By Muttukrishna Sarvananthan –
Dr. Muttukrishna Sarvananthan
Illusory Economy Versus The Real Economy Of Sri Lanka: A Rejoinder To The Governor Of The Central Bank Of Sri Lanka
The Governor of the Central Bank of Sri Lanka (CBSL) has penned a compelling article entitled “Practical, not Conventional, Wisdom has driven Sri Lanka’s Rebuilding and Reconciliation” which was posted on the official website of the CBSL on Thursday 3rd April 2014 but abruptly removed on Monday 7th April 2014 for reasons best known to CBSL. However, it has been brought to my attention that Governor’s article was published on forbes magazine on 28th March 2014. The objective of this rejoinder is to demystify the theory of “practical wisdom” postulated by the Governor from what he claims to be the “conventional wisdom” in economic science.
Macroeconomic theories are formed on the basis of long-term real-time practical experiences of numerous countries in various stages of economic development in various time periods of human history. Similarly, microeconomic theories (aka theory of the firm) are formed on the basis of long-term real-time practical experiences of numerous firms in various sectors of the economy in various time periods of human history. Hence, we would argue that what is conventional economic wisdom is in fact practical economic wisdom and therefore there is no difference or contradiction between the two. What is posited in this rejoinder is the illusory economy championed by the Governor versus the real economy of Sri Lanka.
The Governor claims that “a staggering US$ 3.2 billion” has been spent over the last four years (2010-13) against the conventional wisdom, which has resulted in rapid clearance of landmines, speedy resettlement of IDPs, and all around economic revival in the Northern Province though he does not provide any statistics of such economic revival. Such practical wisdom, so he claims, has resulted in a peaceful country with economic growth all around the country and dramatic decline in levels of poverty.
It is a fact that no other post-independence government has poured such a colossal amount of public money/investments into the North (especially in the Vanni mainland) than the incumbent government. However, what the Governor has failed to acknowledge is that three-times more than the money spent on economic development in the North has been spent on Defence in the past four years (>US$ 2 billion annually), which has been rising every year since the end of the civil war in May 2009. What is the practical wisdom that necessitates defence expenditures to continue rising even five years after the end of the civil war? If such a colossal amount of expenditure on defence is necessary to maintain peace, how can the Governor claim that it is the US$ 3.2 billion spent on economic revival that has ensured peace? Besides, what the Governor fails to understand or overlooks is that absence of “terror” is not necessarily ushering of peace.
Further, the Governor has failed to acknowledge that official poverty levels in the eastern and northern districts are significantly higher than in most other districts in the country; official unemployment and underemployment rates in the north are more than double that of the national average. Many economists, including this author, claim that official statistics on inflation, poverty and unemployment are gross underestimations. For example, according to this author’s estimation while the countrywide unemployment rate was 18.0% in 2011 (though the official rate was just 4.2% in 2011), it was 32.8% in the Northern Province in the same year.
The Governor highlights the average 7.5% rate of growth of the GDP in the past four years (2010-13) after the end of the civil war compared to the average 5.0% growth rate during the course of the civil war. Is this 50% increase in the annual economic growth rate an optimal achievement? The sources of economic growth are more important than the growth itself; recent higher economic growth in Sri Lanka is not much earned growth (for e.g. through rise in productivity or employment generation), rather significantly borrowed growth (fuelled by growth in public expenditure largely through external commercial borrowings).
The Governor also self-congratulates for going against the grain, which has resulted in sustained single digit inflation, low interest rates, declining budget deficit to GDP ratio and public debt to GDP ratio, and rising gross official foreign exchange reserves.
The single digit inflation was attained partly by changing the methodology by which the consumer price indices are compiled by the Department of Census and Statistics whereby commodities that significantly contribute to inflation (such as alcohol and tobacco) were taken-off the basket of consumption goods taken into account in the compilation of consumer price indices. Inflation was also contained partly by resorting to greater external commercial borrowings in lieu of domestic borrowings thereby making the economy vulnerable to external shocks. Of course low inflation resulted in low interest rates but that did not result in higher private sector borrowings because “excessive monetary expansion was contained through unconventional monetary policies such as tight quantitative tightening” according to the Governor.
The declining budget deficit to GDP ratio and public debt to GDP ratio was achieved NOT through any deceleration in public expenditures or public borrowings. There is an “innovative” (albeit high risk) trend of coercing the state-owned and private commercial and specialised banks and state-owned enterprises to borrow in the international capital markets at the behest of the government; while this “innovative” practice of public finance may have reduced the budget deficit to GDP ratio and public debt to GDP ratio, it has also increased the probability of insolvency of many state-owned financial and non-financial enterprises. Moreover, there is a growing trend of government purchasing shares in private commercial banks thereby gaining a foothold in these financial institutions in order to coerce these private financial institutions to borrow in international capital markets and then lend to the government. Furthermore, payment of utility bills to the state-owned Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC) by government departments and institutions, and state-owned enterprises such as the Sri Lankan Airlines are deliberately deferred in order to artificially curtail recurrent expenditures of the government thereby jeopardising the financial stability of CEB and CPC. The losses incurred by state-owned financial and non-financial institutions runs into over US$ 2 billion per annum which are contingent liabilities of the government but not shown in the public financial accounts and thereby manipulatively lowering the budget deficit to GDP ratio and the public debt to GDP ratio.
In yet another “innovative practical wisdom” the foreign currency reserves in Sri Lanka are bolstered not through greater earnings of foreign currency (by way of growth in exports and lower trade deficits) but through greater external borrowings, especially in international capital markets at exorbitant price. The value of Sri Lankan rupee is maintained artificially high by the Central Bank through interventions in the foreign exchange market in order to minimise the cost of repayment of short-term external loans borrowed from international capital markets at high cost thereby eroding the competitiveness of Sri Lanka’s exports. The sale of foreign currency denominated treasury bills and bonds and floating of sovereign bonds such as Sri Lanka Development Bonds have significantly bolstered the gross official reserves of the country in recent years; but such short-term external borrowings may not be able to sustain the current level of gross official reserves for long, thereby making the gross official reserves vulnerable to external shocks as happened in late 2008.
The so-called “innovative practical wisdoms” highlighted by the Central Bank Governor reveal the invisible hand of dubious public financial accounting practices and politically induced statistical manipulations, as opposed to the invisible hand of the markets, at play in the Sri Lankan economy. Are these dubious “innovative practical wisdoms” transforming the vicious cycle of the Sri Lankan economy into a virtuous cycle?
*Muttukrishna Sarvananthan (Ph.D. Wales) is the Principal Researcher of the Point Pedro Institute of Development, Point Pedro, Northern Province, and could be contacted at sarvi@pointpedro.org
Ajith / April 15, 2014
The reality is non of the government institutions including CBSL, Parliament, and Justice system are not independent and they are there to convince the dictator’s wishes and needs. LIES, THREAT, CORRUPTION ARE THE CHARACTERISTICS OF THIS REGIME.
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punchinilame / April 15, 2014
Thanks for boldly disclosing what the “statistics” of Cabral are made up
of.
Please take care, as “accidents” are bound to occur here in SL!
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Moda Putha / April 15, 2014
Well written, well said, congratulations. You were clever to see thru the misinformation the govt makes to show that all is well and that they are doing a lot for the north and the east. I hope your article will be read by many but unlikely it would be published in any of the local press.
For the same reason that you have exposed Nivad hoodwinking everyone, be careful, the govt will not like people like you. Under some pretext they will take you for questioning and that may be……….. Be safe my friend and thanks for your article.
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crazyoldmansl / April 15, 2014
Firstly I am neither a macro nor micro economist. Secondly I have for over two and a half decades been forced to ingest various chemical compositions on the dubious grounds that my grasp on reality has been steadily slipping, and thirdly I can see that I am steadily losing my ability – at about the same rate at which I am losing control of my bladder and bowels – to deal with what look to me like fools, with any degree of civility.
What I see is that the government has adopted a policy of putting the hearse before the horse by borrowing money to build the country into its own idiotic idea of what the island should look like when developed and hope that development will follow as a result and enable the repayment of all those borrowed monies and the interest accruing thereon by the day. It is true that dressing up a prostitute may attract clients and increase GDP but this island is a location with immense potential and even greater problems – somewhat like a pox riddled prostitute and unlikely to attract any sensible client however well it is dressed and made up.
It is of course difficult to convince pimps that prostitution is not a merit good because pimps tend to focus on short term gains rather than long term goals and it is also difficult to convince prostitutes that there are better ways to spend their lives and earn a livelihood.
So let me make a prediction: In about 12 years from the day the government commenced its borrowing at around 6% interest, there will come about a growing difficulty in servicing the loans now being turned over annually. This is when the pimps will find themselves riding something like the recently labeled PIIGS. Their stooges and hangers on and all those who have benefitted from the borrowing spree will then be called upon – or rather snarled at – to cough up cash which they will not be able to do since they have done little other than to inflate their tiny little stock market. Like the PIIGS the pimps will be forced to take a swipe at savings with consequences that I cannot forsooth foresee.
It may also come to pass fortunately or unfortunately as the case may be depending on the point from which the event is viewed, that about this time those “War Crimes” that are being talked about may actually be established as having occurred and responsibility for them pinned on those who now claim credit for having eradicated terrorism with those whose savings were swiped or were in danger of being swiped playing a very helpful role in bringing about such convictions.
The horses will then be put before the hearses and the pimps relegated to a set of silent graves while the laws are changed so that the prostitute is taught how to be a decent parent and produce children free of PIIGISHNESS and the post modern philosophy of SHAPE and endowed instead with intelligence, tolerance, inclusiveness and a willingness to build a law governed society free of impunity and corruption and that accepts the doctrine of human rights.
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Thondamannar / April 15, 2014
Where do one find a real economy ????????????
Today, there are only talkers…………
Todays economy is all about NGOs, HR Activists living off pay masters singing for their supper.
The economy is real or not, it only benefits 1% of the world populations. the reast live by.
The in thing is living it off being in debtness to all & sundry.
This is the growth that we find in the world today.
Eternally robbing Peter to pay Paul & partying.
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Rajash / April 16, 2014
Dear Dr Muthukrishna
Brilliant articel.
I read the Frbes Magazine article as well and was surprised to find the following statement..
“…significant increase in industrial production and domestic terrorism:”
ha ha significant increase in domestic terrorism?
may be they want to kep the high level of army in the NE
another pointdo you really think the Govt spent 3.2 billion dollars in the NE?
I am lost here …what have they got to show for that?
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Ally Weerasinghe / April 16, 2014
What to do.
Will any media in Sri Lanka can afford to publish this article and analyse the situation critically enabling the ordinary citizen understand the country’s position.
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A.D.J. Perera / April 17, 2014
Dr. Muttukrishna’s bold account is frightening. One cannot run an economy for long deceiving the country – an area in which junior accountant Cabraal is a master. It is widely suspected the actual condition and shape of the economy is kept down by borrowings at high rates. Many economists are of the view
the actual US$ Vs SLRs parity is somewhere in the region of Rs.175-200.
Much of the State’s funds are spent on an inflated armed forces budget while at Geneva GoSL delegation boasted several billion dollars are spent in rebuilding the war-ravaged North.
With no war in sight, heavy expenditure is incurred in purchases of
arms, replenishment etc., continues – unchallenged as Parliament is kept in the dark. The bubble must burst sooner than later.
The “chaos” Lalith W was instructed to convey to Washington and London – is inevitable but for different reasons. It will not come because of the diaspora or the Western imperialists – the current scapegoats. Delusionary bogeys – if you like. It will come because of gross Rajapakse mismanagement of the economy and the country.
I feel sorry for the country and the vast mass of our innocent people who did not vote the Rajapakses in. The 98% “literate” Sinhala electorate sowed the wind. They will have to reap the whirlwind.
ADJP
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Pakshe / April 17, 2014
I am concerned not at the ordinary citizen who most certainly will not see or understand this article. I am concerned at the educated morons who keep worshiping this lot of thugs. These are the enablers. They seem to think that when the fall comes somehow they will escape by switching sides or some other miracle/jillmart. The crash will hit everyone with domestic assets liquid and fixed. There will be nowhere to hide. Changing sides will bring you nothing since whoever ends up cleaning the mess up will have no room for hand outs or kick backs. The conditions imposed will take care of that. So to you lot of jokers you will go down with the ship. The other option is to depart leaving nothing behind the path of a traitor with no love for the country.
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Backlash / April 17, 2014
I hope other readers see the issue as fairly clearly seen by Pakshe.
Affected most will be those who converted their landed properties to
cash investments for the childrens’ future, their higher overseas education, their own security during old age and so on. All these have lost their value and will continue to do decline. Like that happened in Argentina some years ago this reckless regime may even resort to “borrowing” the local and foreign savings of the Citizens to save the day. A careful look into the huge sum of Rs.28 billion entrusted to Lalitha Kotelawala under his Ponzie Golden Key Project shows most of the money comes from the investor group I have mentioned here. 10,000 depositors are now in the street with the regime doing very little except a half-hearted effort by Basil to help them. What is going on there is for regime-related powerful sources trying to rob these Kotelawala assets (like the ENT hospital in Rajagiriya) for a song, as it were.
When the crunch comes it will hit all communities – and some of the Rajapakses may have taken night flights by then to USA and elsewhere to enjoy their accumulated loot overseas.
Backlash
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justice / April 17, 2014
Cabraal who functions as the “economics whitewasher” of the regime,has inadvertently become the “economic hitman” of sri lanka,by lulling gullible idiots & the not so gullibles, who pretend that all is OK and carry on,with his ultra-bright review of the economy.
Soon the inexorable economic thunderbolt will hit the country – and then it will be too late.
Only the Rajapakse cabal and hangers on who have secreted funds abroad may survive.
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Backlash / April 17, 2014
Justice,
What the Rajapakses may or may not know is in today’s world
bankers documents make it clear money earned illegally or crime money
will be divulged, in the event of a challenge. The Phillipine despot
Ferdinand Marcos’s ill-gotten wealth hidden in Swiss and other banks in “safe” countries were restored to the country under a blaze of international publicity. Today Bankers are under pressure not to collaborate with despotic and crooked leaders to play safe haven for stolen loot – an area in which Cabral’s supposed to be expertise is said to be playing a role. There were a few African leaders whose
black money had to be forked out.
Backlash
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