To be nationally poor is a public choice 0 782

By Bradley Emerson MBA Sri Jayawardenepura

The inception of my career as a banker in the late 70s was about the same time that Sri Lanka acted on a revolutionizing move to become the first South Asian nation to liberalize its trading economy. Ever since I have been hearing Sri Lanka as a “developing” nation. Fast forward to four decades and several regimes later we are still a “developing nation”. What is it to be a developing nation; What is to be a rich nation and what is it to be a poor nation. The Department of Census and Statistics records Sri Lankans per capita GDP for the year 2019 at $ 3,852 per annum whilst Singapore, who’s open trade regime were developed much later recorded a thumping $65,977. Singapore’s benchmark strategies are spoken of at many forums to highlight its economic ascension from what was once a poor country with a GDP per capita of only $320 in par with Sri Lanka. The success story of Singapore’s economic and demographic development surpasses a single systematic exposition, however, it is crucial in this context to act as an expediential comparison and maybe give an insight or two for Sri Lankans.

Following an economic growth of just 5.3% after the civil war ended and low fiscal revenues combined with mountains of debt,Sri Lanka is classified as among the developing economies by the United Nations Secretariat (UN/ DESA). Comparatively, Singapore ranks sixth highest in the world for a country that possesses half the natural resources as Sri Lanka.

How do we allow this term to dominate us?

I have been hearing of Sri Lanka being trapped by this economic definition for as long as fifty years. Our present standard of living is at least ten times behind that of Singapore, and our drastically slow pace is only weighed down by our debt portfolio. Whilst searching for answers, numerous evidence pointed to the lack of persistence and political instability coupled with low demographic development with a relatively large population earning an income that is just enough to survive.

A radical change is required to overcome this crisis, but what will continue to be a barrier to growth is only ourselves, which arrives at the core lesson to be learned before we begin our mandate. To be nationally poor is a public choice; to navigate this crisis is dependent on our determination. Only we are stopping ourselves from capitalizing on our potential.

Mynt (1973) suggests the key indicators of economic development are the level of per capita income, rate of growth of per capita income, and the widening inequality in the distribution of income, but there is much debate on the contribution of economic production to the country’s prosperity. Sri Lanka’s current account deficit in 2018 amounted to $7.57 billion which was exacerbated by a challenging external environment with the Easter attacks and now the latest COVID-19 outbreak. The country’s export performance declined from a growth rate of 4.1% to 1.44% by the end of 2019, losing out on much-needed foreign exchange that can be utilized to pay off debts. With little to no reserves and a declining rate in the exports, a call for transformation in the policies is imperative to focus on export growth.

Performance into perspective:

In 1969 following the independence of Singapore from the Malaysian Federation, a Singaporean Dollar was exchanged at $0.35 against the Sterling Pound whilst the same could be purchased at SLRS 13.40 in Ceylon. Since 1981, the monetary policy in Singapore was centered on the control of the exchange rate, and today, their currency is equal to £0.57 whilst the SLRS is 237. How did we get here? Is it not by choice? Sri Lanka like any other developing nation is a political economy. What does it mean? It means that every economic policy has the flavour or influence of the political agenda of the incumbent regime. The result is that our direct debt to GDP is around 70% and nearly 90% of our national revenue is expended to service these debts. How do we survive? Just imagine if 90% of your family income is used to service debts, how could you sustain your family without sinking deeper into debt?

There is no doubt that our country is in dire need of an effective policy to reduce an approximate one billion trade deficit a month. The deficit stems from importing more than we export which impacts our reserves. The exchange rate against the dollar reached an alltime high of Rs. 191 in April 2020. The early 2000s experienced a 2.8% yearly depreciation and it was as high as 9.1% for the four year period of 2015-2018 alone. The public has failed to grasp the reason behind the depreciation over the rupee – but the Central Bank’s quick-fixes through injection of money contributed towards a further hindrance to the growth.

In attempts to achieve the government’s export target or rather reduce the trade deficit, stringent measures and banning mechanisms have come into play. However, the effectiveness of these proposals are far from favourable along with strong opposition from the public. From an accountant’s point of view, where we are today as a nation with political interventions on the implementation of policies, fiscal account deterioration and racks of debt; we will easily be written off as ‘bankrupt’. Sri Lanka is in a fight for survival and it is our responsibility to help the nation get back on its feet.

An appeal for long-term change:

The late Prime Minister Hon. Sirimavo Bandaranaike took oath in 1960 as the world’s first female Prime Minister, yet another disruption against the conventional norms in the political economy. Her regime prioritized incentivizing the local industries and capitalizing on domestic knowledge for production. It is agreeable that the lack of an open economy failed to drive economic opportunities, however, the brutal “produce or perish” notion encourages self-sufficiency that which we lack today due to our dependency on international trade.

‘Tea, rubber, cocoa and coconut is a common man’s answer to what our main drivers of export revenue were, yet it is shameful that during 2018, our imports consisted of 5.13% of rubber and 1.89% of tea. We even import coconuts.

Lee Kuan Yew, the founding father of Modern Singapore implemented systems based upon the development of the country’s resources to improve trade and the quality of life. A notable example being the revival of the Singapore River around which businesses and factories developed. The project which took up to 10 years created a foundation for innovation, improvements in transportation, tourism, and water supply.

We possess abundant resources for our island to thrive; the agriculture industry, tea destinations and massive potential to become a global tourism hub. Known as the pearl of the Indian Ocean, our island is at a prominent location which is of the essence to create a competitive advantage. Yet, it is ironic that we import salt and fish when the sea surrounds us. In 1978 when I embarked on my first trip to India, we carried bags full of spices to be locally sold to a country where the demand for our spices was unaccountable but now we are importing spices from India. The largest contributor to export revenue of spices in 2018 was Cinnamon, which totaled at only 11.1% traded to India. The great voyager Vasco da Gama referred to then Ceylon as the land of spices and we chose to lose out on that status.

Paddy cultivation in Sri Lanka traces its roots back to 161 B.C. when Sri Lankans were skilled at making a living out of this industry. Rice crops occupy 34% of total cultivation with over 1.8 million of our population engaged in producing around 2.7 million metric tons of rice annually. The trading of cheaper and quality rice from other nations exerts pressure on Sri Lanka to improve on production. Sri Lanka has the capacity to gain international recognition as the primary rice exporter as well as create a source of employment to improve the livelihoods of many.

However, the policymakers must prioritize their earnings to invest in equipment for pre-harvest operations and marketing of the produce. According to research done by TB Adhikarinayake, the majority of the problems farmers face are related to high losses in the production chain and lack of skilled workers.

The Choice –
a change in direction:

Where are we heading? We are importing what we can produce, increasing the trade deficit, increasing the pressure on the exchange rates, and depriving our children of foreign education. In such a competitive world, the need to solve the Balance of Payment crisis is pivotal to managing the country’s finances in order to avoid a disastrous downfall. The government’s attempt to reduce the deficit by imposing import controls will only create inflationary pressures in the country if we don’t optimize the encouragement given by the government to grow.

Science and technology have given us “formula one” seeds for rice, chilies, and potatoes which can treble the output per acre. Are we making a choice to optimize these opportunities to be self-sufficient?

We have a choice, to change our destiny. Can we, yes, we can! We are poor because we chose to be so. Likewise, we can make the choice to be rich as a nation. Let’s look at a change in direction by seizing opportunities to make exports competitive, using innovative methods of technology, and by utilizing our human resources. It is about time we make use of our knowledge in agriculture, natural resources, land, diverse cultures, and our climate to attract foreign investors.

Every generation has a responsibility towards creating a sustainable nation. It is our choice to change directions to reach the destination we intend. It is our obligation to ensure that majority of our children do not experience a poor quality of life, rather a high standard of living and not to be referred to as people of a poor nation.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *

Political Leadership-A Matter of Age 0 792

Political Leaders a Matter of Age

By: Dr. Kenneth De Zilwa

Perspective

Age has become an increasingly discussed topic when it comes to our political leaders (i.e. Parliamentarians), the arguments have been that we are unduly saddled with older politicians that make the parliament system meaningless as it prevents the infusing of young energetic and more progressive leaders in to governing the country. Well, yes this is definitely one aspect that is on the table and it seems to be the dominant view shared by many of whom are frustrated about the responsibility and accountability of these members albeit their ability to comprehend the demands of the younger generations. Therefore the proposers of this debate are eager for changing the status quo. On the other hand there are those who contend that age is just a number and the ability of the person irrespective of one’s age is what matters in a participatory democracy, for people have many routes to representation and redress.

In order to really get to the bottom of this debate we need to analyse and understanding the dynamics of the global public office and the trends in life expectancy.

Scrutiny of Public Office

The evolution of democracies has meant that parliaments are indispensable and now are deemed to be an integral part of the institutional framework that represents the people’s democratic choice. The choice of selection (be it liberal or conservative or its varying compositions) is of course based on their own perceptions of what the future should be transformed into considering the stage of its economy, social and environmental concerns and the overbearing global geopolitical trends. Irrespective of country-specific rules, the role of parliamentarians, (of both men and women), remains the same: to represent the people and ensure that public policy is informed by the citizens on whose lives they impact. If we look at the political context of each country we find a unique disposition in their selection process, however, parliaments and Parliamentarians do face a common challenge, that is, how best to consult citizens and keep them informed about parliamentary deliberations and how such deliberations would eventually shape the people’s lives (for better or worse, as public policy cuts both ways). What is important here is that the relative maturity of parliamentarians is called into focus, as the people are now looking for responsibility, accountability and also the bottom-line, of delivery.

The UNDP Global parliamentary study undertaken in 2012 indicated that there are 46,552 Members of Parliament (MPs) in the world. Of which there are 8,716 women parliamentarians, or 19.25 pct.  of the total number of MPs. While the global average number of parliamentarians per country is 245.China has the largest parliament with 3,000 members in the Chinese National People’s Congress. The world’s smallest parliament is in Micronesia, with just 14 MPs.  While the global average age of a male MPs is 53 the average age a woman MP is 50. Sub-Saharan African MPs have the lowest regional average age at 49 with Arab countries the highest at 55.

Subscribe the BiZnomics magazine for full article

 

Monetary Easing – Central Bank’s Policy Dilemma Comments Off on Monetary Easing – Central Bank’s Policy Dilemma 857

The Monetary Policy dilemma is nothing new as we have seen US, Japan and other developed economies question the monetary policy tools used to stimulate or contract the economic activity. The US president recently blamed the Federal Reserve Bank that its action of raising interest rates has slowed the US economy. A similar trend has also been seen in India in that the Reserve Bank has reduced its policy rate in the eye of national elections. The Reserve Bank of India Monterey policy cuts its benchmark repo rates to 6.25 percent citing slow economic growth and sharply lower inflation. The committee also change its monetary policy stance ‘Neutral” from the previous outlook of policy tightening. Monetary neutrality comes just a few months after Urjit Patel the former governor resigned amid widening differences with the government over various economic and regulatory issues including the government perception that monetary policy was too tight.

Monetary-EasingThe new governor Shaktikantha Das said that after the announcement on the rate cut the slowing down in the economy and sharply lower inflation opened up for policy action. The need in his view is to stimulate private investment and consumption to address growth, given that the inflation target had been met. India’s inflation rate has been fallen from an annual average of about 10 percent to 3.6 percent in the 2018/2019 financial year. The phase of price increase is now below the target set in the reserve bank inflation targeting framework of 4 percent with a range of 2 – 6 percent plus or minus. In January Indian industrialists met the Governor of the Reserve Bank and appealed for a 50 percent rate cut and reduction in bank’s capital ratio to facilitate the flow of credit to industries to reduce their cost.

Sri Lanka Prime Minister has also appointed a committee to examine why banks have not reduced lending rates in spite of the fact that the Central Bank has reduced rates on two consequent sessions.

The recent announcements by Monetary Board of the Central Bank of Sri Lanka that the reduction of the Reserve Ratio on all deposits of commercial banks from 6 percent to 5 percent from March 1st 2019 following a reduction in the reserve ratio from 7.5 percent to 6 percent in mid-November 2018 comes in at a time when Sri Lanka is facing an daunting task to stimulate the economy given its below potential growth rate achieved over the past three years .Bank maintained their policy rates on deposits and lending facilities unchanged at 8 and 9 percent respectively on both occasions. The reduction in the reserve ratio in February 2019 is justified on the ground that some policy intervention by the Bank is warranted to address the large and persistent liquidity deficit in the money market although is natural on the change of policy rates.

Monetary Policy review by the Monetary Board in February and March have noted the following;

  • The real economic growth remained subdued at 3.2 percent during 2018, compared to a growth of 3.4 percent in 2017. The growth of industry activities slowed down significantly to 0.9 per cent during 2018, mainly as a result of the contraction in construction.
  • Real GDP growth will remain moderate in 2019 as well. The continued low growth emphasizes the need for implementing growth enhancing structural reforms expeditiously.
  • The deficit in the trade account contracted with the continued growth of exports alongside a decline in imports in response to the policy measures to curtail non-essential imports. Increased tourist arrivals in the first quarter of 2019, improved earnings, although workers’ remittances moderated during the first two months of 2019.
  • Proceeds from the issuance of the International Sovereign Bonds (ISB) helped increase gross official reserves to an estimated US dollar 7.6 billion by end March 2019.
  • Noticeable growth of earnings from tourism continued to support the current account although worker remittances marginally declined in 2018.
  • The recent uptick in inflation was driven by the upward revisions mainly to prices of fuel but inflation expectations indicate that it is likely to remain within the desired range of 4-6 percent in 2019 and beyond, with appropriate policy adjustments.
  • Credit extended to the private sector decelerated to 13.6 percent during the first two months of 2019, from 15.9 percent in December 2018. broad money (M2b) also slowed down during the first two months to 14.4 percent in February 2019 from 13 percent in January 2018 of the year. A growth of around 13.5 percent is expected in private sector credit in 2019, while broad money (M2b) is expected to grow at around 12.0 percent in 2019.
  • The Monetary Board views that broad money (M2b) growth is likely to support economic activity adequately without creating excessive demand driven inflationary pressures.
  • The domestic money market has improved reflecting Call Money Rate declining by 45 basis points so far during 2019, however other market interest rates continued to remain at high levels thus far in 2019. The Central Bank may implement mechanisms for more effective downward adjustments in market interest rates.
  • At present there is a slowdown in private sector credit. A Working Committee appointed on the directions of Prime Minister Ranil Wickremesinghe is expected to submit a report recommending necessary actions to reduce the private credit interest margin.

The Central Bank Governor Dr. Indrajit Coommaraswamy explained at the press conference in February 2019 that the policy intervention to inject LKR 60 bn was to ease liquidity shortage. This liquidity shortage continued to prevail despite the liquidity injection of LKR 90 bn in November 2018 through a reduction in reserve requirements. The Governor indicated that liquidity shortage in the market is around LKR 100 bn and expects that the market to find the balance in the shortfall of around LKR 40 bn. He also hinted that large liquidity injections could spill into more imports, thereby adversely affecting foreign reserves and the exchange rate. The governor’s view was that the lower interest rates encourage consumption related loans, with the public opting to import cars or to invest in construction industry that has a significant import content. The Governor’s dilemma is how growth could be fostered without undue pressure on external reserves.

International Reserves of Sri Lanka declined to USD 6.2 bn against predetermined short term (less than 1 year) liabilities which stood at USD 6.5 bn placing the Central Bank on a negative reserve position. The reserve position was USD 6.9 bn in December 2018, down from USD 07 bn in November 2018. The reserves are partly protected with 200 percent cash deposit margins on import of motor vehicles and 100 percent cash margins on consumer durables. These policy actions have substantially reduced imports in recent months. The test is whether the exchange rate will remain stabilized once these direct controls on imports are removed.

Monetary Easing Chart

Source: Central Bank of Sri Lanka

As shown in the chart, nominal interest rates have moved steadily in an upward direction although the differences between them and the NCPI Core Inflation Rate have narrowed owing to a steep increase in the core inflation rate. The core inflation rate which has been well below the target range of 4 – 6 percent has entered in to inflation target range in January – March 2019. It is likely that this trend may continue with seasonal demand and the fuel price revisions that have already taken place.

Expressing optimism on the inflation outlook, Governor Coomaraswamy forecasted that inflation would remain in the range of 4 -6 percent although it is volatile to fuel price adjustments and other administrative price revisions. He explained that the uptick in inflation rate in January to March 2019 was due to non-food inflation driven by education and house rentals. A further upward pressure is expected from fuel price adjustments and likely administrative price revisions on cement, milk powder and LP gas.

Monetary-EasingThe monetary policy review underpins the underlying risks of a ballooning trade deficit. Export growth remains modest. Import growth currently remains subdued due to credit restrictions on imports. The removal of such restrictions may require to let market fundamentals to work in terms of the Government policy framework particularly in the context of the ongoing IMF extended fund facility to improve the overall macro-economic conditions. But such relaxation remains a challenge in the context of slippages in government budget and recovery in imports following the removal of deposit margins of imports. The exchange rate appreciation may short live, once imports picked up in the second quarter and outflow on oil imports at high prices and values due to prevailing electricity shortfall. But it is doubtful whether in an election year imports growth could be kept under policy control for long. Reserves are kept stable and exchange rates allowed appreciating in the backdrop of short term inflows from external borrowings and subdued imports in tourism and remittances are perhaps the only supporting elements from the 1st quarter 2019 particularly, motor vehicles, milk powder and consumer durables.

Tourism and remittances are perhaps the only supporting elements from the point of view of the stabilizing balance of payments but remittance inflows of around USD 07 bn too have slowed down. The flexibility available to the Central Bank to conduct market based monetary policy in election times (2019 May) remain illusory as pressure is building from the fiscal slippages, recovery in imports and private sector for low interest rates. Exchange rate may remain vulnerable and deficits in market liquidity are likely to persist. Bank though, have reported large profits also subject to rising non-performing loans, accounting requirements, higher capital requirements and taxes. Excessively high real interest rates may be a reality with modest growth in GDP as Governor anticipated in February, 2019.

The Monetary Policy Review announcement on 10th April 2019, came at a time that the 2018 economic growth data pointed to a further slowedown in GDP growth of 3.2 percent and also following the fiscal policy stance announced in the 2019 National Budget. It will also provide the Central Bank to respond through its policy stance to the 2019 National Budget. Yet the Central Bank did not change its position on the policy rates expressing downside risks and concerns over inflation and external stability. The concerns have risen as to whether current monetary policy stance is appropriate for the country’s tumbling economy. Some also anticipate monetary policy easing in view of continued slowdown in economic growth.

However, the recent staff review by the IMF advised the Central Bank of Sri Lanka to continue to maintain a prudent and data dependent monetary policy standing ready to tightened policy rate should inflationary pressers re-emerged.

By: BiZnomics Special Economic Correspondent