{"id":149388,"date":"2015-08-21T02:35:31","date_gmt":"2015-08-20T21:05:31","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=149388"},"modified":"2015-08-26T17:09:53","modified_gmt":"2015-08-26T11:39:53","slug":"new-economy-where-to-start","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/new-economy-where-to-start\/","title":{"rendered":"New Economy; Where To Start?"},"content":{"rendered":"

By Hema Senanayake<\/span><\/a> –<\/strong><\/p>\n

\"Hema<\/a>

Hema Senanayake<\/p><\/div>\n

UNFGG became victorious from the general election. Perhaps, UNFGG might be thinking now in honoring whatever the economic promises they made in their election manifesto as they did with previous 100 day program. Honoring promises is a good thing. But during the 100 day program of the previous interim government they did a lot of economic mistakes. Hence, what I suggest is that UNFGG must be a little more cautious in honoring economic promises. This does not mean that UNFGG must ignore or dishonor their promises now because they have got elected, instead I would suggest that UNFGG should honor the economic promises within a more long term prudent strategic approach. How UNFGG could do it?<\/p>\n

In regard to the strategic approach mentioned above, I would suggest them to begin with the country\u2019s current account and balance of payment. Then simultaneously they can move into the fiscal and monetary policy. All these areas constitute the essentials of macroeconomic regime. The ultimate objective of maneuvering these fundamentals is to achieve the optimum efficiency in production and distribution of distributable output. In fact production and distribution of distributable output are what matters for the wellbeing of the people. Let us try to understand this point with an example.<\/p>\n

\"Ravi<\/a>For example, UNFGG promises that the country would be made debt free by 2023 on which year we celebrate 75 years of independence. This idea is not clear and hence needs to be clarified by them. For example, does this mean that the country would be free from foreign debt by 2023 while the government begins in balancing its budget by the same year? If this is the case then the country will be free from foreign debt and the government will be free from public debt too. Or does this mean that the country would be free from foreign debt by 2023 and the government deficit is fully financed through domestic borrowing? This fine difference is important in economic governance because the first option is not economically possible while the second option becomes possible. But both options are not that prudent. Hence we will not achieve either of the options mentioned here and more over it is not economically necessary to be debt free completely.<\/p>\n

However, since it has been mentioned in the UNFGG\u2019s manifesto, the question or the issue of debt is a good starting point in preparing their \u201cprudent strategic approach.\u201d If they do this then, as I said above, they would have to begin from the country\u2019s current account and the balance of payment. I will never suggest them to begin from various kinds of High-Development-Zones. UNFGG has promised in their manifesto to establish 45 High-Development-Zones such as Industrial Hi-zone, Agricultural Hi-zones etc. Why do I suggest so?<\/p>\n

Sri Lanka is a country which runs a current account deficit for a few decades. When a country runs a current account deficit, it is building up liabilities to the rest of the world. In other words we spend more money in foreign countries than we bring in from foreign countries. This means the outflow of foreign currencies is more than the inflow of debt free foreign currencies such as U.S. dollars. For a matter of simplicity, henceforth I use the word dollars instead of foreign currencies. Therefore, this is a practice that cannot be continued if we do not match at least the inflow and outflow of dollars. In general terms, the only way that we can do this matching is borrowing dollars externally. (Foreign borrowings are recorded in the country\u2019s Financial Account. Both current account and financial account constitute the balance of payment records).<\/p>\n

However, if we do not want to borrow externally then we have to have an inflow of debt free dollars which are not recorded in the current account. This inflow of dollars must at least be sufficient to offset the current account deficit. This is where FDIs (Foreign Direct Investments) and net inflow of portfolio investments matters. If these sources of funds bring in enough debt free money then the country can be free from debt to foreign countries.<\/p>\n

Now, when a country increases its consumption and investment, there are chances in increasing the current account deficit. Establishing of 45 High-Development-Zones can either be consumption or investment or both. Whatever the case may be, it increases the current account deficit. If the government could ensure that enough or sufficient inflow of debt free dollars which transactions recorded in the country\u2019s financial account, then we do not have to worry that much in regard to the money which is to be expended in the establishment of the said zones. Also, if the High-Development-Zones could bring in dollars in the future or positively contribute to the current account by reducing imports then establishing of them would be economically justified even with borrowed dollars if FDIs are not sufficient to balance out the current account deficit.<\/p>\n

From the above discusion, you may easily understand that any development project must begin by assessing its impact to the current account and balance of payment. By undertaking this exercise, it defines well, the potential monetary scope of projects. Thereafter only we should bring the project into the national budget which affects the both fiscal and monetary policy. In that way the government can handle the macroeconomic parameters better. If the government begins from project formulation end then there are chances in messing up macroeconomic fundamentals sooner than later. Such a crisis can be easily understood if the incumbent Finance Minister would have to present a Robin-Hood budget.<\/p>\n

Finally, I would say this. We live in a world of fiat money which money is defined as currency which derives its value from government regulation or law. It will continue to be so for a foreseeable future. In this world of fiat currency, technically the potential of the creation of money domestically and internationally is very huge. This potential of the creation of money is further enhanced by the Fractional Reserve Banking system we use today globally. It can further be enhanced when people tend to hold less and less cash (bills and coins) in their wallets due to the fact that people have begun to use electronic payment cards (debit or credit cards) more frequently to effect payments. Due to all these reasons, in fact, we live in a world which has limitless potential of money creation. But unfortunately, most of the money in circulation domestically and internationally is being created as \u201ccredit money.\u201d Anyway, this is not any wishful thinking of creditor institutions; instead it is a systemic need. If this is a systemic need we cannot be debt free. The only thing we can do is to deflate debt time to time. This means we need to learn more about the handling of monetary policy from the very fundamentals of macro-economy.<\/p>\n

In view of above I earnestly hope that the new government will begin from where it has to begin in regard to the economic governance. Then, we will have a truly new dynamic economy.<\/p>\n","protected":false},"excerpt":{"rendered":"

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