A panel of economists said this week at a discussion organised by the International Labour Organisation (ILO) that a sharp rupee depreciation is not the best option for Sri Lanka, to face the global recession.
Economists noted that exports still account for only a small share of Sri Lanka’s total economy. Therefore, rupee depreciation will only benefit a small section of the country and will not be the best option for a majority of the people. “If a country is export oriented, one option right now is currency devaluation. But Sri Lanka’s domestic economy is much bigger than the export sector. The domestic economy is more than twice the size of the export sector. In this case currency devaluation will leave consumers worse off,” said a labour economist from the ILO, Steven Kapsos.
In addition to consumers, import dependent businesses, including exporters, will also be worse off if the rupee is devalued. It would also make Sri Lanka’s large external debt (38% of GDP) balloon and put up the cost of debt repayment.
A leading local economist noted that rupee depreciation is a quick-fix and is not beneficial for export development in the long term either. “Rupee depreciation has been going on for 30 years now, from 1978, because some businesses clamour for depreciation. The rupee was at 8.50 to the dollar at that time and now it is 114 to the dollar. So rupee depreciation has been used as a temporary solution to remain competitive. The business sector has been taking the easy way out instead of addressing real causes for low competitiveness,” said Senior Economic Advisor to the Ministry of Finance, Prof. W D Lakshman.
“So we have not been able to diversify industries and as a result, we are still dependent on one single manufactured export,” said Prof. Lakshman. Focusing economic stimulus packages on generating more jobs and safeguarding existing jobs, is seen as better way to minimise adverse impacts of the global recession.
“Stimulus packages will be ineffective if they do not maintain employments, incomes and household purchasing power,” said Mr Kapsos.
Economists also called on the government to address supply side economics by focusing on productivity improvements.
Economists noted that Sri Lanka entered the global recession on a weak footing with very limited ‘policy space’ for government intervention. Because government expenses are already much higher than government income, Sri Lanka simply cannot afford large scale stimulus packages like other countries.
Prof Lakshman explained that the government actions so far, including responses to the global recession, are based on balancing three broad national policy objectives. That of, ending terrorism, maintaining social welfare for the vulnerable and promoting production, investment and infrastructure.
“At policy level, they are trying to retain all three objectives. So what can be seen is a very careful balancing act on the part of policy makers,” said Prof Lakshman.
A speedy end to the armed conflict is also expected to help cushion recession impacts. An end to open warfare would allow large numbers of people in the North and East to return to productive employments and would increase agricultural outputs, bringing significant economic and social benefits.
Good policy, so what?
However, others noted that although the government’s overall policy objectives were good, the government response to the current global recession, was not. Economists noted that the government response was based on industry pressure and not on a well thought out strategy.
“The government’s response is lobby driven rather than developed as a coherent policy. Companies lobby the government and the government throws money at them. There is no well thought out, coherent process,” said an economist from the UNDP Regional Centre, Dr Ramani Gunatilleke.
Trade unions and economists noted that Sri Lanka is scarily lacking in social safety systems if large scale job losses were to happen soon. Already the garment sector is expecting 30,000 – 40,000 job cuts this year.
“When so many people lose their jobs what are they going to fall back on? Other countries have social welfare for the unemployed and also re-training facilities. Sri Lanka does not. Migrant workers may also start coming back and people who would have left for migrant work, will stay back. So what are we to do with them?” said the General Secretary of the Sri Lanka Nidahas Sevaka Sangamaya, Leslie Devendra.
Economists noted that the Samurdhi programme, which should have acted as a social safety net, is of no help. At this point, Samurdhi grants are spread too wide and too thin to provide any real income support for families. |
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