Is economic recovery possible?

Under a solid IMF package, we do not have to give priority to debt reconstruction, since a solid IMF package would involve arranging a debt consortium

We should have a consensus policy building because it has to straddle different political or government programmes without discarding them or leaving them incomplete when the government changes

Sri Lanka is not a reserve currency country

When it comes to structural adjustment policies, we need to pay a very big emphasis on the budgetary situation

“The economy should grow steadily and sustainably. It should have a sound financial system, be resilient to shocks with inflation under control,” said Dr. Roshan Perera, Senior Research Fellow of the Advocata Institute during a recent webinar on building a framework for economic recovery in Sri Lanka. Explaining that in the economical environment, there are internal and external imbalances to be found, she said internal imbalance consists of issues such as the government spending limitlessly, too much money in the economy and uncertainty. Whereas external balance means a combination of inflation and exchange rates that makes imports more attractive and exports uncompetitive. This includes abrupt changes in the exchange rates that call for financial assistance and in the extreme defaulting on payments to the rest of the world, she explained

The economy should grow steadily and sustainably. It should have a sound financial system, be resilient to shocks with inflation under control,” 

Dr. Roshan Perera

Fiscal dominance as the root cause for macroeconomic instability
Dr. Roshan also explained that the fiscal deficit and the external current account deficit has moved closely together over a long period, and the shift to non concessional financing has led to ballooning of debt service payments and declining of foreign reserves.

 If these macroeconomic imbalances are corrected, and structural reforms are introduced, sustainable and inclusive economic development could be achieved. 

She said that Sri Lanka should address these macroeconomic imbalances by correcting the twin deficits, proposing structural reforms for sustainable and inclusive growth and by building buffers to strengthen the economic resilience to internal and external shocks.

Over the last four decades other than in one year, we have been running a public sector deficit

Prof. Prema Chandra Athukorala

Sri Lanka is not a reserve currency country
Prof. Prema Chandra Athukorala, Emeritus Professor of Economics, weighed in on the topic saying that the external balance of our economy is basically a mirror image of its internal balance. But he pointed out that we should not forget that Sri Lanka is not a reserve currency country. This gets ignored by many commenters in Sri Lanka who say that debt is not going to be a problem for our country. It is said that the external balance is either the private sector balance or the public sector balance. But Prof. Athukorala said that from a policy point of view, what is vital is to know which one is most important from the two. In countries like Australia, the major source of current account deficit is the private sector balance. In Sri Lanka, the biggest problem is that out of the two sources of domestic deficits, it is the public sector deficit that has contributed to the problem. “Over the last four decades other than in one year, we have been running a public sector deficit. If it is financing profitable private sector abilities, that is not going to be a problem.” He explained that when it comes to structural adjustment policies, we need to pay a very big emphasis on the budgetary situation.

When analysing the Sri Lankan situation in the global context, he believes that there is no other alternative. “We are postponing,” he said. When things become worse the government will be going to the IMF. But what is important to note is that under a solid IMF package, we do not have to give priority to debt reconstruction, since a solid IMF package would involve arranging a debt consortium. He believes that through an IMF package, we would be able to avoid the game of debt reconstruction. But our policies should focus on two areas. The balance of payment adjustment policy and the budgetary issues. Prof. Athukorala commented that during the Yahapalana regime, public revenue reform was implemented and it worked. And for the first time in three decades, the primary balance of the budget turned out to be positive for two years. But the current government ignored and backtracked from that reform.

What we need are the dynamics more than the statistics  

Nishan De Mel

The need to convert growth into government revenue
Nishan De Mel, the executive director, Verite Research, remarked into the discussion saying that what we need are the dynamics more than the statistics. He said that the classic argument made by those who want to do it differently is that today’s dissaving is tomorrow’s growth. And if you offset the dissaving with growth, you’ll grow your way out of debt rather than starve your way out of debt. He stated that to find a solution for Sri Lanka’s problems, we have to make assumptions about consequences to growth also. Our additional problem is that we don’t convert growth into government revenue. If we do that, it could solve the fiscal imbalance problem and also the debt sustainability problem at the same time.

Is reform in the public sector in the short term possible without a major shock to the overall economy?
Prof. Rohan Samarajiva, Chairperson, LIRNEasia, joined the discussion and said that the public sector is actually doing fine. He said that now we have gone on for a year or so without most public sector employees coming to work, but their salaries have been untouched. He also explained how the private sector took ahead and decided that they were going to be paid 50% of their earnings. He suggested that we should discuss this issue of how everybody is suffering and by checking the track record for those who have not been called to office, allow them to work from home, possibly without any time duration for half their salaries.

By checking the track record for those who have not been called to office, we should allow them to work from home, possibly without any time duration for half their salaries  

 Prof. Rohan Samarajiva

 If necessary we can even talk about some kind of voluntary packages for them to start a new business or something likewise.

 Prof. Rohan said that the others who are more experienced and essential to the functioning of the government, can be given additional training packages for them to become more productive. 

“Even though we have a large public sector with a lot of employees, we don’t actually spend money on what they require to be productive. In the government, the cost of an employee is quite low. So we really need to drive that up. And tell them that if they don’t increase their productivity, they will be working at home with half the salary.”

Government controls on investors are damaging
A question was raised about the impact on expanding government controls on the investors both local and foreign, to which Anarkali Moonesinghe, board member, Lankan Angel Network, explained that there is no certainty and that it is incredibly difficult to deal with even day to day transactions. She stated that the currency fluctuations and the denial of the reality of where we are at with our exchange rate is extremely difficult. She finds these restrictions so damaging. “We are trying to encourage FDI. We are trying to say that we are open for business and to come and invest in money. So those conflicting messages and policies are very difficult to navigate.The crisis is made significantly worse but these conflicting policies the successive governments have done is one of the problems why we face very low FDI in the country.”

Money printing cannot go on without limitations and we have already come to those limits”   

Prof. Sirimal Abeyratne

 

Money printing should be done within limits
Prof. Sirimal Abeyratne, Professor in Economy, Colombo University said that the link between money and inflation gets weaker during a crisis time. That is why the whole world has started printing money during the last ten years and Sri Lanka also jumped into the same wagon. However, it has a limitation even during crisis time. The money printing and exchange rate depreciation are also linked. That is why money printing cannot go on without import restrictions. Now actually that link between money printing and inflation is getting stronger again.

 And it also happened in some other countries as well because in the world we see that the aggregate demand is getting heated and there are signs of inflation pressure building up in the world economy. Prof. Sirimal believes that money printing cannot go on without limitations and that we have already come to those limits.

Is there a way out for the government and what will happen in the next five years?
According to the computation of Murtaza Jafferjee Chairperson at Advocata Institute, about 37 billion dollars or more is dollar denominated and the average term to maturity of our foreign debt is also around five years. So what is going to happen in the short term? Jafferjee explained that we cannot wait until you get into the bottom of the barrel to default. Any sensible person would say that we need to re-profile the debt which means that we will have to freeze debt payments for quite a few years, giving us time to recover. “When this is going to happen is any man’s guess, but I would say it can be between now and maximum they can hold on for one year if they wait to empty the barrel completely. I don’t know when but they cannot last too long.”

We need a strong political will
Panellist Anarkali Moonesinghe weighed in on this saying that we have now been pushed to this extent so we have to take a good hard look at this. She explained that there are also many positives that can come out of this crisis, long term, but the political will needs to be strong for any of this to happen. From cutting back in terms of the public sector to any of the reforms that everyone has spoken of.

“We are looking for short term solutions for long term fundamental issues,” said Prof. Sirimal. To his understanding it is not a Covid issue. We haven’t put the economy on track over long periods of time so that we have seen for 20, 25 years that the economy was getting slowed down.

 The economic recovery in Sri Lanka means that we should go beyond the pandemic situation and why we didn’t go beyond that in the past is the reason why we are here today. He believes that Sri Lanka needs some bitter policy doses not only for economic recovery but also to get it back on track. He explained how we haven’t touched policy reforms for over 20 years, for which we are paying right now.

“We really need to put our macroeconomics back into a stable position,” said Dr. Roshan Perera. That is in the hands of the policy makers. She thinks that we should have a consensus policy building because it has to straggle different political or government programmes without discarding them or leaving them incomplete when the government changes. Everything else has to be done in parallel and we have to keep the priorities in place and ensure that the reforms are taken right to their completion.