By R.M.B Senanayake –
The two main contenders for the Presidency have paid their deposits and the campaign will now get into high gear. They may present their manifestos for the future. The economy has not figured much in the debate so far.
The economy has been growing reasonably even if one discounts the exaggerated figures trotted out by the authorities for 2014. But although the statistics have not yet disclosed the economy may be slackening. But what made it grow. The growth was not driven by exports although exports have grown last year. We earlier had an average yearly growth rate of 6% and it has definitely increased. But the quality of growth is as important as the magnitude. Have the living standards of the ordinary man- the farmer and the urban worker improved? The much touted Per capita income of $4000 is misleading. Firstly it refers to nominal income and not real income. Secondly it is converted to dollars at an over-valued Exchange Rate. A statistician it has been said is one who says I ate half a chicken when I ate a full chicken because my neighbor ate nothing and the per capita consumption was half a chicken. Similarly our per capita income figures do not really represent the incomes of the poorer segments since it is an average. A better measure is from the Household Expenditure Survey which reflects an income about half such value. Although the poverty figures have come down drastically they are based on a poverty level determined by the Statistics Department. But with continuous inflation even if it is low, the real incomes get eroded and the poverty minimum has to be revised upwards.
The price of rice is too high. There is malnutrition among mothers and children. The poor depend on the government health care system and it has eroded because of a lack of budgetary allocations to maintain the expenditure in real terms. The educational standards in the government schools which are patronized by the less affluent people, has deteriorated again because of the insufficiency of budgetary allocations. The quality of education in schools depends on the quality of the teachers. But teachers are appointed and transferred on their political affiliation and not on their competence or the needs of the schools. Unqualified teachers are appointed on political patronage and the teachers with political influence decide where they want to be posted for service instead of on the need for teachers in the backward schools. The quality of university education has suffered because the Universities are not allowed to manage them. Instead the Minister and his minions decide on matters of university administration. The Minister decides on the numbers to be admitted to the universities- a practice unheard of elsewhere in the world. The Minister seems to be interfering even in matters of university curriculum a matter handled by a special university official called a Provost. The universities have no freedom to manage their affairs. Meanwhile the Government is permitting the establishment of private universities for the affluent while messing up the State university system. So the children of the less affluent will suffer in the competitive race for jobs.
Credibility of Economic Policy must be restored
Unlike in the past there are doubts raised about the calculation of economic statistics from the GDP to inflation. It is necessary to restore the credibility of economic policy. Any new government must re-affirm the commitment for an independent monetary policy which requires an independent Central Bank. The holding of the Exchange rate at an over-valued rate and supporting it by running down the Official Foreign Exchange Reserves is not justifiable, particularly when there are continuous deficits in the current account of the balance of payments. Yes there is a surplus in the Over-all balance of payments but that includes the capital flows which provide the finance to meet the current account deficit. If there are no such compensating capital inflows then the Foreign Exchange Reserves have to be drawn down to fund the deficit in the current account.
The government revenue has been falling and this year it is below 10% of GDP. The minimum to fund the current or recurrent account of the budget is around 14% of GDP. The Government says it is bringing down the over-all budget deficit to 5% of GDP. But the Treasury does not disclose the amount of payment arrears accumulated over the years. The new government will have to commit itself to the provisions of the Fiscal Management (Responsibility) Law. But the deadlines for bringing down the deficits may no longer be feasible. So the reduction of the over-all budget deficit will have to be spread over a longer period. But there is no excuse not to balance the current or Revenue account of the budget for such expenditure must be financed from tax revenue and not from borrowings. A considerable amount of money is wasted on perks for the large contingent of Ministers with their traveling and security support. A lot of money is also wasted on unnecessary foreign travel where large contingents of politicians are taken abroad to keep them happy by allowing them to see the world. All such wasteful expenditure must be cut out and the number of Ministers reduced to about 20. There is no need for providing them a security contingent using government vehicles. The fuel consumption by the Ministers should also be reduced.
The government debt is to high and every year the debt is increased by further borrowings which include the requirement for repayments of the debt falling due during the year. This is shown up by the continuing deficits in the primary account of the budget. It is necessary to budget for a surplus at least to cover the rupee equivalent of the foreign debt falling due for repayment during the year.
The economic growth that has taken place under the present government is entirely through government expenditure on investments in infrastructure, they have failed to produce a return or to sustain the growth rate through secondary effects. But the growth rate cannot be allowed to come down. So fiscal policy cannot be tightened. Government investment will have to continue unchanged although the projects on which they are invested should be re-examined by an expert Committee. There is no need to look askance at Chinese commercial investments. Chinese have huge foreign exchange reserves and even Britain is using Chinese contractors for building. They are commercial investments and we should welcome them. But no new project should be included in the budget unless it has been evaluated by the Planning Ministry which should be staffed with economic and technical experts.
The current account deficit in the balance of payments cannot be allowed to increase. Corrective action is necessary but here again since imports of capital and intermediate goods are required to maintain the growth and such corrective should be through a one-off depreciation of the Rupee to reflect its fundamental value. This will promote both exports and import substitution industries. Promoting import substitution through protectionist tariffs or import bans is not desirable although the producers should not have to face a spate of imports during the time their products come to the market. If a steep depreciation is carried out the need for protectionist tariffs or import bans can be eliminated. Of course the depreciation of the Rupee will increase the prices of imports. Fortunately world commodity prices are falling.
The interest rates on deposits should be freed to increase savings in the country. It may lead to higher lending rates to businesses but it would reflect the scarcity value of funds. Special provision may be made for the SMEs by way of Central Bank guarantees or refinancing. This was an unorthodox measure in the past. But now the Bank of England has resorted to it as does the Federal Reserve which has been buying corporate bonds without being restricted to government bonds only as in the past.
Promote Private business
The new government’s priority task should be design a crash program to attract private capital- both private foreign and domestic capital to be partners in the government infrastructure investments. The Expressways may be handed over to private firms to maintain them from the tolls. It is necessary to give up crony capitalism and allow a level playing field for investors both foreign and local. The private sector must be provided with more economic freedom and doing business should be made easier. The unnecessary bureaucratic controls and Ministerial interventions with business should be eliminated. The restrictions on foreign ownership of land should be removed if it is for business investment including the building of apartments.
The country is now facing a shortage of labor which is hampering the increase of output, particularly in the garment industry. The Land Development Ordinance should be amended to allow freehold ownership of land and a free market in agricultural land should be allowed so that the small holders who can’t owe an adequate income from their small plots can sell out and move to the urban areas for jobs. Companies should be permitted to import labor on contract for a fixed term. We are now in a globalized world and cannot afford to restrict the international movement of labor. The Labor Laws must be made less restrictive and more business friendly. The people are fleeced by local doctors and it is time to allow the private hospitals to recruit doctors from abroad.
Serious attention has to be paid to the plantation sector. Tea prices are alright but rubber is in the doldrums due to the decline in crude oil prices. The plantation companies should be allowed the freedom to convert the rubber to oil palm, coffee, cocoa and other products. The bureaucratic controls imposed by the Rubber Research Institute and the several Ministries dealing with rubber should be relaxed. The bureaucratic controls on the import of tea for blending should also be removed to recapture the tea processing business which we have lost to Dubai and other foreign entrepot centers.
The State Corporations and SOES like Mihin Air and Sri Lankan Airlines should be asked to find he funds if they want to continue. They may be allowed to raise private capital and even listed on the Stock Exchange. But they cannot be allowed to run losses which are funded from the budget or from the state owned banks without any repayment of the funds borrowed. They should be sold to the private sector or closed down if there are no takers.