28 October, 2021

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CBSL’s Voodoo Economics

By Ameer Ali

Dr. Ameer Ali

Voodoo economics is a demeaning phrase coined by George H. W. Bush to attack Reaganomics of 1980s, which introduced what came to be known as supply side economics with its infamous Laffer Curve. That curve related government revenue with tax rates and argued that between 0 and 100 percent tax rates, which bring zero revenue, there will be one rate that would maximize it. On that basis, President Ronald Reagan went on chasing after that magical rate in order to give greater incentives to private enterprise and the market. Hence, the term supply side economics as opposed to the then reigning demand-oriented Keynesian economics.  To back up the theoretical foundation of his argument, Reagan was reported to have paraphrased what Ibn Khaldun, the greatest 14th century Tunisian Muslim historian and sociologist, wrote in his pathbreaking Kitab al-ibar, a four-volume universal history, and Muqaddimah, the prolegomena, where Khaldun observed that “at the beginning of the dynasty great tax revenues were gained from small assessments and at the end of the dynasty small tax revenues were gained from large assessments”.  Supply side economics became the harbinger of the destruction of welfare states and set the pace for the growth of turbo capitalism with all its ugly features and consequences. The rest is history and irrelevant to what follows.

A somewhat different form of voodoo economics is now being propagated from the Central Bank of Sri Lanka (CBSL). This economics is couched within the theoretical parameters of the so called Modern Monetary Theory (MMT), whose cardinal principle is that governments could and should print as much money as they require to spend because governments do not go bankrupt unless forced by political iperatives. This implies that too much money does not create inflation even if they chase too few goods as economists believe. To the former CBSL Governor, Professor W. D. Lakshman, and his current successor, Nivard Cabraal, MMT provided the theoretical rescue for their callous decision to allow the printing machine work overtime to keep on providing liquidity to a beleaguered economy. Apart from denying the inflationary effect of their action, Cabraal also argued that inflation does not depreciate currency.

Not surprisingly and to justify this voodoo economics, CBSL calculated headline inflation rate without including food prices, which is now consuming the greatest share of income in millions of ordinary households.  Food inflation was kept separate and called it simply a “worry”. Once the rate of inflation is artificially reduced another theoretical device, the national income deflator, which is relevant to calculate economic growth also becomes faulty. With these massaged statistics, Cabraal is now feeling upbeat about an 8 percent growth rate for the first half of 2021, and claims that the economy is not in recession. Similarly, on rupee depreciation also, CBSL’s recommended exchange rate was far below the prevailing market rates, and it was because of CBSL’s failure to bring the market in alignment that Lakshman desperately resorted to moral suasion and appealed to monetary institutions to become patriotic. The Professor of Economics should have known better that ethics and morals have nothing to do with market rationality. Cabraal now complains that exporters have hoarded $2.76 billion without repatriating their profits. They are only acting rationally to enhance their profit when the rupee is destined to depreciate further.

Voodoo economics is either generating inappropriate economic policies or reacting to and justifying with theoretical veneer such policies emanating from the Presidency and Finance Ministry. In either way, CBSL’s honeymoon with MMT, whose appeal, according to the American economist Thomas Palley lies in being a “policy polemic for depressed times”, has driven the economy to its dire straits. A vainglorious Cabraal, who is not an economist but an accountant and appointed politically to head CBSL for another term, still believes that “home grown workable solutions” would pull the economy out of its doldrums and realize the so-called vistas of plenty and prosperity enunciated by President GR.  One should not forget that it was during the previous era of Cabraal as CBSL Governor that the premier institution incurred a loss of 10 billion rupees.

Contrary to Cabraal and his political masters there is rising consensus among economists that Sri Lanka has no alternative but to go to IMF for assistance. In their view IMF is the last resort although it is not a panacea for all economic woes. That world institution backs private enterprise and the market economy, but it would insist that the market should be cleaned up first to remove existing rigidities, and that the government needs to adopt measures to increase revenue and cut down wasteful expenditures and close the yawning budget deficit gap.  In other word, IMF assistance would come with conditions that involve structural changes, and indirectly, changes in foreign policy. This is where problems arise to the Rajapaksa regime, which has allowed mafia-imposed rigidities to rule the market, and those mafias act hand in glove with corrupt government politicians. Thus, with a pro-China tilt in foreign policy, going to IMF would not be politically palatable.  On the other hand, Cabraal’s home grown solutions, which hinge on (a) continued financial borrowing from friendly neighbours to settle the bourgeoning debt and to fund public expenditure, (b) arbitrarily chosen measures to adopt an import substitution strategy, and (c) printing more money. This would not work because, the first would imply that lenders, even if they be friends, would be ignoring against all odds the warning by reputable credit rating agencies about Sri Lanka’s increasing credit risk; the second would eventually decrease exports which would be detrimental to recovery; and the third would depreciate the rupee further and hyper-inflation would not be an impossibility.  Therefore, sooner the authorities approach IMF less will be the pain of ECONOMIC restructuring and postponement would mean greater pain. Cabraal should give up his voodoo economics and talk sense to its political masters.

*Dr. Ameer Ali, School of Business & Governance, Murdoch University, Western Australia

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Latest comments

  • 0
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    AA, you say voodoo economics but Cabraaal is calling it Nobel Prize worthy, to be released this week.

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      Voodoo economics! Aha!

      Cabraal’s achievements are there to see…

      https://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS?locations=LK

      After LTTE buried under Namthikadal in 2009, government debt to GDP ratio plummeted from 86.06% to 71.33% at end of 2014 ..
      Within a year, Yahapalanaya increased it to 77.65% in 2015 … What a achievement with Ranil/Mahendran!.. From 71.33 to 77.65 … 6% plus increase without any single project started or finished in Sri Lanka ….

      Yahapalanaya ended 2020 with ‘gifting’ SL with debt to GDP ratio of 101%… Within this period, not a single project started or finished in SL…. This is with No covid and world was booming in that period …
      Of course it is predicted to go up to 108% in 2022 … at least, present administration could defend saying it is due to COVID ….

      Cabraal achieved 12.2% GDP growth in 2012 and keep it high consistently …. that’s why debt to GDP was plummeting in that period …..
      When he was appointed as a CB governor in 2006, SL was $20 billion economy. It was $80 billion when he left in 2015 and remained at that figure until now. What a five year achievement of Ranil and Sira!…
      Wait and see … within a year, Cabraal will pull SL out of this current mess…

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      According to,
      https://www.ft.lk/columns/Sri-Lanka-s-foreign-debt-payment-challenges-in-22/4-723391

      all outstanding international sovereign bonds (ISD’s) except one were issued in between 03/06/15 and 28/06/19 (which is yahapalanaya time)?
      Ranil/Sira/Mahendran has issued 12050 usd mn out of all ISD’s of 13050 usd mn?
      Cabrral isuued only 1000 usd mn ISD in 2012.

      During 2009 to 2015,
      Few Highways, PORT CITY, upper kothmale hydro power station, kewarapitiya coal power station, Hambantota port and airport, Nelumpokuna, cleaning of Colombo and more skyscrapers, lot of hotels/boutiques for tourists, …..etc were built …

      Loan to GDP was around 71.33% at the beginning of 2015 when Yahapalanaya came to power. At the end of Ranil/Sira/Mahendran, it was 101%. It increased by 30% within their administration period while not a single project started or finished in SL…. This is with ‘No covid’ and world was booming in that period…
      Voodoo economics of Ranil/Sira/Mahendran or Cabraal!
      Cabraal is a financial wizard… That’s why these SL haters are afraid of Cabraal … They are afraid of the Cabraal’s ability to pull the economy out of current downturn..

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    It’s good however, that central government is calling for Colombo residents to register their properties. Glad that they are finally bringing in a tax-structure like that of other well-functioning economies. Can you imagine that all this while some residents were not paying for their rates and county taxes? But can’t believe that the Mayoress of Colombo is making a hue and cry of this, and apologizing to the Colombo residents who she feels are being victimized. Colombites were having a gala time of things for a long, long, time, living off the National taxes to pay their rates and services. Maybe this will offset some of the recessionary trends of Lankan currency.

  • 0
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    A pity that you do not understand MMT. You forget to mention that MMTers mentioned that their theory is valid exclusively to reserve currency countries. You are saying that CBSL follows MMT. This is erroneous. CBSL cannot be that ignorant that it does not know that the Rupee is not a reserve currency. From another perspective, this is also irresponsible journalism. Not bothering to study MMT is not an excuse for someone as educated as you are.

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    This newly-fangled economics called MTT is fine if Sri Lanka wants to form her own currency and rely on Lankan entrepreneurship to survive within Lankan ability, and interact with other similar nations like Bangladesh. However, we still want the fast highways, tall skyscrapers, and bullet trains of the West. No, no…..we can’t have it both ways. Relying on China won’t cut it either, for they will soon come to collect. And we can’t sit being a protectorate of China either, leaving them to deal with the East-West tensions and a possible eventual war….indeed, the West will rubber-bullet our small countries first before dealing with China. Most reasonable solution is the IMF.

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