Only a proper national economic policy could fill Sri Lankans coffers!

Lack of a National Economic Policy!

With the global financial crisis of 2008 capital flowed into emerging markets to cause a post-war boom in Sri Lanka by the end of 2009 that enabled the previous regime to undertake huge unplanned projects to end up with many unproductive white elephant infrastructure developments. Though these cosmetic economic progress did help Sri Lanka to cross the border from poor to a low middle income country; the negative peace that prevailed in the six years to 2015, took racial disharmony to reach new heights. With violence aimed to disintegrate the racial and religious minorities, most of them made poor by the three decades of civil-war got poorer. With corruption, nepotism, impunity and lawlessness prevailing the previous rulers with power eat up all the benefits to become richer by 2015, to leave behind a heavy debt burden for the Unity Government to settle. Whereas, the present depreciation of the Sri Lankan Rupee against the US Dollar is not unique to Sri Lanka for many other countries too have seen depreciation of their currencies, includes India in the region as well as countries in other parts of the world like Argentina. It was caused by external factors forcing capital to flow out of emerging markets like Sri Lanka that increased the US federal reserves. The current global economic crisis causing the currency to depreciate heavily has forced the Sri Lankan government to think fresh and take steps to curb imports – a long felt remedy. Bitter Truth is these remedies would produce the desired results only if they bring all economic activities under one umbrella with a change in the mindset of all the ministers and their administrators to put country before self; for they have with power been for too long enjoying more perks than they deserve at a heavy cost to the country’s coffer that is perforated all over with heavy debts.

Sri Lankan people who brought the coalition government to power had high hoped in 2015, that with the mandate and momentum received, it would break new grounds both in terms of good governance and economy building. With the downtrodden masses affected by the civil-war still awaiting justice and the pressure continuing from the international community at the UNHRC on allegations of grave human rights abuses during the final phase of the war and together with delays in addressing the root cause of the civil-war and its ramifications on the minorities left unattended damaged the little good governance the Unity Government had gained and on the economy with the debt crisis threatening to gobble up the entire economy the government opted for rapid economic progress by continuing with mega development projects. Unfortunately with the Central Bank bond scam and its repercussions on the national wealth, the people lost no time expressing their disappointment by voting against the rulers at the LG Polls held early this year. The present financial crisis has brought out some hard truths and even though they are not fully responsible for it, the Unity Government is forced to deal with it.

Clearly the writings were on the wall and the Unity Government like all previous governments since the open economy reforms of 1977; for their economic policies have been locked on the path of liberalization, particularly greater integration with the global capital and goods markets. They have not been favourable for a viable industrial policy to replace imports with local production, as foreign aid for development has pushed for free market policies on the assumption that once the markets gets freed the economy will deliver. Unfortunately corruption and insufficient foreign direct investment did cause the problems and for too long Sri Lanka has had governments that were top heavy with large cabinets, causing subjects to be shared between too many ministers that made the government machinery very inefficient. Further rich men either supported ministers or they bought their way to became ministers have helped uncontrolled imports to increase far in excess of exports. With corrupt activities increased the open economy failed and poor got poorer to cause several uprisings and a civil-war and all were supressed by the state. Discussing reductions of imports was unthinkable and mentioning import substitution was not allowed with the Unity Government that came to power without a national economic policy and they continued to float with a cloud of neo-liberal beliefs about trade liberalization and the value of creating an international financial centre. Earlier, their bankruptcy of economic vision was seen with the most ridiculous proposal to import 65,000 steel prefabricated houses for a whopping US$ 1 billion. Thereafter much time was wasted debating this project in parliament and the media, while housing for the war-affected has been delayed and yet to be met by the government after three years of rule. These steel houses are unsuitable and are more than double the cost of brick and mortar houses that have been locally constructed for generations, is reflective of the economic stupidity that was prevalent among sections of policymakers. Whereas they should have taken necessary steps to address the eventuality of restricting imports and implement mechanisms to slow capital flight; at least now with the present crisis  the politicians have accepted that a problem exist and are talking about restricting imports. Perhaps they have realised their pushing the economy further down the path of liberalisation, would only lead to more suffering of the people and them losing the little remaining support.

The actions proposed by the government of tightening the grip on consumption imports, restricting the imports of vehicles and limiting the number of official vehicles to two for ministers would only bring temporary readies. Because with a coalition government the number of ministers have ballooned to unbearable number; who get duty free vehicles with transport allowances and use helicopters for local travels. In addition the two leaders tour the world on business are often accompanied by large delegations allowing for government members to import vehicles worth millions with over 75% of ministers’ secretaries are family members, all add to the cost of governance and the country cannot afford the waste public money.

The Unity Government has been finally forced to wake up to restrict vehicle imports including luxury vehicles; but it should be note that the country has failed to produce a substantial portion of food for domestic consumption. With falling investment in agriculture, in 2017, US$ 1,841 million went towards food and beverage imports, and which seafood imports accounted for US$ 214 million in our island nation possessing an abundance of marine resources. The government has not improved exports from these sectors, in spite of finishing the civil-war almost a decade ago. Until recently, however, discussing food production to substitute for imports was off limits as neo-liberal economists obsessed about exports, rejected the importance of the agricultural sector. They have even called for getting people off the land by creating a market for land and the people are now paying the price for the wilful ignorance and ideological arrogance of neo-liberal think tanks and policy makers. But even as the government was talking about restricting imports and measures to address the exchange rate crisis, the IMF delegation, which left a few days ago, repeated its commands of liberalizing trade, a flexible exchange rate and austerity in the form of fiscal consolidation.

The Budget due to be presented to Parliament in November and the Appropriation Bill was presented to Cabinet by the Finance Minister; as per which the annual state expenditure for 2019 would be Rs.4,376 billion includes the allocation for government expenditures of Rs.1, 456 billion for recurrent expenditure of the public sector and Rs.856 billion for capital expenditure. With a deficit of Rs.644 billion, which is 15.1% of the GDP and includes an allocation for debt servicing, the largest amount of money in the history of this country of Rs.2, 057 billion. Out of this amount Rs.1, 271 payable locally, while Rs.786 billion (USD 4,650 million) payable to foreign lenders. Accordingly for its debt servicing and financing of the budget deficit in 2019 the Government needs to borrow Rs.1, 944 billion from all sources.

Meanwhile, the highest amount of allocations has been made for Defence that continue to puzzle the tax payers in the country; who had expected this expenditure to reduce having finished the war almost a decade ago. The allocation for Defence in the year 2019 is Rs.306 billion. What is perturbing is the colossal amount that is being earmarked for Defence expenditure. This budgetary allocation for Defence will shoot up from Rs.290 billion in 2018, whereas only Rs.6.1 billion has been allocated to the very important subject of National Integration, Reconciliation and Official Languages. From the Rs.306 billion, it is reported that Rs.275 billion will go towards recurrent expenditure and Rs.32 billion will be utilized for capital expenditure. According to a report published in February this year by Strategic Defence Intelligence, which provides early market intelligence for the global arms industry, Sri Lanka’s defence spending will reach USD 2 billion by 2023, with a compound annual growth rate of 1.71% over the next five years. Again, the question is why should military expenditure be on an upward trend in Sri Lanka, in the absence of a serious terrorist problem, and at a time, when the country is neck-deep in debt running into trillions of rupees; as there is no justification for such a bloated military budget; money that would be better spent on poverty alleviation, education, housing, roads and of course in peace-building.

Almost four decades late, the proposed action of the government to curb imports would perhaps affect the high income earning people in the country, who should with their social consciousness accept and support this austerity drive of the government as it would all help to cut the demand for foreign currency. For they should realise that the government has no option this time due to the widening trade deficit coupled with slow capital inflows amidst rising oil prices that has exposed the vulnerability of the economy. In particular the Sri Lanka Rupee has been hit this year by an emerging-market collapse is the main reason for curtailing imports of non-essential or luxury goods; similar to steps taken recently by India and Indonesia with a view to bring back exchange rate stability by making imports expensive. Only a proper national economic policy could fill Sri Lankans coffers!