Economist wants major shift in policy to avoid Greece-like crisis

14 September 2015 03:32 am Views - 3090

Dr. Indrajit Coomaraswamy addressing the AGM as Planters Association of Ceylon Secretary General Malin Goonetilleke and Planters Association of Ceylon Chairman Roshan Rajadurei look on      Pic by Indraratne Balasooriya

 

•    Public needs to be educated and made aware of macroeconomics
•    Economic troubles due to budget deficit caused by election goodies and commercial foreign loans

•   Must move away from traditional industries to competitive high-tech processes

By Chandeepa Wettasinghe
The Sri Lankan public and politicians must move away from populist, entitlement mindsets if the country wants to avoid a similar fate as Greece, a leading economist said.

 “We need to shift mindsets from entitlement to productivity. Countries like Greece got into trouble because they didn’t make this transition. We’re nowhere near Greece, but we’re on a flight path to Greece, and we need to get off that,” Dr. Indrajit Coomaraswamy said at the Planters Association of Ceylon AGM.
 He quoted Singapore’s Lee Kuan Yew, who had stated that Sri Lanka’s democracy is a periodic auction of non-existent resources; referring to the people voting for politicians who make the most promises-which are at times  left unfulfilled.

“Populism is not only the fault of politicians. It’s the population’s fault too,” Dr. Coomaraswamy said.

 He said if the people were aware of macroeconomics, they would understand that such populist measures were sustained due to foreign aid which will not be forthcoming, now that Sri Lanka has promoted itself to the low-middle income segment.

 Ironically, this was achieved through infrastructure development funded through Chinese commercial loans, of which even the interest payments cannot be covered through state revenue.
 He also said that if people were aware, they would understand that the budget deficit caused through election goodies and loans is the root of Sri Lanka’s economic woes.
 “The budget is the party, and now we’re having the hangover. High budget deficit is high inflation. When inflation is high, interest rates have to be high. If your interest rates are higher than your competitive trading partners, your exchange rates come under pressure,” he said. While Finance Minister Ravi Karunanayake had said before the election that the exchange and interest rates will be maintained with the aim of fuelling consumption instead of savings in Sri Lanka’s import based economy, the rupee was let go recently.
 “Letting the exchange rate down and interest rates up is good. Keeping up exchange rates does not help small countries export. Our exports have fallen from 32 percent of GDP in 2000 to 15 percent in 2014,” Dr. Coomaraswamy said.
 He noted that East Asian countries like South Korea which were below Sri Lanka in the past had managed to become global powers through controlled budgets, which had allowed them to control their rates as and when they pleased.
 “We have had a budget deficit since 1976. These countries have had 2-3 percent inflation for years. In our case, we’ve had double digit inflation. It’s low now because we’re importing deflation from the world economy. That’s one of the main reasons,” he added.
 He noted that the way out of the trap is to focus on foreign direct investments and competitive exports which could only be done if subsidies which are given to protect traditional local industries are discontinued in upcoming budgets.
 “We have to shift from being a low productivity agriculture, low -tech manufacturing and traditional services like transport, communications, retail and wholesale, public administration, into high-tech agriculture, high-tech manufacturing and modern services like ICT/BPO, financial services and shipping and aviation,” he said.
 However, he noted that as long as subsidies which are also election goodies trap people in such sectors, people will not have opportunities to progress to higher income or social statuses in the future.
“But for that, we have to shift money and resources to high productive areas. That’s really a challenge. We can’t do it overnight. We need a vision and policies to gradually move us in that direction,” Dr. Coomaraswamy said. He said that if opportunities are not created, social unrest—especially among the youth—will arise in the future.
“We have had 2 youth insurrections and a separatist conflict. There are complexities behind all those things, but one important factor which cuts across all those 3 events is a mismatch between opportunities and aspirations. We have an aspirational and impatient society so we need accelerated growth,” he said.
 He added that if a CEPA with India and FTA with China are realised, Sri Lanka could attract FDIs from those countries and export back to the 2.5 billion population markets to find the needed economic growth.
 His comments come in the wake of Sri Lanka being ranked as one of the worst in the world in budget transparency and public participation, and the International Monetary Fund inquiring about the past and future budgets.