2018: Year of exposure
View(s):After all, I consider that the year 2018 was not a bad one. At least from the angle that I look at the events and circumstances, it was more a year of “exposing” than “achieving” things. It exposed many hidden things in both economics and politics; it exposed even the hearts and minds.
From an economic point of view, we cannot keep ignoring reforms; its economic fallout is detrimental to the nation as we experienced this year.
The “October turmoil” would have been disastrous too. However, the judiciary exposed that Sri Lanka is still a nation with democratic institutions and values and, rescued the country from an international disgrace.
Now, let us learn from the lessons of the exposure and, prepare for the next step. But learning is a choice and, we still have the freedom to ignore now and face the consequences later.
Stock-taking at the year end
First, I would like to focus on the most fundamental economic variable – the rate of economic growth. If a country gets its rate of economic growth right, it has the economic capacity to achieve many other things – the country can improve incomes, create jobs and, thereby reduce poverty. It is clear that people can be lifted from poverty, only through improved incomes and increased jobs.
If the rate of economic growth is right, then the government is in a better position to manage its budget because tax revenue improves.
Accordingly the Central Bank is in a better position to manage stability – inflation, interest rate and, exchange rate.
Rate of economic growth
The percentage rate of real GDP growth in the first three quarters of 2018 was reported as 3.4, 3.6, and 2.9, respectively. There is no particular reason for a higher rate of growth in the fourth quarter too. Therefore, the annual rate of growth for 2018 may not be deviating much from 3.5 per cent.
Even though South Asia is the fastest growing region in the world today, Sri Lanka does not appear to be part of it. According to World Bank forecasts, the rate of growth of the country which is performing better than only Afghanistan is 4 per cent for the year. So far the actual achievements in quarterly growth rates well below 4 per cent disprove the World Bank predictions.
Right kind of growth
The rate of growth should be not only higher but also a right kind of growth, which exposes its long-term sustainability. A sustainable higher rate of growth does not depend strongly on the performance of the agriculture sector, but industry and services.
Agriculture growth is highly volatile due to its greater exposure to the weather conditions on the one hand and, is naturally constrained by its own capacity limitations to generate more incomes and jobs on the other hand. After two consecutive years of negative growth, the agriculture sector has performed relatively well this year.
A sustainable rate of higher GDP growth should depend increasingly on industry and services sector performance. The industry and services sectors were reported growing on average at 1.8 per cent and 4.4 per cent, respectively. These rates are far from being satisfactory to show better performance of a developing country.
Widening trade deficit
A right kind of growth is closely associated with export performance. During the first 10 months of the year, when export earnings grew by 5 per cent, import expenditure has increased by 10 per cent. The issue has both long-term and short-term economic implications.
The rate of economic growth cannot be higher and sustainable, when export growth is slower. The long-term decline in Sri Lanka’s position in both regional and international trade has been well-documented and discussed. Its sluggish performance in 2018 is just another confirmation of this deep-rooted issue.
As far as the short-term implications of sluggish export performance are concerned, the widening trade deficit has exerted further pressure on the country’s external finance position in 2018 as well. During the first 10 months, exports were close to US$10 billion and, imports to over $18 billion, resulting in a widened trade deficit.
Exchange rate episode
File picture of Chinese tourists at a post office in Nuwara Eliya. Increased tourism earnings was a silver lining in the economy.
The weaker exchange rate of the Sri Lankan rupee due to sluggish trade performance got an awakening alarm due to strengthening US dollar and higher interest rates in the US, resulting in a sudden foreign exchange outflows. As a result, the exchange rate of the rupee depreciated from about US$/LKR 150 at the beginning of the year to 180 by the end of the year.
Had Sri Lanka maintained a sound trade balance with growing exports, the exchange rate of the rupee would have been defended better against external shocks. Thanks to the private remittances of the migrant workers, increased tourist earnings, IMF extended fund facility and government’s borrowings, without which the fate of the rupee exchange rate would have been much worse than what it appears to be.
However, with all that we are only postponing the deeper issue as it is well exposed now. One good thing about not the capacity but the integrity was that Sri Lanka honoured all its foreign debt obligations in the year. The issue is not yet over, as we have to continue with meeting the higher debt obligations in the years to come.
Knockout punch
October turmoil would have been a knockout punch, though its economic repercussions were not insignificant. Throughout the past few years since the end of the war, Sri Lanka struggled to show its conducive business environment to investors. It was only last year (2017) that Sri Lanka was able to attract over $1 billion foreign direct investment after 40 years of policy reforms.
Foreign exchange receipts that were anticipated were put on hold. Credit rating agencies downgraded the credit worthiness of the country, making it even more difficult to borrow. Overnight changes in taxes, prices, and handouts which were not as part of a long-term economic vision but bits and pieces of political mileage, exerted further pressure on government finance.
After all, it was a 52-day period of “inactivity” in economic sphere.
2019: year of preparation
The exposure of economic realities in 2018 confirms again the fragile landscape of the Sri Lankan economy and, the need for wider reforms and political stability. As the country is approaching a last phase of an election cycle with forthcoming Presidential and Parliamentary elections, the year 2019 could be the time for preparation for the reform agenda. This is a task at hand for all leaders and the political parties envisaging the power.
We will also be able to see what would be the pragmatic approach that they propose in the respective election manifestos for reforms to lead the nation to prosperity.
Old trump cards
In the absence of such a vision and mission, you would be able to see some of our leaders playing the old trump cards: handouts from non-available resources and divisions based on ethno-centric politics. The shadows of such games were already visible during the October turmoil as well.
Many are, however, now eyeing the forthcoming elections: They prepare for the elections, but not for the Government. Just like “preparing for the wedding, but not the marriage.” After winning the elections and coming to office, if the Government has no clue about how to manage the economy and lead the nation to prosperity, they will waste years by groping in the darkness.
At the end, having nothing to show to the nation as a achievement, they engage in a futile struggle to remain not rejected. But political history has provided with enough examples to confirm that they did not remain in the heart of the nation.
(The writer is a Professor of Economics at the University of Colombo. He can be reached at sirimal@econ.cmb.ac.lk)