By W A Wijewardena –
The magic year of 2048
President Ranil Wickremesinghe to make his bitter economic package acceptable to people has made an important pronouncement. That is to make Sri Lanka a rich country, obviously in terms of the World Bank’s classifications, by the time the country will celebrate the centenary of independence from Britain in 2048.
The British had left a relatively prosperous country in South Asia in 1948 in the hands of the local leaders who were expected to take it forward to actual richness. However, over the next 75 years, the country could not consolidate that success. Instead, it continued to be a low-income country for most of the period frustrating the aspirations of the people for enjoying richness. Technically, it became a lower middle-income country in 1997 by crossing the threshold of income and officially many years later in 2010 by being accepted by the World Bank for extending facilities available for that level of income. In 2018, the country was able to push itself up to an upper middle-income country but could not retain that position for more than a year.
With the per capita gross national income falling below the threshold level in 2019, Sri Lanka was downgraded to a lower middle-income country once again in 2020. In 2022, Sri Lanka suffered from its biggest embarrassment when the authorities formally requested the World Bank and its associated institutions to treat it as a low-income country for extending concessional aid facilities. With this discouraging track record, the population had been nervous and much in anticipation of reversing the trend and becoming a rich country.
In these circumstances, Ranil has touched the most sensitive nerve of people when he promised, though through a long date, that his goal is to join the rich country club by 2048. The choice of that year was the centenary celebration of independence from the British. Even in 2017 by presenting the Vision 25 he made a similar promise to make Sri Lanka a rich country by 2025. This target was missed by both Ranil and the successive Gotabaya Rajapaksa administration.
Policy reversals should be avoided
This time he has given a long date to make Sri Lanka a rich country. During the next 25 years, there will be many governments of different hues in power. Given the frequent policy reversals which Sri Lanka normally experiences when a new set of rulers occupy the seat of power or within the same government, a new person assumes the power, it is not possible for Ranil to ensure that all these successive governments will faithfully follow the policy target which he has set for the country. But it is a must if he is really interested in delivering richness and prosperity to his people. No policy will become a reality unless it is managed properly. Even if he manages it today, and if the successive governments will abandon it tomorrow, then, there is not an impact which his proposed goal will bring on the lives of the people. This is a pitfall which must be avoided at all costs.
It is a dimmed economy during the IMF bailout
During the period of the IMF bailout package from 2023 to 2028, Sri Lanka’s economy will recover slowly. It had a negative growth of 7.8% in 2022 and it will marginally reduce this negative growth to 3% in 2023. From 2024 onward, it will be a slow recovery to a marginal economic growth of 3% by 2028. This is below the average economic growth of 4% which is Sri Lanka’s natural rate of economic growth that can be attained without any policy action by the authorities. As a result of the negative growth in the first two years and the slow recovery in the subsequent period, the total GDP will fall first and then rise gradually. But the GDP level of $ 89 billion to be reached in 2028 is same as what Sri Lanka had in 2018. It is from this level which Sri Lanka should seek to become a rich country by 2048.
Growth should be between 10-12% per annum during 2028-48
In terms of the World Bank classifications, a country will become a rich country if its gross national income or GNI per head reaches the threshold of $ 12,000 and remain at that level or above thereafter. Over the next 25 years, Sri Lanka’s population also will increase requiring the country to produce more to reach this level. The population of the country has been rising at about 1% per annum in the past. But the future population projections are made based on demographic changes. Accordingly, for Sri Lanka, two population projections were made, one at an average growth of half a percent per annum and the other at an average growth of a little over a fifth of a percent. In the first one, the population will rise to 25.4 million by 2048. In the second one, Sri Lanka’s population will peak in 2035 and begin to fall thereafter. By 2048, its population will be 21.932 million, a little more than its population in 2021.
In terms of the first projection, to generate a GNI per capita of $ 12,000, the total GNI should rise to $ 305 billion or an increase of 243% over the period. The average growth per annum should be about 12%. In terms of the second projection, the GNI should be $ 263 billion marking an increase of 196% over this period. It marks an annual increase, on average, of 10%. Therefore, the annual economic growth to be maintained from 2028 to 2048 will be between 10 and 12% if Sri Lanka is to become a rich country by that last year of the period. This is again a formidable challenge for future governments.
Ranilnomics should be applied right-away
In my book titled ‘A Child’s Guide to Ranilnomics, Cryptos, and Currency Boards’ released in December 2022, I have presented a blueprint of the policy action to be initiated by President Ranil Wickremesinghe. This is in addition and parallel to the ongoing IMF bailout package.
IMF will only help Sri Lanka to stand on its feet once again
The IMF bailout package will help Sri Lanka to overcome its financial sector issues and entail an extremely contractionary effect on the real sector. Its prime purpose is to help Sri Lanka to come out of the present balance of payments issues. This can be explained with the following example. Suppose that there is a man who has been indulged with overconsumption out of what is being given to him by others, some as loans and some as pure donations. He is now overweight, obese, and out of physical fitness. He cannot even walk without being held by someone else. A physician puts him on a strictly restricted diet so that he will gradually and consistently loses his extra fat and could be physically fit once again.
It is a very painful adjustment program without which he will not be able to live as a normal person and prosper in life. Sri Lanka is also in the same situation as the man obese, overweight, and physically unfit. The physician, IMF, on the request of the Government of Sri Lanka, has put Sri Lanka on this strictly restricted diet so that its economy will regain the resilience to advance again.
The overindulging Government will be a lame duck
What are those restrictions that have been imposed First of all, the government budget has been subject to strict controls, and it is required to generate a surplus in its primary account that deals with revenue from all sources and expenditure excluding the interest expenses. On the expenditure side, it should cut the expenditure coming within this definition. In 2022, it amounted to 12.5% of GDP. During the period of the bailout package, this is to be kept at around 12-13% of GDP. At the same time, the capital expenditure is to be maintained at around 4.5%. The restriction of capital expenditure is heavily biting on the government budget and also has a negative impact on the growth of the real economy due to the low contribution to the country’s capital formation.
On the revenue side, it is required to increase the revenue base persistently and progressively from 8.5% of GDP in 2022 to 15.3% in 2028. Thus, what is being taken out of the economy by the government is on the increase, while what is being given back to the economy is highly restricted. Both these strategies have a negative impact on the operation of the private sector, though they will help the obese and overweight economy to gain physical fitness.
Central Bank should also follow an austerity program
Under the IMF bailout package, the Central Bank is also subject to restrictions in operations. It should acquire foreign reserves from the market so that its net negative position of reserves amounting to $ 1.6 billion at end-2022 is gradually to be converted to a net positive position as from 2024. However, when reserves are acquired on a net basis, the central bank will have to exchange reserve money which will contribute to future monetary expansion and consequential inflation. Therefore, the Central Bank should prevent an unwarranted growth in reserve money by restricting the growth of its net domestic assets. This will be done by restricting its lending to the central government.
Accordingly, its net lending to the government which amounted to Rs. 3.4 trillion at end-2022 is to be brought down to Rs. 210 billion by 2028. The result will be the conversion of the positive net domestic assets amounting to Rs. 3 trillion at end-2022 to a net negative position of Rs. 2.5 trillion by end 2028. Thus, the Central Bank will be confined to attaining its inflation target at around 4-6% and not introducing any stimulating package to boost the real sector of the economy. This is not unusual because a central bank by its nature cannot influence the real economic activities by printing money.
The real economic activities arise from the hard work done by people who own physical as well as human capital and not by money printed by a central bank. The hard work will depend on the incentive system that has been created within the economy for private initiatives to prosper and succeed. A central bank support it by maintaining both price stability and the financial system stability and not by directly intervening in the economy. This is the fundamental change which is proposed to be introduced in the new central bank legislation now before Parliamentarians for approval.
The required growth should come from private initiatives
What this means is that the growth in the real economy to make Sri Lanka a rich country by 2048 should come from outside the Government or the Central Bank. That should be done by the promotion of private initiatives at an accelerated level. But the private sector is handicapped by two unwarranted developments. One is the transfer of a bigger volume of resources to the Government by way of taxation from about 7.4% of GDP in 2022 to 14.3% in 2028. The private sector is denied of using this money for its investment purposes. The other is the restriction of the credit levels available to the private sector through the normal banking operations.
Though its absolute borrowing from commercial banks is to increase from Rs. 7.0 trillion in 2021 to Rs. 12.7 trillion by 2028, its borrowing as a ratio of GDP is projected to decline from 39.5% in 2021 to 31.4% in 2022 and further to 27.4% in 2028. What this means is that the private sector’s access to banking resources will not grow at the same rate as the growth in the economy, though that growth is chiefly brought about by its participation in the economy. This is not a good sign for the expected accelerated role of the private sector in the economy when the Government’s operations have been curtailed by restrictions imposed under the IMF bailout package.
Real sector development should come from real savings and real investments
Thus, the financial programming and planning envisaged under the IMF bailout package will create a necessary condition for the Sri Lanka economy to take off from its present shrinking state and accelerate toward its goal of becoming a rich country by 2048. This real sector development is separate from the current macroeconomic stabilisation being targeted jointly by the Government and the Central Bank. It requires Sri Lankans to adopt a host of strategies targeting real sector development. They should make real savings by cutting the consumption, make available such real savings as real investment in physical capital, human capital, and new technology, and get integrated to the global economy seamlessly.
This is in line with the postulation by the Indian economist B.R. Shenoy who emphasised on the need for making real savings for economic advancement which he called voluntary savings. As against these voluntary savings, there are involuntary savings which arise from the financial sector by creating new money and Shenoy said that those involuntary savings do not contribute to the real sector development. Sri Lanka is critically to make this choice today.
Adoption of technology a must
This choice, as I have recommended in my book A Child’s Guide to Ranilnomics, Cryptos, and Currency Boards, involves improving the use of capital efficiently known as improving the Incremental Capital Output Ratio or ICOR on one side, and getting integrated to the global economy, on the other. Sri Lanka’s capital use is inefficient as demonstrated by high ICOR of 5, meaning that 5 units of capital are needed to produce one unit of output. Comparatively, in countries like Singapore or USA, ICOR stands at about 2 and 3 meaning by using a less quantity of capital, those countries can attain the same growth.
The Government should take measures to improve ICOR gradually in the medium to long-run through improvement in governance, management style, human capital development, and use of new technology. Without this efficiency level associated with the country’s manufacturing industry, it cannot integrate itself to the global economy. Without integrating to the global economy, Sri Lanka cannot increase its output level to $ 263 billion and $ 305 billion by 2048.
Get parliamentarians to accept a common program
This involves engaging in long-term economic planning outside the implementation of the current IMF bailout package. Hence, the crucial requirement is not getting the approval of Parliament to the IMF bailout package which is only a necessary condition but to getting the Parliamentarians to sign off a long-term development plan which is the necessity for Sri Lanka to become a rich country by 2048. It will at least create awareness among Parliamentarians the need for adopting a set of consistent policies to reach the goal of becoming a rich country within the next 25 years or so.
*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at firstname.lastname@example.org