By Hema Senanayake –
Ranil Wickremasinghe is going to be sworn in as Prime Minister tomorrow, that is, on the Sunday of December 16th, 2018. People of Sri Lanka defeated the political coup. Ranil successfully gave the leadership to defeat it. He had a vision for it. But unfortunately, since 2015, he has proved enough that he together with his chosen Cabinet has no vision in economic governance. People understood it, yet extended their unconditional support to Ranil in order to uphold the country’s constitution during the coup. This support should not be mistakenly understood as an endorsement of his economic program which was the worst under his purview since 2015.
Ranil should shed his arrogance and be ready to listen to others who talk about economics with greater sense. As Karl A. Menniger said that, “Listening is a magnetic and strange thing, a creative force. The friends who listen to us are the ones we move toward. When we are listened to, it creates us, makes us unfold and expand.” This is what we expect from Ranil’s new government sworn in tomorrow.
The economy is a system. When any physical or natural system has come into existence and prevail there is a cause for it. When the cause ceases, the phenomena cease to exist. This is true for all-natural systems which are objects of scientific investigation. As a result, scientists find out certain laws that are associated with those systems. Similarly, the economy is a system which has been put in place by human imagination. Yet, it has its own laws of behavior. We cannot ignore those rules and move forward maneuvering the economy as per our wishful thinking. Such efforts definitely aggravate the unwelcome systemic behaviors. This has happened to many countries.
The challenge in the area of economy is huge. Anybody or any economists for that matter who cannot explain as to why the richest countries have enormous debt (for example, Japan’s public debt amounts to 253% of GDP approximately) will never tell the new Cabinet as to how the economy be put in a winning trajectory. Read the next line carefully; I assure you that the new government will win the hearts and minds of the people by adequately explaining the macroeconomic reforms that you will bring immediately rather than microeconomic price reduction gambles. In fact, such macroeconomic reforms might help you to engage in limited price reduction gambles if any need arises politically.
What are the reforms you need to explain to the people? There are at least six of them.
1. Dramatic reduction of domestic component of public debt. How? So, I propose the limited use of Full Reserve Banking to deflate public-debt for a very specific time period, say three years or so. Details and the extend of the use of the principles of Full Reserve Banking can be worked out. Once, we worked out the details, I hope, we can convince the IMF and win their patronage for the plan because IMF has itself published a Working Paper on this subject. Implementation of this will never increase inflation and this has been confirmed by the IMF Working Paper.
2. Reduction of tax burden. How? The above action would facilitate to reduce taxes.
3. Managing current account deficit positively. How? By amending the Monetary Law Act in order to introduce a new piece of legislation to facilitate the Central Bank to acquire a new policy tool (effective in short term) to contain the creation of what is known as “credit-money” in the system. This policy tool facilitate the implementation of the first proposal mentioned above.
4. Stabilizing the rupee. How? Mainly by the amendment proposed in above (3).
6. Reduction of people’s including businesses’ debt. How? Though general deflation of debt.
6. Finally, I propose to change the ownership of the system’s holdings of foreign currencies as necessary without increasing system’s liquidity. If we do that the requirement to maintain huge reserves by borrowing dollars will be minimal.
Nothing significantly will cost the government, in conducting a transparent brain-storming discussion on the above proposals. This is only the path to remake the economic development. I assure you, even though they get direct advice from IMF economists, still without the implementation of above program, the new government too, will never achieve what is best for the country economically. The above program proposes to change the macroeconomic system to put the economy on a trajectory of higher and sustainable growth.