Sri Lanka fiscal, monetary policy corrections urgent: Razeen Sally

ECONOMYNEXT – The need for Sri Lanka’s fiscal and monetary policy correction is becoming more urgent and solutions can be in line with a policy statement made by Prime Minister Ranil Wickremesinghe, Razeen Sally, a top international economist said.

"The repair of public finances is more urgent than ever," the ex-London School of Economics Professor who is now with the National University of Singapore told a forum at Ceylon Chamber of Commerce.

"I am repeating a familiar story here, but it is a story that does not seem to have registered with the government as it had not with the previous government."

Natural Complacency

Sally said there was persistent sense of complacency in Sri Lanka which was seen from time after independence. Sri Lanka had endowed with a natural bounty unlike countries where resources were scarce and people had a more enterprising work ethic and sense of urgency.

"Sri Lanka’s perennial curse given its natural bounty is this cursed culture of complacency," Sally said.

"And it manifests itself in its worst form when it comes to macro-economic policy, for most of Sri Lanka’s period since independence."

"That was true of the last government, it remains true with the present government."

Some analysts have said that the abolishing of a currency board and the creation of a central bank in 1951 literally gave a license for post-independence rulers to print money, borrow and default on public debt, taking private savings down with it through currency depreciation rather than create visible sovereign default.

Though the ousted Rajapaksa regime invested heavily in infrastructure after the war it also expropriated private firms undermining property rights, bought back privatized firms and expanded the state at the expense of the rest of society.

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It also built a wall of trade restrictions to benefit crony special interest groups, stifling and victimising the rest of society, some critics say.

As a result was insufficient space and economic freedom for real growth generating free enterprises to take off and generate taxes for the government to repay loans amid questionable ‘gross domestic product’ numbers.

It was in this backdrop that a revised budget in 2015 raised public sector salaries from non-existent taxes and cut fuel prices, unleashing a consumer boom.

Double Bubble

The Central Bank compounded the problem by cutting interest rates, releasing hundreds of billions of rupees liquidity tied up in term repos, then printed tens of billions of rupees at weekly Treasury bills auctions, adding more monetary fuel to the fiscal fire.

Most economists were muted in their criticism of the January 2015 revised budget but with prudent policies not coming out in the budget for 2016 and risks for the poor climbing, there is a sense that time is running out.

Sally said a ‘disastrous’ budget for 2015 had made monetary and fiscal policies worse than the Rajapaksa regime. The budget was hit by both revenue shortfalls and higher spending.

"Monetary policy is far too loose," Sally said. "The exchange rate has continued to weaken, the interest rate climate is probably too liberal, it creates unrealistic expectations in the economy."

 

However Prime Minister Ranil Wickremesinghe in a policy statement in early November had shown the path to correction, with a sense that ‘realism had finally arrived’ and that the government was prepared to fix the fiscal problem.

"The budget clearly did not do that," Sally said. "The budget had continued that accursed complacency in both the revenue side and expenditure side.

"And there is clearly a disconnect, between the Prime Minister’s economic policy statement and the budget itself which is not only messy – particularly in what happened after the budget – but it is clearly a missed opportunity which questions the government’s reform credibility.

Sally said it was not rocket science what to be done. A major tax reform and expenditure was needed.

There was a sense of complacency that is was possible to "carry on as normal and Sri Lanka would be able to ride this out with a bit of luck."

"That is wantonly dangerous and probably not sustainable," Sally said.

Don’t wait for the IMF

There was talk about going back to the International Monetary Fund for a stand-by loan. It may be necessary to do so, especially if global interest rates rise.

"The Sri Lankan culture of acting irresponsibly in terms of the nation’s finances, and then expecting to be bailed out by the IMF so that the cycle can continue is just very damaging.

"And the international institutions play their part."

The IMF and other lenders have been willing to bailout Sri Lanka in the past.

"It prevents, if you like, a sinner repenting. It is just another excuse to continue sinning.

During the last administration, an IMF loan had fixed the problem and kicked the main problem down the road without major reforms needed to fix long term problems.

"The last government pretended to be reforming, the IMF pretended that the government was reforming but it postponed the problem."

"The main message is that the problem has to be sorted out at home. You cannot expect the IMF to come out and sort out Sri Lanka’s problems.

And given the message from the last budget, it probably makes a dialog with the IMF on a potentially standby lacks credibility

The positive news was that here is a better diagnosis of the problem affecting Sri Lanka this year.

"It is a non-competitive economy because of too much interference by the state in all its manifestations, and the choke hold on the private sector in particular" Sally said.

He said the Prime Minister’s policy statement was constructive. The budget was also constructive in places including the plan to give freehold land to people and improve the business environment.

Broad measures to liberalize the economy and boost investment was needed instead of doing small ad hoc changes which are open to be reversed, he said. (Colombo/Dec19/2015)

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