By Amila Muthukutti –
An economy is expected to grow at a considerable pace, achieving full employment, price stability, exchange rate stability and few other macroeconomic objectives. Economic growth is an increase in the amount of goods and services produced per head of the population over a period. What is required for producing more and more goods and services in the economy is assets, anything that positively contributes to the production process and generates cash inflows. In other words, an economy cannot grow without assets. Simply, an asset is something that brings money into the pocket, while liability is something that takes money out of the pocket. Accordingly, an economy cannot move forward without building a solid base of assets generating cash inflows. Let me explain how lack of assets and underutilization of prevailing assets have resulted in economic deterioration.
Politics and economics are just like two sides of the same coin. Politicians in charge of the economy may not do it properly, as their objective to remain in power is prioritized over the objective to put the economy onto the right track. Welfare has always taken over the economy in Sri Lankan history, because politicians tried to make people happy, merely for their political survival. In fact, building certain assets in the economy is not so popular, as they take time to give something visible in return.
Even though some assets were constructed for the last decade, their fruits could not be properly reaped, mainly due to political objectives. Lack of national policy leads to underutilization of assets built by previous governments. On one hand, many projects that were constructed by the previous government, were not properly utilized by the present government. On the other hand, those projects were not strategically positioned in right places. Whoever responsible, the country is left with white elephants and a mountain of public debt. Accordingly, politicization of assets starts from putting politicians’ names for projects to appointing their supporters.
For past few years, public debt has been the hot topic in almost every political debate, crediting debt into each other’s account. However, truth is that in a country where reserves are not enough to fund for projects, there is no alternative other than relying on external sources. The fact that matters is whether the debt-funded projects would generate enough cash inflows and thereby profits in the future. This led to a situation where the nation became deeply indebted, when compared with peers.
According to International Monetary Fund’s (IMF) statistics, public debt is estimated to have increased significantly to about 90% of Gross Domestic Production (GDP) by the end of 2018, due to weaker economic performance and sizeable depreciation of the rupee which depreciated by 19% in the last year. Public debt as a percentage of GDP is 84.1% in 2016. It is 90% in 2018. Public debt has risen considerably within very short period. Moreover, Asian Development Bank (ADB) has been the largest creditor claiming for 13% of external central government debt. Chinese loans amount to 7% of total public debt.
Debt-to-GDP ratio is on the rise means increasing percentage of GDP is allocated for repaying debt. If a country is financially capable of paying interest on its debt without refinancing and recording slow growth, that country can be considered economically stable. However, because debt-to-GDP ratio in Sri Lanka has increased significantly, the Central Bank is also repeatedly engaged in refinancing activities for debt repayment. Therefore, questions must be raised concerning stability of the economy. If projects implemented for the last decade could generate profits, the country could not have gone for refinancing strategies which put the economy out of the frying pan into the fire.
Building assets in the economy is a prime factor contributing towards economic growth. Private sector can never be expected to build liabilities in the economy, as they are profit oriented. If so, it is the public sector that builds liabilities in the economy, resulting in a situation where each citizen of the country has to share its burden. Foreign Direct Investment (FDI) is one of the best ways by which assets can be built in the economy. Nevertheless, when there are no assets in a country, no foreign investor is encouraged to invest in that country. That is what is currently happening in Sri Lanka.
Politicians as well as the public must understand the difference between assets and liabilities. When the public can differentiate cash-generating assets, politicians cannot cheat the public by constructing white elephants. Before building new assets, steps should be taken to properly utilize existing assets, most importantly convert state owned enterprises (SOEs) into profitable ventures, in order that debt burden will be reduced in the future.