Sri Lanka: Prospects for the Economy and Policy

Ambiguities

There should be some protection for the agricultural sector, particularly given
the growth being negative, amounting to -4.2 percent during 2016. This cannot
be attributed solely to natural disasters like droughts and/or floods. These
calamities should be anticipated even in the future.

by Laksiri Fernando -Jul 23, 2017

( July 23, 2017, Sydney, Sri Lanka Guardian) There is some confidence in the
economy as reflected in the sales or turnaround in the Colombo Stock Exchange
(CSE) during the first six months of this year, particularly the last three months.
Dropping 200 marks within the first three months, ASPI (All Share Price Index) has
gained 700 marks by the end of June, the overall ASPI to be around 6,700. The
situation is still below the 2010-2011 level, when suddenly the CSE became the
best stock market in the world in 2010, which could not be sustained due to the
tarnishing of its image through insider trading and other malpractices, sanctioned
by the last regime.
If the situation is not to be cyclical, the government must take more positive
action in rejuvenating the economy. Confidence in the economy would boost the
CSE, and confidence in the CSE would boost the economy. The approval of the
GSP+ is another factor for a cautiously optimistic future. If this is utilized properly,
that can uplift the economy to a great extent. This is not limited to garments, but
there are over 6,000 goods covered under this preferential facility.
An added factor is the IMFs approval of the third tranche of the Extended Fund
Facility (EFF) of $ 167.2 million last week. It is hoped that with this grant, both the
external reserve situation will be strengthened, and the exchange rate flexibility
would be enhanced. This however is a loan and therefore it would increase the
countrys external debt which is already high of around 34% of the GDP (out of
overall 79%). Therefore, the rationale of this loan should be to increase the
external revenue through exports, while debt servicing in the short run, without
overwhelmingly depending on the remittances of the expatriate labour.
Imbalances in External Trade
We do have a lopsided situation in respect of our external (free) trade that has
been the case under all past regimes. The following Table 1 reveals the adverse
situation.
Table 1
External Trade Position, 2010-2016
2010 2011 2012 2013 2014 2015 2016
Imports 13,451 20,269 19,190 18,003 19,417 18,935 19,400
Exports 8,626 10,559 9,774 10,394 11,130 10,546 10,310
Trade Deficit -4,825 -9,710 -9,417 -7,609 -8,287 -8,388 -9,090
Private Transfers3,608 4,583 5,339 5,619 6,199 6,167 6,434
Other
142 512 96 -551 100 338 714
Transfers
C/A Balance -1,075 -4,615 -3,982 -2,541 -1,988 -1,883 -1,942
Source: Central Bank (US$ million)

Throughout years, we have had a considerable trade deficit and the situation has
deteriorated since 2013. In that year, there had been an unexplained flight of at
least $ 551 million funds out of the country, even if the other inward transfers
are counted as zero. Except in 2010, trade deficit has been around 85 percent of
our exports. What this fact reveals is that we are an import nation rather than an
export economy. In other words, Sri Lanka is a consumer country rather than a
producer country.
In 2016, for example, we have imported $ 19,400 million of goods but exported
only 10,310 million worth. The exports are only around 53 percent of the total
imports. What has come to our rescue is the private transfers, bulk of which is
from the expatriate labour. One can argue that expatriate labour is also an
export, but this is at a considerable human cost to the country both socially and
economically. The country is increasingly facing shortages of skilled labour and
also professionals. Of course, there are possibilities of importing such labour
from other countries, but the result would be the depletion of our foreign
reserves, apart from other repercussions. Even with our export of labour, the
country has not been able to foot the bill of our imports. The deficit in the current
account (C/A) balance has been worst in the years 2011-2013 due to political
consumerism, but the situation has not yet improved; 2016 making a deficit of $
1,942 million.
Policy Requirements
In the above context, complete free trade is highly questionable at least in the
short term, if not in the long run. The answer undoubtedly is not a closed
economy, but nuanced policies to offset the imbalances. There is a need to
restrict/discourage certain imports which exacerbate the deficit or harm the local
small industries and agriculture. Luxury vehicle importation is one, apart from
completely scrapping of duty free vehicle licences for politicians and bureaucrats
until the trade deficit is properly adjusted. Restrictions on liquor importation are
another necessity. There can be higher tariffs for several other unnecessary goods
coming into the country. Even in developed liberal countries, such measures are
taken unless a country is within an open-border economic union (i.e. EU).
There should be some protection for the agricultural sector, particularly given the
growth being negative, amounting to -4.2 percent during 2016. This cannot be
attributed solely to natural disasters like droughts and/or floods. These calamities
should be anticipated even in the future. This author could remember travelling
to Jaffna by road before and after the open economy was inaugurated in 1977. A
clear difference was the disappearance of plush agricultural fields, probably onion
and chilies, between Vavuniya and towards Elephant Pass.
These sectors might not be resurrected, even with protection, as the war has
changed the demography, occupations and life styles of the people in the
northern province. However, there are peasants and farmers still in the northern,
eastern, north central, Uva, southern and other provinces who need some care or
protection for their agricultural products, until these sectors are modernized and
made competitive with overseas markets. It is not total protection that is
necessary, but nuanced safeguards.
What is more necessary are intermediary industries like Lanka Canneries (MD) or
Larich that can convert some of the agricultural products into exportable goods,
however assuring a reasonable price to the primary producers. If they were to
reach the overseas markets, like China or the Middle East, the tastes could be
milder. There is space for other competitors. I remember such products coming
from Jaffna before the war and not sure whether they survived. My emphasis on
Jaffna or the North is that those economies have got devastated during the war,
and resurrecting of them is necessary for both reconciliation and overall
development. As I have previously suggested, there can be products like Tea-
Cola or Mung-Mite like Vegemite or Marmite. It is a story in Australia that the
growing middle classes in China even buying bottled fresh air, as they have
money to spend. Like the European markets under the GSP+, there can be market
opportunities in China, Japan and India, even without strings!
Most of the above are opportunities, and not realities. To convert them to
realities, it might be necessary to have a cautious approach without having
wishful thinking, like Miracles or Megapolis. Because the present condition is
more of a paradox than a clear progress. Instead of a western megapolis, what
might be necessary in the country is a series of smart cities surrounded by
happy villages.
After the end of the war, there was an upsurge in the economy (2010-2012), but
short lived. In 2012, the growth rate was 9.1 percent, which came down to 4.3 in
2013. The growth has not yet recovered to the required levels, the present
administration also involved in too much politics, rather than economics. The
growth rate last year was 4.4 percent. Although the growth rate is not the only
indicator of economic progress or stagnation, it is a reasonable pointer. The
upliftment of the economy, in terms of overall or per capita GDP, during the last
decade, is mainly because of the hightide of the Asian resurgence, however
making an extra-rich class in its wake and making the poor sections economically
stagnating.
Deficit in Change
For the present situation to be assessed properly, certain political factors need to
be considered. There were political reasons why a political change was necessary
in 2015. The primary reason was the 18th Amendment and the consequent
authoritarian political developments. The political grip was kept within a family
and a closed group, while allowing the governing politicians to misuse and
virtually plunder the economy at various levels. That was one reason for the dip in
the economy towards the end. It was, however, not merely about corruption, but
also about misplaced (or lack of) economic policy and mismanagement.
It was at the last moment that the so-called Yahapalana alliance was forged.
Some of the consequences of that hasty or half-hearted formation are now
visible. There were ideals and realities. There were genuine as well as opportunist
elements behind the movement. The government that became formed was a
bicephalic (two headed) animal, with the UNP and the SLFP. I am not saying that
there is a big difference between the two, as far as the economic policies are
concerned, yet, while the UNP has more confidence in the private sector, the SLFP
might still emphasise the state sector under Maithripala Sirisena. In addition, the
way the two parties are organized and their rank and file are concerned, there is
obviously a conflict of interest.
The major deficit of the national unity government, in my opinion, is the absence
of a viable economic policy. It is still ambiguous. Without such a policy, political
reforms might be in jeopardy. The political reforms have not progressed much
beyond the 19th Amendment. The formulation of a new constitution has been
slow and half-hearted, creating unnecessary opposition because of the delays
among other reasons. Major crimes and fraud/corruption are not investigated as
promised. Many promises have been given to the international community,
without realizing the consequences of their implementation in the local context.
In terms of the economic policy, what became declared was a social market
economy after suddenly coming into power. It is more of a concept or a vision
than a concrete economic programme. While both the UNP and the SLFP may
agree for social justice, in addition to economic development, particularly
influenced by late Ven. Maduluwawe Sobitha Theros movement, still there can
be differences on the issues of private sector vs state sector or liberalization vs
social welfare. Maithripala Sirisena, as the leader of the SLFP, has declared their
policies to be social democratic, whatever it means.
Why Not Having Two Engines?
After assuming duties, the current Minister of Finance, Mangala Samaraweera,
declared the engine of growth to be the private sector. This is a traditional UNP
policy. However, there is a SLFP section in the government with a different policy,
although many of the old timers (including the old left) are still rotating around
Mahinda Rajapaksa! Given the circumstances, or even otherwise, why not having
two engines, instead of one?
There are two major development paradigms, from the West and the East,
although not purely distinct. One emphasizes the private sector, and the other,
the state enterprises. Even in the West, mercantilism preceded the liberal
industrial revolutions. Still on welfare issues, social democratic regimes, or even
others, rely on the public sector. Could the private sector deliver social welfare to
the people? There can be some wishful thinking, but not practical, although the
norms of good governance should apply to the private sector as well.
The traditions in Sri Lanka are more of state-reliant. This may have to be changed
or balanced, but not overturned. Take the example of SAITM issue. Already the
Neville Fernando hospital is taken over (I wouldnt say nationalized!). Sri Lanka
may need to be pragmatic and take a middle path. Two engines may be better
than one. There is no question that the state sector is inefficient and corruptible.
This has to be changed. But who can say the private sector is not? Take the
example of the central bank bond issue. In the modern world, the same/similar
business excellence models apply to the private sector as well as to public
sector. Sri Lanka should take a leaf out of these developments.
This is the critical last point. Prime Minister has announced a new wave of
liberalization by the next budget 2018 (DailyFT, 20 July). That is all fine. A
business-friendly environment is undoubtedly necessary to boost exports.
Barriers to trade and productivity should be eliminated. Three-year economic
policy statement would be unveiled, as reported. Although short of a five-year
economic plan, this is undoubtedly a welcome development. The PM has also not
neglected the workers or the work force in his speech. He has also extended open
arms to China, Japan and India while addressing the European Chamber of
Commerce. That is the declared policy.
However, in the website of his Ministry of National Policy and Economic Affairs
under Economic Policy Statement the following is what appears as a preface.
Our economic strategy is focused on interacting with this giant economy in the
Indian Ocean. What we are hoping for is a lawful economic environment that will
set the stage for sustainable development. Today our economy need no
governance, yet a regulation. Hon. Prime Minister Ranil Wickremasinghe says that
the aspiration for a prosperous country could be realized merely through more
and more liberalization of the economy.[1]
It could be a distortion by the webmaster. However, it implies the strategy is only
focused on India! It is also more than ambiguous, when it says, Today our
economy need no governance, yet a regulation. Through experience, it is
obvious that good governance is necessary both in the public and private
sectors. It is also wishful thinking to say, aspiration for a prosperous country
could be realized merely through more and more liberalization of the economy.
Necessary liberalization is fine, but not to repeat things like bond scams. If the
idea is to achieve prosperity merely through liberalization, it could also mean
the complete neglect of the public sector, agriculture and welfare of the people.
The government needs to clarify these matters.
[1] http://www.mnpea.gov.lk/web/index.php?lang=en Accessed on 22 July,
5.00pm.
Posted by Thavam