By Hema Senanayake –
It seems that the government, at least Ranil’s faction in the government, is desperate in signing the proposed Economic and Technology Corporation Agreement (ETCA) with India. Some people support it and some people oppose it. They have their own arguments either to support or to oppose it. Some are economic arguments and some are not.
In this article, I intend to discuss only economic reasons as to why anybody must support or oppose to ETCA. Since, the ETCA is not finalized yet, we only can discuss as to how we can determine whether any particular economic and trade agreement is beneficial for the country. Such analysis might pave the way to prepare a better frame work or as GMOA has proposed to prepare a national policy in signing any trade agreement. In general if ETCA brings win-win situation for both Sri Lanka and India, we may agree that the agreement is good.
There are two vital economic reasons as to why economic and trade agreements are signed between and among countries. In fact one reason is broader economic objective and the other is a determinant reason, in other words it is the second reason through which we can determine whether any particular agreement is good or bad.
The first reason to sign economic and trade agreement is that such agreements usually help in utilizing what is known as “comparative economic advantage” in achieving partnering countries economic development objectives. Let us learn the importance of this point from the world’s largest trading nation which is the United States.
“The United States is the world’s largest economy and the largest exporter and importer of goods and services. Trade is critical to America’s prosperity – fueling economic growth, supporting good jobs at home, raising living standards and helping Americans provide for their families with affordable goods and services” (Official website of the Executive Office of President of the U.S.).
Globally, this is the same thing or goal that the World Trade Organization professes to achieve through the principle known as “free trade.” Yet, all free trade agreements are not good.
Sometimes, these agreements do more harm than good for particular countries immaterial of whether the country is developed or developing one. This means that such agreements do not make or create win-win situation for all partnering countries. This is where that the above said second reason or a criterion comes into play. Let me explain this point as follows so as to explain it as simple as possible.
There are two important national accounts maintained or posted by the Central Bank of Sri Lanka. One is the National Current Account and the other is Balance of Payment (BoP). With any trade agreement entered into with any country these two particular accounts are changed positively or negatively. Therefore in general if the change happened in these two accounts are positive, the trade agreement is good and if the change occurs is negative then the agreement is bad. This statement or conclusion is true for any country which uses some other country’s domestic currency as its international reserve currency, which is the case for both Sri Lanka and India. This conclusion is not fully accurate for those countries whose currencies are used as international reserve currencies such as U.S. dollar or euro.
Now, let us take an example. Let us assume that Sri Lanka would have a negative impact on its current account after signing ETCA. What does this mean? This means that Sri Lanka would be posting an increasing current account deficit due to ETCA. However, if this current account deficit is not balanced off with the inflow of non-credit based dollars (or any other reserve currency) posted in the Balance of Payment account, ETCA is bad for Sri Lanka. It is bad for India in the long term as the agreement could create financial/monetary instability in Sri Lanka.
I heard that one time Dr. Wickramabahu Karunaratne was questioning as to why people or professional groups are not opposing when Sri Lanka is signing trade agreements with Germany and why do they oppose when the same thing is done with India. I do not know why professional groups are doing it. But what I know is that Sri Lanka has a current account surplus with Germany, but with India, Sri Lanka already has a current account deficit with no significant positive effect on non-credit based currency inflows posted in BoP. Now, I guess, Wickramabahu himself could figure out the answer for his own question raised before media.
If ETCA is bad for Sri Lanka under the above premise, then there is a particular reason for the said determination and that is why we say it is bad. What is that reason? Let me explain it as follows;
Let us assume that the BoP stays as it is. Let us now assume that after signing the ETCA, Sri Lanka has to post an increasing deficit or widening deficit in the national current account. If this happened, Sri Lanka has to borrow in foreign currencies (dollars) in each accounting cycle in order to prevent monetary instability. This means the effect is very quick. If this happens, the final conclusion is that Sri Lanka would be borrowing dollars to support India’s economic development.
Therefore, entering into a trade and service sector agreement with another country is a serious business. This is a job to be done carefully by the Ministry of Finance. The CBSL, as the official economic advisor to the government must express its independent opinion on the subject. So far we have never heard anything from CBSL on this particular issue.