By Hema Senanayake –
Economies collapse suddenly amidst apparent economic growth if monetary disorder takes place. In fact I have never seen or observed or studied an economic crisis occurred in any country in the recent past which did not trigger from a financial crisis. Such crises happen quickly. Such crises do happen even under the close watch of International Monetary Fund. The classic example is the Argentinian crisis which occurred in December 2001, because until the crisis was erupted Argentina was hailed as a good country that even could set an example for other Latin American neighbors. It was a total collapse with unemployment shot up over 30%. The IMF itself explained it as follows:
“Until shortly before the crisis, the country had been widely praised for its achievements in stabilization, economic growth and market-oriented reforms under IMF supported programs,” (The Role of the IMF in Argentina, 1991-2002, IMF Report). The IMF further observes that the events of the crisis, “have raised questions regarding the country’s relationship with the IMF because they happened while its economic policies were under the close scrutiny of an IMF-supported program.”
Many countries faced economic crises in the recent past. Chinese economy is in a crisis right now. Sri Lanka is not immune for economic crises too. Sri Lanka could face an economic crisis under the watch of IMF. I am not going to alarm the new government about it. But when the Sri Lankan rupee depreciated suddenly even after the Central Bank of Sri Lanka (CBSL) borrowed dollars 1.1 billion over a currency SWAP agreement signed by and between India and Sri Lanka, I feel things are not normal. The reason is that currency SWAP agreements are signed not to borrow by one signatory country or the other. Usually currency SWAP agreements are signed to promote trade between two signatory countries without using reserve currencies such as U.S. dollar or euro –And definitely it is not a financial arrangement to borrow. But Sri Lanka did it. This cannot be defined as a prudent or calculated move of CBSL but rather it must be a decision, at least, made with certain desperation.
Economists might feel proud about forecasting economic crises. Yet, I feel that they can be more proud by instrumenting in preventing crises. Accordingly, I made a simple and humble suggestion when the new government was sworn in, in the third week of August. In regard to economic governance, I suggested them “to begin with the country’s current account and balance of payment. Then simultaneously they can move into the fiscal and monetary policy” (“New Economy: Where to start” Colombo Telegraph, August 21, 2015).
In a way, my suggestion was a caution because the manifesto of UNFGG had been loaded with a lot of projects and programs. I further cautioned that, “If the government begins from project formulation end then there are chances in messing up macroeconomic fundamentals sooner than later.” Why should we worry about macroeconomic fundamentals? It is because, the rates of interests would go up, currency depreciates, country’s liabilities to foreign countries go up and inflation might set in when macroeconomic fundamentals are not right. The ultimate effect is that the country would not achieve its potential GDP.
For a moment just forget about what the UNFGG has promised in their manifesto to establish Megalopolises (Megacities), 45 High-Development-Zones such as Industrial Hi-zone, Agricultural Hi-zones etc. Now I invite you to look at the huge cabinet we have now. Each and every Minister, State Minister and Deputy Minister wants to do something. For an example a couple of days ago I heard that all journalists are supposed to get a six figure loan from Peoples Bank in order to get a laptop computer. The program has been devised and facilitated by a certain Ministry which deals with journalists. Since computers are not produced in Sri Lanka we need to import them. With any increase of import the country’s current account changes negatively. It is true that the money expended here is not government money but the program affects badly for the current account deficit. This particular program might be a smaller one, but the cumulative effects of the programs that all ministries would aspire to put in place could possibly be devastating on the country’s current account because these programs would come on top of the programs mentioned already in the UNFGG manifesto. This is why I insisted that the new government must begin with what is known as the country’s current account and balance of payment (BoP). Which institution should take care of these two accounts? It is the CBSL.
The CBSL governor, Arjuna Mahendran recently defined Sri Lanka as a “country having over borrowed.” He mentioned this before Sri Lanka borrowed dollars 1.1 billion over the currency SWAP agreement signed with India. Therefore, after the borrowing was made from India, the situation of “having over borrowed” might have worsened further. If this is the case, my point or my suggestion to the new government has more validity. Perhaps it warrants me to insist now that the country’s financial situation has mandated us to begin with the current account and BoP in economic governance. We should not begin from formulating projects; instead CBSL must set the financial limits and scope for the projects to be undertaken by the government under budgetary provisions and for the projects that could be undertaken out of budgetary provisions.
All ministers and elected officials especially on the government side must be made aware of their limits on off-budget items. Some of such expenditure items are truly huge. For example in the first quarter of this year UDA (Urban Development Authority) tried to issue debentures amounting to Rs.10 billion through the CSE (Colombo Stock Exchange). I can’t say this is bad. But cumulative effect of such expenditures undertaken by Ministries or government agencies could bring enormous pressure on BoP. So does the private sector too. Let me give you a quick example.
Very recently the CBSL reduced the Loan-to-Value ratio to 70% in regard to auto loans even though the ratio was subsequently increased to 90%. This decision would reduce the excessive credit growth occurred in this particular business sector and as a result would reduce the negative pressure it had put on the country’s current account and BoP. This example clearly shows that the CBSL keep an eye on private sector credit growth. Similarly, CBSL must closely scrutinize the credit growth that could possibly occur through government agencies as a result of undertaking off-budget projects and programs. Perhaps, such borrowings must be permitted subjected to the prior approval of CBSL –because Central Bank is considered as the official economic advisor to the government. Sometimes, economists argue that central bankers must talk and advise only about monetary policy. But I feel that if computer loans or UDA debentures or any other program bring in negative pressure on the BoP the CBSL must intervene proactively and appropriately. So, CBSL should do its job without trying to learn it from politicians. That would prevent Sri Lanka falling into an economic turmoil at least.