15 October, 2019

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Importance Of Building Assets In The Economy 

By Amila Muthukutti

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

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. 

Public debt 

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. 

Conclusion 

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. 

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Latest comments

  • 2
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    Sri Lanka has to build a new city or two for the future. Somewhere in the cool climate. Perhaps around the environs of nuwara eliya, budulla , bandarawela or ratnapura. Everything cannot be centered around one city.
    It has to be a planned city like Paris ( circular formation) Washington or new York ( grid formation ) this should have been thought of years ago. Expect Colombo 7 there is no city planning in Sri Lanka. The warm, humid and tropical climate is detremental to productivity. Is it a wonder that Lankan’s are slow, fat ,sluggish, stupid and lazy. It’s the heat. Lord Mountbattan ran the the south east command during world war 11 from Kandy. Because he correctly believed that Europeans function better in a cold climate.
    I am born and riased in Colombo , so are my parents and one of my ancestors is named colombage-the clan or house of Colombo. F ing shit city.

  • 0
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    Economic growth is directly proportional to investment in human capital and machines. In other words, machines help to make humans more “productive.” Or you could say, efficient. Organizing these resources, so-called “entrepreneurship”, is also important. There is another factor which is never mentioned in economics books: environmental sustainability, e.g. not destroying the ecosystem. Sri Lanka in ancient days had all of these things. The machines were indigenously crafted, they were so efficient that not only was Sri Lanka self-sufficient in food production, but agriculture in dry zones was also possible. Some of these machines, such as the tanks, are still there today. In those days most people were content with their occupation, so there was no push to mass produce and maximize profits, unlike what we see today. This kind of cooperation ensured the ecosystem was not destroyed. Along with the Dutch, Portugese, and British came mercantilism. The indigenous economic structure was uprooted so that commodities like tea and rubber could be sold to Europe at a premium using indigenous slave labor. At the time of “Independence” Sri Lanka was on a path to adopting a capitalist model, but this was later delayed due to political turmoil. Moving forward, Sri Lanka will have to invest in more modern machines, as well as reeducate and reorganize human capital. The infinite debt-slavery model proposed by the IMF is not sustainable in the long-run.

  • 1
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    Public sector as a whole is a mammoth liability for the country because of the despicable patron-client politics practiced by both major parties during their 70-year misrule of this once most prosperous economy among the newly independent nations of Asia. The “chit-system” adopted by MPs to put their relatives, friends and henchmen on the government payroll has turned all state ventures into white-elephants. The worst part is that the service rendered to the public, who pay for all this, is so inefficient, wasteful, corrupt, unfair and disrespectful. If you’re an ordinary citizen without much of a social profile, then you’re at the mercy of the bullies and goons who run these so-called public enterprises.

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