3 August, 2021

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New Economy; Where To Start?

By Hema Senanayake

Hema Senanayake

Hema Senanayake

UNFGG became victorious from the general election. Perhaps, UNFGG might be thinking now in honoring whatever the economic promises they made in their election manifesto as they did with previous 100 day program. Honoring promises is a good thing. But during the 100 day program of the previous interim government they did a lot of economic mistakes. Hence, what I suggest is that UNFGG must be a little more cautious in honoring economic promises. This does not mean that UNFGG must ignore or dishonor their promises now because they have got elected, instead I would suggest that UNFGG should honor the economic promises within a more long term prudent strategic approach. How UNFGG could do it?

In regard to the strategic approach mentioned above, I would suggest them to begin with the country’s current account and balance of payment. Then simultaneously they can move into the fiscal and monetary policy. All these areas constitute the essentials of macroeconomic regime. The ultimate objective of maneuvering these fundamentals is to achieve the optimum efficiency in production and distribution of distributable output. In fact production and distribution of distributable output are what matters for the wellbeing of the people. Let us try to understand this point with an example.

Ravi RanilFor example, UNFGG promises that the country would be made debt free by 2023 on which year we celebrate 75 years of independence. This idea is not clear and hence needs to be clarified by them. For example, does this mean that the country would be free from foreign debt by 2023 while the government begins in balancing its budget by the same year? If this is the case then the country will be free from foreign debt and the government will be free from public debt too. Or does this mean that the country would be free from foreign debt by 2023 and the government deficit is fully financed through domestic borrowing? This fine difference is important in economic governance because the first option is not economically possible while the second option becomes possible. But both options are not that prudent. Hence we will not achieve either of the options mentioned here and more over it is not economically necessary to be debt free completely.

However, since it has been mentioned in the UNFGG’s manifesto, the question or the issue of debt is a good starting point in preparing their “prudent strategic approach.” If they do this then, as I said above, they would have to begin from the country’s current account and the balance of payment. I will never suggest them to begin from various kinds of High-Development-Zones. UNFGG has promised in their manifesto to establish 45 High-Development-Zones such as Industrial Hi-zone, Agricultural Hi-zones etc. Why do I suggest so?

Sri Lanka is a country which runs a current account deficit for a few decades. When a country runs a current account deficit, it is building up liabilities to the rest of the world. In other words we spend more money in foreign countries than we bring in from foreign countries. This means the outflow of foreign currencies is more than the inflow of debt free foreign currencies such as U.S. dollars. For a matter of simplicity, henceforth I use the word dollars instead of foreign currencies. Therefore, this is a practice that cannot be continued if we do not match at least the inflow and outflow of dollars. In general terms, the only way that we can do this matching is borrowing dollars externally. (Foreign borrowings are recorded in the country’s Financial Account. Both current account and financial account constitute the balance of payment records).

However, if we do not want to borrow externally then we have to have an inflow of debt free dollars which are not recorded in the current account. This inflow of dollars must at least be sufficient to offset the current account deficit. This is where FDIs (Foreign Direct Investments) and net inflow of portfolio investments matters. If these sources of funds bring in enough debt free money then the country can be free from debt to foreign countries.

Now, when a country increases its consumption and investment, there are chances in increasing the current account deficit. Establishing of 45 High-Development-Zones can either be consumption or investment or both. Whatever the case may be, it increases the current account deficit. If the government could ensure that enough or sufficient inflow of debt free dollars which transactions recorded in the country’s financial account, then we do not have to worry that much in regard to the money which is to be expended in the establishment of the said zones. Also, if the High-Development-Zones could bring in dollars in the future or positively contribute to the current account by reducing imports then establishing of them would be economically justified even with borrowed dollars if FDIs are not sufficient to balance out the current account deficit.

From the above discusion, you may easily understand that any development project must begin by assessing its impact to the current account and balance of payment. By undertaking this exercise, it defines well, the potential monetary scope of projects. Thereafter only we should bring the project into the national budget which affects the both fiscal and monetary policy. In that way the government can handle the macroeconomic parameters better. If the government begins from project formulation end then there are chances in messing up macroeconomic fundamentals sooner than later. Such a crisis can be easily understood if the incumbent Finance Minister would have to present a Robin-Hood budget.

Finally, I would say this. We live in a world of fiat money which money is defined as currency which derives its value from government regulation or law. It will continue to be so for a foreseeable future. In this world of fiat currency, technically the potential of the creation of money domestically and internationally is very huge. This potential of the creation of money is further enhanced by the Fractional Reserve Banking system we use today globally. It can further be enhanced when people tend to hold less and less cash (bills and coins) in their wallets due to the fact that people have begun to use electronic payment cards (debit or credit cards) more frequently to effect payments. Due to all these reasons, in fact, we live in a world which has limitless potential of money creation. But unfortunately, most of the money in circulation domestically and internationally is being created as “credit money.” Anyway, this is not any wishful thinking of creditor institutions; instead it is a systemic need. If this is a systemic need we cannot be debt free. The only thing we can do is to deflate debt time to time. This means we need to learn more about the handling of monetary policy from the very fundamentals of macro-economy.

In view of above I earnestly hope that the new government will begin from where it has to begin in regard to the economic governance. Then, we will have a truly new dynamic economy.

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Latest comments

  • 1
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    “New Economy; Where To Start?”

    Ask Cabbural; He has lots of experience in economic manipulation. Ponzi schemes, hedging and fiddling with parity rates are his strong points. Of course, he is also an expert in zero-based budgeting which to him means ending up with a zero budget.

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    Certainly a very complex set of economic procedures, that needs to be balanced out most carefully.

    As we do not have oil and gas to give a natural balancer on our deficits, we would have to rely on expertise of the local entrepreneur to produce all kinds of tangible gadgets to sell to countries in the reigion. And the best country to sell to (in terms of transpotation costs), would be to India. And the cheapest transportation method would be via the land bridge, of course.

    Government debt would be passed to public in the form of credit, with illusiory fiat money depending upon Fractional Reserve Banking System of America’s ability to secure the illusion without other major powers trying to topple them, and create their own illusory system.

    For that, we would have to convert most of Lankan landscape into a hot-bed of industrial sites, at the demise of astethic landscape, identity and heritage.

    We could have rested easy within our own shipping routes, with China taking care of a new form of BRIC currency, and lived within our own local fiat currency. We would have retained our identity and heritage. But of course, we had to be mindful of retaliation from the West.

    Wish the West could teach us to create a fiat currency out of tourism, ecology, environment protection, ancient food production methods, religious heritage, and the fact that we have moved away from BRIC so as to sustain the West.

  • 0
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    Our econ0my should be guided by a national council. Parlimentary overseeing commitees will monitor. Ever4y )ne will participate.

  • 1
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    First, remove Ravi K as Finance minister.
    Second, investigate the Bond racket and jail the culprits. I doubt Mahendran had much to do with it, except acts of omission that eventually favored his son in law. Remember the UNP is reluctant to go too deep because their rich supporters are also bond racketeers…

    Third, investigate, investigate and investigate until the PEOPLE are satisfied that justice has prevailed. Not lip service.

    Limit cabinet to 25 ministers and 35 deputies. That’s it.

    I am trying to not laugh at my own stupidity trying to imagine that any of this will happen…who knows, even the broken clock is correct twice a day!

  • 0
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    There is no “New Economy” has been an introduce by UNP-Wickemasinghe…, MS and CBK regime since 2015 January 9th.
    In fact in current reality is sweets words by UNP political manifesto, has no relationship with so-called market social economy. Its(UNP) is more or less reflected an economy of Depend and Neo-liberal system has been serve backwardness and simple commodity production of remained in tag of underdevelopment.
    That capitalism is not which demand by emerging economy of Island.

    During 180 days rule of undemocratic & minority govt. run by the UNP headed regime has widen gap the inequality between have and have NOT or rich and poor.

    The those all Sri Lankan enterprises who fell of economic and political victim to investment of capital ,banks, stock market and largest foreign investors left country; is that decaling lead more new crisis of production, services, lost infrastructure boom and declined of financial capitals well.

    During the MR ruling alliance Sri Lankan Govt. banking sector has been played forefront role of main trend by capital supply in locally projects and entrepreneurs.

    Globally, China and Japan play key role of foreign investment.
    While Indian investment are more backward in technology and science, which that projects undertaken by Indian entrepreneurs not meet the ‘just in time system’ of several projects, always behind schedule due to the lethargic management operation and outdated unfounded innovation of Indian entrepreneurships.

    UNP regime since 2015 January 9th stop all ongoing projects at once during 180 days rule. Needless to say UNP regime that insult to China, an investment of over-estimated projects cost of by the former MR ruling party of that so-called ‘corruptions’ blaming of PRC govt. unnecessary by and large the influences of US and Indian.

    Badly that UNP political agenda move was that short sight policy of ‘Pivot Asia’ gain power for US military base in Sri lanka, by UNP-Ranil, MS and CBK politics of Junta regime’s foreign policy of more towards West.

    That was harm not only of our main investor an island , we lost our friendly international investor in the capital market by dealing betray our own national interest by UNP of Wicks.., CBK and MS that anti-social capital type of politics by UNP.

    Well two factors were key reasons of the setback of growth of GDP and national economy development has been undermined by UNP -Wick… MS and CBK regime by mismanagement and mishandling of Economic growth, since 2015 January 9th.

    Indeed so-called “rainbow revolution’ of UNP CBK & MS that politics has closed down the of door for an economic growth and democracy.
    And national economy has lost trust of foreign capital , nation building overall economy that referring to social capital has been unable build social contract, with all social emerging classes and forces as well as during peril of democracy of that 180 days of UNP Junta type of dismantle of democratic rules.

    Social capital is wide known the West-specially UK, previously west Germany and North European countries as new trend of school of thought, that embodied key factors of Good Governances serve for the Public and Private sector but not that accepts by Multinational Corporations(MCs)of Private Empires.

    In my view UNP -regime is not the for the social capital, where is majority of democracies of community believe ongoing is unfair UNP rule does not work communities do not function well. The nation trust of justice Under the UNP-Wickrama… CBK & MS has lost confidence and people dignity of fair treatment do not work well.

    In Sri lanka under the UNP regime & MS rule suppression of democratic institutions recant past, which crumbled democracy and development required to hold the country political and the economy together just was not there.

    At the same time Sri lanka became the wild in democracy, more lawless nation than certain west Asian countries, in respect of security in North & East is concern during 180 days rule of MS & UNP rule.

    Rule of law has been disappear in the superstructures, ,political party management, election result ,an appoints of national list MPs, Judiciary verdicts, unconstitutional act of manner of President and Primer-minister dealing with elected represtantative and their rights of MPs of disobeying by UNP ‘NEW’ democracy.

    We as nation is caught up in a system of democracy vacuum with neither democracy governances plan nor programmed, under UNP new Regime and MS’s uncivilized team of governances. In Sri Lankan there has been an enormous erosion of trust in democracy in recent days .

    How can such country ,nation and people urge for NEW ECONOMY?
    IT IS illusion by writer new economy of Sri lanka by diminishing politics influence of democracy.

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