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Think tank renews call for major economic reforms

28 May 2015 - {{hitsCtrl.values.hits}}

By Chandeepa Wettasinghe

Colombo-based think tank, the Pathfinder Foundation, yesterday renewed its call for sweeping economic reforms and cautioned that otherwise Sri Lanka would inevitably have to face successive crises in the near future.

“Are we on the right track as far as the economy is concerned? There is a very strong case that we can make, that we have not. It’s not enough to do incremental changes. We need major reforms,” Pathfinder Foundation Deputy Chairman Dr. Indrajit Coomaraswamy said.

He noted that while the government had aspired to resolve constitutional crises and other political dilemmas, they had ignored the economy, which is by far the most important factor of a country.

While noting the recent growth numbers—which are lower than official figures—the reduction of poverty and inflation, Dr. Coomaraswamy noted that such key economic indicators are deteriorating significantly.

He said that this is due to the lack of momentum in the key drivers of the economy, which in the recent past have been foreign borrowings and the new capacity added from the previously war-torn areas.

“The streams are diminishing significantly. So we need new sources of growth. The local savings levels are low, so we will have to rely on foreign savings which are not debt. The economy will have to be driven by foreign direct investments and private investments into the export sector,” he said.

While agreeing that lower levels of growth could be sustained theoretically, he said that it would lead to social upheavals.

“If we bring holistic reforms, the potential is there for an 8 to 10 percent growth. Some might ask, ‘Why not aim for lower growth?’ We cannot, because the modern Sri Lankans are too impatient and aspirational. So we need stability as well as prosperity,” Dr. Coomaraswamy noted.

He said that the cost of living is not high as people complain and the real problem is giving away relief in budgets with no links to improve productivity, which would lead to inflation and Balance of Payment issues.

“Is it fair that people who are sitting around and doing nothing get a wage increase of Rs.10,000?” Pathfinder Foundation Executive Director Luxman Siriwardene queried. “We must change this entitlement mentality. The government’s job is to create a framework to release the creativity and productivity.”
While he said that the drags on the economy, such as war, increasing nationalization and declining terms of trade have moderated, Siriwardene noted that politics and politicians still place a huge burden on the economy.

The comments were made during the launch of the Pathfinder Foundation’s white paper titled ‘Charting the Way Forward: Prosperity for All’, which will be presented to the government soon.

Rupee forwards down; further falls seen

REUTERS: Sri Lanka’s rupee forwards fell yesterday due to importer dollar demand amid outflows from foreign sales in government securities, dealers said, with further weakening expected due to lower interest rates.

Actively traded three-month forwards ended at 139.00/10 per dollar, compared with Tuesday’s close of 137.10/40. “If the Central Bank is going to reduce the interest rate further, then the worse is yet to come,” a currency dealer said on condition of anonymity. “The Central Bank needs strong dollar inflows. If it fails to do so then it has to correct the monetary policy with tightening.”

Dealers said lack of greenback conversions by exporters, who are managing their costs locally with cheaper rupee loans in a lower interest rate environment, was weighing on the currency.

The Central Bank allowed the spot rupee to fall 0.15 percent, or 20 cents, to 133.90 on Tuesday, near its record low of 134.10, hit on June 28, 2012, Thomson Reuters data showed.

Some dealers said the depreciation was not adequate and the market had adjusted to trade forwards after the Central Bank was seen preventing the spot currency from falling sharply. A currency dealer said with the three-month forwards trading around 139.00, the implied spot rupee should be around 137.20 per dollar. But the Central Bank has kept the spot at 133.90.

The Central Bank has allowed the spot to fall 0.75 percent, or by Rs.1 since April 30 to account for broad gains in the dollar and rising credit demand in a low interest rate environment.

Two-month forwards were unchanged at 135.50/80 per dollar and one-month forwards were steady at 134.70/90, as the Central Bank prevented falls, dealers said.

However, a Central Bank official told Reuters on condition of anonymity on Tuesday that the regulator only intervenes in the spot market and never fixes prices on the forwards.

Rupee fall likely post-election

The people of the country would suffer immensely from a foreign exchange meltdown following the upcoming elections if the Central Bank keeps propping up the rupee, according to experts.

“The problem with the Central Bank is that, as and when there is a pressure to depreciate, they, in collusion with the political leadership, try to maintain what cannot be maintained,” Siriwardene said.

Dr. Coomaraswamy, who worked at the Central Bank in the past, agreed with the view but defended the institute saying that the effects have been caused by ill-conceived budgets of politicians.

“Just like the politicians, the Central Bank tries to please them (people) by not allowing the rupee to depreciate at the right time and the result of that - you’ll see most the ordinary people facing a more painful depreciation after the election,” Siriwardene said.

Dr. Coomaraswamy said that the more the depreciation is postponed, more pain is felt, as when the Central Bank reaches a point of not being able to support the rupee, it will collapse, whereas people may have been able to adjust to the decline if the foreign exchange was left to its own devices.

Since Sri Lanka depends on imports for consumption, all sections of the society would feel the brunt of the fall and the effect from the wage hike would disappear.

However, he said that all hope is not lost.

“Sri Lanka has many friends. There may have been some criticism during the war but no one is against Sri Lanka. We need to trade on this goodwill and ask for help with foreign direct investments to improve our export sector,” he said.

The Central Bank in its April monetary policy review said the rupee was depreciated 2 percent against the US dollar. The bank has spent almost US $ 1 billion in the last six months defending the rupee.

Sri Lanka ran into a Balance of Payment crisis in

2011/12 amid the aggressive defending of the rupee by the Central Bank, spending over US $ billion, which resulted in dwindling of foreign reserves.

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Think tank renews call for major economic reforms

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