Sri Lanka has disregarded the first lesson of economics for politics

ECONOMYNEXT  – The Sri Lankan economy is a victim of politics, where basic principles have been disregarded for expediency at a cost to the people, participants at an economic forum said.

“Thomas Sowell, the American economist said, the first lesson of economics is scarcity,” Wickremesinghe said at a conference heldi n memory of Saman Kelegama, a top economist who was head of Sri Lanka’s Institute of Policy Studies, a think tank.

“There is never enough of anything to fully satisfy all those who want it.

“The first lesson of politics is to disregard the first lesson of economics.”

Suresh Shah, chief Executive of a brewery group and former head of Sri Lanka’s largest business chamber said he had been involved in many policy dialogues, but in the end, economic objectives had been sacrificed for political ends in Sri Lanka.

He said that this is the complete opposite of what the Asian Tigers did to become advanced economies.

Successive Sri Lankan governments have extended election goodies to the public towards the end of an election cycle, in order to get elected for another term.

Critics say the current administration, in 2015, enagaged in a massive ‘Keynesian stimulus’ printing 630 billion rupees, leading to foreign reserve losses, capital flights, currency collapse and high inflation at the beginning of their term and has to now deal with the hangover.

Sri Lanka’s economy then slowed as the state was forced to raise taxes to pay higher salaries and subsidies.

Some economists say Sri Lanka’s economic problems started with the setting up of a central bank in 1951, which printed money, creating non-existent nominal wealth and called for the re-creation of an East Asia style currency board.





The first recipients of the printed money (usually state workers or users of subsidized fuel) then acquired goods and created excesss demand, leading to a currency collapse which made everyone poorer.

The currency shortages also led to trade controls, high import duties, and import substitution and a politically powerful group of domestic busnesses that exploited consumers through tariff protection.

Successive governments also borrowed,  running large budget deficitsandpushing up the debt burden. Due to chronic currency depreciation, Sri Lanka’s nominal interest rates are also much higher than countries with stronger exchange rates.

Sri Lanka’s President Maithripala Sirisena had spoken out in favour of business lobbies that want to sell high priced goods at the expense of poorer consumers.

Sri Lanka’s United National Party wants to reduce tariff protection and phase out so-called ‘paratariffs’ by 2020.

Sarath Rajapathirana, an economic advisor of President Sirisena, said faster liberalization would bring early benefits.

“We are going to reduce paratariffs over of 3 years,” he said. “My personal opinion—I’m not talking about the government’s—is we’re too slow.

We have to signal to the stakeholders in the economy of our country, people who are interested in industry in Sri Lanka, that we’re serious about doing these things.”

Rajapathirana refused to comment on how his market oriented policy advise is being received by President Sirisena.

President Sirisena became increasingly involved in blocking pro-poor reforms amid chaotic United National Party policy-making in 2015 and 2016.

Sri Lanka tea industry was also hit by ad hoc policy making, after President Sirisena suddenly banned glyphosate, a weedicide amid questionable scientific evidence. (Colombo/July02/2018)


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