During the election campaign in August last year, the ministers of the “100 day” government had emphasised that raising spending and giving salary increments will give a boost to the economy, repeating the standard Keynesian doctrine.
The writer in his previous article published in Mirror Business in November mentioned that if the government spending is financed purely by taxes, growth will be neutral, as somebody’s money in the private sector will be taken and given to the state sector. If the spending is financed by excess liquidity through central bank credit, or actual printed money, expect foreign reserves to go down. Actually what happened was, as clarified by Central Bank last week, the private sector credit has grown threefold in 2015 to record Rs.691 billion from Rs.224 billion in 2014.
Nevertheless, the economy has recorded a relatively lower GDP growth rate of only 4.8 percent during the year 2015. This low growth rate is in spite of a series of massive borrowings far in excess of US$ 6,000 million raised through so called “development bonds” and other financial instruments issued during the last 15 months to mid- March 2016.
Compare economic performance of two regimes
During the previous regime under President Mahinda Rajapaksa, following the end of the armed conflict with the LTTE, Sri Lanka continued to experience strong economic growth up to December 2014. Even the multilateral financial institutions at that time praised Sri Lanka saying it was firmly on a path of economic transformation. The previous government had been pursuing large-scale infrastructure development and other reconstruction and rehabilitation projects in its efforts to spur economic growth not only in urban areas but also in rural, war-torn and disadvantaged areas.
In terms of the famous Harrod-Domar model of the development economic theory, it was likely that more foreign direct investments (FDIs) may flow into the country followed by these developments, as the return on investment of those funded projects would essentially be higher with more efficient infrastructure in place.
Sri Lanka’s economy was among the fastest growing in South Asia.
However, the current economic downturn is quite unexpected. One of the major concerns in the Sri Lankan economy is the “negative balance of payments” situation and the depletion of the external foreign reserves. The rupee is around Rs. 137 per US dollar with the Central Bank intervening to keep the currency falling while printing money heavily to keep interest rates down. Sri Lanka’s trade deficit widened in 2015 as exports fell, dragged down by lower earnings. However, the oil import bill has come down significantly and that alone should give a positive balance of payments in the foreign reserves.
Further, the import prices of rice, sugar and crude oil prices declined compared to year 2014.The Sri Lankan rupee depreciated against the US dollar over 9 percent during the year2015. Due to the rupee depreciation, the prices of essential food items have gone up despite government announced a reduction of prices of a series of items including coriander, which is good as a remedy for viral flu. Unfortunately the Sri Lankan exports are not doing well. The tea prices in the Colombo auction have decreased during the year 2015 compared to last year, mainly due to subdued demand from main export markets such as Russia and Middle -East. The Central Bank said that the current account deficit during the eleven months up to November 2015 increased substantially and the official foreign reserves have come down to some US $ 5.5 billion.
When former President, Mahinda Rajapaksa handed over the government on 9th January 2015, the foreign reserves stood at US$ 8.2 billion, which is equivalent to 5.1 month of imports. As for the economic performance during 2014, the economic analysts here and abroad have pointed out that the Sri Lankan economy fared well. During the year 2014, the total imports were US$ 19 billion and exports were US$ 11 Billion. Although the trade deficit of US$ 8 billion was recorded by end December 2014, that was more than off-set by remittances from migrant workers and foreign exchange from tourism totalling US $ 9.4 billion.
It is pleased to note that Sri Lanka’s annual average inflation has bottomed out at 3.0 percent by February2015 and corresponding figure from March 2013 to end February 2014 was 6.0 percent. Further the government budget deficit was curtailed to 6 percent of the GDP, and that was the lowest since 1978; when he took over in 2005 it was 7.5 percent of the GDP. Out of US $ 11 billion exports, textile and garments and tea and rubber contributed US $ 7.2 billion which was 65 percent. When we take into account the tourism and migrant remittances, it was 86 percent of the total imports.
Is debt servicing the real issue?
One of the criticism against Mahinda Rajapaksa was the then government resorting to heavy borrowings, especially from China. Contrary to popular belief, the Central Bank annual report presented in April 2015 revealed that the total external debt as a percentage of GDP was at 57 percent as at December 2014 against 55 percent of the GDP when he took over the government in 2005. It is true that debt servicing is on the high side totalling US $3.4 billion but end of the day it was a current account surplus as at December 2014.
This was possible due to foreign inflows to government amounting to US$ 4.8billion in 2014. On the other hand, during the eleven months to end 2015, the foreign inflows to government have drastically reduced to US$1.1billion only. As a result, the balance of payment (overall BOP) has recorded a deficit over US $ 1,000 million in 2015 compared with a healthier surplus in the overall BOP by end 2014. That is how Mahinda Rajapaksa handed over the treasury to the present administration with US$ 8.2 billion worth of official foreign reserves by end December 2014.
In that context, the annual debt service of around US$ 4 billion this year could have been easily managed through a more prudent fiscal and monetary policies.
The government in mid-November last year reduced the VAT rate from 11 percent to 7.5 percent and another bracket increased to 12 percent. This was implemented only for two weeks during this year and reverted back to the previous rate of 11 percent. However, the Prime Minister has recently announced in Parliament that the VAT rate would be again increased to 15 percent with effect from April 2016. Adding insult to injury, he further announced the reintroduction of a new tax in the form of a “capital gain tax” after a lapse of 29 years. This would affect the investor climate as the “marginal propensity to save” is higher for the “rich” compared with less affluent class.
Development beyond neo-liberalism
Bill Gates, founder of Microsoft has once said at a function that “neo-liberalist” economic policies have improved the life of billions of people, but it has also left out billions of people.
The present “national government” has only enabled the elected MPs and even defeated candidates to carve out portfolios and privileges in parliament, thus wasting valuable tax payers’ money. The innocent citizens continue to pay direct and indirect taxes to the general treasury to maintain a large cabinet of ministers and non- cabinet and deputy ministers.
The overall impact on consumers, employers and public finances is hard to pin down. It would increase demand for goods &services as some 92 Ministers together with their family members would start spending money. Spending should fuel growth at least in the near-term. The government budget deficit as well as the negative balance in the current account will probably rise, as the MPs will go aftervehicle imports by using the duty free permits allocated to them.It seems that the so called national government has so far failed in addressing the pressing needs of the people and improve their quality of life. They have not even been able to avoid the economic down turn.
Whilst commending the high economic growth achieved during the last five to six years to end 2014, it is necessary to critically analyse whether the benefits of growth have been trickled down among the majority of the people of this country and value for money created with these projects. In fact, President Mahinda Rajapaksa himself at the launch of the Central Bank annual report in April 2012 had reported to have said that there is no point in having high growth rates if the people are not enjoying the fruits. Even the opposition members have commended the then President for making such a statement at the release of the Central bank report.
This is a perennial issue connected with economic growth and equality especially when adopting a more liberalized economic policy. Joseph Stiglitz-former Chief Economist at the World Bank and winner of the Nobel Prize for Economics, in his book titled ‘Globalisation and its discontents’ mentioned that, “Globalisation today is not working for many of the world’s poor for much of the environment”
Isn’t it unethical to increase the number of ministers?
During the recently concluded parliamentary election campaign, the UPFA has categorically stated that they would not join with any party to form a national government. Their manifesto in also silent on supporting for a national government. There is no mandate given by the people for the UPFA elected members to support this move.Further, there appears to be a procedural flaw in obtaining the required approval at the executive committee of the UPFA. Therefore, neither the SLFP nor the UPFA can be included as a party in the so called national government formed in terms of article 46(4) in 19th Amendment. One could argue that the due process of law has not been followed in forming the national government.
The concept of sovereignty of the people as per the 1978 Constitution means the authority of the government is created by the consent of the people.The government is granted with the people’s power ‘sovereignty’, on trust, in order to serve the public. This is the reason why in most democratic countries, governments are known to be ‘by the people for the people.’ We speak about a limited government under unlimited sovereignty. Sovereignty includes franchise and it is a fundamental right. A pertinent question would be whether the citizens’ fundamental rights have been violated? Isn’t it unethical and bad in law to increase the number of Cabinet Ministers beyond the stipulated maximum of 30 under the 19th Amendment of the Constitution?It is the power of the people that is exercised by Parliament.
The writer is of the view that the main challenges faced by the country, namely the economic welfare of the people and true national reconciliation could be addressed only through a vision driven approach. The overall vision would have to be shared by the people of this country. Only then could we really build a strong and dominant culture, which is the necessary pre- requisite to attain economic& social wellbeing of the people. The concept of good governance would be one of the component in the shared value system and should not be the end objective. It has to be achieved by effectively
implementing an “inclusive growth model” through peoples’ participation at grass root level. Therefore time is opportune for the policy makers of the government to look at the issues from a fresh and open mind taking into consideration the social wellbeing &long term economic sustainability rather than adopting a narrow political agenda for survival. Otherwise, the peoples’ unlimited power, meaning ‘sovereignty’ can at any time make the government of the day null and void.
(The writer is the Chief Executive Officer of a leading publicly listed plantation company in Sri Lanka)