NOTES TO THE PEOPLE
By sumanasiri liyanage
My good friend, Prof Sirimevan Colombage, who had a long experience in the Central Bank of Sri Lanka, has, in a couple of articles, raised an issue of great importance for policy formulation. As a well-experienced expert on monetary management, Prof. Colombage seems to be worried about the way in which monetary affairs are at present handled by the Central Bank of Sri Lanka especially under the governorship of Prof. W D Lakshman. Undoubtedly, the differences between these two well-known economists in Sri Lanka, go beyond the practice of monetary management as differences touch hard monetary theory principles that divided economists into two major camps, orthodox and heterodox. It should be acknowledged that the three of us studied Keynes’s The General Theory of Employment, Interest and Money under a brilliant teacher and scholar, late Prof H A De S Gunasekera, the first Sri Lankan Professor of Economics and the Secretary of the Ministry of Planning in 1970-77 regime. I recollect this fact because Prof. Colombage’s writings too have a Keynesian touch although I include his recent writings into the broader category of orthodoxy.
An Orthodox Recipe for the Resolution of Crisis
Many pages have been spared to present an orthodox recipe for the resolution of the current impasse. While Prof Colombage had focused primarily on monetary management, others have touched upon the elements of broad economic management. These elements include fiscal discipline maintaining fiscal deficit around 5 per cent of the GDP, the independence of the central bank that follows inflation oriented monetary policy, liberalization of trade and capital transfer, and going back to the IMF for meeting ‘temporary’ imbalances of the balance of payment. In short, orthodoxy proposes to follow strictly the dictum of the ‘Washington consensus’ as a long-term corrective measure. In the words of Prof. Colombage, “The budget imbalance has led to a situation of “fiscal dominance” in which CBSL tolerates expansionary fiscal policy by accommodative monetary policy. In contrast, “monetary dominance” prevails when monetary authorities focus entirely on controlling inflation, irrespective of budgetary requirements.” Hence he observes: “The excessive accommodation of fiscal requirements has weakened CBSL’s monetary management to a large extent. Hence, fiscal discipline, coupled with central bank independence, is essential to put monetary management on the right track”. Although he questions the logic of CBSL policies, he has emphasized that the figures relating to money printing has been exaggerated by media and some analysts.
Of course, one may simplistically argue that these measures have worked in some countries and produce positive results. However, they have forgotten the socio-political setting within which those policies were implemented. Moreover, the experience of the last forty-three years in Sri Lanka has well demonstrated that this orthodox recipe has failed to work. The argument of policy inconsistency and incongruence is not an adequate explanation for this failure. The attempt to follow this policy package in strict sense in the 2015- 20 period were the worst years as far as the economic performance in Sri Lanka is concerned. This is not limited to Sri Lanka. As Dani Rodrik has shown that even the countries that implemented fully the Washington consensus package in its all phases and strictly sticking to the words had failed to achieve results.
Responding to the Critics: Our Route to Resolution
Prof. Lakshman rarely responds to his critics. Nonetheless, since many international organizations including leading foreign banks and rating institutions started a continuous crusade showing that the Sri Lankan economy is heading for a serious crisis unless Sri Lanka goes back to the International Monetary Fund for corrective advice and measures backed by its credit facility, he was forced to respond to the critics. As a leading political economist of the country, Prof. Lakshman knows very well that the forecasts and projection on the economy are not value-free and invariably is conditioned by the subjectivities shared by those analysts. Thus, he linked those adverse comments by three main financial institutions with the political event that is now taking place in Geneva, the sessions of the United Nations Human Rights Council (UNHCR). In a powerful presentation at the webinar organized by Veemansha Initiative a couple of weeks ago, he portrayed the government’s stance as our route to resolution implying that his critics were based on a different theoretical perspective. Hence, it is implicit that he insists on the deviation from the orthodox stance and policy measures. What does this new perspective entail?
Prof. Lakshman’s route to resolution proposes inter alia (1) establishment of a permanent single digit interest rate structure that he thinks imperative to promote investment and entrepreneurship in the country; (2) continuation of the support through monetary and fiscal interventions that is essential to provide adequate impetus to the economy amidst the challenging domestic and global macroeconomic conditions; (3) facilitation of credit to the private sector to expand by around 14.0 % in 2021 and at least by around 12.0-12.5 % annually over the medium-term; (4) providing credit guarantees and re-finance for distressed private firms; (5) maintaining a continuous vigilance to inflationary pressure due to global factors and local supply side constraints; (6) reduction of foreign/ domestic borrowings ratio to 33: 67 from the present 43: 57; (7) selected import restrictions; (8) introducing multiple exchange rates to promote quick inflow of export earnings; (9) bilateral currency swap agreements to increase foreign exchange reserve; (10) the setting up of National Development Bank Corporation combining SMIB, HDFC and RDB; and (11) the hybridity of import substitution and export orientation.
Gaps and Lacunas
Prof. Colombage understands well that the policy initiatives of the present regime is different from the mainstream economic measures. However, he has asked a very pertinent question: What is the alternative? Of course, Prof. Lakshman has provided a quite detailed list of policies some of which I have listed above. Nonetheless, the government is yet to submit a comprehensive policy document following the line of national planning since the list above raises many questions and entails multiple gaps and lacunas. Without addressing these issues government’s policies do not provide an alternative development guide.
Let me take one example. The formation of a development bank is imperative to control centrally transfer of capital between sectors. However, what was suggested is not an adequate for this Herculean task. Instead, what the government proposes is hybridity of private/ public control of development finance so that main task of development would get derailed. This once again raise a theoretical issue; namely, is the maintenance of lower interest rates an adequate measure to stimulate private investment?
The government tends to believe that big distressed private sector firms should be supported in order to boost economic growth. The same idea was recently reiterated by the Prime Minister. This is hilarious. At the moment of writing distressed farmer women are engaged in satyagraha in Hingurakgoda disclosing the trap woven around them by the so-called microcredit institutions. The government has so far refused to listen to them. Hence, government’s policies are dented against poor strata of the society.
Alternative may exist. Nonetheless, if the alternative neglects the poor but most important contributors to the economy, such alternatives will not work.
The writer is a retired teacher of Political Economy at the University of Peradeniya.