Sri Lanka needs to invest in ‘country specific’ responses to the global economic crisis instead of blindly following other countries, say economists in state institutions.
“We should not be applying general economic theories without understanding the nitty-gritty’s of this country’s situation. We can’t just follow a prescription without understanding the possible impacts on different sectors of our society and the different people in our country,” said an Advisor to the Ministry of Finance, Prof W D Lakshman, speaking at a seminar on the global economic crisis, organised by the Institute of Policy Studies, last week.
The state’s economists noted that Sri Lanka’s situation is different to most other countries facing the global economic crisis. For starters, most other countries are not also fighting a war, while catering to the daily requirements of the rest of the country.
Let’s all suffer
In keeping with its policy of country specific responses, the government has decided not to depreciate the rupee sharply, or to devalue, although many other countries have adopted this approach. This is to avoid further expansion of Sri Lanka’s large external debt and to safeguard consumers from domestic price increases.
Exporters maintain that this decision is unfair by them, as it makes Sri Lankan goods uncompetitive. However, state economists point out that consumers and importers have not got off painlessly either.
This is because the government has also decided to develop domestic production. So although global commodity prices have reduced drastically, the price reduction is not being transferred, in full, to domestic consumers. Instead, the government has increased cess on a large number of commodity items. This is expected to prevent a sudden influx of cheap imports from destroying domestic producers. This will also reduce pressure on the rupee, by reducing import demand. Meanwhile, incomes of importers will reduce and government incomes, from import taxes, will increase.
State economists noted that exporters’ concerns are addressed through an economic stimulus package and a 5% export rebate facility. Economists also noted that depending only on low prices to compete in international markets is not sustainable, because demand from traditional western markets is shrinking anyway, as a result of the recession.
The slow government response to the global recession is seen as normal due to complexities in decision making. “Government actions generally come with large delays. In the US for instance, the proper assistance package is coming only now,” said Assistant Governor of the Central Bank Dr H N Thenuwara.
Steady, steady…
Meanwhile, the financial sector regulator says it is focussing on financial sector stability.
“We are amending the Finance Act to control unauthorised deposit taking by various institutions that are not registered finance companies. Our banking sector is reasonably stable but we will continue to align with accepted international practices,” said Dr Uthum Herath, also Assistant Governor of the Central Bank.
The Central Bank has also relaxed monetary policy to address domestic liquidity shortages.
“The Statutory Reserve Ratio has been relaxed and policy rates were reduced but inflation is still on average around 21%. So we can’t relax monetary policy too much. Rehabilitation in the North and East will also have inflationary impacts. We have to keep all these factors in mind when it comes to monetary policy. So whatever policies we adopt must be country specific,” said Dr Herath.
The Central Bank maintained that the country’s rate of inflation is declining.
Reserve headache
Government economists also said that action has already been initiated to build national foreign exchange reserves. “There are other ways to address the foreign currency reserve situation rather than devaluing our currency to maintain exports,” said Prof Lakshman.
These ‘other ways’ implemented so far, includes attracting foreign exchange inflows by opening up government securities to Sri Lankans living abroad, resorting to currency swaps with other countries and encouraging foreign exchange savings by giving an added bonus interest.
Trouble spots
The banking sector meanwhile, flagged an existing capital shortage that could hamper government reconstruction plans in the North and East.
“We have some outstanding structural challenges in the banking sector. The most important is the need for capital. Banks need capital for expansion and also to participate in North-East rehabilitation. But access to capital is very difficult,” said an Advisor to the National Development Bank, Nihal Welikala.
The banking sector pointed out that low returns on investment, high taxation ( around 60% of banking income) and high overheads, are turning investors away from the local banking sector.
The banking sector is also concerned about falling consumer confidence in the financial sector, following the collapse of the credit card company Golden Key. “If depositors lose confidence in finance companies, that situation will leak to the banks. There is a risk of contagion even from unregistered finance companies. So this needs to be carefully managed,” said Mr Welikala.
Don’t cook the numbers
Despite government responses to the global and internal situation, economists noted that poor public communication left people confused or unaware of government intentions. In particular economists called for greater transparency in government communications on economic matters, to retain public credibility in the government.
“We need more balanced information outflows. For instance, we find that sometimes the official numbers are couched in such a way as to present only a positive picture of the situation. This is not realistic and it erodes credibility,” said Dr Anila Dias Bandaranaike, a former Assistant Governor of the Central Bank.
Private sector representatives meanwhile, noted that the government’s habit of going into denial whenever a problem is pointed out, did not help to build confidence either.
Tackle fundamentals
Others called on the government to take on politically painful and long standing macro economic corrections. “There are long standing macro economic fundamentals that need to be corrected. These are politically sensitive but they must be addressed,” said an economist from the University of Colombo, Dr Sirimal Abeyratne.
“Restoring macro-economic stability should be the priority. It will minimise the destabilising effects of the economic crisis and enable the government to retain the policy flexibility to respond better to the external crisis," said Deputy Director, of the Institute of Policy Studies, Dushni Weerakoon. |
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