17 November, 2017

Economy 2017: The Alarming Signs Should Not Be Ignored

By W.A Wijewardena

Dr. W.A Wijewardena

Dr. W.A Wijewardena

Year 2017 marks two anniversaries

The year 2017 dawns with two anniversaries. One is the sixth anniversary of this series analysing economic and related issues. The other is the second anniversary of the good governance government that came to power in 2015 in a silent revolution. The first anniversary is to be celebrated by looking at some of the economic analyses done during the past six-year period. However, with respect to the second anniversary, a grand celebration is being planned by the victors of the silent revolution.

Grand plans to mark the anniversary of the silent revolution amidst an economic volcano

Any celebration by government leaders involves the spending of scarce public money for a purpose not directly productive according to economists. Yet, the leaders of developing countries are known for their desire to make a show-off of their successes by using taxpayers’ money. In Sri Lanka’s present case, it is more agonising for two reasons. One is that it is not only the taxpayers’ money that is being used; it is borrowed money which is being wasted since the Government has to borrow even to meet its day to day operations due to shortfalls in revenue. The other, is that it is being done while Sri Lanka is sitting on an economic volcano which is to erupt at any moment, destroying everything in the vicinity.

The economic crisis started in 2012

The economic volcano is the deep economic crisis which the country has been going through since around 2012. The symptoms of the onset of the crisis were visible from many fronts though they were conveniently ignored by the policy makers at that time. The symptoms took the form of 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 the only response to such constructive criticism was a flat denial, rebuff, name-calling and personal attacks. On top of this, there was a deliberate attempt at massaging the main economic numbers painting a rosy picture about a fast-growing vibrant economy.

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. It led to a growing trade deficit and a major part of the deficit was funded by using the remittances made by Sri Lankans working abroad. Those remittances provided a temporary relief to the authorities and they were supposed to use that breathing space to take measures to fix the external sector ailment permanently. But what was done was to borrow money from commercial sources and use the loan proceeds to meet the market demand for foreign exchange so that the rupee could be prevented from falling against other currencies. The attention of the policy makers to this insane strategy was drawn 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 policymakers 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 was 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 publicised. 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 policymakers 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 into 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 removing any statistical ground for blaming it for the prevailing economic ills. 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.

IPS’s State of the Economy Report was more frank

Had the leaders of the new government gone through the State of the Economy 2014 report issued by the Institute of Policy Studies or IPS in October 2014, instead of relying on the Central Bank, their reaction to the issue would have been different. In this report, the first chapter on policy perspectives and the second chapter on macroeconomic performance outlined the basic economic issue faced by the country. The report said that the source of growth in recent years had been largely dominated by the domestic non-tradable sector, meaning that the growth had not generated sufficient volume of exports (p 2). In fact, if this message had been read correctly, any policymaker would have known the reasons for the chronic and acute external sector crisis in the country. The Government cash flow had been managed by delaying payments to suppliers which was not a viable solution. The viable solution was to raise revenue and curb wasteful expenditures. The report had stressed that the Government should have moved away from consumption type taxes which are unreliable and based on the performance of imports and economic growth. If both do falter, so does the tax revenue. For a more sustainable increase in tax revenues, it was necessary to go for fundamental reforms in tax policy and tax administration (p 3). This was not addressed to either in the interim budget or the two permanent budgets that followed.

Falling exports was the culprit, according to IPS

IPS had correctly identified that it was not prudent for Sri Lanka to go for mega projects undertaken out of foreign commercial borrowings backed by sovereign guarantees since they increased the Government’s payment liabilities, on one hand, and make the country vulnerable to adverse developments elsewhere, on the other (p 4). The report had advised that Sri Lanka should identify key urban areas into which industries and foreign direct investments can be channelled and build the energy, housing and environmental management infrastructure around it (p 13). This piece of advice aiming at inclusive growth everywhere is more prudent than embarking on a single province-based Megapolis, being undertaken by the Government. It has also opined that Sri Lanka, being a small developing economy, should consider the demand for its products from outside Sri Lanka as critical for sustained long-term high growth, absorbing the surplus labour and raising productivity (p 19). Hence, export of goods and services should be promoted at any cost and budgetary provisions should have been made for achieving that goal. The implication of the government-led economic growth in the post-2009 period, according to the report, is the driving of the private sector to lesser economic engagement with unintended consequences for long term economic growth (p 33).

The late realisation of truth by the new government

It took about 11 months for the Government to recognise these important requirements as revealed by the Economic Policy Statement presented by Prime Minister Ranil Wickremesinghe to Parliament in November, 2015. It was too late by that time. Then, it is still too late now since two years have now elapsed without any concrete action by the Government to come out of the economic crisis in which it is now deeply immersed. The Government is walking into 2017 totally unprepared it seems, for the pitfalls that lie ahead.

Waste of two years without concrete action

Prime Minister Ranil Wickremesinghe presented a second economic policy statement in October, 2016 in Parliament. However, this second statement had no connection to the first statement he presented in Parliament nearly a year ago. It was a completely different statement from the first one, without any evaluation of the attainments made with respect to the goals of the first statement. Hence, two years have now elapsed without a concrete economic policy package for rescuing the country.

Ambitious plans to make Sri Lanka a rich country

In the second policy statement, the Prime Minister had emphasised the need for maintaining a minimum annual economic growth rate of 7% by Sri Lanka. The growth target of 7% is for the country to double its income in every 10-year period based on compound growth rates. Then, in a 30-year period by 2047, Sri Lanka’s income would increase by about eight times from what it had in 2016, elevating the country to the status of a rich country. It is a noble ambition but without a concrete plan, it appears that the target has become elusive.

Slowing-down of the economy in 2016 and 2017

Sri Lanka’s annual average growth rate during the post-independence period has been at about 4.7%, well below the desired growth rate of 7% announced by the Prime Minister. In 2016, the Minister of Finance has expected the economy to grow by about 6%. But the indications today are that the country’s growth rate in this year would be around 4%.

The country has already experienced a downfall of the output of paddy and tea, causing a negative impact on the growth targets for 2017. The best economic growth the country could attain in 2017 would be about 4.5%, despite the high economic growth expectations made by both the Central Bank and the Minister of Finance.

What it would mean is that the economy should grow faster than 7% in the next 30-year period, if it is to realise its target of becoming a rich country by 2047. This is difficult but not impossible, provided Sri Lanka follows a consistent economic policy toward that goal during the remaining 29-year period.

The fragile external sector

The external sector is fragile today with mounting pressure for the rupee to depreciate against the dollar in 2017. On one side, the country has lost a significant amount of its foreign exchange reserves in its attempt at defending the exchange rate. The free foreign exchange reserves by the end of the year would be around $ 4 billion, well below the amount it has to set aside for servicing the Government’s foreign debt during the next 12-month period.

The option available to the country is to borrow more foreign funds from commercial sources. However, the US Federal Reserve is planning to increase interest rates in order to avoid another economic and financial crisis in that country. With this expectation, US interest rates have started to go up causing capital outflows from EU and elsewhere. Thus, the Euro has already fallen close to parity with the US dollar. Sri Lanka, without sufficient foreign exchange reserves, cannot avoid a massive depreciation of the rupee in 2017.

This makes it important for Sri Lanka to finalise the deal on Hambantota Harbour and the Mattala Airport within the next three-month period.

‘Fiddling while Rome is burning’

The year 2017 and beyond is not rosy for Sri Lanka. With the mounting economic crisis which has engulfed the economy, Sri Lanka cannot waste money on anniversary celebrations. It would be like the Roman Emperor Nero, as the popular saying goes, fiddling while Rome was burning.

*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

  • 3
    0

    Who are you telling this? to this Yahapalana government!
    Don’t pretend! you know the old saying: “Beeri Alinta Veena gayana karanava vage” (like playing violin music to deaf elephants)!

    • 2
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      Wije: Why do you not criticize the corrupt international financial system and the IMF and World Bank, as much as you do quite rightly the corrupt and moronic politicians of Sri Lankan?

      The IMF and WB which are supposed to do global financial governance know that there is massive corruption and financial OUTFLOWS from poor countries in Asia and Africa but does nothing to stop this.. they support the looting of third world by corporations that benefit the US and Europe.

      Instead they write copious reports about immigrant remittances into poor counties like Sri Lanka which export labour but do not fill the gaping hole in the bucket of leaking economies that are bled by corrupt politicians and their international corporate and so called development partners.

      • 2
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        These economists are part of the problem and do not have any real solutions to the global economic crisis and massive inequality that breeds wars.

        We need POLITICAL ECONOMIC analysis of how America and its international aid business is all about impoverishing countries while promoting US corporate interests including militarization and arms sales and further impoverishing poor countries in the global south,

        China gives billions to third world dictators and does not ask questions. United States gives pea nuts to corrupt dictators and wants to control the domestic policy making process of countries that receive its peanuts worth of so called development aid!

      • 1
        0

        Wije doesn’t criticize some facts which are blatant.

        Yahapalanaya govt gave a salary increase of Rs 10,000 to all public servants without any linkage to productivity. Imagine the cost forever is Rs 10,000 x 1.5 million x 12 months is Rs 150 billion per year. This is without considering extra pension costs. Add the 450,000 pensioners increment to it and we are sunk!!

        This govt is no different to MARA since both will do anything to grab and stay in power.

        Thus country has no future unless we can find 10 good politicians who will do the right thing!!!

        Cannot see anyone in the current outfit nor in the MARA team.

  • 3
    1

    The former finance and economic development ministers without an o=level to their names a central bank governor an accountant and not an economist what else could we expect?

  • 3
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    “Economy 2017: The Alarming Signs Should Not Be Ignored”.

    WAW, people are not ignoring the danger that is looming. It is the planners who is wasting everybody’s time without a plan. First step should be for justice to prevail. Then the rest will make sense fall in the correct places. When the leaders experiment and fiddle with the powers vested in them, it is going to be a very rough ride for all.

  • 5
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    A fair and valid prognostication, but be assured, everything is going to be alright. We shall just have to send more of our women folk to slave in the Middle East.

    • 4
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      Yes, Spring Koha, you hit the nail on the head.
      1.Our greatest income earner is Exported Women
      2.To improve earnings we must export more.
      3.Sign an FTA with Saudi Arabia.
      4.Pay a bonus to every couple that produces a female child.
      5.To keep the boys busy, import more 3- wheelers.

  • 2
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    Destroying the national economy is part of the agenda of this corrupt puppet government. Expect it to sell all stratergic national assets to foreigners and GDP growth to remain in 4% range.

  • 1
    1

    Most of the officials of the central Bank and especially Ajith Nivard Cabraal should take the blame for the current situation of the Country. For not standing up against the wrong dictates of the previous Government.

    • 2
      0

      Stop trying to save the current moronic government. Or at-least name a few wrong dictates factually without throwing around words like a typical UNPer.

  • 3
    1

    The Ranil W….is not a visionary leader of UNP or country since, he has step into Party leadership. He lack reading economic development Model & Path and knowledge of Economics by himself. Such man cannot lead nation for Prosperity of development of People life in every sphere of society.

    I think the writer is well-know fact by that his working experiences in CB of several years familiar with UNP set of policies.
    Indeed Writer want to please that Ranil W… MS and CBK by avoiding political prosecution by state authority or may be writer also line up on New Treatment of Christies of politics by Western new concord an Ideology of “democracy.”

    The writer is in that the line of Bond washing theory of Economist.
    He blame for past MR alliance that making boundary of indifferences ills of Economic not that UNP set of Neo-con, but that make excuses to protected boot legging political-economy of UNP new think-tank.

    Last 24 months UNP leadership which that pattern of working conditions that an Economics ills has been badly unsustsnsbility of production of Agriculture, Industries, Venture investment projects and Services has been created that bottleneck policies has undermined overall growth of GDP.

    1 Lost Boom of Development.

    2 The increased national Debts in two fold

    3 The lost of Value of nation currency-Rupees by 20% percent than
    previous MR ruling alliances.

    4 Large scale withdrawal of Stock market investments by foreign
    parties.

    The bona fide of Economic reading has change by Primer and Minister of Finance by their budget reading and Economic policies has change by overnight.

    Sri lanak just become Borrowing country. The rapidly declined the Bill market rate has been ignored by IMF, WB and ADB, while that granting huge loan for to Govt. of Sri lanka.

    Under Ranil W.. economic policies has shifted into Bill market of sale. Such Amortization of capital by UNP high level economic think-tank is working on apprenticeship aptitude test of Our country.

    The UNP policies are intangible assessments of our nation potentials.
    The writer attitude to UNP authority is not that well being of Majority of our People.

  • 2
    0

    As usual Mr. Wijewardena’s analysis is flawless and frank. However, I noticed that he has intentionally or unintentionally emphasized the root caused of the economic crisis as a result of mostly previous government policies and actions. He has totally missed the disastrous impact of 100 -day package of the current government. This disastrous impact is never ending due to the unreasonable, unjustifiable and wasteful increase of mostly unproductive and inefficient public servants. Of course this include the political appointees and the members of parliament who are receiving enormous subsidies, duty exemptions as well as numerous allowances. It has become the practice of most analysts to emphasize the previous government, of course which ‘wasted’ huge amount of funds which ended the thirty years of terrorism in Sri Lanka.It would have been more balanced if Mr. Wijewardena mentioned the circumstances behind the expenditure incurred during an post- war period as well as catastrophic impact of the 100-day package of the current government.

  • 0
    0

    A multitude of “Experts” speak, advise and initiate measures to make this country in the minimum to keep its head above water. With all that, why have they failed and made the country to fall into a “Black Hole”? The simple answer is, all those connected with this process have and are still making the situation EXPEDIENT and that has been the “NORM”. Just look back and ask the question: Has or have anyone or all those experts suffered with the outcome that they have brought about? NO is the resounding answer. Then WHO was at the receiving end? No one else, other than those who entrusted, laid trust and confidence to MANAGE the affairs for them. They are the “Ordinary citizens” of the country. This is the sum total of our endeavor for the last so many decades.

    Now, if we know where we are today, how and what the WAY to “RECOVERY” is the most pertinent question before all of us including those “Experts”. The “ordinary man” does not know and do not not want to worry about and argue on those “Micro” and “Macro” economics and a whole multitude of terms used to do “Analyses”. What they want is nothing but; food (three meals a day- a simple one), shelter to house the family; simple clothing to cover nudity; and a simple,happy and contended life for the family. They know HOW to get that SIMPLICITY; a decent and an adequate income; reliable medical service; and a proper futuristic development (education) plan. Now, why we are not achieving that? The simple answer is: MISMANAGEMENT of our NATIONAL RESOURCES (includes Asset Management) and WRONG DECISIONS made in the direction of INCOME GENERATION. Then, if that is the identified WRONG DOING; what have we got to do? The answer to begin with is: First(1) desist from being “EXPEDIENT”; (2) ADMIT the “MISTAKES” and RESOLVE to CORRECT (Resolution) (3) Take CONTROL (Management) of all the NATIONAL RESOURCES and ASSETS. (4) Establish GOOD GOVERNANCE devoid of personal and related favouritism (5) Have a NATIONAL PLAN (Economic, Social,Education etc) and an IMPLEMENTATION STRATEGY armed with a DEDICATED TEAM with proven track records, freed from all sorts (especially political influence) influences with assigned RESPONSIBILITY and ACCOUNTABILITY. (6) Establish ASSESSMENT and ACCOUNTABILITY mechanism (both with review and enforcement mechanisms through Audit and Judicial and subject all types of failures to recovery and penal penalties). ALL these come within the philosophy of COMMON SENSE and it is that COMMON SENSE REVOLUTION that we NEED NOW.

  • 0
    0

    Ex-CB deputy Governor has not approach about “good governance” improvements proves suspect under that UNP Ranil W… policies of
    Neo-con Liberalism as well.

    The Capital and Financial globalization does force present government in power to pay more attention to what bankers want, but finance and banking is one industry among many with its own national special interest of Islanders.

    Why is that UNP leadership has been ignored, its should demand line up always or even most of the time with what a country needs?

    The policy of UNP leadership of Ranil w.. and their think-tank not considered a typical conflict in a developing economy of Sri lanka.

    What is the Big foreign banks want ? Foreign Bank prefer high interest RATES and an appreciated US currency ,while domestic EXPORTORS prefer LOW interest rates and cheaper currency.

    That is why of these two outcomes should monetary and fiscal policy of CB be designed to delivered by Governor of CB? Or by Ministry of Economic Strategy? Or by Primer of who in charge of Economic affairs?

    In case of successful of Exporters’ preference will do the most good for National economy as a whole, while that ours national economies where finance does have the upper hand of UNP bunch of leaders politically will prosper. In generally CB and other Banking interest
    tend to have a preference for the very light and relaxed regulation regardless of the implication for the rest of developing economies.

    The very reasons since last 24 months Economic policies under the Ranil W.. and his political gang of UNP’s their influences to Central Bank of Sri lanka, Ministry of Finance ,& Economic Affairs can have most a corrupting effects on politics and the institutions, it goes unchallenged by lucrative business circulars by UNP political henchmen.

    Which as example demonstrated CB Bond scam of finance’s which is remarkable ability to undermine “good governess”; and to do so in the oldest democracy in third worlds country -like -Sri lanka.

    Where exactly did Sri Lankan it all go wrong?
    The Balance of Payment, Foreign Reserves and National Rupees currency stability, that once again crisis demonstrated, how difficult it is to tame finance an field which both the LIFELINE of all ongoing modern economy of Island and gravest threaten to ours stability and an economic sovereignty by misrule of UNP an irrational set of policies under the Ranil W..’s short sight vision.

    In fact The Wijewaradean’s economic dose not prudential and his line of Economic policies has omitted market economy, that is not extensive disclosure and transparency UNP policies NOT requirement the before they develop.

    The UNP financial intermediaries pocketed the fees and commissions.
    It might have worked like a dream—–until the crisis struck many UNP’s of their financiers, economics of their think -tank and UNP policy makers thought that it did.

    At last people of Sri Lankan has pay the price for it.

  • 0
    0

    All agree that Sri Lanka must finalise the deal on Hambantota Harbour and the Mattala Airport within the next three-month period. This needs to be followed up with the Plans for the Indian & Japanese industrial zones in Trincomalee, to maintain our non-aligned policy.

    Other economic priorities are the privatization of Sri Lankan Airlines and other loss making business enterprises and the finalization of an eco-friendly medium term power generation plan, without wasting time on planning coal power plants.

  • 0
    0

    Thanks for the insightful article

  • 0
    0

    Dear Sir,

    It is unlikely that the US FED will increase interest rates in 2017.

    More likely interest rates will be slashed to zero once again.

    More likely the quantitative easing program will be restarted.

    Thanks.

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