. After independence, the rulers tried to maintain that life style without increasing the revenue, spent the money left behind by British and by 1953 ran out of money. Poor economic policies of the country during 1956 to 1977 worsened the situation. In 1977 economy was liberalized with tilt towards western countries which pumped in money to wean the country away from socialism, which resulted in the country booming. With large funds reaching the country, corruption set in lad by Gamini Dissanayake and Premadasa, and the short sighted policy to attack Tamils, resulting in war related spending, took away this prosperity and the country remained static. Corruption continued throughout and in 2009 after war ended, it worsened with Mahinda Rajapakse leading the way. (CONTD)

        • 2
          2

          (CONTD) Large sums of money was borrowed at commercial rates for ego boosting white elephant projects, which gave little or no revenue. In this melee, Rajapakse brothers, their relatives and henchmen filled their pockets, depriving the country of finances. Last government which came to power promising to eliminate corruption, not only did not carry out its mandate, but also turned a blind eye to the pilfering by their catchers. Since 2019, mismanagement and Covid related drop in revenue has resulted in the present state. To recover following steps need to be taken:
          1. Eliminate corruption. Arrest all those who are in possession of wealth which they cannot account for, starting from politicians, officials and others.
          2. Live within your means. Stop all luxury and unessential imports, and spend the dollars earned to import fuel, gas, food and medicine.
          3. Work hard to increase revenue especially from exports.
          4. Stop all unnecessary foreign trips by politicians and officials. Curtail benefits given to MPs and ministers other than basic needs.
          If you carry out these, there is a chance to take the country out of this rot. Anyone who talks about being able to solve problem immediately is a charlatan.
          Most importantly allow Tamils to prosper, they will save the country from shame.

          • 3
            5

            Sankaralingam,

            “Most importantly allow Tamils to prosper, they will save the country from shame.”

            Hilarious. What happened to all the money donated by the diaspora to the LTTE? You should have taken your own advice a long time ago.

            • 3
              3

              Money donated by the disapora to the LTTE, has been wisely invested, so that the GDP of Tamil diaspora is higher than Srilanka. It is this LTTE money in possession of overseas Tamils, that the Srilanka government is begging for, to save it from disaster.

              • 1
                0

                Sankaralingam,

                A wise investment indeed. Kumar Pathmanathan handed over diaspora donations to Rajapakse (https://www.colombotelegraph.com/index.php/where-is-kps-wealth-jvp/). According to CT, he is under their “protective custody.” Well done!

              • 0
                0

                Doc
                Does the wise investment by the LTTE include that by KP?

    • 1
      0

      Champa,

      There’s no money to buy oil even from Russia! They won’t give us a credit line for it either, because they want upfront cash to fund their invasion war. China has given all it can and is avoiding our beggings. Only thing left is IMF and India, and they are not going to allow their funds to be used to buy Russian oil. See what happened to Imran Khan…..taking Western money and then slowly trying to buy Russian oil?

      • 0
        0

        ramona
        A US conspiracy ousted Imran Khan. Therefore, SL leaders will not dare antagonize the US. Otherwise, oil-for-Rubles is an attractive deal. Corrupt leaders prefer buying oil through third parties. The US/NATO/EU have imposed over 5,000 sanctions against Russia resulting in sky-rocketing gas prices and higher inflation in their own countries. Economists will have to create a new equation to explain that.
        I am yet to read the latest news about the Russia-NATO conflict in Ukraine.
        The Ukrainian army’s attack on Kramatorsk railway station was also credited to the Russian army and the West believed it. Anybody who checked the map of Donbass would have noticed that Kramatorsk is located in the Donetsk region controlled by pro-Russian groups. Why would Russia attack them? It doesn’t make sense. This is not the first time the Ukrainian army attacked fleeing civilians. The barbaric killings of Russian soldiers in captivity is akin to neo-nazi racist killings. Earlier, Western media reported that Russia’s military operation in the Eastern/Southern regions has reached a stalemate. Maybe they are not aware that Russia is known for “start slow and finish fast”. Unfortunately, Ukraine is paying for NATO’s and EU’s unjustifiable expansion towards Russia.

        • 1
          1

          Champa,

          It will be more like oil-for-rubles credit line with high interest rates that will trap us in even more debt.

          • 0
            0

            I didn’t think about a credit line. Any agreement with India is dangerous as India is a part of the mini-NATO, QUAD. India controlling our economy directly affects our non-aligned foreign policy. We should not have signed any defence agreement with India as it will force us to take sides with the QUAD which is against our best interests.
            As far as I know, there is no shortage of oil or gas in Sri Lanka. If there is any disruption, it is deliberate. Same goes with rice, vegetables and fruits. We have them in abundance. Our problem is food insecurity or very low food security among households, especially with children

            • 1
              1

              Champa,
              “As far as I know, there is no shortage of oil or gas in Sri Lanka.”
              Priceless!
              How long have you been living in a well? Who brings you food?
              Why don’t you ask the guys who are falling dead in queues what they are waiting for?

              • 0
                1

                old codger
                You seem to always read only the first sentence of each paragraph. If you read the second sentence of the paragraph from which you picked up the first sentence, you will get the answer to your question.

                • 0
                  0

                  Champa, there is no money to pay for oil or gas. So who is responsible? India? The CIA?

  • 5
    1

    It is not clear what the advice specifically is.
    Can someone help please?

    • 2
      4

      I am surprised that Sivasegaram the all knowing pundit, is unable to understand.

      • 0
        0

        GS, now that you seem to know something we do not know, can you tell us what it is please.
        BTW, how is your smart twin brother? Give him my regards.

  • 2
    0

    No more foreign funded projects should be approved.
    No new projects of any kind should be commenced.
    Get rid of public servants who have nothing constructive to do.
    Retire all above 50 years in service on full pensions,
    A pool of vehicles and drivers like in govt. departments will save funds even in parliament.
    The idle armed forces and their unnecessary perks should be pruned.
    Waste of men and materials should be eliminated.

  • 3
    4

    Hema, who needs your advice? You spent the years of Yahapalanaya trashing the CB’s policies, despite the fact they returned the first govt budget surplus in 52 years. Yahapalanaya’s successors the proceeded to trash the economy implementing some of your policies led by the tool WD Lakshman and his stooge Kenneth de Zilwa. We don’t need your advice, please get back to your day job as a middle manager in a cardboard box manufactory.

    • 2
      0

      WWB
      We can do without the personally rude comments.

  • 3
    0

    Advices? Reminds me something I heard long ago!

    “A man and his son were once going with their donkey to market. As they were walking along by his side a countryman passed them and said, “You fools, what is a donkey for but to ride upon?” So the man put the boy on the donkey, and they went on their way.

    But soon they passed a group of men, one of whom said, “See that lazy youngster, he lets his father walk while he rides.”

    So the man ordered his boy to get off, and got on himself. But they hadn’t gone far when they passed two women, one of whom said to the other, “Shame on that lazy lout to let his poor little son trudge along.”

    Well, the man didn’t know what to do, but at last he took his boy up before him on the donkey. By this time they had come to the town, and the passersby began to jeer and point at them. The man stopped and asked what they were scoffing at.

    The men said, “Aren’t you ashamed of yourself for overloading that poor donkey of yours — you and your hulking son?”

    • 0
      0

      The story was by Aesop.
      It has a funny ending with the three of them falling into water.
      That is what happens with pleasing trying to please too many with differing opinions.

  • 1
    0

    DR.Nandalal Weerasinghe has been appointed as new governor of central bank.he has accepted this post under a very serious financial situation.hope and pray he will be able do his job without any problem and hope he will not be called NANDANA WINTHANA WEERASINGE LATER BY THE SAME PEOPLE WHO APPOINTED HIM.

    • 0
      0

      Both Education and Finance should be well clear of politics, for a land to progress.
      The politicians appoint and remove CB Governors at will. As long as this continues no son worthy of his credentials will accept that post.

      • 0
        0

        “Both Education and Finance should be well clear of politics”
        Are they anywhere?
        Politicians meddling in their administration is bad. Then that applies to almost every government activity.

  • 2
    1

    Hema Senanayake,

    “Having said that our fundamentals should begin by understanding that there are no various methods of developing the country. This means, if we forget about the corruption (corruption can be eliminated by a country’s legal structure), there is no separate economic plan for SLPP or SJB or JVP or even FSP.”

    Incorrect! Each political party has a different method for capital formation and consumption allocation. Taxation for “common interests” and austerity measures are quite different for each political party.

    Gotabaya government did not tax the rich, but spread the taxation on the struggling Sri Lankans. Austerity was placed on the Masses, whilst the rich splurged the money of the Hardworking-Suffering-Lankan-Masses on all kinds of crypto currencies and overseas shell accounts in an attempt to create money out of the hard-work and industry of global enterprise. His supra-capitalistic stance was ensured by the military, to keep the struggling Masses in place. And the elite were encouraged to show off their gotten wealth to show success of his stratagems.

    • 2
      1

      That did not work! He is now attempting to hold onto power using the previous UNP system. The idea is for the India-merge with the probable land-bridge to Tamil Nadu. Then there’s that diaspora with trillions of dollars. Yes, Mother Lanka will be quite the rich place, sans country sovereignty, in a decade or so. Thank you to India of course, for coming to our aid after our leaders, in an effort to build up the Sinhalese to be the greatest in the world by using all kinds of mad alternate monetary mechanisms, placed Motherland in this dreadful compromised position.

      JVP-NPP taxation will be the opposite: The rich will get taxed, and any loans, including the IMF ones will be about building up the small business enterprise of the common man. Austerity will be for all, and spread across the board so the struggles of the Masses can be evened out. It’s not going to be easy for many years for any party after the country ruination by the Rajapaksa regime. But we will finally slowly and surely climb out of this mess within a decade or so, whilst having our sovereignty intact.

      • 0
        0

        Correction: He is now attempting to hold onto power using the India-Lanka merge of the Ranil-UNP.

        • 0
          1

          Sirisena-UNP was good however, where Lankan soverignity was utmost!

      • 1
        3

        There is already anti Indian propaganda by agents of China and Pakistan. Eleven party alliance led by Weerawansa and Gammanpila told Mahanayake theros that they are worried that Srilanka will become a state of India.

        • 0
          0

          GS
          Are your plans to make Sri Lanka a state of India in trouble therefore?

      • 2
        1

        Ramona Fernando,

        “The idea is for the India-merge with the probable land-bridge to Tamil Nadu.”

        Does Sri Lanka need to be flooded with tens of thousands of foreign beggars? Even India cannot take care of these people. The solution now for Sri Lanka is to sell off certain lands in the North and East to China to pay off its $10 billion debt, then form investment partnerships with South Korea, Japan, and USA to develop the South of the country. This sounds controversial, but keep in mind, China already has Hambantota Port for 99 years. When Port City is finished, China will have a permanent military presence on the island. The government should consider halting the Port City project, which is continuing day and night despite shortages of essentials. If China has control of cities like Jaffna and Kalmunai, UNHRC will quickly drop their demands for “human rights.”

        • 1
          0

          Lester,

          Nooo……no more Supra-Capitalistic ventures….whole country to be united under the Socialist JVP-NPP comrades of all Races! President to be a Tamil Patriot Country-Unifier!

        • 0
          0

          Lester,
          Why oh why don’t you check before you shoot your mouth off?

          https://www.newswire.lk/2022/04/08/indian-mans-donation-to-crisis-hit-sri-lanka-people/
          An Indian beggar has sent money here.

  • 2
    1

    “Economy is a system. It is a wonderful system put in place by human imagination to achieve the goal of optimum wellbeing for all the members of the society or all global citizens. This system works in a unique way.”

    The modern economy – capitalism – is a way for the wealthy and elite to increase their own net worth, while doling out crumbs to the rest. Any real benefits to society actually come from innovations in technology. What is happening in Sri Lanka could well repeat itself all over the developing – and at some point, developed – world, if technology does not come to the rescue yet again. Consider that the USA is experiencing its highest levels of inflation in 40 or 50 years. This suggests that the monetary cycle has reached a peak. Decades of low interest rates, money printing, access to easy credit, and outsourcing, has hit the wall. So-called globalization was supposed to benefit “everyone”, but the developing world says otherwise. These days, the rich are stockpiling their bunkers and hoarding cash. Something bigger may be on the way.

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