16 April, 2024

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Economic Realities & Political Promises

By Ameer Ali

Dr. Ameer Ali

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists” ~ Ernest Hemingway

After concluding its review on SL’s economic progress during last year and commending the regime for its “unwavering commitment to the program’s implementation”, the IMF review commission has recommended the release of the next tranche of $337 million to bring it to a total $1billion since March 2023, but with a reminder that “sustaining the reform momentum and addressing governance weaknesses and corruption vulnerabilities are critical to put the economy on a path towards lasting recovery and stable and inclusive growth”. What this means is that lasting recovery is not possible unless there is going to be a system change. While expressing general satisfaction over “all quantitative performance criteria and indicative targets, the commission’s Chief and his Deputy did not however fail to point out that the reduction in “social spending” has not met the recommended target. Herein lies the class bias in IMF’s reform agenda and economic liberalism’s war against welfare entitlements. Social spending includes importantly education and health, and IMF would prefer more private investment in these sectors so that government budget deficits could be reduced. President Ranil Wickremesinghe’s warpath against subsidized education and public healthcare via funding cuts in real terms and his preference for private universities and hospitals are too well known to require added emphasis. The only support IMF recommends to the poor therefore is the social safety net which was why RW created the aswesuma.      

In spite of IMF’s guarded optimism about the economy’s recovery, reality on the ground tells a different story. Almost 7 million Sri Lankans are living in poverty, more than 100,000 micro and small enterprises have been shut down and over one half of a million households had lost electricity connection for not paying their bills. Too many families are finding it unaffordable to buy textbooks for their school kids, and malnutrition is pervading a whole generation of children. Government hospitals are starved of medicine, doctors and nurses, and schools are understaffed and ill-equipped, and causing teaching standard to take a nosedive. The exodus of the educated, professionals and the able bodied continues unabated, and at least theoretically it will continue until the marginal cost of migration equals the marginal benefit of staying at home.

True, with CBSL’s compliance with IMF’s agenda the financial sector has reached a degree of stability. Headline inflation has tumbled from a staggering 70% to single digit although it still remains above the target rate of 5%, and the rupee has appreciated against the dollar. For the first time since 2022 the buying rate of dollar has dipped below Rs.300. But have these achievements been translated into lower prices and adequate supply of essential goods in the market? Why doesn’t the market reflect these achievements so that middle and low-income consumers could enjoy the benefits? Why rice, the nation’s staple, is still scarce in a number of towns in spite of a bumper Maha harvest? In short, why is the free-market economy remaining unfree and fail to respond to market fluctuations? In essence, IMF’s plaudit for SL’s financial stabilization has not been translated into stability in the real sector of the economy. To IMF, stability of the monetary sector is the key to economic growth, because it oils the growth locomotive. Sadly, it was this narrow focus on economic growth and rapid financialization of economies since 1980s that led to so many monetary crashes resulting in economic slowdowns and recessions. When “corruption vulnerabilities” are added to this failure as in Sri Lanka bankruptcy is inevitable.  Hence economic reforms should not focus narrowly on finances alone but broadly on the wider economy.   

Another objective of IMF’s focus on financial stability is to enable Sri Lanka to accumulate as much hard currency as possible before the government commences debt negotiations with foreign creditors. This would simply mean that Sri Lanka’s economic recovery cannot be sustained unless it finds a negotiated solution to service its foreign as well as domestic debt. Accordingly, with import and capital controls as part of tight monetary policy, with inflows of dollars through financial assistance from WB and ADB, and with increasing remittances from expatriate workers, and from tourism, foreign reserves reached a total of $4426 million in January this year. It is unlikely that those controls would be relaxed soon and certainly not until after completing external debt restructuring. Already and as part of the debt restructuring exercise, CBSL Chief Dr. Nandalal Weerasinghe had pushed down the throats of domestic creditors to share part of the loss by accepting a lower return on saving funds such as EFF and ETF. Even here Dr. Weerasinghe continued to reflect IMF’s class bias by exempting the commercial banks with the argument that banks were already paying a higher rate of tax. After this exemption, commercial banks are found to be enjoying roaring rates of profit while their poor customers are facing the brunt of IMF’s economic reforms.

Having commended the government for its commitment to the program IMF has reminded the regime to commence restructuring negotiations with foreign creditors without delay. This is the known unknown that is going to usher in either a summer of economic hope or winter of economic despair. Unless the creditors are going to be extraordinarily and uniquely generous to wipe out Sri Lanka’s entire debt amounting to $52.7 billion (in September 2023), which would spell disaster by setting up a bad example, any other form of solution would involve servicing and settling the debt at concessionary interest rates and over extended terms to settle. When debt servicing starts Sri Lanka’s dollar reserves have to increase faster. There is no guarantee that this is going to happen with a political culture rotten to its core. More import controls, tighter monetary policy and higher retail prices are not going to disappear. IMF reforms are silent on Sri Lanka’s political culture, which allows one to assume that it approves the prevailing system and expects it to deliver growth and progress. Ever since the aragalaya was staged in 2022 the cry for system change has grown louder and louder. Steady and inclusive economic growth is not possible within the prevailing political culture. The recent mass resignation from COPE is just one example demonstrating how incorrigible the system has become. Even worse is the declaration by former President Maithripala Sirisena under whose presidency the Easter infamy occurred now confessing that he knew the brain behind it, and the current president and his Attorney General Department remain totally insouciant about it. How far is this political culture going to deteriorate and become chaotic before the whole system is thrown out?                   

Meanwhile, President RW is yet to make up his mind whether to allow a General Election to precede or follow the Presidential Election. In the meantime, the cabinet has approved a proposal to initiate electoral reforms, which indicates that there is also a strong possibility of postponing the General Election until the delimitation process is completed. Yet and in spite of this uncertainty election fever is gripping the country and the season for promises and voter enticement has begun in earnest. RW had made the boldest of promises to create an economic paradise in 2048 when he would be a nonagenarian. On the economic front, all political parties are in consonance with the IMF reform agenda but with a caveat that they would renegotiate on certain items. Among these parties only NPP seems to have taken a stand that IMF reforms need wider focus and should directly benefit sectors such as agriculture and small industries that are the backbone of Sri Lanka’s economy. IMF’s “corruption vulnerabilities” pervade not only public administration but also local markets. The so-called free market is not free at all. They need cleansing of artificial rigidities before any reform could benefit producers and consumers. Those rigidities are part and parcel of the political culture. One or two spokespersons from the opposition seem to rely on advanced technology to solve the rigidities. Even technology in the hands of wrong managers could be manipulated to serve different purposes.  Therefore, the forthcoming election whatever form its takes presents a lifetime choice to voters between system change and system tolerance. The destiny of Sri Lanka’s economy and the welfare of its masses depends fatefully on that choice.    

*Dr. Ameer Ali, Business School, Murdoch University, W. Australia

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Latest comments

  • 4
    2

    Thank you, Dr Ameer Ali,
    .
    I have read your entire article carefully; it makes sense.
    .
    However, I will not attempt a critique because I don’t know sufficient Economics.
    .
    I wonder if you saw this sane 100 minute discussion in excellent English?
    .
    https://www.youtube.com/watch?v=T9Lu36rnYNo
    .
    It is good because doesn’t give us only the NPP views. Even AKD is not even there.
    .
    However, Eran Wickremaratne, Shanikyan Rasamainikkam, and Janaka Ratnayake present other views. The NPP views are well presented by Harshana Nanayakkara. It is not a secret to any of us that AKD will not risk speaking in English. Sad, but true. But is that a crime?
    .
    Dr Harini Amarasuriya is spoken of a lot. Her English is excellent, but I was surprised that she spoke so much in Sinhala in London.
    .
    Find out about how many rounds of voting there will be at the Presidential Elections.
    .
    Panini Edirisinhe

  • 9
    2

    Has a turnaround truly happened or are we imagining that all is well due to reductions in consumption due to the increase in prices? As the prices have sky rockketed people are not consuming as much as they did before the bankruptcy. This has resulted in less imports. Further, we are not servicing our debt to international lenders, this has also drastically reduced the outfloor. All Ranil has been able to achieve to date is to use police and military powers and illegally control protests and the Speaker of the Parliament passing bills illegally in contravention of the rules laid down in the Constitution. Even the appointment of the IGP was done illegally by the Speaker who lodged a mail vote outside the Constitutional Council. The President too made the IGP appointment without the legal approval of the CC. Until Harsha declared that the Chinese, Indian, and Paris Club debt restructuring agreements have not been signed, the citizens of the country thought they were signed. This is a fault of the media as well as the media never challanged the politicians. All in all what Ranil has been able to do is put the citizens in more trouble by borrowing more.
    So has the economic conditions really improved? I would strongly say NO!

    • 11
      1

      Buddhist1
      “Has a turnaround truly happened or are we imagining that all is well “
      There is definitely a turnaround, but all isn’t well yet. For all to be well, the ratio of what people earn to what they spend must go back to what it was before. For that to happen, there are three ways:
      1. The value of the USD must fall to around 180, which isn’t likely to happen, because exporters are already griping that it’s fallen too low already.
      2. Salaries must double or treble to keep up with prices. The government might increase State salaries, but the IMF will stop it.
      3 The government can go back to subsidising everything. That will work till the next bankruptcy.
      “As the prices have sky rockketed people are not consuming as much as they did before the bankruptcy”
      True. A look at any supermarket shelf shows that. Some brands have disappeared, while others are in smaller portions.

      • 6
        3

        Hi Old Codger,

        My views on your points:

        1. SL is an export and tourism-oriented country. If the Dollar falls, then the revenue in SL Rupees will fall, which would affect most of the businesses in the country. At the same time, there is the possibility of imports increasing as their cost will be lower.

        2. When salaries are increased, it creates a wage spiral, resulting in businesses and state service-provider sectors raising prices. This would hurt the wage increase.

        3. Today, a friend of mine confirmed that when he bought a chicken to cook the same day, the family fully consumed it. Today, the same chicken is portioned and used for three days. This is due to consumers cutting down on consumption.

  • 12
    1

    “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin.”

    None, Whether it is politicians or professionals or administtators who live inside or outside of this island are not prepared to tell the truth behind the causes of economic, political and social crisis of this island. Findamentally, this island was not ruled by the people of this island for more than five or six centuries. Even now, the country is not independent and people are slaves of the agents of the invaders/super powers.

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