Sri Lanka in state guided market oriented economy with 1970s elements: CB Governor

GUIDED MARKET: Sri Lanka is trying to reach prosperity by limiting competition and pushing up prices to re-distribute income to producers from the mases.

ECONOMYNEXT – Sri Lanka is following a ‘guided market oriented economy’ with some elements of the 1970s and pre-1990s India, which was shown by the success of boosting domestic production by banning turmeric imports, Central Bank Governor W D Lakshman said.

Sri Lanka was now following an ‘alternative’ economic model.

Guided Market

“Our approach is market oriented, but guided by the state,” Governor W D Lakshman told reporters in Colombo Friday.

“Take our neighbor. With the kind of approach you are saying people criticize, with that, they have built up their Indian industrial foundation. After than in 1990s they started opening up.

“I am not saying that Sri Lanka will go back to 1970s. 1970s is the period people are referring to with extreme disgust.

“I am not saying that we have to go that period, but some elements of that period we adopted.

India had a so-called ‘Hindu rate of growth’ mired in controls and forex shortages also known as the ‘license raj’ after then Prime Minister started using central bank credit to finance Soviet-style 5-year plans.

The exercise ended in 1991 when the Indian rupee collapsed and the Reserve Bank of India ran out of forex reserves.

In January 1990 the Indian rupee was 16.90 to the US dollar. By the end of 1991 it was 25.80 to the dollar.





The Reserve Bank of India then stopped the Treasury secretary from getting involved in rate decisions and sold down its stock of ‘ad hoc Treasury bills’ used to print money for deficit financing.

However some critics say the RBI had in recent years triggered monetary instability with open market operations and then resorted to tactics like gold taxes instead of fixing policy errors.

Meanwhile Governor Lakshman claimed that the success stories had had also been seen in other countries.

He said the idea of ‘all around failure’ referred to countries like Sri Lanka but there had been success stories.

“That is what happened in China. That is what happened in Japan, post war,” he claimed. “Up to a certain period, they built up on the basis of certain controls certain restrictions. You have to read the historical stuff to find out how people have used their controls.”

Turmeric Economy

Sri Lanka has shown the success of the program by producing turmeric, domestically, Governor Lakshman said.

Sri Lanka banned the import of turmeric, a popular spice used in South Asian cooking; driving prices up to 200 rupees for 50 grams or 4,000 rupees a kilogram last year.

“We had difficulties with respect to turmeric last year,” he said. “No one is now talking about it. Now may be the entire domestic requirement are produced here.”

Powdered turmeric is available at self service supermarkets sporadically at prices ranging from 350 to 750 for a 100 grams.

The high prices re-distributed income fairly efficiently without a separate bureaucracy money indiscriminately from the poor and rich to turmeric farmers.

However it is not known whether any or how much value was lost due to inefficient production, or whether the productivity of the farmer was high enough to capture the transferred income through the coercive denial of competition.

There is no information available on the goods and services that consumers of turmeric forgo and reduce demand, when they buy a 100 gram pack at 600 rupees, up from about 100 to 115 rupees last year.

It is not known whether the import substituting farmers are productive enough to capture the lost spending on other sectors, some of which were taxable and would have helped state revenues, or a part of its is lost through non-competitive cultivation.

It is not known what crops, perhaps competitive crops, that generated value to consumers and farmers through free exchange, that were displaced to grow the spice whose price shot up due to a state controls or whether fallow land was used to grow the crop.

But the controls are known to have to have triggered an expansion in the smuggling business and Sri Lanka’s Navy was kept busy trying to stem the flow of turmeric across the Palk Straits.

Sri Lanka Customs also seized shipments at the port. It is not known how much turmeric escaped the net and entered the country. The usually omnipresent price control agency has not been seen.

Monetary Instability

More concerns however have been expressed by economists over large scale money printing under a so-called ‘Modern Monetary Theory’.

Sri Lanka has been rejecting real bids to oversubscribed domestic bill auctions and printing money to purchase bills into the central bank balance sheet and dumping excess liquidity in to money markets in a bid keep interest rates down.

As a result Sri Lanka has now controlled the import of a large number of goods as money printing triggered forex shortages. Some items are allowed in under licenses. Some are allowed in for re-export. Some are allowed in under supplier’s credit.

The excess money is turning into imports – whatever is allowed – through the credit system and the central bank is selling dollars to redeem the newly created money in forex markets, losing forex reserves.

Low rupee interest rates and high dollar yields in the domestic interbank market then turned negative, discouraging exporters from selling forward and encouraging importers to hedge forward putting more pressure on the spot market as banks tried provide covered forward positions.

The central bank then closed the forward market for importers.

Banks have been asked to sell 10 percent of foreign remittances converted to the central bank, creating more reserve money, and adding new liquidity to money markets which are already flushed with cash from Treasuries purchases.

Meanwhile stock markets have risen but credit driven positions are triggering volatility.

Latest Comments

Your email address will not be published. Required fields are marked *