23 September, 2020

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An Economic Crisis Worsened By A Political Crisis: Time Is Running Out For Sri Lanka

By W. A. Wijewardena

Dr. W.A Wijewardena

Warning against political instability

The Central Bank Governor Indrajit Coomaraswamy, while announcing the Bank’s monetary policy stance for the next two months, is reported to have emphasised on the need for a quick resolution of the ongoing political stalemate in the country. Coomaraswamy, according to reports, has rung “an alarm bell over Sri Lanka’s political leaders calling for a quick end to the political standoff triggered by the Local Government poll results before it affected growth, warning there was no scope for loosening fiscal policy”.

It is reported that Coomaraswamy who has to play an apolitical role as the Governor of the Central Bank had been disturbed by the prevailing political situation mainly because of its adverse impact on the market sentiments and investor aspirations. Both, if prolonged, would push economic growth further down.

He is reported to have clarified this point as follows: “For the country to have better outcome, Sri Lanka needs political stability as quickly as possible. We have not really considered the political situation when making this decision on policy rates. How politics could affect is on sentiments which lead to a reduction in investment and growth. Clearly, one would need to loosen policy then to support growth, but you also have to look at what happens to fiscal policy. If the political situation leads to a loosening of fiscal policy, the Central Bank has to lean against that and tighten monetary policy”.

CB’s duty is toward the betterment of people

Coomaraswamy’s warning signals may not be to the liking of those who have appointed him to that high post. Yet, he and the Monetary Board that functions above him have to work for the best interests of the economy and through that move, for the best interests of the people. If the action of the political masters is inimical to this goal, the Central Bank has a responsibility to point it out to them. That is the professional role to be played by an apolitical central bank.

The Prime Minister Ranil Wickremesinghe who has been a party to this political standoff had admitted that the current economic growth has been less than what it should have been at a meeting with the media heads of the country. While claiming that he is still the Prime Minister in terms of the Constitution, he has totally disregarded the possible impact of his choice to remain as PM supported by Constitutional provisions now.

A crisis ridden economy

Sri Lanka’s economy had been in a crisis on all fronts. It started from around 2013 when the growth numbers started to decelerate from the post-war high economic performance during the two preceding years. This writer warned of this in a series of articles published under this series. In an article published just before the onset of the year 2017, under the title ‘Economy 2017: The alarming signs should not be ignored’, this writer warned that the grand plans made to celebrate the second anniversary of the Unity Government had totally ignored the economic crisis which the country had been going through. The following were the highlights made in the article under reference.

Ignoring the onset of the economic crisis

The symptoms of the onset of the crisis in 2013 were visible from many fronts though they were conveniently ignored by the policy makers at that time. There was a worsening external sector, unusual growth in money and credit, suppressed inflation, slow-down of economic growth and an undisciplined budget causing the accumulation of public debt.
Independent analysts, including this writer, drew the attention of the policy makers at that time to the need for taking urgent corrective action to arrest the oncoming catastrophe. But, instead of responding positively, an attempt was made by authorities to depict a rosy picture by massaging the main economic numbers.

External sector crisis is looming over Sri Lanka

The external sector crisis began to manifest itself when exports started to fall both as a share of the Gross Domestic Product or GDP and the world exports from around 2005 in a background of rising imports. The government tried to get a temporary relief by using remittances of Sri Lankans working abroad to part finance the consequential expansion of the trade deficit.

The unmet part was financed by borrowing from external commercial sources at high interest rates. Those borrowed funds were then used to prevent the exchange rate from falling in the market. The attention of the policy makers to this insane strategy was drawn by this writer in an article published in this series in November 2011 under the title ‘External Value of the Rupee: Market driven or Central Bank driven?’

Yet, the policy makers continued to follow the same policy by making ever increasing commercial borrowings from abroad. Then, the foreign borrowing numbers were cooked and published in a special debt report by the Central Bank to show a rosy picture. This stand of the Central Bank was challenged in another article in the series published in May 2014 under the title ‘Sri Lanka’s external debt sustainability: Complacency based on incomplete analysis may be the worst enemy’. The Central Bank vehemently reacted even going to the extent of personally attacking this writer. But the problem did not go away and its results are now being faced by the present government.

Massaging economic data to paint a rosy picture

Economic data too were manipulated by the government that was in power starting from growth numbers and then poverty and unemployment numbers. Growth was shown as a super achievement but the actual growth was pretty much lower than what was publicized. Attempts were made by the government to drive growth arbitrarily above what the economy could have achieved based on its capacity for growing, known as the country’s potential growth. The result was to overheat the economy leading to both inflation and depreciation of the currency. This was brought to the notice of the Central Bank in an article published in this series in March 2014.

The Central Bank once again rebuffed it as irrelevant but the subsequent events proved that the country was heading for disaster on both the inflation and exchange rate fronts. The inflated growth numbers were visible when they were significantly higher than the household income numbers gathered through field surveys even after making an allowance for the incomes of companies which are not included in household incomes but in the GDP numbers. This anomaly in growth numbers was again highlighted in an article published in February, 2014.

But the Central Bank instead of advising the government on the adoption of relevant corrective policies took issue with this writer. Then, it was revealed that the growth numbers had been massaged by the top economic policy makers to suit their petty objectives. This was the subject matter of an article published in the series in December 2013. The poverty of the poverty numbers was also brought to the notice of the authorities in an article published in May 2014.

Central Bank and Ministry of Finance acted as if there was no crisis

Thus, when the new government came to power in January 2015, it was a sick economy which it had inherited from the previous administration. The top priority of the new government was, therefore, to take a quick stock of the economy, make a diagnostic and a prescriptive study and introduce urgent corrective measures. Since the economic volcano was showing all the signs of eruption without warning, there was no time to be wasted.

The Central Bank, as advisor to the government, was to apprise the new government of the real economic situation and the need for urgent corrective measures. But the Annual Report of the Monetary Board for 2014, prepared after the new government came to power and released in April 2015, was silent on any economic crisis being faced by the country. It had reconfirmed the doubtful economic data issued by the previous administration thereby making it totally blame-free.

Even the Annual Report of the Ministry of Finance, released in June 2015, had taken the same stand: The country does not suffer from any economic ailment that needs quick fixing. Consequently, it is the present government which is now being blamed for the ills in the economy.

Economic scorecard of the new government is no better

Today, the situation has been worse. The country continued to record a low economic growth of around 4.5% in 2015 and 2016. The growth attained in 2017 has been even less than 4%. During 2018 to 2020, the best scenario for growth has been at around 5 to 5.5%. This is far short of the required economic growth for the country to increase its average income from around US $ 4000 today to US $ 5000 by 2020 in terms of the government’s economic strategy titled Vision 2025. If this target is missed, the targets set for 2025 in the same strategy document have to be given up completely.

A worsened fiscal situation will derail the monetary policy plans

Coomaraswamy has been perturbed by a worsened fiscal situation that would derail his monetary policy programme for 2018 and beyond as pronounced in the Road Map of the Central Bank released at the beginning of the year.

The government claimed, quite correctly, that it inherited a debt-ridden economy at the time it came to power in January 2015. The Finance Minister Mangala Samaraweera, while delivering the Budget for 2018 in Parliament equated the debt problem far worse than the problem created by the Garbage Hill of Meetotamulla. Yet the track record of the present government has been not to reduce the debt level.

The debt stock has risen under the present government

Like all the previous governments, it had to borrow more to pay interest and repay the principal of the maturing public debt adding more to the total debt stock. The government to its credit had made some gains in improving its revenue position during 2016. But, since it had allowed the government expenditure to boom, it had to borrow more to finance its lavish expenditure programmes.

Accordingly, the total debt stock which amounted to Rs 7.4 trillion at the time the new government came to power had now boomed to Rs 10.3 trillion by September 2017. The years 2018 to 2020 will be severely crucial for Sri Lanka since the total public debt repayments and payment of interest would exceed the targeted revenue of the government by a significant margin.

At the same time, the external sector crisis is looming over Sri Lanka badly. Though there has been some recovery of exports during 2017, it is still far behind the expected growth path putting pressure for Sri Lanka rupee to depreciate in the market. Hence, the recovery of the economy in the next three years appears to be highly challenging.

The costly political battle between the two major parties

On the top of this worsened economic situation, the country has now been hit by a disastrous political battle for power. Politicians of all sides who are embroiled in the battle are demonstrating that they are ordinary beings wired to seek only the self-survival. But when they fight with each other, they bring miseries to others.

Economists call it imposing an external cost on society. To eliminate externality, Nobel laureate Ronald Coase suggested in 1960 that the parties should go to negotiation table and reach an agreement. The religious leaders also give the same counsel but require the warring parties to act responsibly and on a moral and ethical code.

The current plan being pursued by warring parties has been to eliminate the other and emerge victorious. Each party has even suggested forming a government of its own by attracting defections from the other. Whether that government is a UNP government or a UPFA government, it runs the risk of not being able to introduce a consistent economic policy programme supported by much needed economy-wide economic reforms.

It also creates uncertainty and markets do not like uncertainties. Markets react to uncertainties by reducing investments, on the one hand, and causing funds to flow out of the country, on the other. It will further worsen the growth prospects for the future. The outcome of the funds flowing out of the country has already begun to reflect on a depreciated exchange rate.

The politicians may continue to play the political game of seizing and clinging onto power. But the victim of their game would be the economy and the people at large.

*W A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 0
    2

    Thanks for the article Dr. W.A Wijewardena. If economy had gone the previous government way, all would have been taken care of. But new gov went on another directional axis, disrupting the financial flow procedures. Then they tried to quickly go the Rajapaka way with Port City etc, but it was too late – people’s EPF funds were already languishing on Singapore hedge funds deals (courtesy of Coomaraswamy).
    *
    Was it unwise for Rajapaksa to indulge in BRIC is the question. Guess this was the only way to get a bit of modern development?
    *
    2 choices left:

    1. Ranil to get all the money back from Perpetual Treasuries (never mind the penalties). Say goodbye to the Tamil Nadu- Singapore-Sri Lanka triangle. Place all of Lanka’s money on the Sri Lankan enterprise, with money on organic farming and Sri Lankan things. Rupee to take on its own Lankan value according to country worth…….well, some of it can go to Chinese enterprise to boost it up. Clean up the cities with some of the money. However, is Ranil ready for this kind of traditional-socialistic-enterprise, is the question.

    2. Rajapaksa to go full-fledged with the BRIC enterprise. Kiss goodbye to India, UK etc……..+

    • 0
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      Dear Ramona,
      I know that reasoning with you is akin to talking to a brick,BUT,
      Did you not know that BRICS stands for Brazil/ Russia/ INDIA/ China/ South Africa ?

      • 0
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        Ah well…..there should be/must be, a new name for the Russia-China alliance then. Let’s throw US into it also, shall we, with Trump overseeing (although we wont tell Obama-Clinton about it- they’d make life intolerable).

  • 2
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    The Sinhala racist blame everything on Tamils and on LTTE since the formation of it in the 70s.

    Sri Lanka is sleepwalking in to an economic crisis precipitated by the Sinhala politicians. The country is in a huge debt crisis thanks to the mega white elephant projects now sitting idle.

    The country has to sell it self off to China and India.

    I didnt see the word LTTE or Tamil in your article.How refreshing.

    But Tamil bashing and Muslim bashing is the get out clause the Sinhala politicians have. Explode few bombs blame the LTTE and attack a few Muslim businesses start a race riot …and all is buried under.

    This is the economic and political cycle of Sri Lanka Sinhala Buddhist politics since independence.

    • 0
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      Rajash,
      “Sri Lanka is sleepwalking in to an economic crisis precipitated by the Sinhala politicians.”
      The Sinhalese will always vote for crooks if they are Sinhalese.
      What is the solution?
      1. Sell the country to India. Advantages- cheap cars /sarees/ onions/gardeners. It will keep our women happy.
      2. Sell the country to China. Advantages- cheap disposable TVs/ Computers/ highways,etc. The TVs will keep our women happy.
      3. Give the Sinhalese one vote each. Two votes each for minorities.

      I prefer option 3.

  • 0
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    I think your article is very political. what you are saying is forget the failures of UNP govt and go on. IT looks bo the Mahinda rajapakse and the clan and Ranil Wickramsinghe, RAVI the LIAR and Mangala were destroying Sri lanka. In the cse of Mahinda Rajapjse which had very good and new machines he had sold for a very cheaper price (One ruppe for the whole factory or something like that). The INdian buyer was so greedy for his buyer he di dnot checkl anything just uprooted all the machiens and loaded into truck there after into palnes. they have torn of very valuable pieces of cloths say the people who know it. Anyway, if you list economy destruction by Ranil and the gang and the repercussions such high inflation, with drawal of foreign investment, alck of financial policy or the desperate need to change financial policies of sri lanka, Ranil abandoning of many dilapidated factories (paranthan, Kankesan, Pugods, MAththefods, Oruwal aSteel, Refinary) etc., Ranil can not do it too. Because of that, president has to forget everything and get rid of ranil. Because you know, Sri lanka ie a heavy importing country. Educated youth are unemployed. Yet he brings both educated and uneducated and skilled labaour from overseas. that will never develop sri lanka. It iwill create a failing capitalist country. He is following IMF/MCC and world bank economic agenda which they say predict based on the political atmisphere and not the economic indicators. IMF/MCC is the worse.
    So, I think, Instead of supporting the failing marraige you should have talekd the the truth. Because, the country is bankrupt. Country is dependant on what the women send here. So, country is not depending on the rupee value because the stock market is doing well or GDP is high. Sri lanka’s GDP is crap.
    Can you respond to this. I am not a financial guru. But, I think I am better than Ranil.

  • 0
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    Punish Mahendran, Karunanayake, Aloysius to restore the people’s confidence of this government. Rout out the corrupt.

    Then investments will flow in.

  • 1
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    I think, It is better to say hell with the economy.. First clean this den of theives. Because they are at the helm, nothing will work. YOu know that. both the Rajapakse clan and the Ranil gang did the same. that needs to be stopped. they all are collecting files in order to scare the other.

    • 0
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      Jimbo – You are right, Medamulana Meeharaka has still got the “Kumari File” on Rauff Hakeem !

  • 0
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    I think we have to change our financial policy. why do we have issue US bonds at around 6.2% when Japanese and other interests rartes very low. Japanese prime rate is 0,9%. We do not import or export much to the US. On the otherhand, I heard some comapnies are waiting until we issue the US bands when their money is very cheap. IT is only the state Prime rate is over 4.5%. and not the federal.

  • 1
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    Dr. wijewardane: I heard that Japan had offered Money at cheaper rates. but, Ranil had refused because he wanted to borrow from the US dealer. Then, Ranil;s plan had been to send Maithripala sirisena to War crimes. (It looks very strange). He would beome the president. Mahinda Rajapakse would become the PM on the promise that he would be allowed to amass wealth spread else where to Sri lanka. I heard this is also a short story.

  • 0
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    Dr. Wije. Thanks but you need some INTERNATIONAL political economic analysis of where and how high level corruption has come from and spread like a cancer. and what foreign interests drive this. National economy is also part of the global economy and does not exist independently of society and politics.
    Why are foreign Insurance Companies buying up Sri Lankan Insurance Companies as a financial crisis looms??? – To suck out more funds and drain the country while the crisis unfolds?
    Sri Lanka is in the “International Bail out Business” run by KPMG, DELOIT, Arther Anderson and the IMF and WB.. Please read the Amstrdam Based, Transnational Institute’s Report on the “Bail Out Business”. which in on the web
    Many of the Debt figures for Sri Lanka as for Greece and other countries in the IMF’s bailout business are fictitious as the funds cannot be traced. These debt figures should be challenged rather than repeated. IMF works for the deep state in Washinghton and GLobal 1 percent.

    This is how the Washington Consensus renables the Global 1 percent to loot corrupt countries, by first making the leaders and proffressionals and ACCOUNTANTS and BOND TRADERS corrupt and then sucking out the funds through Debt Restructuring.
    I have a question.. Why are foreign Insurance Companies buying up Sri Lankan Insurance Companies as a financial crisis looms – this is to suck out more funds and drain the country.

  • 0
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    Dr Wije: Also: That the Sri Lankan Economic Crisis is caused by corrupt politicians is true, but your Economic Crisis Narrative is the end goal and part of the strategy of the Washington Consensus to suck up the wealth of the world to the global 1 percent.
    Trickle Down economics does not work anymore as Nobel Laurate Mohamad Yunnus said.

    The Economic Crisis Narrative” is also how international financial institutions that work for Global 1 percent legitimized take over the National economic and development policy making process in countries like Greece and Sri Lanka and deprive the people of policy space.
    TRICKLE DOWN ECONOMICS does NOT work today. As Yunuus the name of the game is SUCKING UP the wealth of nations to global 1 percent via the International Bailout Business.

  • 0
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    The performance of the unity government was hampered by the policy differences between the two parties. GDP growth plummeted because of the negative impact of the ban on Glyphosate affecting the production of tea, rice, maize and sugar. Conversion of white elephants to joint ventures slowed down because of the policy differences between the two parties. As expected the action taken to stabilize the economy was unpopular, as voters still expect handouts.

    A UNP Government is capable of accelerating the growth rate and the appointment of Field Marshall Fonseka as the Minister of Law & Order can expedite the conclusion of cases pending against the acts of the previous government..

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