The Sunday Leader

Macroeconomic Imbalance

  • Sri Lanka’s Continuous High Deficits, Cumulative Public Debt Bleeding The Economy

by Santhush Fernando

Continuous high deficits and cumulative public debt has been one of the driving factors behind the Indian Ocean Island economy’s macroeconomic volatility is adversely affecting the investment climate, one of Sri Lanka’s budding economist said recently.

“High government borrowing levels influence higher interest rates, crowding out private investment. Recent BoP (Balance of payment) weakness has been largely influenced by external debt repayments with implications for the depreciation of the Sri Lankan Rupee. At other times fiscal expansion drives imports, contributing to BoP stress and depreciation of the Rupee. Episodes of inflation in the past were influenced by then Central Bank’s accommodative monetary policy to ease stress on government debt servicing,” said Senior Economist Deshal De Mel at a public forum.

Financing deficit at present requires high levels of indirect taxation affecting consumer freedom and resulting in high import taxes and restricting domestic competition.

Economists in both Sri Lanka and overseas have long stressed that it was high time for  its economy to return to economic fundamentals and take a corrective approach towards improving Sri Lanka’s macroeconomic outlook.

“We had decades of bad management and economists had been repeatedly urging policymakers that bad performance in exports cannot be cushioned by remittances indefinitely,” Senior Lecturer of the Department of Economics of Colombo University – Prof. Sirimal Abeyratne earlier told The Sunday Leader. (See http://www.thesundayleader.lk/2016/02/07/blessing-in-disguise/)   In an exclusive interview with The Sunday Leader in May 2015 the renowned academic warned that Sri Lanka was moving towards a ‘grave situation’ in foreign exchange reserves.  (See http://www.thesundayleader.lk/2015/05/24/reverse-direction/)

During the previous regime, Sri Lanka celebrated when foreign inward remittances increased but in fact it was a cause for despondency and not jubilation, he added.

“Rising remittance is not an indication of prosperity but misery and inability,” Prof. Abeyratne lamented.  Migrant workers especially housemaids to Middle Eastern countries, undergo many untold degrading treatment and human rights violations abroad whilst their families to undergo many socio-economic problems, he pointed out.

“Although migration of unskilled labour has gone down, skilled migration is on the rise indicating that our economy does not have the capacity for skilled talent, which is regrettable.”

“Contrary to what many Sri Lankans think and to what successive governments have been trying to popularize, remittances is a miserable way of earning foreign exchange.”

“One of the worst features of the rising remittances scenario that existed prior to 2015, led to the postponing of our major economic problems. Now that our economy shaken, at least policymakers should realize that encouraging FDIs (Foreign Direct Investments), and enhancing and diversifying exports on one hand and reducing debt on the other is the only way forward,”

In 2011 inward remittances grew by a staggering 25% whilst in 2013 this growth moderated to seven percent. Although even in 2014 remittances increased by around 9.5% for the first time in recent history remittance inflows in 2015 dwindled by 0.5%.

Although the country’s gross official foreign reserves stood at US$ 7.3 billion by end December 2015, the Central Bank of Sri Lanka announced the overall balance of payment (BOP) posted a deficit of US$ 1,274.2 million during the first eleven months of the year, as against a surplus of US$ 1,628.3 million during the corresponding period of 2014.

In May 2015, the straight-forward academic warned that though good governance was important to any economy, taking steps in the right direction was equally important.

“One is to allow the foreign reserves to dwindle while we defend our exchange rate, which is what we are doing now. Or we can stop this intervention and allow the Rupee to depreciate.

Both will have painful consequences because we have taken many steps in the reverse directions since the beginning of the year.” The defending rate approach, despite maintaining a stable foreign exchange rate, will entice importers to spend more at the expense of exporters and other foreign exchange earners such as expat workers. On the contrary the depreciating rate approach will discourage importers at the same time acting as an incentive for inward foreign remittances and service exports such as tourism, IT exports etc.

Decades of post-independence nationalism and protectionism has left the majority of Sri Lankans thinking that allowing the Rupee to depreciate is a ‘dirty’ option.

“We have been talking about the need to have long term policies for a long term now. 10 years ago we were talking about it and here we are still today deliberating about it…. Previous government was not least bothered during the last 10 years whilst I don’t see any indication from this government that it’s ready to get its act together as well,” he lamented.

1 Comment for “Macroeconomic Imbalance”

  1. With certain sections of the ruling regime and the administration having got used to diverting the wealth of the country to their benefit by devious methods and even twisting the law and cunningly arranging the facts in their favour, that having become a slave to this devious practice, the country will face a whip lash in protests and other disturbing experiences that would see us falling further into the chasm of destruction, if the re-adjustment and re-orientation of programs be implemented without careful attention. Good habits die hard, those strange better habits will die harder.

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