20 September, 2020

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Sri Lankan Economy Heading For A Depression 

By Milton Rajaratne

Professor Milton Rajaratne

Depression is defined as continuous fall in national output for a several years. Sri Lanka’s national output began to decline from its peak of 9.1% in 2012 and ended as 3.1% in 2017. In the first quarter of 2018, national output runs at a level as low as 2%. Performance of the economy and the success or failure of the government’s role in maneuvering the economy is presented in the annual reports of the Central Bank and it has confirmed that the output has been drastically declining and the economy as a whole performing poorly. This article compares and contrasts the state of the economy in 2017 with that of 2014 in order to assess the direction and performance of the economy in the new policy regime. Among 30 different criteria presented in the table below, only five have shown slight progress whereas 25 have failed in contrast to their values in 2014. As this is a mere continuation of failure since 2015, this article analyses economic implications of the five improved areas. 

Selected Macroeconomic Criteria – 2014 & 2017      

Criteria 2014 2017
1 Economic Growth Rate (%) 5.0 3.1
2 Private Consumption (%GDP) 67.4 62.2
3 Unemployment (%) 4.3 4.2
4 Gross Domestic Investment (% GDP) 32.3 36.5
5 Gross Domestic Savings (% GDP) 29.9 29.3
6 Change in Consumer Prices (%)  2.1 7.7
7 Change in nominal wage index (%) 3.7 0.0
8 Trade deficit (US$ bln) -8.3 -9.6
9 Export Earnings (US$ bln) 11.1 11.3
10 Import Expenditure (US$ bln) 19.4 20.9
11 Gross Official Reserves (for months of imports) 5.1 4.6
12 Debt Service Ratio (% Export income) 20.8 23.9
13 Public debt (% GDP) 71.3 77.6
14 Foreign debt (% GDP) 30.0 35.5
15 Exchange rate (Rupee/US$) 131.05 152.85
16 Government revenue (% GDP) 11.6 13.8
17 Government expenditure (% GDP) 17.3 19.4
18 Budget deficit (% GDP) -5.7 -5.5
19 External borrowing (% GDP) 2.1 3.3
20 Interest rate (FDs at Savings Bank) % 6.5 11.0
21 Lending rate % 6.2 11.5
22 All Share Price Index (units) 7299 6369
23 Value of shares traded (SLR bln) 340.9 220.5
24 Non-national net purchase (SLR bln) 21.2 17.6
25 Market capitalization (SLR trln) 3.1 2.8
26 Manufacturing (% of GDP) 15.7 15.7
27 Industrial strikes (Man days lost) 37,000 58,279
28 FDI inflow (US$ million) 1528 1375
29 Capacity utilization (factory industry) 81% 78%
30 Incremental Capital Output Ratio 6.5% 11.8

Annual Report – 2017, CBSL.

Government revenue has improved from 11.6% to 13.8% during the three year period. This is due to widened and deepened tax net. On the contrary this siphons moneys from individuals and industry. Thus increase in government revenue through tax income has adverse repercussion on consumption. This causes decrease in private consumption in the first round. This leads to inventory accumulation and production cut consequently which curtail factor income causing contraction in national income. As government’s expected income drops due to economic contraction, government tend to widen and deepen tax net in the second round to increase income or otherwise fills overall deficit through inflationary sources. As this cycle deepens a vicious circle of economic depression and inflation are experienced. The continuous decrease in GDP from 5% in 2014 to 3.1% in 2017 and 2% in the first quarter in 2018 can partly be appropriated to this phenomenon. However, if the government spent tax revenue to generate new revenues, then this process is cancelled out and GDP is recuperated. Government expenditure has increased by 2.1% while government revenue has increased in 2.2% during 2017 and as a result budget deficit has decreased slightly. The increase in expenditure is mainly due to uneconomical projects that do not generate new incomes. As there seems to be an expansion in the budget deficit of Rs. 733 billion this year which requires financing through loans or other means that eventually causes tax or price increase during the year. 

The improvement of unemployment rate from 4.3% in 2014 to 4.2% in 2017 indicates a progress of 0.1% during a three year period. This comprises a large portion of recruitment into government service. As the job market has shrunk due to growth contraction, new employment opportunities have not been generated in the private sector to a satisfactory level. The growth contraction is mainly due to decrease in private consumption and poor exports. Unsatisfactory job creation has withered the one million job creation program. The much expected employment opportunities from FDI and foreign employment also have dwindled due to falling FDI inflows and failure to harness foreign employment opportunities.           

The increase of gross domestic investment (GDI) from 32.3% to 36.5% during this period is remarkable. According to theory, there should be an ascending relationship between GDI and GDP growth rate. However, contradictorily, descending relationship between the two has been reported; GDP growth rate has decreased from 4% in 2016 to 3.2% in 2017 while GDI has increased significantly. The relationship between GDI and GDP is explained by the concept of Incremental Capital Output Ratio (ICOR). This measures the units of capital required for a unit of growth in GDP. In 2017, this ratio has been 11.7:1. That is 11.7 units of investment are required to generate one unit of economic growth. In Sri Lanka, throughout the past decades this ratio has been generally 5:1 i.e. five units of investments bring about one unit of GDP growth. The government utters 7% of economic growth in the coming years. According to ICOR calculation for 2017, there should be 82% of GDI to gain 7% of economic growth which is beyond imagination. 

Export earnings have marginally grown by 1.8% from Rs. 11.1 billion to Rs. 11.3 billion during three year period which in other words is US$ 70 million average increase per year. This growth should be seen in the context of rapidly depreciating rupee during the period. It is believed that depreciating local currency is helpful in boosting exports. Sri Lanka’s exchange rate against US$ has depreciated by almost 30 rupees or by 20% during the period. If exports were stimulated due to rupee depreciation at this rate, export earnings could have soared at least by US$ 2 billion. This suggests that the government has failed in its export promotion drive together with FDI led export promotion. Although FDI has picked up in 2017, it has not significantly contributed to boosting exports. This encourages us to conclude that new FDI has focused more on local market than export market which is less advantageous.                

Above discussion reveals that the four indicators, out of 30 as indicated in the above table, that have shown progress since 2014 also have encountered macroeconomic complications. The economy has become almost numb and thus irresponsive to policy measures introduced since 2015. This ailment of the economy can be observed from several symptoms. They include irresponsiveness of output to increasing domestic investment, irresponsiveness of exports to increasing FDI, irresponsiveness of exports and imports to depreciating rupee, irresponsiveness of the production system to increased government expenditures. Additionally, hyper sensitivity in sectors of the economy has caused several problems which include increase in cost of production due to increase in factor costs, decrease in real consumption due to taxes and increasing consumer prices, and the vicious cycle of tax. In general, the performance of the economy in 2017 is mostly a continuation of policy failure since its onset in 2012. 

           

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Latest comments

  • 5
    0

    Paradise Lost? …………. eh, Milton?

  • 8
    0

    The current budget imposing various tax including withholding tax for landlords is creating fear among the foreign investors , so many are planning to withdraw the hard earned money what they have in Srilanka. It’s high time for the government to get professional advice and encourage foreign investments. Cash flow in Srilanka is very high ,but it doesn’t go through the books , so only the hard earned transparent money feels the pinch.

    • 1
      1

      ROY did you know at the beginning of the Yahapalana govt, Ranil, Arjun Mahendran, Ravi Karunanayake were involed with HArvard’s Economists from Washington. Did you read. At present the govt is working accorindg to IMF/WB and MCC advices. YOu give sa good point. In Sri lanka the underground market is very important part. On the other hand, are you saying DRUG MARKET is thriving. Sri lankan is being drawn to outside and come back to sri lanka for some other purposes.

  • 6
    7

    9% growth? numbers made up by boot licker Cabraal. You yourself was a very good apologist for those ‘golden’ times. Anyways, slowing growth does not necessarily mean we are heading for a recession: a good economic 101 professor will teach you that good professor!!!!!!!

  • 11
    0

    Where is our economic maestro Dr.? Harsha who bragged before election that they know how to fix the economy. He said the Government will introduce a new management system followed in Singapore to Public enterprises. What happened to that? He said foreign investors are waiting eagerly to come to Sri Lanka. He said the first one will be the Volkswagen factory. Volkswagen company later denied that they did not have plans to invest in Sri Lanka. Where is one million jobs promised by PM? Now he says Government will produce 100,000 entrepreneurs under ‘Enterprise Sri Lanka’. 100,000 UNP catchers will take the soft loans given under ‘Enterprise Sri Lanka’ and I am sure no one will repay those loans. At the end poor tax payers will be the losers.

  • 8
    1

    “The fault, dear Brutus, is not in our stars, But in ourselves “

    The reality is that Sri Lankans of all walks of life lack Positivity, energy, dynamism and creativity to turn things around. Its politicians are a mirror of the society.
    The Sri Lankan defeatist attitude needs to be addressed first. The outdated British mindset which exists in our education system is responsible for producing generations of lethargic and unproductive citizens. Americans system is co-ed which means boys and girls having grown up togather function better as Adults.
    American occupation of Japan, in the 1940’s, Korea in the 1950, and trade relations with China in the 1970’s meant these people adopted cutting edge training, education and production methods along with as competitive attitude that brought these nations to its present position.

  • 2
    0

    You really do not need to analyze all those macro economic indicators to conclude that ” Sri Lankan economy is heading towards a depression”.

    There are so many socioeconomic factors which are quite evident for anyone to conclude the same outcome.the levels of that was in Zimbabwe in the late nineteen hundreds, wherein the local currency became un-tradable due to it’s loss of trading value.

    A similar fate awaits Sri Lanka, given the rapid rate of depreciation of the Rupee against the USD.

    The domestic import market will become so volatile, that people will loose faith, thus leading to a total collapse of the importation of non-essential goods in all such market situations.

  • 6
    0

    First thing first ! Can you trust these figures ? Where did the Bond scam
    happen ? Every single MP and MP plus Ministers keep promising to the
    people of more and more benefits from them ! All ministers are heavily
    busy inaugurating , laying foundations , distributing and giving away and
    giving away non stop ! A new consumerism started with the opening of the
    economy against the opening of doors to export ! The major exports which
    is Garments , has to import needles even today to run the machines that
    make Garments ! And we are talking about CAR MANUFACTURING ! SRI
    LANKANS ARE REALLY SUFFERING FROM SWOLLEN HEAD SYNDROME !
    Let us treat it first and everything else will fall in place on time !

  • 3
    0

    “A similar fate (Zimbabwe) awaits Sri Lanka with the rapid depreciation of the Rupee against the US$”
    This has been patently clear for some years now. The patient is terminally ill. Witch Doctor Cabraals and
    the like are not merely time wasters but otherwise rogues who empty the national coffer for their scheming and thieving political bosses. The majority Sinhala voter – who voted these crooked governments to power – despite glaring instances of robbery of the family silver -continues to be gullible on a regular punnaku diet. Sri Lanka’s rush to bankruptcy is inevitable. The lesser alternative is pawning the country to “overseas investors” The Rajapakse family has shown the way in Mattala and Hambantota. This is already happening.

    What are our Mahanayakas who claim to have saved the country several times in the last 2,500 years (the magic number) from similar danger – doing this time?

    Devanampiyadasa

  • 3
    1

    doesn’t make sense.
    with a ships queuing to get to Hjamambantota Harbour a busy Matra Airport, traffic jam in all major highway out of Colombo towards tourists resorts, high level activity in port city build up, new Hotels such as Shangri La and ITC Mayura Sheraton sprouting up, army run hotels in the NE full house, the lotus tower opening round the corner, luxury condominiums….sprouting up every where

    …..and the country is in recession?

    …may be for the ordinary people?

    Mahinda would have proclaimed a double digit growth.

  • 4
    0

    The success of an Astrologer (Royal or otherwise) does not depend on the stars but on the ability to read body language. The predictions are what the client wants to hear.
    Economics is not yet a Science – at best ‘Weather forecast’ level. Milton is doing the ‘What someone wants to hear’ and laced same with the wisdom of hand-sight.
    Countries have remained prosperous with 3% growth (What the hell is it?). Inflation is worldwide and is necessary for the economic system evolving. Everywhere, to lead the same sort of life in the eighties have to spend 20-30 times more!
    We are not alone facing this ‘heading-for-depression’ syndrome.
    Look at our bloody politicians who say “Cut down taxes to arrest the depreciation of the SLRupee”.
    .
    We must decrease imports. Politicians are yet to suggest that we grow our own pulses, produce animal feed to enhance milk and meat production? Should we fish rather than embarking on projects like ‘whale watching’ to attract tourists?
    The elites thrive on imports and will keep us in this black hole.

  • 0
    0

    What you say Is Mahinda Rajapkse govt did better than what Ranil have done even with his team of experts which include Ravi K, PAskaralingam, Arjun Mahendran and American Economic experts including IMF. I think some one should add how much this govt borrowed, how much foreign loans were taken and whether they are paying salaries with foreign loans. IT looks Ranil’s econimiic expertise is a failture. there are so many things happening and journalists are not allowed to write and not investigative or intelligents writers are writing articles. Many local experts seem to be cheating the public and write useless articles. SOme one should have how govt expenses are, how much parliament and procinvial council, Local council expenses are.

  • 0
    0

    The problem is until 2013 the country gre economically as a PEACE TIME DEVIDEND because there was no anymore WAR. Since then, Mahinda Rajapakse’s team did not know how to correct except hiring almost every one to the govt jobs. He liked only the massive projects which provides commis. they di dnot repair any of the degraded dilapidated manufacturing sites such Kankesan Cement, Paranthan, Weaving mills, Sugar plantations, Oruwala Steel, Sapugaskanda Refinery. Ranil is ULTA LIBERAL anf RUGHT Wing. He also doe snot know the cnanges in the world and still favours importing and liberal economy. Otherwise why in the world when we are importing every thing in this world Ranil says we need to have FTA’s with the whole asia. On top of that He meptied the state banks, state employye funds and made SOEs lose profits and BOC to make 50% of profits out of what they could have earned. Even todate Ranil, Mangala and his ministers including those of SLFP in the govt are doing the same destruction, theft and wastage. there are many thing that media is not interested in reporting. they want money and to keep ratings.

  • 1
    0

    You are not, by any chance a reincarnation of that deceased five-foot wonder Milton Friedman of Chicago who destroyed the world with Ronald (brain dead) Reagan? Are you?

  • 2
    0

    There is an interesting article in the Divaina newspaper written by this soothsayer economist Milton. It is with the high praise of Gota’s Viyath Maga, the savior’s path to the redemption of Sri Lankan economy.
    Apparently Prof. Milton is like the king without cloths in the Perahera, only his face is seen.

  • 2
    2

    we can sell the country little by little to china and india and avoid a depression.India also at last has come on board and wants to buy.On one side chingalese with chinky eyes and on the other side tamilsikhs wearing turbans and talking hinditamil.

  • 2
    0

    What Depression,
    Colombo Inhabitants Per Capita income will be USD 12500 in 2020, according to Dammika Perera.
    He doesn’t read these Stats.
    As the biggest Business Boss who even owns a Bank produces these Statistics ..
    Is was only last week Dr Ranil shoveled the dirt to start the Gamaperilya .
    And declared that no one will be poor in 2025.
    I know the UN published that Report saying 5 Million inhabitants are malnourished.
    As they are on less than 2 Dollars a Day..
    Must be an aberration..
    Wonder whether that UN dude works at their Madras Desk or is it Mogadishu?…

  • 1
    0

    This govt has achieved: Taxing people more, increasing debts, creating more state sector jobs when investors are reluctant, encouraging strikes.

    With or without this article, people know that present team does not do good for the country’s economy and further burden the masses despite the promises made by those fake economists in the UNP.

    However, I do not think that to convey the message that we are doing bad the write has to get into this detail when items within the list are interlinked anyway. Perhaps, does he want to exaggerate the situation under a different agenda?

  • 0
    0

    This comment was removed by a moderator because it didn’t abide by our Comment policy.For more detail see our Comment policy https://www.colombotelegraph.com/index.php/comments-policy-2/

  • 0
    0

    Devanampiyadasa may have not failed to note a few days ago the Yahapaalaya regime
    imposed a staggering levy of Rs.1.5 million on import of cars under 1,000 cc. At the same time, the much heralded Colombo Stock Exchange is virtually lifeless. Bread and Coconuts at unaffordable levels to the lower middle class and poor – little surprise the more daring young in the suburban and rural areas are resorting to criminal activities – merely to live for the day. Zimbabwe is already here – for sure.

    ADJP

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