Sri Lanka’s economy during the last 60 years has been suffering from, ‘Kala-Sarpayogaya,’ a term widely used in astrology to describe erratic ups and downs in a person’s life and his inability to maintain peak performance for longer period, according to an economist.
Sri Lanka’s economic growth since independence is characterized by boom and bust cycles, which Dr.Priyanga Dunusinghe, an Economics professor at the Colombo University, attempted to attribute to vast resource gaps, particularly in the budget.
“Whenever the country recorded a higher growth, it was followed by a poor performance. To a certain extent we can say, this is a ‘self-killing’ growth path; in the sense, we failed to maintain the growth momentum. The country finds it difficult to sustain it (growth) for a longer period.
If I put it in Sinhala, this is called the ‘Kala-Sarpayogaya’ in terms of Sri Lanka’s economic performance. Our good performance has been followed by a weak or poor performance. So, we have failed in managing this situation,” Dr. Dunusinghe said, presenting a paper at the recently concluded annual sessions of the Sri Lanka Economic Association.
Meanwhile, former Central Bank Deputy Governor Dr. W.A Wijewardena said Sri Lanka’s economic growth has averaged 4.6 percent per annum from 1950 to 2015, but a growth of over 7.0 percent was recorded only in 6 years during this period.
“If you draw this growth rate, you will find certain spikes. So, you will see, we have long troughs and spikes and only in several occasions we have had above 7.0 percent (growth), so that Sri Lanka’s economy has failed to generate a sustained growth in the past,” Dr. Wijewardena who delivered the keynote address at the event noted.
A study undertaken by Dr. Dunusinghe, using data of over 50 years, has found that this erratic growth path was due to resource gaps seen in foreign exchange, savings and investment and more importantly, the budget.
“The growth will remain slow or constrained if fiscal gap acts as a binding constraint even if the other two do not,” he explained using the ‘three-gap model’ which uses fiscal gap as an extension to the ‘two-gap model’ used in economic theory.
Nevertheless, Sri Lanka’s economy over the years has been driven by higher budget deficits and it has been a main source of economic instability as such instant booms could not be sustained for long.
The course of correction successive governments followed in such instances was to resort to tough adjustments in the economy, such as austerity and monetary tightening, which are generally considered
This is completely opposite to how some of the South East Asian countries such as Singapore, Malaysia and Thailand have attained economic prosperity through surpluses in current accounts of their external accounts i.e. higher goods and services exports compared to imports.
Sri Lanka’s budget has been in deficit every year since the state budget development began except in 1954 and 1955 and more importantly the current account of the budget—the gap between the income and the recurrent expenditure—had been in deficit since 1987, meaning Sri Lanka had been borrowing even for its day-to-day expenses.
UNP Parliamentarian and a scholar, M.D.H Jayawardena, who served at the Ministry of Finance in early 1950s, stood strongly against unsustainable deficit financing as the country couldn’t afford to do so. But the policy was reversed when S. W. R. D. Bandaranaike, the fourth Prime Minister of Sri Lanka came to power in 1956.
Based on his study ‘Resource Gap and Public Investments’ Dr. Dunusinghe argues that there is a positive relationship between public investments and private investments, which is identified as the, ‘crowding in’ effect.
“Public investment attracts private investment and hence accelerates the (economic) growth process,” he explained.
Sri Lanka’s public investments have been hovering around 6 percent of GDP but the Treasury has been in the habit of slashing such investments every year when they realize they are going to overshoot the deficit target.
But this practice ends up hurting the country’s economic growth and people’s well being, as today’s investments yield higher returns in the future.
This is an opposite notion to ‘crowding out’ effect, where higher budget deficits chase away private sector investments in an economy as the government absorbs funds if otherwise available to the private sector for investments.
Sri Lanka’s domestic savings rate has been around 25 percent of GDP while the bulk of it is contributed by the private sector. The public sector has been a dis-saver, consuming more than it has been generating.
This has forced the government to borrow from the domestic market as well as from abroad i.e. domestic and foreign savings, to fund its public sector investments.
But successive governments have failed in their selection of the projects on which these moneys are invested in, as majority of such projects have failed to generate sufficient return to service the borrowed moneys and as a result the country faces the risk of heading towards a debt trap, Dr. Wijewardena cautioned. But the country’s headroom for further foreign debt is very much limited as Sri Lanka has already breached many or all of the debt matrices and thus should be prepared only to borrow to roll-over the US $ 5.0 billion sovereign bond obligations that are coming for due every year for three years from 2019.