Living Beyond Means

by N. Sathiya Moorthy

Central Bank Governor, Dr. Indrajit Coomaraswamy

At a recent economic seminar in Colombo, Central Bank Governor, Dr. Indrajit Coomaraswamy, is reported to have said that the nation has been living beyond its means. He attributed the profligacy of the past to concessional loans with long-term repayment periods from international financial institutions like the World Bank and ADB, and also pointed out that the climb-up to becoming a ‘middle-income country’ meant that rating agencies and international capital markets dictated the terms and conditions for funding and growth, instead.

It does not require an economic expert like Coomaraswamy, who is also the CB Governor to say what he has said. In doing so, he also underlined the importance of three macro-economic fundamentals enabling sustained growth. These comprise reducing fiscal deficit to 3.5 per cent of the GDP, a flexible inflationary targeting regime, moving from a monetary aggregate, with assistance from IMF.

All of it is well said – but hard to implement, especially for a policy-planner and enforcer. This is especially so of containing fiscal deficit to manageable levels. It’s again a spiral. International funding agencies dictate ‘commercial terms’ on matters like deficit-financing if only to ensure that nations remain economically afloat, to be able to repay the loans received with gay abandon.

 

Flight of capital

Less said about rating agencies and capital markets the better. The former are as much unpredictable like Sri Lanka’s weather. The fine-print of their competitive calculations are worse. They are like the difficulties imposed on the demography just now. For a geographically compact island-nation, Sri Lanka has 600,000 people in the South suffering the worse consequences of near-unprecedented rains and floods, and 850,000 in the North and the East faced with the consequences of unprecedented drought.

Market investors, going by whatever name called, are not charity organisations. They are Shylocks of the worst case, and they are meant to be so. They may not demand their pound of flesh, and from near the heart, but their heart is always in the pound of flesh. Among them, overseas fund-managers are looking for attractive interest-rates for their own investors back home, which the schemes and systems back home do not promise, nor do they offer. But they are even more concerned about the principal, and ‘flight of capital’ is their way of ensuring that both stays – and within their hands.

Whether they seek to control the political system to ensure not only political stability but also economic prosperity is debatable still. But they are concerned about it, after all. Remember, what happened immediately after President Mahinda Rajapaksa’s election in 2005, and that of the equally Left-backed Government in neighbouring India, under Prime Minister Manmohan Singh.

In both cases, there was this pattern of local stock markets crashing immediately, and forcing the Left constituents of the ruling coalition shying away from dictating economic policies to the government leadership. In the case of Sri Lanka, the more recent ‘Central Bank bond scam’ has also made the polity and society nervous about the institutional mechanisms that are supposed to be in place and in order – precisely to do things Coomaraswamy and his scam-stained predecessor, Arjuna Mahendran, were supposed to be straightening.

Today, much of Coomaraswamy’s time is expended, investing as to what went wrong, and how to repair it. Going beyond individuals and institutions, there is also the systemic scheme of the political masters, who have learnt to ‘live beyond the means’, which is what Coomaraswamy has talked about.

 

No free lunches

It is not about political corruption, which is a virus that is all-pervasive and has not left any country or government. Some learn to hide it, some know not how to do it, and get caught at it. This has become as much true of democracies as with dictatorships or whatever form of government the human mind can imagine and institutionalise.

There are no free lunches in politics. Winning elections in democracies is no mean affair. Whoever wins – or, loses – has expended so much money on it that either he should have started off as a corrupt politician early on, or should have financial backers, who would have fixed a price on his victory. The rest of it follows. They could be domestic or overseas investors, or foreign governments, or one masquerading as the other – or, each other.

There are no free lunches for the voters, either. Only that they too prioritise, but their prioritisation at election-times ends up becoming acarte blanche for things that they did not intend voting for one over the other. Like the Sri Lankan voter giving Rajapaksa two terms in a row. They looked for a leader who would stand by the armed forces, for defeating the LTTE, and without giving in to ‘international pressures’ on a cease-fire of the LTTE’s choosing.

Yes, the voter needed development and jobs, too. But he did not bargain for the Hambantota port and the Mattala airport. They did not even bring the promised jobs, leave aside medium and long-term businesses, which could have changed the face of the local economy, whatever the long-term costs in terms of repayment with interest and schedules thereof.

It’s all like the present government’s poll-time promise to wipe out lawlessness and human rights concerns inherited from the Rajapaksas. There was a mention of a new Constitution, but neither the voter asked for details, nor was anything provided. Today, no one knows which one is a greater mess for future generations.

 

Price to pay

However, in economic terms, the price to pay in terms of Hambantota and Matara projects are much higher, but quantifiable. Whatever awaits the new Constitution in terms of social costs and political stability is not quantifiable in economic terms, not just now, all the same – but they are less harmful in terms of fiscal commitments, that too to third nations.

In this case, the price that the nation has had to pay is incalculable, too. The price to China is not only in terms of the return of principal and interest. There seems to be a hidden political cost, too, which did not seem to have been calculated, or was/is calculable.

Overnight, this one decision has changed the colour of the large Indian Ocean waters around the country. It is inconceivable that those that had drawn up the project over the past several years and decades – and the Rajapaksas were not the only ones – did not look at the source of investment, or the investor interest, or both.

Not that this has made the fiscal cost of returning the investment to China cheaper, either. Independent of all arguments of ‘sovereignty’ and ‘territorial integrity’, looking at outside government-level investments would have caused real and meaningful security concerns in the Indian neighbour, and for very valid reasons.

Today, in the ever-changing geo-strategic global re-arrangement, a foothold for China at Hambantota and Matara – or, for the US, but less so India – would turn away other nations and their ocean liners and airliners, especially in times of anticipated adversities. For the immediate, there are also no answers to creating jobs by their tens of thousands, as the Rajapaksa regime had indicated. This would remain so, now and ever as the incumbent government is keen on selling Sri Lankan real estate to another ‘sovereign nation’, say, China in this case.

 

Continuing travails

Right now, the Joint Opposition (JO), identified with the Rajapaksas, has claimed that the government is working towards trading 60 per cent stakes in Matara airport to India. Whether true or not, they need to answer two specific questions, handed down by the Rajapaksa Government. One of them is economic and the other is political.

One – how did they expect to return the investments to China while accepting such massive loans as investments? If they can teach their trick to the incumbent dispensation, the nation would be saved. It would have been saved even from the continuing embarrassment of selling Sri Lankan ‘real estate’, which they themselves certified as of ‘prime economic value’ to other parties/nations, without retaining it for the nation itself.

Two – politically, how did they expect to address issues of concerns, not only to the Indian neighbours but also to fellow Sri Lankans. It is sad but unforgettable – and unforgivable – that the present-day rulers, whether in government or in the Opposition when the Rajapaksas ruled – were very much a party to the deal, either through the Cabinet approvals that they had voted for, or by maintaining silence when they should have spoken out.

The travails continue. The very same people who settled for silence under the Rajapaksas are now again ruling the government, but do not speak out about what is wrong with their own perceptions and prescriptions. At least the rest of the country is convinced that all is not well in the State of Sri Lanka, and with the state of the nation’s economy.

There still seems to be some kind of a political consensus nearer home about engaging with China and addressing Indian concerns. That is on the political front, but with economy playing its part. What the nation needs instead, or alongside, is a consensus on political economy, with a broad policy agreement across the political chess-board, where future governments and generations could erase a dot above the ‘i’, and change the angle of the cross across the ‘t’.

 

National commitment

For that again, the initiative rests with this Government, as over the promised Constitution-making. For economic problems and fiscal commitments made by one government or generation have implications for very many future generations. Even solutions would have to be found with those generations in mind.

Until such issues are addressed earnestly and follow-up measures taken with national commitment and sincerity, Sri Lanka would continue to live from ship-to-mouth. Earlier, it used to be only in terms of food, today it is more so about investments and employment, and consequent family incomes and governmental revenues – not necessarily in order.

Not that such an approach would produce instant results. Instead, it could at least lead to a situation in which Coomaraswamy’s successors in the unimagined 22nd century would not have to go back to the Central Bank’s mainframe, download the incumbent’s current speech and whitewash it as his/hers!

For, what even Coomaraswamy has prescribed now – as many of his predecessors before him, and possibly downloading from the IMF website of some kind – only covers the short-term, but cannot be achieved over the short-term, either. The long-term beckons, but by then all of us would be dead, political masters, bureaucratic policy-makers and the population of voters, who are supposedly the beneficiaries. But Sri Lanka would remain, and would have to remain, too!

 (The writer is Director, Chennai Chapter of the Observer Research Foundation, the multi-disciplinary Indian public-policy think-tank, headquartered in New Delhi. Email:sathiyam54@gmail.com)

2 Comments for “Living Beyond Means”

  1. kumaran

    THIS IS RIDICULOUS! Every stupid Sri Lankan ( stupid because we are merely allowing these same bunch of idiot politicians to rape us). knows that we are in this situation because the expenses incurred by the State to meet the desires of the politicians is a large percentage of the total income of the State. We dont need experts.

  2. gamarala

    Wrong.
    There are “free lunches” in Sri Lanka, for politicians like saleable duty free vehicle permits, worth Rs 40 Million each, and additional ‘allowances’ to do their jobs in addition to salaries.
    They get a pension too, only after five years unlike public servants who have to carry out their duties with efficiency, diligence and fidelity to earn annual increments of salary, and pensions, after forty years.
    Why are massive money loosing state enterprises still allowed to function?

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