By W A Wijewardena –

Hosting the country with a series of vision plans

The Unity Government released its newest economic policy statement titled V2025 – the marketing tag for the goals it has set for realisation from 2017 to 2025 – two weeks ago.

Indeed, this has been the fourth of such statements which it has placed before the people during the last two-year period.

The first statement had been incorporated into the manifesto of the United National Party when it sought power at the General Elections in August 2015. Then, nearly three months after the elections, a comprehensive policy statement was delivered by Prime Minister Ranil Wickremesinghe in Parliament in early November 2015 two weeks before the presentation of the Budget for 2016 by his Minister of Finance.

Almost all the promises relating to the economy which had been made in the manifesto had been re-presented in the first economic policy statement in addition to some new policies that had been needed for elevating Sri Lanka to rich country status over the years.

However, as this writer had pointed out in a number of articles in this series, the Budget presented two weeks later had been mostly out of alignment with the goals set in the statement.

Then, a third policy statement had been presented in October 2016 by Prime Minister Ranil Wickremesinghe in Parliament just one month before the presentation of the Budget for 2017. This policy statement had focused on how Sri Lanka should get itself integrated into the world economy in a bid to expand its export base, a policy recommendation that had surfaced in the deliberations of the Sri Lanka economic summit held in January 2016.

Now, after about 11 months, another policy statement has surfaced two months before the presentation of Budget 2018.

V2025 corresponds with country’s election cycle

V2025 has two goals, four intermediate goals to be realised by 2020 and one final goal to be realised by 2025. Both 2020 and 2025 are election years in Sri Lanka. Hence, V2025 corresponds with the country’s election cycle and not necessarily to any perceivable economic cycle.

As intermediate targets to be realised by 2020, V2025 envisages to increase Sri Lankans’ average income – also known as per capita income or PCI – from the current $ 4,000 to $ 5,000, generate one million jobs, increase foreign direct investments or FDIs to $ 5 billion and double the country’s export base from $ 10 billion today to $ 20 billion in 2020.

As the final target in 2025, it plans to make Sri Lanka a rich country. Originally, this goal had a long date between 2045 and 2050 for realisation. However, V2025 has advanced that date to 2025, the year in which Sri Lanka would get to choose a new Government through its electoral process.

Accordingly, the objective of the unity government is clearly to present a success story to the electorate when it seeks re-election in both 2020 and 2025. If for some reason its re-election bid fails in 2020, the attainment of the final goal in 2025 will also become a non-event if the new Government does not buy itself into the policy goals of the unity government.

The underlying ideology is the social market economy 

There is one underlying economic ideology behind all the four policy statements. That is, the new Government will follow an economic philosophy called ‘knowledge-based highly competitive social market economy’ to make Sri Lanka a rich country.

This philosophy, without the two qualifying adjectives ‘knowledge’ and ‘competition’, had been adopted by Germany after World War II as a more acceptable middle way between two extreme views, namely the capitalism pursued by Western countries and the communism adopted by the Soviet Union and its satellite countries.

The social market economy, while recognising the private-sector led competitive free market economy as the main guiding economic principle, upholds the need for a Government’s intervention to assure the delivery of social goals like access of people to education, healthcare services and employment.

The preamble to the manifesto of the UNP has described a social market economy as follows: “Social market economy principle is a more advanced ‘people-friendly economy system’. It combines the competitive market economy with overall governmental intervention in the economy to assure the delivery of social benefits to people. There are ‘safety nets’ to protect the socially and economically disadvantaged groups and ‘systems’ to conserve the environment. Thus, its aim is to deliver ‘economic democracy’ to people by widening the frontiers of the open economy policy being in place in Sri Lanka since the late 1970s.”

Rajapaksa administration had expanded the state sector to a fault

Thus, the social market economy was the UNP’s reply to the expanded government sector led growth philosophy followed by the previous Mahinda Rajapaksa administration.

In fact, that administration had expanded the state sector to a fault even by reacquiring some of the state enterprises that had previously been privatised. It in this manner reacquired Sri Lankan Airlines and the Shell Gas Company by buying the shares held by foreign companies through state banks and state managed provident funds.

It repossessed some of the private ventures under a fancy legislation it called ‘the Revival of Underperforming and Underutilised Assets Act’ which, to many outside the government, was a mere expropriation act.

The result of the state expansion during the reign of President Mahinda Rajapaksa was the ever ballooning Government expenditure far above its ability to raise revenues. Accordingly, the revenue account of the budget representing the government’s consumption expenditure and its revenue was continuously in deficit. During 2005 to 2014, the Government’s consumption exceeded the revenue on average in each year by Rs. 91 billion or 2% of GDP.

When the Government runs a deficit in its revenue account, it has to borrow money not only for its capital expenditure programs but also for its consumption. The result is the continuous swelling of public debt making it impossible for the Government to repay its debt and pay interest thereon without resorting to further borrowing. That was how the public debt numbers got themselves multiplied from Rs. 2.1 trillion at end-2004 to Rs. 7.4 trillion at end-2014.

When there were constraints to raise new loans, the Government always kept the budget deficit at an acceptable level by pruning the capital expenditure programs – a measure that had seriously impeded the country’s long-term economic growth. This was the tactic used by policymakers in the Rajapaksa administration to show good budget numbers, but it was done at the expense of long-term economic growth.

The brewing economic crisis since about 2013

The Rajapaksa policies sowed the seeds of an economic crisis which started to show itself up from around 2013. Economic growth began to decelerate from an average annual growth rate of about 8% that Sri Lanka had attained during 2010-12 to an average rate of 4% during 2013-14.

Inflation began to accelerate at an annual average rate of about 6% during 2010-14. Exports as a percentage of GDP began to fall from 27% in 2005 to 14% in 2014. The deficit in the current account of the balance of payments could be financed only by borrowing from abroad. But it added to the country’s foreign debt stock and also put the Sri Lanka rupee under pressure for depreciation.

The Government was able to keep the rupee/dollar rate fixed by supplying dollars to the market from the foreign exchange reserves held by the Central Bank. However, it required the Government to go for more foreign borrowings to recoup the lost reserves. Accordingly, almost the entirety of the foreign exchange reserves held by the Central Bank was made up of borrowed money which it had to pay out when those borrowings began to mature. It drove the country’s foreign exchange situation to a highly critical level.

The new Government inherited a sick patient but no treatment was administered

Thus, it was a sick economy which the new Government had inherited when it came to power in January 2015. The new Government was expected to take early measures to put the economy back on track. But it lost a valuable 11 months by directing its full energy towards constitutional reforms and the oncoming general elections, thereby allowing the economic crisis that had been simmering at the time it took charge of the economy to deteriorate to a boiling point.   It was therefore necessary for the unity government to come up with a long-term plan to fix the economy.

The first economic policy statement

The first economic policy statement was delivered by the Prime Minister with this objective in mind. It had made a fair diagnosis of the economic ills from which the country had been suffering and pointed to the prescription that was needed to attain long-term economic growth.

It contained a three-pronged analysis: taking a stock of the economic situation that was prevailing at that time, the need for changing the economic policy direction and a synopsis of what the Government was planning to attain long-term economic growth.

Deviating from the previous Government’s policy of attaining economic growth purely concentrating fully on the domestic economy, the new policy statement emphasised the need for integrating Sri Lanka with the rest of the world to create long-term prosperity.

The policy statement succinctly presented this strategy by pronouncing that Sri Lanka should produce for an economy bigger than that of the domestic economy. What it meant was that Sri Lanka’s domestic economy was too small for any industry to produce on the required scale of efficiency.

The rationale of this strategy could be understood by observing the production structure of Sri Lanka’s two biggest exports, namely, garments and tea. In both cases, the almost entirety of the production is exported and if there are no export markets, both industries would become unviable.

The need for going for high-tech products

In this connection, the policy statement had laid down two strategies, one short-term and the other long-term. The short-term strategy had recognised the unfavourable global economic environment that had been ruling the global economy since 2013.

Since Sri Lanka was unlikely to benefit from such an environment, the economic policy statement had proposed to strengthen the local economy and attain high economic growth in the first two years. In the long run, it was the promotion of exports since Sri Lanka’s domestic market was tiny and not able to absorb everything that it could produce.

The statement had therefore emphasised, as mentioned earlier, the need for having a bigger market for its products than the small domestic market. In doing so, the statement had reiterated the need for shifting the policy thrust in favour of high tech exports. This vision represented a major change in Sri Lanka’s past economic policy stance that had not made any distinction between high-tech and low-tech products.

In the case of low-tech products like garments and tea, any producer could copy them and become formidable competitors to Sri Lanka. But if they were high-tech products, such free entry to the export market by prospective competitors is curtailed.

Failure to implement the policy package 

But the unity government had failed to implement this policy package on several counts.

First, there was no consensus building between UNP and SLFP, the two main political parties which had joined together to form the unity government.

Second, the package was not communicated properly to the public and, therefore, they were kept in the dark. This was despite the promise of the Government that it would deliver economic democracy to people, a system in which the public would be consulted on all major economic policy measures.

Third, the Minister of Finance, instead of presenting a budgetary program that was conducive to the proposed policy package, came up with budgets that were totally out of alignment with the policy. This was obvious when the appropriate budgetary policy was to cut consumption and increase capital expenditure programs.

Instead of directing the budget toward this end, the two budgets that were presented by the former Minister of Finance increased Government consumption expenditure and limited its capital expenditure programs.

Policy statements should not just be wish lists

Hence, the Prime Minister had to present another policy statement in Parliament in October 2016. When such subsequent policy statements are made, it is necessary for the Government to present an assessment of the targets in the first statement, give a timeline of their achievements or failures, an explanation for both successes and failures and finally, the remedial measures adopted to rectify the deficiencies. The second policy statement or the latest V2025 lacked this analysis.

Hence, they were just standalone statements lacking concrete implementation plans. In other words, they simply remained wish-lists that had not been put into practice in the ground.

The next part will analyse the targets in V2025 and their ground reality.

To be continued …..

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached atwaw1949@gmail.com