Sri Lanka unveils deep reforms to boost economic activity, freedom
ECONOMYNEXT – Sri Lanka’s Prime Minister Ranil Wickramasinghe has unveiled far reaching reforms involving trade liberalization, unshackling land ownership, reforming state enterprises and creating space for agriculture and industry in a bid to boost economic activities.
Wickremesinghe said Sri Lanka will embark on a third generation reform drive, in the wake of the first by J R Jayewardene in the late 1970s and, then by President Ranasinghe Premadasa in the late 1980s.
Sri Lanka and India both inherited deadly British Fabian semi-communist policies which were in was in vogue after World War II.
The policies were compounded by the setting up of money printing central banks that destroyed sound money, maintaining poverty with inflation and currency depreciation.
"Since the days of the Second World War, we have lived with a false notion that the Government must somehow intervene in the economic process," Wickremesinghe told parliament.
"This has resulted in many drawbacks, as we all know. The Government took over many private enterprises at the time. Heavy taxes were imposed on the private sector that negatively affected imports and exports."
Indian intervention started with Soviet style Gosplan’s with Fabian influenced Jawarhlal Nehru running heavy industry based socialist policies but fortunately he was an atheist and the country did not descent in to nationalist.
But Sri Lanka went into a morass of national socialism involving not just socialist intervention and expropriation violating property rights and economic freedoms, but also violating language and other liberties on majoritarian ethno religious grounds.
The nationalized Reserve Bank of India and mis-use of central bank credit to finance Nehru’s interventionist five year plans, destroyed the Indian rupee which was earlier indirectly used in Sri Lanka through a currency board.
Most of the region including the Middle East was ‘dollarized’ with the Indian rupee.
The currency depreciation generated by Sri Lanka’s soft-pegged Central Bank also led to calls for imports substitution, trade restrictions, nationalist autarky and gave rise to a rent seeking ‘domestic production’ business class that preyed on the poorest consumers with import duties.
He said up to three million people will be given free hold land, improving property rights.
The development of freehold land in Sri Lanka was reversed once during the British period through the ‘waste land ordinance’ and after independence by expropriations, analysts say.
He said Sri Lanka had to enter global value chains, a process of stage-by-stage production evolved by capitalism in recent decades replacing the earlier ‘high value added’ industrial exports.
True capitalists have gone further and now evolved service exports especially through telecoms busting labour and migration barriers imposed by nationalists and trade unions giving opportunities to poorer workers in different countries.
Wickremesinghe said property expropriation through a controversial law by the Rajapaksa regime would be reviewed.
Analysts say the reversal is important to citizen’s freedoms deter the elected ruling class from trying to expropriate people’s property again, which has happened several time earlier.
However when the last regime started expropriation, Deputy Foreign Minister Harsha de Silva led a campaign to educated the people on economic freedoms and gave strength to those standing up to freedoms.
Wickremesinghe said he was also suspending the retrospective taxes imposed in a deadly interim budget in January 2015 as it had undermined the investment environment.
It is not clear however whether the tax will be suspended so that the balance instalments will not be paid or that the current tax will go ahead. If the tax goes ahead, analysts say future governments will try it again and harm businesses.
State owned enterprises will also be placed under a public trust and peripheral businesses will be sold off. Loss making state enterprises, which bailed out with tax money has been a severe burden on the people for years.
Wickremesinghe said Singapore’s rulers had come to Sri Lanka in the 1950s and expressed a wish to follow Sri Lanka.
"Back then, Singaporeans came to us in search of employment," he said. "Today, we go in pursuit of employment to Singapore and Malaysia. Today, we are in debt to the whole world."
Malaysia, whose policies were tinged with nationalism has trailed behind Singapore, though it is a much larger country with resources including oil.
But it has generated millions of jobs, including for people in Indonesia, which suffers from a Sri Lanka style depreciation currency and much higher inflation than both Malaysia and Singapore.
He said Sri Lanka had a long history of free trade from the time of Manawamma to King Maha Prakramabahu.
"We traded in spices, precious stones, elephants and rice with the world," he said.
"We were considered a key import and export hub. We believe that with the planned economic remedies, we will be able to bring back such an era of prosperity for the nation once again."
He said Sri Lanka would move towards a knowledge based ‘Social Market Economy’ built on social justice principles.
A fundamental bulwark of Germany’s Social Market Economy was a very strong Deutsche Bank, which preserved the real value of workers salaries and prevented the destruction of their savings making sure capital was available for investment.
The key discordant note in Wickremasinghe’s policy speech related to the exchange rate.
He said Sri Lanka should adopt a "competitive foreign exchange policy that will encourage and empower exports," raising fears that an 80’s or Indonesia style ever depreciating currency that destroys domestic demand and capital will be come.
Sri Lanka’s 1980 reforms brought only partial success because the State deficit spent with the help of a central bank and then depreciating the currency and inflating the debt away, destroying investible capital and people’s savings in the process.
Singapore on the other had decided not to create a central bank and keep the currency board it had, unlike Sri Lanka which abolished it.
Independent Singapore’s first Finance Minister Goh Keng Swee once said the currency board was retained to inform the world that the objective was to maintain a strong convertible Singapore dollar.
"This remains the best protection against inflation," he explained. "Our economy was and is both small and open. Financing budget deficits through Central Bank credit creation appeared to us as an invitation to disaster.
"There was no effective way of exchange control in an open trading economy like ours to deal with the inevitable balance of payments troubles." (Colombo/Nov06/2015)