By Hema Senanayake –
Mr. Nagananda Kodituwakku has announced his candidacy for 2020 presidential election. He claims that he has an impeccable character. At least this means that he will not lie to the people of Sri Lanka. I like it the most. In other words which are familiar to him, he will tell the truth, the whole truth and nothing but the truth. This is the very reason that he must be careful in submitting his election manifesto. What is troubling me right now is that he unknowingly, assuming that he doesn’t lie, has declared some of his economic views which would be found false when come to actual governance of the country.
However, certain reforms he proposes have well resonated with me and I guess so should be with many. This parliament with having 225 parliamentarians are too big for the country. Nagananda proposes to reduce it to 125 members that is 100 parliamentarians less than now. It reduces the chances of fielding and getting elected politicians with lack of integrity. I like it. If he really proposes to stipulate to have certain education qualifications for those who are allowed to contest in parliamentary elections, that would be a bonus benefit. The country needs politicians with high integrity. Also, he proposes to establish the supremacy of law, I would say over corrupt politicians of all kind. If elected, he has the vision and vigor to do it and he would do it better than any other prospective candidates. I like it too. But I have a problem with his economic wisdom or how he approaches the issue of economic governance.
When come to the subject of handing the economy, he seems to be in the same fantasy world in which many UNP leaders had been living in prior to the presidential election of 2015. By profession Nagananda is a lawyer and might have no knowledge of economics specially as to how extremely complex system of economy works in Sri Lanka and elsewhere. Therefore, I think he should not suggest any conclusive propositions at this time, in regard to economics other than expressing his commonsense economic vision. But I noticed that he made some mistakes which would be tantamount to political lying. Let me be specific.
Nagananda proposes to declare one-month amnesty for corrupt politicians and high-level government officials if they agree to pay all monies earned from corruptions. This is one method of finding money to pay huge government debt. Just one week prior to the 2015 presidential election, UNP’s best team had similar illusions in regard to economic governance which is one of the most important subjects, then and now. For an example, at the historic debate held on December 31st night of 2014 at the Independence Square, when the incumbent President Mahinda’s team questioned as to how they (UNP) proposed to find money to finance the proposed salary increment of Rs. 10,000 for each government employee and for other projects, Ravi Karunanayake and others have insisted that they can find money just by stopping corruptions. They have presented nice calculations to prove not only that they would have enough money but also they would save a considerable amount of money by stopping corruption. By that night I realized that they would make a big mess in regard to economic governance but as I openly said in my prior articles, I casted my vote to the common candidate in January 2015.
However, the next day after the said debate, that is on January 01st, 2015, I wrote an article explaining how the economic system works. On that day I wrote that, “…you may win an election on corruption charges, but you can’t run an economic system by just being not corrupt. This means stopping corruption would not give you any new money to finance the salary increases etc. This truth will be found out soon by the new government… Stopping corruptions might reduce the cost of doing government business. But systemic arrangement of the economy is such that it does not necessarily bring in new money to increase welfare payments. Unfortunately, sometimes corruptions bring in new money into the system… I am writing this not to absolve the government from the culpability of corruption. But I want to enlighten the general public and the civil society organization activists who happened to be the vanguard of the current movement of the opposition in order to make them intellectually ready in economic governance. Then they can be a true force acting outside the new government. They need to be mindful that powerful anti-corruption charges/allegations would have limited and minute impact once the new government sworn in. Perhaps subsequent litigations against corrupt politicians or officials might help to recover and bring in a few millions to government coffers. It cannot be huge, I guess.” (Another Dimension of Corruption, Jan. 01, 2015, Colombo Telegraph).
Mr. Nagananda, I request you to read the above said article again and again because as I pointed, I never know any large physical system than ECONOMY that truly depends upon a hypothetical system created by human imagination –And that hypothetical system is being the monetary system. The monetary system is not real or physical phenomenon.
Then the other method of reliving debt burden is to request debt forgiveness from foreign debtors and Nagananda pointed out that Russia did cancel debt for many African countries. Those countries might be lucky. But any prospective presidential candidate should not keep hopes on foreign debt forgiveness. The country must be ready to honor their debt obligations, especially foreign debt, if the country has a slightest hope of maintaining a reasonably stable currency. Without a reasonably stable currency our all economic hopes will be shattered as is happening now due to inefficient monetary policy management.
Thirdly, Nagananda, rejected to deal or negotiate with the World Bank and International Monetary Fund (IMF). This is sheer ignorance. The UNP had and still has the totally opposing view to Nagananda’s; they totally rely on IMF’s policy interventions. This is sheer ignorance too. Any country that uses some other country’s credit based domestic currency as its reserve currency, has to negotiate with IMF, period. Sri Lanka is one such country. Not only those countries, even the powerful European Union had to seek IMF intervention during the Great Recession of 2008-09, as the European Central Bank could not create money as easily as the Federal Reserve of the United States for the use novel policy tool call “Quantitative Easing.”
IMF is not a monster, instead Sri Lanka is a member country of IMF. However, all IMF policy interventions are not correct even though the UNP takes them as god’s words. Let me give you a quick example. Recently, IMF insisted that Sri Lanka must have a floating exchange rate and secondly, from the same report they propose to target inflation. This kind of recommendations based upon the economic theories which IMF believes as true. Many such theories held by IMF previously as true had been fallen apart many times.
When this report was published and was quoted by the former Chairman of Ceylon Chamber of Commerce Mr. Chandra Jayarathna, I knew that those two propositions of IMF have no economic meaning. When a country is having an increasing current account deficit (which simply means that the country has more outflow of dollars than inflow of dollars from trade) you can’t target inflation by having floating rate of exchange.
The IMF theory is that excessive current account deficit would be contained when the rupee gets depreciated by requiring importers more money to import their respective merchandise. When the rate of interest is reasonably low or even moderately high this will not happen. The only thing that could happen is to trigger an inflation. However, in order to discourage imports the CBSL could increase the rate of interest but if CBSL did it, it could again trigger an inflation and diminish economic growth. IMF’s propositions are self-defeating. The CBSL understood it after the rupee’s exchange value got the hardest hit. So, they used something call administrative policy tools to prevent the rapid depreciation of rupee. This kind of measures were used by Treasury Secretary P.B. Jayasundera when the rupee got depreciated rapidly from 113 to 133 in 2012, but those shocks are bad for the economy that time and so is now.
Why any country should have a floating rate of exchange? A couple of days ago, a high official in the Central Bank explained through a main TV channel, not his views but IMF’s view. He said floating rate of exchange helps to absorb external shocks while domestic interest rates could be used to target inflation. These are clear nonsenses. When I make such a claim I must provide evidences. Take the example of increasing salaries by Rs. 10,000/= for government employees. This was a change of domestic policy environment. The situation it created hit a significant blow on the existed exchange value of rupee. Here, I do not suggest that the new government’s decision to increase salaries was bad. But what I am suggesting is that the government (or the CBSL under Arjuna Mahendran) did not change the monetary policy environment which was required to prevent the devaluation of rupee due to the increase of salaries. Now, this was an internal shock not an external shock. When salaries were increased, it increases the potential to increase what is known as “credit money” exponentially. If the CBSL had contained it happening, salary increases would not have brought unnecessary pressure on the currency. My point is that most currency depreciations occurred in recent past were caused by internal “shocks.”
In fact, what the IMF should have suggested was to take all policy measures (monetary, fiscal and administrative) to contain the increasing current account deficit and by doing that stabilize the rupee so that such fundamental stability increase the chance of increasing the inflow of non-credit based dollars (and other reserve currencies) into the country which currency flows are posted in the country’s capital account. This might strengthen Sri Lanka’s balance of payment only which can ensure a stable currency. If Sri Lanka can show to IMF that the country can prudently manage its monetary and fiscal policies in order to prevent any balance of payment difficulties, I guess IMF would be a true source of strength for the country. When the country can’t do it, IMF usually imposes conditions and policy recommendations with a view to strengthen the balance of payment situation of any member country. IMF is an international agency with which you can negotiate positively if you know the subject.
Now, understanding economics especially macro part of it, is not that simple. Once you understand this, then you as a previous executive of a prestigious government department, would easily figure out, what action you have to take in order to bridge the said knowledge gap.
The other thing I like your candidacy is that at least, it would upgrade the whole process of the next presidential election. I wish you good luck.