By Hema Senanayake –
I, including many concerned people, requested Dr. Nandalal Weerasinghe and the government to reveal the technical report submitted to the IMF. This is important because, given the country’s current political situation, the IMF needs the political and social consensuses on any IMF support program. Since, it is not forthcoming from responsible government agencies, I decided to write a preamble for a possible IMF technical report with an objective to get wider political and social consensus. Here it is.
Sri Lanka understands that it had done many macroeconomic mistakes in economic governance, in recent past. It further understands that setting proper macroeconomic fundamentals means nothing other than setting the causes in the cause-and-effect relationship of the whole economic system. In this cause-and-effect relationship we cannot get the desired effect or outcome without setting the causes, which means without setting the proper macroeconomic fundamentals. It is these fundamentals that only a government can change either for good or bad. Sri Lanka did it wrongly and the outcome is the present unprecedented economic crisis with having scarcities of many essentials including lifesaving medications.
Sri Lanka determines to change the course by setting new set of macroeconomic reforms in the economy by obtaining wider political and social consensus for reforms. Such general consensus about economic reform is vital to ensure that the set macroeconomic approach would remain as it is even though political power switches among political parties when decent democratic elections are held. Sri Lanka understands such guarantee for sticking to the economic reforms is important not only to the IMF but also to the existing creditors of foreign currency denominated loans and any possible investors who wishes to invest in dollar denominated fixed rate bond issues ignoring credit ratings in near future.
Sri Lanka further understands that far reaching successful economic reforms beyond regular monetary and fiscal reforms are not possible without proper philosophical understanding of how money based economic system works. This is a time that whole Sri Lankan society is awakened to hear and to understand the structure of the economic system and how it works and what are the economic variables that the government could and should maneuver to have a sound and resilient economy.
Sri Lanka understands that the economy is and should be based on market exchange of goods and services (call market mechanism) which is dependent upon a sound monetary infrastructure. Market mechanism in general set the prices or the relative value of any produce which even helps to produce common interests (public services) such as general administration, law and order, education, health etc., by the government. Sri Lanka understands that market mechanism is not a tool for pure exploitation but a tool an efficient mechanism or tool for the validation of the use of social resources in any production of goods and services efficiently.
The market mechanism simply doesn’t work if there is no instrument that penetrates each cell of produce to reveal its relative value so as to exchange the produce in the market. The money does this job. Without a stable currency it is not possible to reveal any produce’s relative value, and in the event that will lead to a significant market failure and continued economic crisis. Therefore, Sri Lanka understands the need to strengthen market mechanism and to have a near perfect stable currency.
Further, Sri Lanka understands that the economy will grow if the capital allocation and the consumption allocation are increased on continuing basis. It further understands that these allocations are originated from the total proceeds (not GDP) or from the total sellable output which means that the only option to ensure economic growth is to increase the total sellable output and in turn this is possible by expanding the entrepreneurial base. Sri Lanka understands that the expansion of entrepreneurial base is not possible without increasing the “business confidence’ among entrepreneurs. This is where entrepreneurs -local and international, look at real economic parameters rather than political promises. Business confidence increases if market forces determined current account balance is positive or at least steady if deficit is reported. If the domestic currency depreciates or if currency is fakely stable while foreign reserves depreciate, it is highly unlikely that there could exist a good business confidence. Sri Lanka further understands that the increased business confidence may significantly contribute to expand the country’s total sellable output while contributes to positively change the country’s current account when entrepreneurs invest in businesses that would increase net inflow of foreign currencies. This situation may further improve the balances in capital account through non-credit based inflow of foreign currencies such as FDIs and foreign grants etc. ultimately contributing to ease the Balance of Payment situation.
Therefore, Sri Lanka understands that IMF support program is essential in easing balance of payment crisis, stabilizing the domestic currency, which would ultimately increase business confidence. Along with such stabilization of domestic currency which helps in increasing inward remittances, increase tourist arrivals, streamlining exports and regaining lost export quotas etc. will increase the confidence of international community on the country which waiting to kick off the inflow of foreign investments to Port City Project.
In view of above Sri Lanka understands its massive responsibilities towards the changing and strengthening of fiscal and monetary policies including the short term use of administrative tools to take care of the current account balance in the short run. However, Sri Lanka further understands that finding a lasting solution to the economic crisis is not possible without reforming the entire economy by changing the entire macroeconomic approach.
As mentioned before Sri Lanka understands that the increase of total sellable output would increase the capital allocation and allocation for the consumption. The capital allocation is a society’s decision and hence entrepreneurial holders of capital reserve are obligated to use those resources for useful investments including investments that might possibly change the country’s national current account. Accordingly, taxation policy of the profit reserve of entrepreneurial entities would not be ad-hoc. instead, the policy would be based on to optimize the capital accumulation and the application of the same for the country’s economic growth and especially job creation. On the other hand Sri Lanka understands that it is the consumption allocation which should be taxed to collect money for the government which is obligated to produce common interest (public services) for the society hence taxation policy on the consumption allocation would be designed to achieve two basic objectives, one is to optimize the general wellbeing of the members of the society and the other is to support the increase of total sellable output focusing on having positive impact on the current account.
Thus, Sri Lanka having understood the macroeconomic implications of taxation policy, it further understands the necessity of continuing increase of country’s total proceeds which is in turn linked to the rational optimization of public sector and its expenditure. However, Sri Lanka understands that this objective of optimizing public sector cannot be achieved without ensuring the free flow of labor between public sector and entrepreneurial sector which in turn cannot be achieved without having universal pension reforms enabling the auto adjustment of productivity increases and inflation in calculating pension (retirement) benefits.
Further Sri Lanka understands that administrative price-system does not work in the long run hence it determines to ensure that the value of almost every produce be reflected based on market forces and Sri Lanka is mindful that ensuring such process is an integral part of proper taxation mechanism to remove unjust distribution of distributable output.
Sri Lanka further understands that in order to function efficient market mechanism and economy needs to ensure that everybody should be reflect its true cost not any administrative price. Using this economic principle in regard to state owned enterprises (SOEs) is vital in restructuring them to perform an important role in the country’s economy. However while ensuring to reflect true value of output, it is necessary to ensure that their services such as electricity, water etc., are accessible to low income groups of the society. Proper taxation mechanism instituted can be used in ensuring accessibility to vital services for low income groups. In that respect, taxation mechanism is not only a tool to collect income for the government, but also an efficient mechanism of the delivery of social benefits to low income groups.
Sri Lanka further understands that that rationalization of government expenditure must arise from the fact that the government is the largest institutional consumer and for its operations it must mainly find funds from the general allocation of consumption money mentioned above and not from deficit financing or from heavy borrowings either from domestic or foreign loans. Sri Lanka understands that the government should be prevented borrowing dollar denominated loans from foreign capital markets but should be able to raise money to roll over the existing foreign currency denominated loans subject to that such operation will last only up to the time of paying such loans in full.
Sri Lanka further understands that understand that the government should not undertake any infrastructure project either if it is not able to finance from its income or domestic loans taken subject to the debt limit set by the macroeconomic fundamentals and approved by parliament. However, the government undertakes strategically important infrastructure projects that are justified by the increased economic output or increase wellbeing of the society subject to the proven debt sustainability. Sri Lanka understands that the government its agencies do not enter into any venture or project that are partly or fully funded by foreign currency denominated short to medium term loans borrowed from commercial capital market including any Exim bank of a foreign country.
Further Sri Lanka understands that given the massive money printing spree undertaken by the central bank under government’s persuasion, the bank will not have enough policy tools to contain credit growth, in the case of the economy started to grow. Therefore, Sri Lanka further understands the need of acquiring new policy tools or need to plan ahead to contain credit growth not increasing interest rates.
In view of the above, this preamble explains the necessary macroeconomic principles that Sri Lanka should adhere to, immaterial of the change of political power in democratically contested national elections.